New Economist

Who's on top?

Lists and rankings fascinate many, from Letterman's top ten to People magazine's best and worst dressed. Even economies have their own such lists. This week the Economist Intelligence Unit published its business environment rankings, with the United States the 9th most attractive place for business out of 82 countries, "the lowest the country has placed since the launch of the business environment rankings in 1997". Angola came last, while Denmark was ranked first, followed by Finland and Singapore. Canada came fourth, followed by Switzerland and Hong Kong.

The World Economic Forum's Global Competitiveness Report 2007-08 was also published this week. They rank the United States first for their Global Competitiveness Index, followed by Switzerland and Denmark.

The IMD's World Competitiveness Yearbook 2007 also ranked the US first, closely followed by Singapore and Hong Kong. Luxembourg was fourth, followed by Denmark and Switzerland.

Finally, the World Bank's Doing Business 2008 (sic) report ranks Singapore first in its Ease of Doing Business Index - followed by New Zealand and the United States. Hong Kong was fourth, followed by Denmark and the United Kingdom.

One can of course argue with the components and weighting of the various indices, which are by their nature somewhat arbitrary. Nonetheless, despite very different methodologies, the same handful of countries crop up time and time again. The general conclusion, as a previous post on this topic argued, is that three groups typically do well:

* the Nordic economies, particularly the smaller economies of Denmark and Finland;

* the Anglo-saxon economies - the US, UK, Canada, Australia and New Zealand;

* the Asian city-states of Singapore and Hong Kong.

So too does Switzerland.

These are clearly very different economic models, showing that in the path to economic prosperity 'one size fits all' just isn't true. Second, most of these countries have relatively 'free' markets and light regulatory regimes. Third, the relative success of the Nordic economies show that low tax rates are not a necessary pre-requisite. Fourth, in Europe smaller countries seem to do better than the larger ones.

Nordic model blog

A welcome addition the my blogroll: nordicmodel, which as one might suspect features articles about Denmark, Finland, Norway, Sweden. Invaluable.

Ten indicators for a happy society

Just about everyone seems to be writing about happiness these days - even investment bankers. Deutsche Bank economist Stefan Bergheim analyses 22 rich countries, and comes up with four varieties of capitalism: the happy variety, the less happy variety (Germany, Spain, France, Belgium and Austria), the unhappy variety (Portugal, Italy and Greece), and the Far Eastern variety (Japan and Korea). So which countries benefit from happy capitalism? it's the usual suspects - the Scandinavians and the Anglo-saxons:

The happy variety of capitalism: Australia, Switzerland, Canada, the UK, the US, Denmark, Sweden, Norway and the Netherlands as well as (to a lesser degree) Finland and New Zealand have organised society and institutions in such a way that they provide the conditions that are important for human happiness.

Lest American or British readers get too excited, Bergheim adds a coda:

Over the last ten years it is above all the Irish, the Spanish and the Scandinavians that have succeeded in implementing considerable happiness-enhancing changes.

Bergheim's paper, The happy variety of capitalism: Characterised by an array of commonalities (PDF), identifies ten commonalities or ''indicators for a happy society" from a cluster analysis of these countries:

1. High degree of trust in fellow citizens
2. Low amount of corruption
3. Low unemployment
4. High level of education
5. High income
6. High employment rate of older people
7. Small shadow economy
8. Extensive economic freedom
9. Low employment protection
10. High birth rate

One can quibble about one or two, but the list seems broadly right. However it is notable that Bergheim glosses over child poverty and inequality of income and wealth. These show greater divergence between the Anglo-saxon and Scandinavian countries than his analysis suggests. Likewise gender equality, or measures of 'active citizenship' and political engagament.

The key lesson of much recent cross-national happiness research, and the recent debates about social Europe, is that there is more than one path to economic prosperity and to high levels of subjective well-being. One is the Scandinavian/Nordic model of social democratic capitalism - more recenly dubbed 'flexicurity'. The other is the Anglo-saxon model of liberal capitalism - the so-called 'Anglosphere'. They each have their pros and cons, but both are associated with low unemployment, robust economic growth, and above-average levels of happiness and life satisfaction.

UPDATE: The Economist blog, Free Exchange, is more sceptical about the paper, particularly its policy conclusions: That's enough happynomics

There's nothing new in the data: happiness correlates positively with wealth, education and trust, negatively with corruption and unemployment. But the conclusion is a touch unusual, coming from an investment bank. For governments:

Happiness and life satisfaction should be explicit policy objectives

Eeek. To do Deutsche the courtesy of taking its paper seriously, has it given any thought to what would follow? Governments telling us how happy we are, civil servants walking around with absurd smiles on their faces, public festivities day in day out, holidays for every trade and age. A favourite slogan of Stalinism, in the depths of the terror, held that "life is better and merrier than ever before".

