Way Up North Where the Air Gets Cold

More people are asking if the "Nordic Model" can be applied to other economies, or if there is something unique about Scandinavian economies that cannot be replicated elsewhere:

An Economy With Safety Features, Sort of Like a Volvo, by Alan Cowell:  When people talk of "the Nordic model" as Europe's panacea they may consider places like this ferry port in southern Sweden... The factory closed last year ... as the telecommunications company reduced its global work force of 107,000 to about 63,000. But for people like Marie-Louise Nordstrom, 53, who lost her position ... after 35 years in the same factory, the change has been relatively painless.

Under a deal between bosses and labor unions, she ... will remain on full pay for 12 months... Then she will qualify for unemployment benefits worth 80 percent of her salary. In the meantime, a private company sponsored by Swedish employers is helping her retrain and recover from the shock of losing her job...

At a time when major nations in Continental Europe ... are questing in vain for release from the economic doldrums, ... [t]he Swedish economy is set to grow by 3.7 percent this year — almost twice the rate forecast even for Germany... Unemployment, though higher than the Social Democratic government admits, is still lower than the nearly double-digit joblessness of France or Germany.

Yet, defying conservative American beliefs, the economy prospers — even though taxes here remain high and big government administers cradle-to-grave social programs that absorb more than half of the national output. It is called the Nordic model. The question some Europeans are asking is: Would it work farther south, in Germany or France, or even Italy?

The roots of Sweden's current prosperity lie in the early 1990's when the Scandinavian nations were buffeted by recessions that sent unemployment and budget deficits soaring.... Labor unions, said Ingemar Goransson, a blue-collar union negotiator, saw their mission as "not trying to save jobs." "Our job is to create a society where people are protected and suffer as little as possible and get new chances in society with education and training," ... "...There's a general culture of problem-solving instead of fighting."

Indeed, ... Swedes are prepared to pay top dollar for the safety features: income taxes peak at 55 percent. Traditionally, too, ... Scandinavian lands have drawn economic benefit from policies that bring women into the work force far more than in some other European countries. But there was another element that distinguished them from Continental Europe, where globalization is seen as little more than code for the imposition of American slash-and-burn capitalism and the destruction of the welfare state.

"I think the fundamental aspect of the Scandinavian model is trust" among the unions, the government and the people, said Joakim Palme, a leading expert on Nordic welfare systems and the son of the murdered prime minister, Olof Palme. While many in France or Germany fear globalization, he said, "the Scandinavian experience has been to be positive to this change, because it is producing more wealth in the end."

That might be precisely why the Nordic model will not easily take root elsewhere in Europe... The question, too, is whether the Nordic model itself can survive at a time when the region, like the rest of Europe, is challenged by immigration, reshaping the social fabric that once hastened reform.

"Sweden is a small country," Mr. Goransson said. "Up to 10 years ago it was very homogeneous .... Everything was very alike. ... all Swedes looked the same; almost thought the same. Because we are all so equal, we can share the pain of the problems."

These days, though, an estimated 13 percent of Sweden's nine million people were born outside the country, and unemployment among immigrants is significantly higher than among native Swedes... A report last year by the European Policy Center ... said Scandinavia's "negative approach towards immigration" might "represent the biggest threat to the long-term survival" of the Nordic model...

Of course, the Nordic model has its quirks. Sweden's official unemployment rate of 4.8 percent, many economists say, is distorted by the omission of people in government-financed retraining programs. The labor unions calculate the real figure at closer to 8 percent. According to some estimates, Swedes take an average of 17 weeks a year off from work ... further twisting the statistics...

And in this debate, size, geography and history do matter. Sweden has been free of war for 200 years. Norway, with 4.6 million people, is rich in oil but fiscally cautious. The economy in Finland, with some 5.2 million people, revolves around the fortunes of the cellphone giant Nokia. Also, the Nordic countries tend toward the individualism of seafaring lands whose past spanned trade and conquest. Only Finland, the lone republic among the Scandinavian monarchies, joined the euro common currency, and Norway has rejected membership in the European Union altogether...

