Thursday, January 1, 2015

The Real Success of the Nordic Welfare State - Part I


The Nordic welfare states were for decades considered role models; they were supposedly the proof that a highly developed welfare state could coexist successfully with an economically free society. Indeed, the Nordic countries, especially Sweden and to some extent Denmark, were recognized for pushing the welfare state further than other countries, for having developed social-democratic “universal” welfare states, and at the same time managing competitive economies with high rates of growth.[1] Though there is some truth to these perceptions, they require some important amendments that might somewhat tarnish this rosy view. 

It is important to remember that the Nordic countries benefit from a series of important advantages compared to other countries, both from a historical, cultural, geographic, and demographic point of view.[2] Historically, they hardly developed feudal systems, and there has been an almost complete absence of war on their territories for over two centuries.[3] Culturally, these countries are famous for their work ethic, combining a high level of trust and responsibility with a culture of consensus. Geographically, they are naturally protected and lie far from the frequent political turmoil of central and southern Europe. And finally, demographically they still have relatively homogeneous populations.

Such exceptional conditions would arguably have ensured the success of virtually any political system. They largely explain how these countries, which developed industrially relatively late, have, during the first half of the twentieth century, gone from being Europe's poorest countries to being among the richest in the world. The fundamental reasons for the success of the Nordic countries therefore has not much to do with the welfare state. Indeed, the economic success of these countries was a reality already before the establishment of welfare states, which did not happen fully until the early 1960s.[4] Although the concept of the welfare state was born relatively early in Scandinavia,[5] the advent of the modern welfare state of highly progressive taxation and widespread and often universal social benefits came rather late compared other European countries.[6]

Further, contrary to widespread views, studies show that the Nordic welfare state had a quite negative impact on entrepreneurship.[7] Most of the biggest industries and large Scandinavian companies were practically all founded and developed during the more liberal era before the advent of the welfare state. Conversely, very few significant new companies rose during the period of the social-democratic welfare state in these countries, that is to say, during the 60s, 70s and 80s.

Macroeconomic reforms always have a delayed effect; years and often decades can go by before their full impact is felt throughout society. For this reason, the Nordic welfare states initially benefited tremendously from the inertia of many previous decades of economic and social development, as well as from the investments and revenues of strong international corporations before the development of the welfare states. In the 1970s and above all in the 1980s, however, the effects of this growth started to wane, and both companies and the population began to feel significant pressure from the high taxes and the bureaucracy that had been increasing since the early 1960s. When the final crisis of the social democratic welfare state occurred in the early 90s, especially in Finland and Sweden, the welfare state had continued to grow in size until the tax burden that was needed to finance it clearly became unsustainable. At the time, the top marginal tax rate for individuals and businesses could actually exceed 100%,[8] and in 1993 the total government expenditure accounted for a record 70% of GDP.[9]

In order to get a qualitative idea of the economic freedom in the Nordic welfare state, it is possible to consider the Economic Freedom of the World Index.[10] This index is composed of five parameters that have a crucial impact on a nation's economic freedom: the size of its government; its expenditures, taxes, and enterprises; its legal structure and the security of property rights; the access to sound money; the freedom to trade internationally; and the regulation of credit, labour, and business. The Nordic welfare states were (and are) very strong in all these categories except the first one.[11] Strictly speaking, it should not really be possible to say that these countries were good examples of free economies, if the State had such a strong involvement in these societies. For instance, in the late 80s, the number of employees in the public sector in these countries was an astounding 40% of the working population.[12] The economic success of the Nordic welfare state can be explained by the fact that this negative impact of the size of the State and its intervention in the economy were counterbalanced by very high scores for the other four parameters of economic freedom mentioned above.

The admiration for the Nordic model, especially for the Swedish model, was partially based, therefore, on an erroneous historical and economic understanding of these countries. Despite what many people thought at the time, the Nordic welfare state cannot really be said to have been a success. Indeed, it is not surprising that in the ranking in GDP per capita over time, however flawed such a ranking in reality is, the Nordic countries lost many positions from the 1970s to the 2000s.[13] However, the Nordic welfare state can be called a success if the last two decades of reform are considered. This will be the topic of the second part of this essay.



Notes: 

[1] Of course, it is not possible to see the Nordic countries as identical. There are many differences, and they have different histories and have taken slightly different paths. Nevertheless, this country-by-country differentiation is not really possible to make in this relatively short essay. 

[2] For a good historic and cultural review of the basis for the l’État-providence in Scandinavie, see for instance, the Swedish case in « Sweden after the Swedish Model  : From Tutorial State to Enabling State » by Mauricio Rojas (Timbro, 2005). 

[3] The only times this happened was during the Finnish civil war of 1918 and the Norwegian resistance during WWII, from 1940 to 1945. 

[4] For instance, the OECD stats show that the Nordic countries had tax rates which were generally lower than most other European countries, including the UK. 

[5] The concept of society as “folkhem” (or literally « the home of the foyer people ») was invented by the Swedish social democrates towards the end of the 1920s. 

[6] « Les démocraties scandinaves », p99, Yohann Aucante (2012, Armand Colin). 

[7] Axelsson, S. (2006), « Entreprenören från sekelskifte till sekelskifte – kan företag växa i Sverige? » in Dan Johansson and Nils Karlsson (eds.) Svensk utvecklingskraft, Stockholm : Ratio. 

[8] Henrekson, M. (2007), « Välfärdsstaten och entreprenörskapet », IFN Policy Paper nr 16. 

[9] More than 70 % for Sweden and a bit less than 70 % for Finland. See « The Economic Crisis in Finland and Sweden in the 90s”, p37, Report to the Minister and Head of the Ministry of Health and Social Affairs (SOU 2000 :83). 

[10] The « Economic Freedom of the World Index » is an economic indicator that was created and is published by the Fraser Institute, du Canada. Voir : en.wikipedia.org/wiki/Economic_Freedom_of_the_World 

[11] This was the case between 1970 et 2004 for the Scandinavian countries, according to the study of Bergh, A. and M. Henrekson (2010), « Government size and implications for economic growth », Washington: AEI Press. 

[12] « The Economic Crisis in Finland and Sweden in the 90s”, p28, Report to the Minister and Head of the Ministry of Health and Social Affairs (SOU 2000 :83) 

[13] With the exception of Norway which has a specifically oil-fueled economy. See for instance GDP per capita in PPP, knoema.com/sijweyg/gdp-per-capita-ranking-2013-data-and-charts

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