No! Enough social engineering, even in the name of happiness! let me be miserable in my own way, that's what would make me happy.   

 

Why Danes are smug

Will Wilkinson describes a recent article as "easily the funniest happiness research paper ever" on his Happiness and Public Policy blog. The British Medical Journal is by Kaare Christensen, Anne Maria Herskind, and James W Vaupel: Why Danes are smug: comparative study of life satisfaction in the European Union (PDF). It's all about having low expectations. Here's the key quote:

The key factor that explains this and that differentiates Danes from Swedes and Finns seems to be that Danes have consistently low (and indubitably realistic) expectations for the year to come. Year after year they are pleasantly surprised to find that not everything is getting more rotten in the state of Denmark.

This finding is supported by Danish news coverage of the 2005 pronouncement by Ruut Veenhoven, Dutch Professor of Social Conditions for Happiness and head of the World Database of Happiness, that Danes are the world’s happiest people. The headlines in Denmark ran: We’re the happiest “lige nu.” The phrase “lige nu,” which can be translated literally as “just now,” is a quintessentially Danish expression redolent, indeed reeking, of the sentiment “for the time being, but probably not for long and don’t have any expectations it will last.”

Great Danes?

Ho hum. Yet another article telling us all why Denmark is so fabulous - this time in The New Republic. Jonathan Cohn's piece, Neoliberal utopia awaits: Great Danes, is subscribers only. But fortunately Daniel Von Trier has posted it on his weblog. Here's an excerpt:

...nobody is suggesting that other countries could--or even should--import the Danish model whole. (Among other things, the strong sense of common purpose has an uglier side: relatively harsh treatment of foreigners and immigrants.) The idea, rather, is to take broad lessons from Denmark's experience. And the broadest lesson would seem to be the most obvious one: that it is entirely possible to have a large welfare state, with generous benefits, without choking the economy. Data from the rest of Scandinavia, which all use variants of the same economic model, support this argument.

In a recent Scientific American column focusing on the performance of these Nordic countries, Columbia University economist and best-selling author Jeffrey Sachs blasted the right's anti-tax, antigovernment conventional wisdom, concluding that "a generous social-welfare state is not a road to serfdom but rather to high levels of satisfaction, fairness, economic equality and international competitiveness."

Nor is Sachs the only prominent economist who has taken notice of Scandinavia's success. So have Harvard's Richard Freeman and Nobel Prize-winner Joseph Stiglitz, the former chief economist for the World Bank. Even some relatively conservative economists--like the American Enterprise Institute's Kevin Hassett, who has been an adviser to John McCain--will concede that the Nordic model works, although they are dubious that the United States could copy it: "The Scandinavians," Hassett says, "show that you don't have to have a terrible economy if you have a big welfare state and high taxes."

Even the more conservative of Clinton's economic adviser are interested:

For most of the 1990s, the Clinton administration pursued a relatively conservative set of economic policies that focused on efforts to improve overall growth, such as free trade and balanced budgets. Most economists believe Clinton's economic policies did, in fact, strengthen the economy as a whole. But it's also becoming apparent that the poor and middle class didn't benefit from the subsequent period of growth as much as the administration had hoped--and that both groups remain surprisingly vulnerable to economic dislocation today.

Of course, even back in the early '90s, not every member of the Clinton administration was so sanguine about the policies it was pursuing at the time. Among those dissenting was then-Secretary of Labor Robert Reich, who proposed that "if we blended our flexible labor markets with [Europe's] investments in human capital and put the safety net somewhere in between ours and theirs, you would have the best system in the world." Reich's argument famously lost out to those of Clinton's more conservative advisers--among them former National Economic Council Chairman Laura Tyson and former Treasury Secretary Robert Rubin.

And so it was a little ironic that, a few weeks ago, it was Tyson and Rubin, along with some other former Clinton advisers, who found themselves discussing Denmark at a panel on economic policy co-sponsored by The New Republic and the Brookings Institution. Tyson, who just completed five years as dean of the London Business School, first raised the possibility that Denmark might be a model for the United States, noting that "there is nothing in the growth rates to suggest that Denmark is paying a penalty for having a high level [of taxes and government spending]. ... This is not to mention in addition the fact that health care coverage in Denmark is universal, and it is not to mention the fact that, actually, Denmark has one of the lowest poverty rates in Europe and has the lowest poverty rates for children in all of the oecd countries."