Jeffrey Sachs recently addressed the question of whether the Nordic model is transferable:

But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness.

Comments

[finnsense]

I've heard the argument that the Nordic model is not replicable due to the homogeneity of the Nordic countries a lot. I've even made the argument once or twice but on reflection I'm not that convinced.

The argument revolves around the idea that people only care about people "like them" enough to pool risk in a welfare state. In countries with large immigrant populations people distrust other groups so they're not willing to share risk with them. It makes some sense but it's not the feeling on the ground. People in Finland who dislike the welfare state don't complain about immigrants sponging, they complain about people sponging full stop. Likewise, people here (Finland) who think people should be protected usually think everyone should be protected, immigrants or not. They see it as a basic human right.

The truth is that though Finns are generally white and non-religious, a Helsinki lawyer has no more in common with a reindeer herder in Lapland than an Iraqi refugee. The divisions here are far less stark than in the UK where I grew up but they are still very obvious.

I don't know if the Nordic model could be replicated in the US. Probably it could, if it worked. i.e. if it could be shown that certain groups were not manipulating the system. The model could certainly be replicated in central Europe where the differences are largely about labour models, not social protection in general.

[Stephen Gordon]

I'm not convinced that ethnic homogeneity is necessary, either. Although it could be convincingly argued that ethnic cleavages make it difficult to apply the Nordic model to the US, it could well be that the reasons why that is the case are particular to the US experience.

I have a post about ethnic diversity and the nordic model that expands on this point.

[anne]

Jeffrey Sachs:

"But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness."

Precisely so.

[anne]

Thank you, Ninja:

http://www1.worldbank.org/devoutreach/textonly.asp?id=352

September, 2005

The Scandinavian Model and Economic Development

Praised but dismissed

Today the European Union looks to the Nordic countries in search of role models for how low inequality can be combined with good economic performance (Herald Tribune, 17.9.05). Yet, in spite of recent praise, the Scandinavian model is still dismissed as an infeasible model for developing countries. Based on generosity towards the poor and protection against market competition, the argument goes, the Scandinavian model is only possible in consensual, homogeneous and affluent societies with an extraordinary commitment to equality. In third world countries that are conflict-ridden, heterogeneous, and poor, the model has no relevance, it is claimed.

In Moene and Wallerstein (2005) we present a more agnostic view, which we summarize below. We argue that the Scandinavian model is not an end state, but a development strategy. Scandinavian consensus, homogeneity, and affluence are products of the model, not prerequisites. We claim that wage compression attained through highly coordinated wage-setting was the central policy. As we see it, the economic benefits of wage compression would be as significant in South Africa, Brazil, or India today as they were in Scandinavia between 1935 and 1970. The political feasibility of a policy of wage compression, however, is open to doubt. Hence our agnosticism regarding whether or not the Scandinavian road to affluence can be repeated....

[a]

Following Anne, here is the conlcuding part of the same article:

==============
We do not believe that Scandinavian workers are inherently more egalitarian than other workers. Rather, our belief is that a preference for greater equality is widespread. The preference for greater equality can only be acted upon to the extent that wages are set centrally. When wages are set at the plant level, for example, wage compression can only occur within the plant. When wages are set at the industry level, wage compression occurs within the industry. When wages are set at the national level, wage compression occurs at the national level.

Is the Scandinavian model politically feasible in the third world? This, it seems to us, is the critical question. The elements that appear to have been important in allowing wage differentials to be reduced through collective bargaining were (a) well organized employers, (b) encompassing trade unions that included the low-paid workers and (c) immediate benefits of wage compression in terms of the earnings of those at the bottom. These conditions are not notably present in Africa, Asia and Latin America today. But we still understand very little of the political dynamics that made wage compression possible in an environment with strong unions and a government that considered industrial workers to be its core constituents. Thus, we are reluctant to conclude that the social democratic experience cannot be repeated.
==================

[a]

And I argue, that is why the republic party's spirit in the past 20 years is extremely anti-the political spirits described in the study in Moene and Wallerstein (2005).

