(Almost) everything you wanted to know about the Nordic model

Edward Hugh has already stolen my thunder, but as promised yesterday here is some more about the so-called 'Nordic model'. The Nordic countries are ranked among the most competitive countries in the world, have high living standards, and are home to quite a few successful multinationals. Yet they also have some of the highest rates of taxation and public spending, and lowest levels of inequality, in the world. How do they do it?

That question has been posed many times in recent years. The best recent work I am aware of on the Nordic model was published by the European Policy Centre as a working paper in September: The Nordic model: A recipe for European success? (PDF). Edited by Carlos Buhigas Schubert and Hans Martens, it includes quite a wide range of contributors and is over a hundred pages long. In their introduction, Schubert and Martens provide a good overview of what makes the Nordic model distinct - and successful. But they also point out that what may look to outsiders like a coherent approach contains significant differences:

When one looks at the situation in more detail, the Nordic model naturally divides into many sub-models. So although it has some clear overall characteristics, there are, of course, also differences. Norway is an oil economy. Sweden is still a manufacturing society to a significant extent. Finland is dominated by one company, Nokia, and is still suffering from losing its biggest trading partner – the Soviet Union. Denmark has a small, flexible economy which relies on pockets of high-tech and generally small and medium-sized businesses.

Can the Nordic model be replicated? Perhaps, but not easily. The authors also note that the Nordic countries have small populations, are very homogenous, "with a preference for equality, inclusion and collective action". Most also have a long history of political dominance by social democratic parties. Those cultural and political characteristics, and the institutional complementarities that go with the Nordic economic and social model, will make it harder to export key elements elsewhere, particularly in anglo-saxon countries.

Though recommended reading, I would add the caveat that you won't find much criticism within the EPC document. It was "produced with the generous support of the Nordic Council of Ministers", after all.

Also worth a look:
* The Nordic model - a model for Lisbon? (PDF), a 16 page paper prepared by Danish, Finnish and Swedish Social Democrat MEPs for a Socialist Goup discussion, May 2005.
* A new book by Olli Kangas and Joakim Palme, Social Policy and Economic Development in the Nordic Countries, Palgrave, July 2005 (though it is more about social policy than economic).
* The January 1999 Economist survey of the Nordic countries, Happy family? (Unfortunately, most is only available to subscribers only).
* A 1996 conference paper by Lars Mjøset, Nordic economic policies in the 1980s and 1990s (PDF).
* Papers given at a 2001 seminar on the Nordic alternative and the related Nordic model website.

Comments

[Shaun]

I also recommend - Huber, Evelyne and John D. Stephens Development and Crisis of the Welfare State. In its comparison of welfare states, you can see why the Nordic model is a lot more sophisticated than most people (including myself) realised.

[hirvi]

[I]...particularly in anglo-saxon countries.[/I]

I believe that's true. But many of them seem to be 'adversarial' as opposed to 'consensual' thinkers, so is there any evidence they'd want to be like us?

[Tom Geraghty]

It's funny how the knee-jerk "Nordic model is not exportable" theme is taken as gospel, but nobody ever makes the obvious parallel argument that the deregulate-everything "Anglo-Saxon" model may not be appropriate for all countries due to the scale or social or cultural idiosyncracies of the US or Britain.

[New Economist]

Tom

I take your point about the anglo-saxon model. However:

(1) I am not saying the Nordics should import our model, when they already have a system that seems to work as well, if not better.

(2) There is greater homogeneity in the Nordic countries than the anglo-saxon ones. If a model can work for a country as tiny as New Zealand as well as it does the enormous US economy, that does tend to suggest it may 'export' more easily than one which has only really been tested in a bunch of relatively small and homogenous countries.

[Stephen Gordon]

I don't really understand why it's so important to note that the Nordic countries are homogeneous, and why that would be an obstacle in exporting that model.

Could you (or someone) expand on this point?

[New Economist]

By homogenous, I mean - until quite recently, at least - each country being dominated by one religion, one language, one race, one political party, and a population small enough that most of the key decision makers grew up together and know each other well. A little like if New England had been a separate country for the past 300 years, with little immigration from the rest of the United states and most of its popoulation still pilgrims.

[hirvi]

Stephen,
perhaps NE is implying that 'homogeneous countries' have a different approach to social solidarity?

If so, he could be right, at least as far comparing Nordic to Anglo-Saxon economies is concerned.

Looking at recent OECD child poverty* stats, one finds the Nordic countries occupying the top four positions (= the least child poverty), and the English-speaking countries taking six of the bottom eight, with not one of them making it into the top 15.

(*with poverty defined as households with income below 50 per cent of the national median income)

[Stephen Gordon]

That's what I thought, but I still don't see why a lack of homogeneity would make it harder to import the Nordic model.