Upon hearing that description, Rubin quipped, "I think I would like to move to Denmark." That, surely, isn't necessary. But a fact-finding visit might be worthwhile.

Forgive my scepticism, but if even a British Labour government balks at the idea of introducing the Danish 'flexicurity' model, then there is no hope of a US administration taking it up. It's not that the Danish aka Nordic aka Scandinavian model dosen't work - it does. But it is damn expensive. I doubt that taxpayers in Anglo-saxon countries are prepared to foot the bill.

Human Development Report 2006

The UNDA has just published the 2006 Human Development Report. The full report is available online, with this year's issue focussing on 'the global water crisis'.

The latest Human Development Index, which analyses 2004 statistics from 175 UN member countries, is published in the report. It once again ranks the Nordic and Anglo-saxon economies highly, accounting for seven of the top ten: 

1. Norway
2. Iceland
3. Australia
4. Ireland
5. Sweden
6. Canada
7. Japan
8. United States
9. Switzerland
10. Netherlands

Finland, for once, didn't come first - it ranked 11th. The United States moved up from tenth to eighth place. The UK was 18th, down from 15 in 2005 "because of a change in how education statistics are reported". The press release notes:

After a costly setback in human development in the first half of the 1990s, Central and Eastern Europe and the Commonwealth of Independent States (CIS) have recovered strongly, and progress since 1990 in East and South Asia continues to accelerate. But  sub-Saharan Africa shows no sign of improving, principally because of the devastating effect of HIV/AIDS on life expectancy.

Danish for all? No thanks, says IMF

We know that the European Commission, the OECD, the World Economic Forum and the World Bank all think very highly of Denmark. But what about the IMF? The Executive Board are quite positive in their latest Article IV consultation with Denmark. Yesterday's Public Information Notice states:

Directors noted that the Danish flexicurity model has worked well, contributing to Denmark's low unemployment. At the same time, they observed that it involves costly benefits and active labor market policies, which may make it less applicable to countries with high unemployment and weak public finances. Nonetheless, the model merits study by other countries, as a possible way to increase labor market flexibility.

However the accompanying report, Denmark: Selected Issues, is not quite as fulsome. It contains a 22 page paper by IMF economist Jianping Zhou entitled Danish for All? Balancing Flexibility with Security: The Flexicurity Model. The concluding remarks start off pleasantly enough:

The Danish flexicurity model has been widely praised for its association with a low unemployment rate and a high standard of social security for the unemployed. The model combines a high degree of labor market flexibility with a high level of social protection. While most European countries are facing chronically high unemployment rates and the needed labor market reforms often face strong political opposition, the flexicurity model looks increasingly attractive to policymakers in Europe. (emphasis in the original)

But then point out some of the potential problems in adopting the flexicurity model:

However, whether the Danish model should and can be adopted by other European countries to reduce unemployment is not obvious. First, Denmark has traditionally had a combination of a flexible labor market and a high level of income protection. Economic performance under this system has varied, as demonstrated by the economic crisis during the early 1980s and the remarkable labor market performance in recent years. Second, other countries have been able to reduce their high unemployment rates to low levels with rather different social models (e.g., Ireland, Sweden, and the United Kingdom). Finally, generous unemployment benefits often raise moral hazard issues that might hinder effective implementation of the Danish model. In this regard, a strict job search requirement and tight eligibility criteria for unemployment benefits are key.

The Danish model is costly. The tax burden in Denmark is heavy because of the need to finance the country’s high spending on labor market programs and unemployment benefits. As most countries that are tempted to adopt the Danish model will typically start from a high unemployment level, a move toward the Danish model will, in the short run, trigger a sharp increase in the cost of unemployment benefits and active labor market policies, thereby widening the tax wedge, with an adverse impact on labor demand and supply. This implies that the Danish model may not be suitable for countries facing high unemployment and budgetary difficulties. Using a calibrated model for France, the paper finds that implementation of the flexicurity model could be costly, and reduction in structural unemployment during the first few years might be limited.

Nonetheless, certain key aspects of the Danish model could usefully be studied and considered by other countries...

So the countries which could benefit the most from a more flexible labour market - those with high unemployment - would face high up-front costs and at best modest short-term reductions in unemployment were they to move to the Danish model. That's why the Danish (or Swedish or Dutch) model has not spread more widely - few politicians are prepared to bear the short-term fiscal and political cost for medium-term gains that may not occur until after they've left office. Gerhard Schroeder is a notable exception - and Germany is now starting to see unemployment rates fall. But how many other European politicians would dare follow his brave example?