American public need a leader that can unite them and call for "preference for greater equality" that is wide spread among all cultures. And then... it is possible to get there.

[Bruce Wilder]

I wonder if "ethnic homogeneity" is not code, a compact and polite way of referring to the political legacy of slavery or aboriginal genocide, which dominates the politics of some American States. (One might notice that the division of the Kalmar Union into the three Scandanavian countries might have something to do with ethnic divisions, of a remarkably subtle sort.)

I notice that some people, and maybe economists in particular, tend to approach these phenomena, in search of a kind of implicit "system" solution, where the explanation is anchored in an implicit and timeless "equilibrium" solution. Given a bunch of factors, "ethnic homogeneity", "access to international trade", the result is what we see. Change the variables, and the system will seek a different "equilibrium". Thus, can we tweak Italy, and make it more like Sweden?

What I know about politics, and the character of politics, is that it has deep historical roots, persistent patterns. It is apparently "path-dependent", in the sense that persistent patterns of social relationships are apparent in politics.

Massachusetts is not exactly ethnically homogenous, nor is it a stranger to racist expression. But, Massachusetts adopted a Constitution in 1780 (still in effect, the oldest constitution still in operation in the world), which declared all men free and equal, and in 1784, its courts confirmed that that constituted a ban on slavery. (more than 70 years later, Southerners were arguing that similar language in the Declaration of Independence did not encompass negroes, and that the U.S. Constitution granted no rights to blacks, "which a white man was bound to respect") Massachusetts, before the Civil War, was a center of both anti-slavery agitation and, interestingly, "know-nothing" anti-immigrant agitation; a "know-nothing" state government adopted a law mandating racial integration in schools, before the Civil War. Today, the State allows gay marriage and has recently adopted a plan mandating universal health insurance.

The first State in the Union to flirt with gay marriage, and to create a system of near-universal health coverage was Hawaii, again not exactly ethnically homogenous. Very recently, Hawaii's politics has swung right-ward, under the pressure of economic hardship, religious revival and a meth epidemic.

I would venture that Scandanavian politics might be a result of how those societies responded to the experience of the extreme poverty of the 18th and 19th centuries. During the last half of the 19th century, large parts of Scandanavia were quite literally on the verge of starvation; fully one-third of the population of Norway immigrated to the U.S. in two successive generations; Denmark and Norway created huge merchant marines, for the same reason New England did -- lacking resources at home, they could engage in carrying the trade of others -- does that have something to do with today's easy access to international trade?

Back in the U.S., reactionary politics and the extreme poverty and economic inequality, which is its goal, seems to flourish in the States of the old Confederacy, supported by pervasive racism and a religion emphasizing sexual hypocrisy and an empty public piety. Mississippi, which State was subsidizing racial terrorism into the 1960's, recently reformed its "welfare" system to cutoff support to deadbeat quadriplegics. The relatively "moderate" States of the old South have been so, for many, many decades. North Carolina's sharply divided politics are not the product of Research Triangle; it is the other way around. North Carolina was the only southern State to mandate free public education before the 19th century, though, typically, it did not actually fund it. Unionist western North Carolina dissented thru the Civil War and became the base of a populist politics of racial alliance after.

The relatively clean politics of Michigan, Wisconsin and Minnesota might have something to do with the combination of their inheritance as parts of the Greater New England migration of the early 19th century, and the Scandanavian migration of the late 19th century.

Michigan and Alabama founded the first land-grant colleges in the U.S.; today, Alabama's legislature appropriates more per state college student for their state university system than does Michigan, which, nevertheless, boasts large, prestigious and well-funded institutions; Michigan, under a Republican governor, carried out a program to ensure a generous minimum standard of funding for elementary education, while Alabama, under a Republican governor, refused to revise its regressive system of taxation and education funding.