I like the Nordic model, and I'd like to see more of it here. Offhand, I don't see why Canada's relative heterogeneity would be an obstacle, so what I'm really looking for is a way to counter arguments along the line "The Nordic model can't be applied to Canada because Canada is a heterogenous country." I can't plausibly reply "No, it's not", so right now my answer would be "So what?"

There's probably a good comeback to that, and I'd like to learn more about this line of reasoning if it's going to keep coming up - as it seems it will.

[Jonathan Goldberg]

Stephen:

My reference answer to your question:

I don't really understand why it's so important to note that the Nordic countries are homogeneous, and why that would be an obstacle in exporting that model.

Could you (or someone) expand on this point?

is here:

WHY DOESN’T THE US HAVE A EUROPEAN-STYLE WELFARE SYSTEM?
Alberto Alesina
Edward Glaeser
Bruce Sacerdote
Working Paper 8524
http://www.nber.org/papers/w8524

The basic thesis is that ethnic and above all racial animosity makes people unwilling to pay taxes to benefit "them."

[hirvi]

"That's what I thought, but I still don't see why a lack of homogeneity would make it harder to import the Nordic model"

Stephen, I agree with you.

Allowing people not to have healthcare or to be fully educated, even making them pay for higher education purely because they don't have money, means terrible inefficiency, but has nothing to do with lack of homogeneity.

[Daniel]

Hej!

Well, I would challenge the finding that the Nordic countries are homogenic.
A raise in population in Sweden from 8 to 9 mil people for exoample was mostly due to imogration from now neighboring countries. Take walk around the outsirts of Stockholm, Malmo or Götheborg and you can see yourself.
Those numbers (or rather the percentage) might not be much comparred to the US or Canada but do not forget that people regard themthelves as homegenious with all implications that come with it and theat the Nordic countries do not regard themselves as imigration countries (as arguably the US and Canda)

[Stephen Gordon]

Jonathan, thanks very much; I'd heard of that paper, but I hadn't read it yet. I've just given is a quick skim-through, but there's a lot to digest. Thanks again!

[fjolset]

I used to think that the old 'cultural homogeneity' argument was compellling. I lived in Denmark for a couple of years, and this made sense. However, it ceased making sense when I lived in Toronto for six years and saw that the Canucks had made far more progress in social equity than the Americans. That's just about what tipped me ovet to the left side of the dived.

[Øystein Sjølie, Oslo, Norway]

Reporting as a Norwegian economist/journalist:

As noted, the Nordic countries are not alike, and only two are really rich (in a Western EU/north America context): Denmark and Norway. Norway has a lot of oil, and is one of the worlds three leading exporters. However, much of the income (around 80 per cent at present rate) is saved in a well diversified fund abroad. Even subtracting this, Norway would be a very rich country on a per capita basis, on par with Denmark and far beyond Finland and Sweden. The two latter countries have more big manufacturing companies, partly based on energy and pulp.

However, one of the striking similarities between the countries is the income equality, which translates into low poverty rates. Most Norwegian experts (who dont refer to this as a cultural feature) points to the way the labor markets operate. Hiring and firing are certainly harder than in the US and UK, but far easier than in most of the EU continent. But wage settings are centralised. This has worked as a major compressor, jacking up the wages of the blue-collar guys at the expense of the white-collars. A conspiracy between the well-organised capitalists and the well-organised manual laborers has compressed living standard differences substansially.

While Norway has a generous welfare system, most of the benefits from the system are connected to labor market participation. The welfare state can then be viewed as a well developed insurance scheme for the employed. Together with a compressed wage structure, this gives strong incentives to work, and the employment rates in both Norway and Denmark are among the worlds highest (at 76 per cent, surpassed only by Iceland and Switzerland).

This three year old paper, cowritten by the Norwegian economist Kalle Moene, is still relevant:
http://www.oekonomi.uio.no/memo/memopdf/memo3503.pdf
Among other things, they argue that homogenity is no prerequisite for a "nordic model".

[Joe]

I think the Nordics model might work because of the size of the counties. What I mean is they are small enough to be run as if they are corporations themselves. That is they have to be competitive on a global scale just to stay afloat. Our government in the US doesn't have to really compete with anyone today. It used to compete with Russia, that is why both the US and Russian systems used to be more efficient. For example NASA--we spend almost as much money on NASA today as we did when we went to the moon. Yet somehow with after 45 years of advancement we have lighter, faster, and better everything and we can't get back to the moon because it will cost too much. It should be way cheaper to go to the moon today than it was in the 60s. I wonder how long it would take us to get to the moon if another country were planning to attack us from there. The Nordic counties are competing like we were in the 60s, that is why they are better at running themselves.

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