Is the US losing competitiveness?

Switzerland, Sweden and Japan were the big gainers in global competitiveness this year, while the United States slipped was the big loser, falling from first to sixth place (see US summary here). That's according to the World Economic Forum's Global Competitiveness Report 2006-2007, published today.

Switzerland moved up from fourth to first place, displacing the US. It was followed by Finland (unchanged in second place), Sweden (up three places to third), Denmark (down one place to fourth) and Singapore (steady in fifth place). The Forum's chief economist, Augusto Lopez-Claros, is quoted in the press release as saying:

The top rankings of Switzerland and the Nordic countries show that good institutions and competent macroeconomic management, coupled with world-class educational attainment and a focus on technology and innovation, are a successful strategy for boosting competitiveness in an increasingly complex global economy.

Business activity in these countries benefits from a well-developed institutional framework, characterized by the rule of law, an efficient judicial system and high levels of transparency and accountability within public institutions. Excellent infrastructure is an additional positive feature of the business environment. Our indicators point to the rapidly growing importance of higher education and training as engines of productivity growth.

Countries that, like the Nordics, are investing heavily in education are likely to see rising levels of income per capita, growing success in reducing poverty and an increasing ability to establish a presence in the global economy.

Other noteworthy developments: the UK slipped from ninth to tenth place (see UK summary here), Japan gained three places (from tenth to seventh), and beleaguered Italy continued its downward trend, dropping another four places in this year’s report (Italy summary here).

Of course, one needs to take these rankings with a large pinch of salt. The annual WEFreport is a quirky compendium of disparate data of varying quality, along with opinions from their own survey:

...results of the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum, together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the Report. This year, over 11,000 business leaders were polled in a record 125 economies worldwide.

Let's see now: 11,000 divided by 125 is an average sample of 88 people per country. Now that's really representative, isn't it?

The surprising thing is that despite such doubtful data, many of the report's judgements ring true. Here's the report's take on Germany and the UK, drawn from the 16 page Executive Summary (PDF):

Germany and the United Kingdom continue to hold privileged positions, ranked eighth and tenth, respectively. There are interesting contrasts in the performance of both economies from the perspective of the GCI pillars. Both countries have excellent institutional underpinnings, and in some areas namely, the property rights environment and quality of the judicial system, Germany is second to none.

The United Kingdom excels in market efficiency indicators, with the most efficient financial markets in the world. The flexibility of the UK labor market and its low levels of unemployment stand in sharp contrast to that of Germany, where the business community is saddled with cumbersome labor regulations. But Germany does somewhat better than the United Kingdom in innovation indicators and the sophistication of its business community, which are among the best in the world.

Sounds about right to me.

Sweden 1, 2, 3, 4

Some more commmentary on Sweden worth noting:

1. A pleased Johan Norberg explains how radical is the Alliance?

Almost all foreign observers - and some Swedish - ask me how radical Sweden´s new government will be. It depends on your comparison. If you compare it to my ideals they are obviously far from it. Don´t expect a liberal revolution. But if you compare it to other governments, my guess is that this government will lead Europe in reform.

It´s true that the moderates were...well...more moderate this time around. But on the other hand, the three other parties are more radical than they have been before, and will push in a more radical direction, for example centern wants more labour market reform and more open borders, folkpartiet wants lower taxes on high incomes and more free trade, and the christian democrats attacks the taxes on petrol and properties...

2. Guardian columnist Polly Toynbee thinks the defeat of Sweden's Social Democrats underlines how a bored electorate could easily turn to Cameron's Tories: Why Stockholm syndrome should terrify New Labour

The fall of the Social Democrats in Sweden reverberates around Europe, but sends particular shudders through those close friends of Goran Persson in Labour ranks. As strangers occupy Stockholm's governing corridors, here is a chilly memento mori for Labour.

...Here is Labour's fear. How can a good government lose power when the country is flourishing? With a rising growth rate of 5.6%, low interest rates, thriving manufacturing and exports Britain would die for, how did it happen? True, unemployment is a problem - but hardly worse than in much of the EU, while Sweden's welfare system is the envy of the world. Abroad, Persson wasn't hampered by two unpopular wars with no end in sight. So why?