Oklahoma is one of the most politically conservative States in the Union at the moment -- often bizarrely conservative. Does that have something to do with stealing the whole damn State from the Indians? Ya think?

I'd like to see the contemplation of the supposed mystery of Swedish prosperity amidst the welfare State balanced by contemplation of the "mystery" of Mississippi or Texas poverty amidst the libertarian paradise of low and regressive taxation and non-provision of State services. Tell me again why Somalia, without a central government, has not burst forth as a libertarian model for the world.

[cm]

finnsense: I'm sure that at face value, even in Finland few people are happy paying high income/VAT tax rates (?), excise taxes on booze, and I'm sure there is some good amount of anger directed at "slackers", esp. on the part of the better to do with a sense of entitlement to the fruits of their "hard work". But then there appears to be a "mysterious" social consensus that compels people to even reflect on this, in the aggregate come to the conclusion "better this than that", and largely banishing "slacker-bashing" to private discussions.

I'm wondering whether Northern societies, by virtue of having lived and living in a rather harsh climate not lending itself easily to agriculture, have a larger sense of social cohesion, as at least historically the harsh environment has led to a more widespread distribution of hardship, it being more difficult to achieve self-sufficiency.

Just a thought.

[anne]

http://www.iht.com/bin/print_ipub.php?file=/articles/2005/09/16/business/wbmodel.php

September 17, 2005

The Envy of Europe
By Thomas Fuller and Ivar Ekman - International Herald Tribune

STOCKHOLM Per Nuder, the finance minister of Sweden, says he is often approached by other European politicians who want to know the secrets of his country's economic success. "The bumblebee is flying," his colleagues say.

The reference is obscure but appropriate: Just as scientists marvel at how such an unwieldy insect can actually fly, European leaders want to know how Sweden and its Nordic neighbors, so heavily laden with cradle-to-grave welfare systems, float high above the struggling economies of much of the rest of the Continent.

Finland, Sweden, Denmark and Norway are rated among the top six for competitiveness by the World Economic Forum and score highly in just about every international comparison on living standards, education and health care. The Nordics are outpacing the European average in economic growth and, remarkably for countries with such large public sectors, all have budget surpluses.

How do they do it?

The question has taken on even more pertinence this year as the European Union struggles to overcome an existential crisis, highlighted by Dutch and French voters' rejections of the proposed EU constitution and the stalemate over the bloc's budget.

With an eye on Asia's rising giants, Prime Minister Tony Blair of Britain, who currently holds the rotating presidency of the EU, wants to reduce trade and employment barriers and steer Europe to a more free market orientation.

But he faces resistance from President Jacques Chirac of France and some of his allies, who are loath to weaken the Continent's so-called social model.

Fans of the Nordic model include Hans Eichel, the German finance minister who invited Nuder to campaign with him Monday. Yet Eichel's Social Democrats face the prospect of defeat in elections Sunday after angering many traditional supporters with attempts to achieve a greater balance between market and welfare-oriented policies.

Economists say the Nordic countries have a solid footing today precisely because they went through a wrenching period of restructuring in the 1980s and 1990s that opened them to increased competition. Unprofitable manufacturing industries were winnowed out while research and development was increased to buttress high-technology industries. The service sector was built up, and government programs like pensions and unemployment benefits were reined in. Today, unemployment is manageable - although some economists question the figures. Productivity, a measure of how much each worker produces, continues to increase faster than the European average....

[anne]

http://www.calvorn.com/gallery/photo.php?photo=6454&u=99|5|...

Chestnut-sided Warbler Perched on a Branch
New York City--Central Park, Tanner's Spring.

Thoughtful, provoking comments :)

[Cyrille]

Quite a few people may be happy paying high taxes. Rawls taught us all about the veil of ignorance, and one cannot honestly change his views about taxation on the basis of his increase in income alone.

