All Europe needs to do to save its ailing welfare states, goes the current thinking in Brussels, is copy the “Nordic Model.” By this popular notion, Sweden, Denmark, Norway, Finland and Iceland have found the magic formula to marry high growth with “social justice.” This much misunderstood model is likely to be discussed at a European Union summit next week devoted to the economy.
As economic and social analysts living and working in the Nordic countries, we feel duty-bound to warn against an uncritical embrace of the Nordic Model, which remains as ever an extreme version of the cradle-to-grave state most Western European nations already have. But the Nordics are a model in a different sense than understood in Brussels. Much of their economic success in recent years stems from the introduction of free-market reforms, not the welfare protections these countries are famous for. These reforms are the nucleus of a new, second-generation Nordic Model that ought to inspire Europe. A brief look at each country shows how it happened.
Sweden
Between 1890–1950, it had one of the highest growth rates in the world, with an average tax burden (taxes collected as a percentage of gross domestic product) of 10–20%. This period explains much of today’s wealth. Of Sweden’s 50 largest companies, only one was started after 1970. That’s no big surprise as by 1980, the average tax burden had reached 50% (where it remains today) while the labor market became highly regulated and the size of the welfare state reached epic proportions.
Sweden would pay dearly for these follies. According to the OECD, the country’s per capita GDP ranking slid from fourth place in 1970 to 13th place today. Officially, unemployment hovers around 6% but once all those on sick-leave, early retirement or otherwise subsisting on state aid are included, the figure balloons to around 20%. Between 1995-2003, 11 of the EU-15 countries saw greater employment growth than Sweden.
In the early 1990s, though, market reforms were enacted that improved Sweden’s economic performance. The telecom market was deregulated, marginal tax rates were cut to 65% from 87% (in 1979), companies were allowed to provide private health care coverage and the pension system was reformed. As a result, between 1995 and 2004, average GDP growth per capita was 2.6%. This compares to only 0.8% between 1985 and 1994.
Denmark
Here’s a similar, though less extreme, case. In 1970, in terms of GDP per head, Denmark was the world’s third richest country, surpassed only by the U.S. and Switzerland. In 2003 – after more than 30 years of expanding welfare statism – Denmark dropped to seventh. Recent changes, such as easing firing rules, have ensured that this drop in prosperity was not more dramatic. For instance unemployment benefits are now limited to four years and the unemployed are forced to take training programs to qualify for support. Long-term unemployed – as well as young people – also risk losing benefits for refusing a job offer. This has reduced the jobless rate. Even more jobs could be created by cutting the top marginal income tax rate, which stands at a confiscatory 59%.
Finland
The country suffered a severe economic depression in the beginning of the 1990s, resulting in the bankruptcy of countless inefficient companies. That’s when the government started cutting costs, accelerated privatization and eliminated the double-taxation of dividends. As a result, private wealth, corporate profits and tax revenues skyrocketed. This, in turn, made it possible to lower the personal income tax rates by six percentage points in all income groups, on average to 35% from 41%. These dramatic changes galvanized the Finnish economy.
Norway
It’s a special case as its incredibly generous welfare state can only be financed by enormous oil and gas revenues. And yet, even there, market-oriented ideas enjoyed a certain renaissance when the hegemony of the Labor party was broken in 1981 and a coalition of nonsocialist parties liberalized the financial markets, abolished the state’s broadcasting monopoly and introduced private hospitals. When a more “moderate” Labor party came back to power in the early 1990s it chose not to reverse these policies. The center-right coalition, returned to power in 2001, went further, introducing competition between private and public schools. As one out of three Norwegian workers works in the public sector and revenues from oil and gas will decrease over the years, the demands of an aging population can only be met with further reforms to strengthen the private sector. But that’s in doubt. The current Socialist coalition won the 2005 election promising “less markets and more government.”
Iceland
Today, this Arctic island is one of the wealthiest countries in the world. But until the late 1980s, Icelandic society was deeply socialistic with many state-owned enterprises, high taxes and excessive government interference in business. Starting in the early 1990s, Iceland has steadily liberalized. Corporate taxes were cut to 18% from 45% in 1991 and income taxes to 23.75% from 32.8%. During the same period, most state-owned companies were privatized and streamlined regulations.
Iceland’s GDP grew on average 4.3% annually between 1995-2005. The sole exception was 2002 when the economy contracted 1.3% mainly due to a decrease in investments as a result of the Icelandic Central Bank’s actions to curb inflation in that year. Purchasing power, though, has grown every year since 1995 and unemployment is 1.6%.
So please don’t use the Nordic countries to try to validate the big-state model. It’s just the opposite.
Nordic Stars
By Af Chresten Anderson
Published in the Wall Street Journal, 16 March 2006
Written together with:
Mr. Dag Ekelberg, deputy director of Civita in Norway.
Mr. Gudmundsson, director of Veritas in Iceland.
Mr. Munkhammar, director of Timbro in Sweden.
Mr. Nyberg, an economist at the Finnish Business and Policy Forum EVA.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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