...Sweden shows "the economy, stupid" is no longer enough to win. That is alarming to Gordon Brown whose claim to the top job is Britain's unaccustomed economic strength. The warning from Sweden is that when things feel so good, voters feel they can take a punt on a fresh new party. "Time for change" is always a potential winner: a natural democratic urge tugs voters towards throwing the bastards out after a while.

...Persson forgot his wise maxim: in opposition the left must behave like a government, and in government it must act like an insurgent opposition.

3. Andrew Brown, also of the Guardian, disagrees - he doesn't think the British government can learn from Swedish politics; there are too few similarities between them: Knowing left from right in Sweden

There are some big changes under way in Swedish society that we ought to know about, but they have nothing much to do with the outcome of this election. Big changes very seldom do follow elections there, because the governing classes in Sweden tend towards agreement about the direction of policy, even if they disagree about who should carry it out.

I spent six weeks travelling around Sweden this summer, talking to small, boring, unimportant people whose perspective on the election was rather different to Polly Toynbee's. If there has been a swing to the right, it is a deep slow one, which really reflects assumptions about human nature. No one cares about equality or solidarity nearly as much as they did in the seventies. The Social Democrats are now seen as at least as upper class and potentially corrupt as their opponents.

4. Mats Engström, editorial writer at the Swedish newspaper Aftonbladet, posts at Open Democracy on why We still love the Swedish model

So have Swedish voters indeed rejected their famous model? My answer is no, on two grounds. First, there is the tightness of the vote: the "red-green" side (the Social Democrats and its allies) received 46.2% of the vote against the four-party Alliance for Sweden's 48.1%. The close result will be reflected in the balance of power in the new Riksdag (parliament), where the left bloc will have 171 seats to the right's 178.

Sweden's major overhaul

Some readers have rebuked me for my comment in yesterday's post, Sweden moves to the right, that "the much vaunted 'Swedish model' is set for a major overhaul". Likewise, Andrew Leonard over at How the World Works, wrote in his post Nordic welfare woes:

The New Economist promptly declared that the "Swedish Model" is set for a "major overhaul," and the righty blogosphere is hooting with glee at the "socialist" defeat. But the New York Times' prediction that a "fine tuning" is in the offing seems more likely. Observers have been quick to point out that four years ago the Moderates campaigned on a platform of big tax cuts and were trounced. Their proposals for reform have since become considerably more, er, moderate.

...Salon contributor and U.K. journalist Andrew Brown is working on a book about "Sweden and the Future." Taking time off from writing a column for the Guardian on the election to exchange a quick e-mail, he noted that this shouldn't be interpreted "as a big swing to the right. The thing about Swedish politics is that there is always a pretty tight consensus among the ruling class about what ought to be done; just sometimes a disagreement about who ought to do it."

Well, let's clarify what I meant. I don't expect Sweden's uber-generous welfare state to be radically reformed (though the incoming government did pledge during the campaign to cut unemployment benefit). But let's not pretend that nothing has changed. This morning's Financial Times front page has a story by David Ibison in Stockholm: New Swedish government vows to cut role of state in economy

Sweden's new government plans to reduce the state's role in the economy substantially, and will sell off government stakes in some of the country's best known companies, including SAS, the airline, and Nordea, the Nordic region's largest bank. In a shift in economic direction, it has pledged to spin off holdings in unlisted state-controlled firms and to open large parts of the economy to private sector competition.

...The Alliance's plans clear the way for a period of significant corporate restructuring and rapid changes to the private and service sectors. The new government's policy was expected to involve a three-stage period of privatisation and deregulation over the next three to five years, bankers said.

The first stage involves the sale of stakes in listed companies, then the sale of unlisted state-owned groups and finally the possible sale of public service companies, such as utilities. It will see the sale of 20 per cent of Nordea; 45 per cent of Telia-Sonera, the telecommunications group; 7 per cent of OMX, the stock market operator; and 20 per cent of SAS.

Fredrik Reinfeldt, prime minister elect, has not committed himself to a timetable for the sales but said they would go ahead when the best price was obtained. They have a combined market value of about SKr150bn (£11bn).

Carl Bildt, a former prime minister and leader of Moderaterna, the main party in the Alliance, told the Financial Times: "We need to do with the service sector what we did with the private sector in the 1990s." He was referring to the deregulation of the banking, telecoms, retail and automotive sectors in the 1990s. That created some of the country's most powerful companies, such as Ericsson, the communications company, and Volvo, the world's second largest truck maker.

That may not seem like a 'major overhaul' to US readers, but if any European readers believe a rolling five year campaign of privatisation and deregulation won't shake up the Swedish model they're engaging in wishful thinking.