LETTERS TO THE EDITOR

Summer 2007

by Jaakko Kiander

Sir,
Although Nordic nations and their welfare systems are not identical, they share so many similarities, while displaying so many differences to other countries in the EU, that it seems quite legitimate to speak about a Nordic socio-economic model. The Nordic countries can be classified as the most advanced welfare states in the world; they are egalitarian societies with extensive public sectors, high taxes and large-scale income redistribution, coupled with low poverty rates and relatively equal income distribution.

This combination has, of course, raised questions about their economic viability, because redistributive taxes and extensive social security systems are usually seen by economists as bad for work incentives, and therefore bad for job creation and investment. High levels of union membership plus labour market regulations are also often said to be obstacles to employment because they tend to raise minimum wages and compress the wage structure. It’s fairly common-place to hear criticism along these lines; the OECD, IMF, numerous lesser think-thanks and many financial journalists have all predicted an economic meltdown for the Nordic nations. So far, reality has defied these critics.

In her article, Lorraine Mullally joins the prophets of doom, claiming that “the Scandinavian model has backfired in Sweden, Denmark and Finland”. It is true that these economies have not flourished like Ireland, which Mullally uses as a benchmark of success. But, then again, neither have other OECD countries. When compared to the OECD average, and to the major European economies, the Nordic nations have done well. For example, Sweden, Finland and Denmark repeatedly come top of the list for international competitiveness in annual reports published by the World Economic Forum and the Institute of Management Development. Sweden and Finland are world leaders in many technology rankings, too. Hard macroeconomic data underscore their success, with average GDP per capita (adjusted by purchasing parity) at around $36,000 in the four Nordic countries last year, above the UK, France and Germany which averaged just $31,000. Irish GDP was higher at $43,000, but Ireland still fell behind the Nordic countries in terms of gross national income per capita. This is the price that Ireland pays for its high level of foreign direct investment: a large chunk of Irish GDP is paid out to overseas investors.

The Nordic countries have also been able to prevent permanent mass unemployment. Some writers and politicians, including the Swedish centre-right opposition before the recent election, have tried to challenge figures that show Swedish unemployment is low by arguing that the “true” numbers are much higher than the official ones. Yet their argument is not supported by statistics on the percentage of the working-age population who actually have jobs. By this measurement, an average of 74% of the Nordic workforce is employed, better than the average of 69% in the UK, Germany and France. In spite of their welfare systems, a high proportion of Nordic people do go to work. It is true that overall employment is supported by large public sectors, but that does not mean that Nordic businesses employ fewer people than the private sector in other European countries.

There is also little evidence to substantiate the claim that the Nordic model has “meant poorer public services”, as suggested by Mullally. International comparisons are difficult, but Nordic social services, health care and education systems all appear in good shape and are probably functioning much better than their counterparts in the US and the UK. It is well known that the Finnish school system has produced the best results in the OECD’s “PISA” study, which compares educational attainments worldwide. The state of public finances is also healthy in the Nordic countries. On average they have a surplus of 3% of GDP, while the three biggest EU countries have deficits of equivalent amounts. The level of gross public debt is only 40% of GDP in the Nordic countries, again relatively low in international terms.

Far from being economic disadvantages, the Nordic countries’ welfare systems are most likely to be the “secret” of their economic and social success as they create both the incentives and opportunities to increase the labour supply. This is especially true for women. Even mothers with small children, and those on the lowest incomes such as single parents, can easily return to work when the state provides heavily subsidised day-care for children. Furthermore, the large-scale social services sector offers many employment opportunities, again particularly for women. Finally, as most social benefits are earnings-related, they provide in-built incentives to encourage the work ethic. As a result, the Nordic countries are egalitarian societies which encourage education and hard work, and they still manage to be among the richest countries in the world.