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.

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.

Democracy and globalisation

Are democracy and globalisation mutually supportive? A new BIS working paper by Barry Eichengreen and David Leblang, Democracy and globalisation, finds a positive two-way relationship. Here is the abstract:

The relationship between democracy and globalisation has been the focus of substantial policy and academic debate. Some argue that democracy and globalisation go hand in hand suggesting that unrestricted international transactions leads to increased political accountability and transparency. And, politically free societies are likely to have minimal restrictions on the mobility of goods and services across national borders. Others argue that the causal relationship should be reversed: democracies are more likely to have closed markets and vice versa.

We examine these relationships between political democracy and trade and financial globalisation over the period 1870-2000 and treat both democracy and globalisation as both cause and effect. Our empirical strategy uses instrumental variables and estimates relationships using the Generalised Method of Moments framework. Our general findings support the hypothesis of a positive two-way relationship between democracy and globalisation.

This paper is one of several presented at a BIS conference last June on Financial Globalisation. The papers have recently been posted online, including comments on the Eichengree and Leblang paper by Harold James and Marc Flandreau. Worth a look.

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'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.

More on the Swedish model

I know I wrote about it Sweden only a few days ago, but can't ignore the long piece on the Swedish model in this week's Economist: Admire the best, forget the rest. An excerpt:

In recent years defenders of the European social model—capitalism tempered by a generous and interventionist welfare state—have taken to praising Scandinavia to the skies. ...Sweden, whose 9m people make it by some way the biggest Nordic country, is a particular favourite. A year ago the Guardian, a British newspaper, said it was the most successful society the world had ever known. As if to bear this out, the Swedish economy grew at a sizzling annual rate of 5.6% in the second quarter of 2006, enough to trigger a spate of interest-rate rises by the central bank. Sweden's big companies, such as Ericsson, SKF, Telia and Volvo, are breaking export records.

A visit to the capital, Stockholm, confirms that life for most Swedes is pretty good. Yet there is disgruntlement in the air, and it is causing nervousness among the Social Democrats, who have ruled Sweden alone or with other parties for 65 of the past 74 years, and must on September 17th again face the voters in a general election.

...the biggest beef is, perhaps surprisingly, the economy. The opposition maintains that Sweden's economic record is nothing like as good as its fans believe. If so, that has implications for other Nordic economies—and raises doubts about whether other European countries are wise to look northwards for a model.

In truth, the Swedish economy's best years are long gone. Between 1870 and 1950, average growth in Swedish GDP and productivity was, by some measures, the fastest in the world. In 1970 Sweden was the fourth-richest member of the OECD club of industrial countries. But for most of the past 50 years the story has been one of relative decline, including a deep recession in the early 1990s (see chart 1). By 1998 Sweden had fallen to 16th in the OECD rankings. It has since climbed back a bit, but the relatively strong growth of the past decade should be seen mainly as a rebound from the 1990s trough.

For all that, even the opposition accepts that Sweden has some enviable economic advantages. Anders Borg, Mr Reinfeldt's chief economic adviser, praises the country's well-managed, export-driven, high-tech companies and its well-educated workforce. Female participation in the workforce is higher than in most other countries; English is widely spoken; and Swedes are thoroughly computer-literate. Sweden is one of the few rich European countries for which globalisation has been a benefit, not a threat. Most other European governments would be pleased if they could only emulate Sweden's success.

What's not to like about Sweden?

One of the fastest-growing developed economies in the world. Plenty of jobs. Generous welfare and a stable currency. What's not to like about Sweden? Quite a bit -- at least according to the Swedes.

So writes Bloomberg columnist Matthew Lynn today: Sweden Sends Message to Europe as Election Looms. Lynn continues:

As the country of 9 million people prepares for a general election on Sept. 17, there is a good chance the most consistently left-of-center of European nations will take a rare step toward the right. The four-party opposition spearheaded by the Moderate Party had a lead in recent polls ranging from 3.5 percentage points to 11.5 points over the governing coalition led by the Social Democrats.

That is more than enough to make a change of government a real possibility. "Almost 10 years without reforms have passed and problems are mounting,'' Johnny Munkhammar of the free-market think tank Timbro in Stockholm said in an e-mailed statement. "Lower real employment, increased poverty, very high youth unemployment. This only shows that Sweden should do much more of the market-oriented reform that created improvements 10-15 years ago,'' he said.

Plenty of his fellow countrymen are thinking the same way. If the Social Democrats are voted out, there may well be an important message for the rest of Europe. If they can't hang on to power even with the success of their economic policies, the outlook is less than rosy for other European governments that support expensive social systems.

On the surface, Sweden has done well in recent years -- far better than most other European countries. The government says the economy will expand about 4 percent in 2006, after growing 2.7 percent last year. The unemployment rate dropped to 7.5 percent in July, down from 7.8 percent a year earlier. Property prices have been strong, making everyone feel a lot richer ...

Sweden's government doesn't even need to borrow any money to fund all those generous Swedish social benefits -- this year it is expected to record a budget surplus of 2.7 billion kronor ($372 million), and that should rise over the next few years.

Not much sign of a crisis there.

