The Nordic Economies - for Big Government

Since the recent financial crisis, the Nordic economies have been hailed as the panacea for the failure of capitalism in many circles of policy makers and economists. The Economist’s February issue featured the success of the Nordic economies, calling them the “The Next Supermodel”; WEF’s “The Nordic Way – Shared Norms for the New Reality” pointed to the strengths of their economic models – and it goes on.  They have been impervious to the financial crisis, enjoy high credit ratings from rating agencies and are considered havens in financial markets.

These economies include Sweden, Norway, Denmark and Finland. Despite a few differences in their economic models, they are characterized by heavy tax and spend, and high living standards. They have made phrases like “Getting to Denmark” and “Flexicurity” popular because of the reforms that modernized their welfare system, but nonetheless, kept their egalitarian principles intact.

Nordic states have high levels of public spending. In 2007, the average tax-to-GDP ratio was upward of 55 percent, with Norway’s as high as 59 percent, Denmark’s 56 percent, and Sweden’s 55 percent - a lot higher than the OECD average of 38.5 percent. Although this decreased slightly in 2011 according to OECD statistics to just below 50 percent, it was still a lot higher than U.S’s 25 percent and 33.8 percent in OECD.

The public sector is one of the largest employers in these states, accounting for 30 percent of the total employed, compared to the OECD average of 15 percent. Despite this, Nordic labour force is more competitive and productive than the average OECD worker as their labour productivity (measured as GDP per hour worked) is higher than the OECD average of $45.5 (Norway $83, Sweden $51.7, Denmark $53.5, and Finland $48.1).  Furthermore, the Nordic states surpass rest of Europe and OECD in economic activity rates. In 2011, 78.2 percent of Norway’s working age population was active; in Denmark, Finland, and Sweden, the rates were 79.46, 74 and 79.5 percent respectively – all higher than the OECD average of 70.6 percent and Europe’s average of 69.4 percent (source: OECD). This really drives the point home - despite having a welfare system that looks after the unemployed, the Nordics not only work more on the average compared to other OECD workers, but are also more productive!

Other indicators of economic performance such as annual consumption and GDP growth rates have also been better than the average performance of OECD countries (For details, read “Economic Lessons from Scandinavia” by Graeme Leach, Legatum Institute).

So how have the Nordic states defied economic theory which states that heavy taxation will retard growth and serve as a disincentive for people to work, save and invest. One answer is to look at the nature of their tax structure. Despite a high tax-to-GDP ratio, corporate taxes are relatively low compared to the U.S., Germany and some European economies.  Furthermore, the Nordic states are open economies that promote free trade, have little product market regulation and low levels of industry protection. They also have control over their own monetary policy which gives them freedom to respond to market failures, apart from Finland because it is part of EZ.  The private sector also plays a strong role and in many cases has stepped in to provide public sector services.

Another reason for their success is that the Nordic economies went through their financial crisis in the 1990’s and so knew better not to nose dive into another one! The crisis led them to introduce fiscal policy reforms and financial market regulations which resulted in the nationalization of banks, and the return to flexible exchange rates in 1992, as well as a host of other reforms. 

So if there was one reason for their success, it would have to be the balance that they have managed to achieve between the public and the private sectors by extending the market into the state rather than the state into the market.

Prelude to the 'Big Government' series

I have been wanting to write about the role of government in economic development, especially the question of if big government hampers or helps economic growth for quite some time now. Because I studied economics at school and have an interest in these topics, and given that the current state of economic conditions around the world has given rise to a lively discourse on the public economy, this question has never been more relevant.

I want to take a stab at addressing this in the blog series which I am calling ‘Big Government’. I intend to give examples of countries where big government has been extremely successful in increasing prosperity and growth, and then some where it has inhibited growth. For the former, the Nordic states, as well as Austria, and The Netherlands come to mind. While big government in Japan a few decades ago created a lot of inefficiencies and hampered growth.  

Although there is a lot of literature out there arguing that big government stunts economic growth – including a recent World Bank report (2012), and another study conducted by the European Central Bank called ‘Economic Performance and Government Size’ that made the same conclusion – I still believe in its virtues. But I am open to how my ‘Big Government’ series may change my opinion.

As an introduction to the series, I want to talk a bit about the economic role governments are expected to play in democratic countries in the private sector. Their role is to correct for “externalities” – i.e. rewarding the private sector for positive externalities in the form of tax cuts, or subsidies; and conversely, punishing the private sector for negative externalities in the form of taxes.  The revenue collected from taxes is then spent to increase the welfare of citizens.

 

For the purpose of this series, having a big government, therefore, primarily means having a welfare state; i.e. you allocate a substantial share of GDP to transfer programs that spend on safety nets and human investment. A big government does not mean a protectionist, freedom inhibiting, and welfare reducing government. You can have a state that spends a sizeable share of its GDP (according to some sources, this share is 15% or more) on social programs and still be an open and a growing economy - but just a more equitable economy. Over the last decade for instance, U.S. public social spending increased from less than 15% of GDP to almost 19.5% of GDP in 2012 (Source: OECD). The Nordic states have had the highest social spending rates in the world for decades without negatively impacting their growth or prosperity. This said, it is worth looking at some key socio-economic indicators to compare across welfare and ‘non-welfare’ states and see where the differences start to matter for policy planners and decision makers.

My first case study will be on the Nordic economies. Hurrah!

 

Leaving Places

Leaving places sucks, especially when you think of all the exciting things that might have happened if you had stayed just a bit longer, or explored more places, or taken advantage of the  opportunities that came along or spent more time with that special someone. It’s like going through a long list of “what might have been” – and that doesn’t get you anywhere!

Realizing that the window is now - potentially permanently - closed on these opportunities is a disheartening thought. But then you hope for another door to open for a slew of more exciting ones until you have to pack up again, likely at the most inopportune time, and move to your next pit stop.

Not knowing for how long this new place will be your home, or where your impulse or fate will take you next is a fear most people given to a nomadic lifestyle may have overcome. But for the rest of us, who build meaningful relationships, and create memories, and try to put down roots, all to start from scratch somewhere else, leaving places is actually quite hard and scary!

I have left places quite a lot – and I am doing that right now in a few hours as I write this blog, and will be leaving a very special place that I have called home for three years now in the very near future, and in all honesty, I am terrified as hell!  But the one thing leaving places affords you, is the chance to start afresh and do it better and wiser. If you can do that, leaving places and moving on is worth it!