Although being completely middle class in France (I get 48000$ a year, although my 16500 contribution to unemployment benefits and healthcare is not included in that, so maybe I should say 64500), my marginal tax rate is probably comparable to the top tax rate in the USA (it is 37%).
Yet I am absolutely fine with that, because I don't believe that we have excessive redistribution in this country, and while I know that there is waste at government level that I want to see reduced, I'd much rather see those savings then go towards reducing the debt than cutting taxes.

It seems to me that any objection to high taxes would be a lot more valid if it came from someone not paying a high rate.

[a]

It is interesting that indeed, most of my European friends would say --- "yes more money would be nice, but I don't mind paying tax".

There is this rhetoric that taxing is to take away "YOUR" money to the "evil government". Well, I do mind using my tax money bombing innocent people in another country! But I don't mid taxing me to enhance the education and give more unemployment benefit to workers... I have to say, with the war going on, I do min paying tax to the US government!

I so envy the Europeans that are not war-crazy... They can say "I don'tind paying tax"!

[anne]

http://www.iht.com/bin/print_ipub.php?file=/articles/2005/08/23/opinion/edpower.php

August 24, 2005

In Defense of the Welfare State
By Jonathan Power - International Herald Tribune

STOCKHOLM — The statistics had arrived on the Swedish prime minister's desk that morning, his first day back at work after his summer vacation, cycling around the villages near his summer estate.

It was good news. Goran Persson, now in his ninth year of office, told me that the growth rate for this year will be near 3 percent and next year more than 3 percent - enough, he said, to maintain Sweden's trajectory of the last decade, which was 'above the average for the European Union' and, in particular, 'as good as the Anglo-Saxons, Britain and the U.S.' (He admitted that he was referring to U.S. per capita growth, so as to discount the effect of its fast, immigrant-driven rise in population.)

This raised the first question - how does this self-confessed socialist state do it? What is the secret for success when Swedish taxes are the highest in the world and the welfare state is the country's single largest employer? After all, when Persson came in as finance minister in 1994 the country was reeling economically, as state expenditures on the health and social sectors raced ahead of the country's ability to generate wealth.

'If you have a free economy,' explained the prime minister, 'a highly educated work force, a very healthy people, very high productivity and a sound environment then you can create the critical size of resources to create good growth.

'That has to be joined with adequate public financing of universities, research and development. As long as we are efficient and constantly challenging ourselves we continue to be productive.

'Then if we produce successful growth, the government gets the public's support for high taxes. If the quality of the public sector is good, then a prosperous people will continue to vote for funding it.' ...

[gordon]

Aah, "homogeneity"! Well, Americans would all be Swedes if it weren't for those wretched blacks and hispanics, wouldn't they?

[tnvsmith]

I trully believe globalization to be negative thing. Also, I firmly believe there is a reason why you will Never see anything remotely similar to a Volvo or a Mercedes-Benz come out of anywhere in Africa! There is a point when people and government understand they must work together in order to perpetuate their own survival.
Today in 2006, The powers that be in the US try to appeal to the most TAXPAYERS!!
The Nordic Model does work in a homogenious society with an off-hand common goal of self perpetuation. No work equals no taxable income. No taxable income means no capital for government investment. No investment means nothing happens except people trying to fend for themselves at others expense. If a government is responsible to the people paying the tax, it works! Since many of the Nordic systems of social democracy are actually legitimate,(!!) such a system, within a homogeonous society, can... (and Does) work, effectively. Imagine if the government of Liberia, Rwanda, Somalia, Chad, Ethopia, Mozambique or all the other struggling democracies tried to encourage their tax base to produce tax revenue, thus encouraging finacial growth?!?!? Nothing will ever come from Africa except more and more emigrants looking for work since they have slaughtered all the "bush meat", since their "governments" are continually JUNTAS that are placed in power to give favor to those giving hand to the ones placing power upon the ones who are somewhat popular