Indeed the economy has been strong enough for the Swedish central bank, the Riksbank, to raise its benchmark interest rate to 2.5 percent. Some analysts say gross domestic product will grow even faster than forecast. London-based Capital Economics Ltd. said last week it expects the economy to grow "by something close to 5 percent'' this year.

So how come the Swedes are so grumpy? Most governments with that kind of record could expect to be swept back into power.

While unemployment levels are low by European standards, the government massages the figure by redefining some jobless as ill. "On a normal day, nearly a fifth of the potential workforce is on sick leave or receiving a disability benefit,'' the Paris- based Organization for Economic Cooperation and Development said in a report on the Swedish economy. More days are lost due to sickness than in any other OECD country.

Youth unemployment is running at more than 20 percent, one of the highest rates in the region. Most Swedes might have jobs now -- but they worry about whether their children will.

Economic growth might look strong, but it has been helped along by high levels of immigration. Sweden, like Ireland and Britain, is one of the European Union countries that grant eastern Europeans unrestricted access to the labor market.

...The country may be getting richer overall, but if people's living standards aren't rising, they won't feel any happier with the government. As Timbro's Munkhammar says, GDP per capita hasn't been growing nearly as fast as the general economy. In short, people aren't getting richer -- and they don't like it.

Meanwhile, taxes remain prohibitive, even by European standards. Sweden's income-tax rates can be as high as 60 percent, among the most punishing in Europe. With a total tax burden of slightly more than 50 percent of GDP, according to Eurostat, the Swedish government takes more of its people's money than any other country in Europe...

Also worth reading is a recent European Commission brief, The Swedish labour market model: performance under outside pressures, by Jonas Fischer in the Directorate-General for Economic and Financial Affairs.

Reflections on America

Stein Ringen reviews Claus Offe's new book in the latest Times Literary Supplement: The American seen. The book, Reflections on America: Tocqueville, Weber and Adorno in the United States, is published by Polity Press. These remarks caught my eye:

Tocqueville’s, Weber’s and Adorno’s reflections abound with questions that have lost none of their relevance. What is the destiny of freedom and is it better protected in the American or the European social model? Are we excessive in our demand for equality, and if so what follows? The state is both necessary for and dangerous to freedom; how do we find the balance? Is culture, now a huge sector of economic growth, an industry of manipulation? Is there a social architecture between the individual and the state or was Margaret Thatcher right that there is no such thing as society?

If anything, the European–American comparison seems to me to have become more relevant. Europe has put behind it the transition to democracy that Tocqueville correctly saw would be difficult, and is now an equal partner with America in the great drama of liberty. Europe has not been “Americanized” except superficially, and is competing with America with a distinct social model.

The Debate Over Inequality

by Mark Thoma

Well, me versus Samwick, Mankiw, and DeLong seems like a difficult match to win, but I am going to persist anyway. Stay the course so to speak (see also the Paul Krugman column that is at issue, an earlier post by Andrew Samwick, my response to Andrew, and a follow-up at Angry Bear). Each is objecting to Paul Krugman's claim that government policies can change income inequality and that changes in political ideology can explain, in part, variations in income inequality over time.

I hope to have more to say later, but for now let me offer a bit of evidence from Australia through Andrew Leigh, and add a bit more on the US as well. First, here's Andrew Leigh:

Top Floor, Going Up, by Andrew Leigh: An updated version of my research with Tony Atkinson on top incomes is written up by John Garnaut in the SMH today. There’s not much there to surprise regular readers of tbis blog. But since it’s not every day that I crack the front page of the SMH, I thought I’d indulge in some shameless self-promotion.

Here's the abstract from the article (PDF). It's also written up in the Sydney Morning Herald, as noted by Andrew:

ABSTRACT Using taxation statistics, we estimate the income share held by top income groups in Australia over the period 1921-2002. We find that the income share of the richest fell from the 1920s until the mid-1940s, rose briefly in the post-war decade, and then declined until the early-1980s. During the 1980s and 1990s, top income shares rose rapidly. At the start of the twenty-first century, the income share of the richest was higher than it had been at any point in the previous fifty years. Among top income groups, recent decades have also seen a rise in the share of top income accruing to the super-rich. Trends in top income shares are similar to those observed among other elite groups, such as judges, politicians, top bureaucrats and CEOs. We speculate that changes in top income shares may have been affected by top marginal tax rates, skill-biased technological change, social norms about inequality, and the internationalisation of the market for English-speaking CEOs.

Factors like top marginal income tax rates and social norms are connected to the political environment, but of course, this is in no way conclusive. A lot of the change is driven, according to their results, by the incomes of CEOs. But I think it's at least suggestive that the political environment drove some of the change.

For the US, as passed along to me in an email, factors such as the New Deal's very large tax increases on the wealthy, both directly on income and indirectly on corporate profits are an important factor connected to the political environment at the time. It's an open question how much of the change in inequality that might explain by itself.

Unions are also worth taking seriously with union membership nearly tripling to about a third of the workforce from the mid 1930s to the mid 1940s. This would affect all wages, not just those in sectors where unions are prevalent. The decline of unionization after the 70s is also a factor to consider, and there's a strong case to be made that this was made possible by a political environment that allowed union busting to occur. In any case, I don't think this is a settled question and I hope to follow up with more later. [dual posted]

Update: Please see Brad DeLong's excellent summary and follow-up on this debate.