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A Case for the Nordic Way

Posted: 06/24/2013 11:38 am

While Southern European economies continue to suffer the after-effects of the 2007-2008 financial meltdown, the economies of Denmark, Norway, Sweden, and Finland as a whole have successfully weathered the economic storm and have returned to positive growth rates and low unemployment. This contrasts to the economic woes of most countries of the southern tier of the EU.

But why have the Nordic economies like Denmark done so well, while Southern economies continue to flounder? They are as a rule void of many of the economic, political, social issues that continue to haunt most Southern European members of the European Union.

An important reason is that Nordic countries in general were relatively better at keeping their fiscal house in order and undertook necessary structural reforms when times were good. As a result, today the fundamentals of these economies are sound overall. As opposed to most Southern countries, the Nordics have large levels of private savings, large current account surpluses, only a moderate public sector deficit, low inflation, and moderate levels of unemployment. The Nordics offer widely different solutions, each reflecting the history and the tradition of the country. Still there are certainly reasons to say, that at their core there is an underlying commonality of thought.

Denmark is a case in point. Unlike its Southern European brethren, it has sustained the core of its welfare systems without the need for major adjustments and cutbacks. Emblematic of the "Nordic model," the Danish model is based on political ideals married to economic and societal realities. It has a generous welfare system and provides substantial unemployment benefits, free education from kindergarten through graduate school, a generous child and family policy, comprehensive care for people with disabilities, and universal access to health care. Unsurprisingly, the Danish welfare state is among the most expensive in the world. Total public expenditures are close to 60 percent of GDP compared to 40 percent in the U.S., and the public sector in Denmark comprises 30 percent of the entire workforce.

In order to support its generous welfare system, Danish taxes are also among the highest in the world, peaking at a marginal rate -- including an 8 percent health care tax -- of 63 percent for the highest income earners and averaging 40 percent for all taxpayers. Denmark also has a value added tax (VAT) of 25 percent on all goods and services. Add to this the price of a new car in some cases being as much as 3 times more expensive than it would be in the U.S., with gas that runs close to $8 per gallon.

In spite of its high tax burden, Denmark consistently ranks among the most competitive nations in the industrialized world. This somewhat surprising complementarity, between a generous welfare state on the one hand, and a competitive labor market and entrepreneurship on the other, is best understood in the context of the Danish version of "flexicurity." Flexicurity means that there are flexible rules for hiring and firing, which makes it easier for employers to adjust their costs as business dictates, while the individual employee has a great amount of security in the form of unemployment benefits, should the need arise that are set at a fairly high level. Danes are generally well-educated, and as a result they are able to switch jobs and start new businesses at a rate that is far higher than in many other advanced countries. This makes the country as a whole highly competitive.

Notwithstanding its present sound economic fundamentals, Denmark faces some difficult obstacles in the coming decades. It is an aging country. Demographic changes will lead to a growing number of old people, who can expect to live longer, while the traditional workforce will become smaller. And although a majority of older citizens will be in good health, the need for long-term care and health services will increase as a result. A related challenge will be how to strengthen labor supply and foster employment among immigrants and their children. A later retirement age, new job creation programs, a rethinking of unemployment benefits are all part of the response.

The Danish or for that matter the Nordic "model" is not a silver bullet, and it is not easily duplicated in other parts of the world. It is risky, and smacks of overconfidence to offer it as a panacea. It is not in the Nordic culture to lecture others. Denmark, or any of the other Nordic country for that matter are not free of major challenges, be it economic, political, social or cultural. Still the common experiences of the Nordics hold serious lessons, which should be taken to heart. This situation is the result of a historic development, based on respect for diversity, a social contract, transparency and tolerance. These values have at times been questioned and even challenged, but never under serious threat in the past fifty years. It is based on the strong cohesion of society, the unquestionable adherence to the rule of law, to a consensus seeking political system. While perhaps it is not a universally adaptable model; it certainly can serve as an example for others.

 

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