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.
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