Nordic model

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Nordic model refers to the economic and social models of the Nordic countries of the European Union (Denmark, Finland, Sweden). These present a certain number of features that justify a common analysis, in spite of some differences due to the history of every country.

In Index of Economic Freedom 2008, Denmark ranks high at 9th of 157 countries. Finland ranks 16th and Sweden 27th.[1]

Nordic countries can characterized as follows:[2]

  • Many aspects considered very favorable to the countries
    • Strong property rights, contract enforcement, and overall ease of doing business (except hiring or paying taxes).[1]
    • Ease of doing free trade. According to Ease of Doing Business Index, only Singapore and Hong Kong have as little barriers to free trade.
    • Little product market regulation. According to OECD, Nordic countries rank very high in product market freedom.[2]
    • Little financial market regulation. According to OECD, Denmark and Finland have the least regulation in EU-15.[2]
    • All Nordics have been pioneers in privatization, though they still have stock holdings and some monopolies such as alcohol retailing in Finland (Alko). For instance, Sweden successfully privatized education with education vouchers in 1992.[3]
    • All household members seem to work, affected by various policies. Nordics have relatively high employment rates.
  • Labor market regulation is heavy in Sweden and Finland, whereas Denmark's labor market is the most laissez-faire in Western Europe.
    • Instead of individual contracts, trade union leaders make contracts for employees in Sweden and Finland. The system may have helped moderate wage demands, but simultaneously may have negative impacts associated with labor market inflexibility. The difficulty of hiring and firing has particularly hurt low-skilled who struggle to find jobs.
    • Sweden has decentralized wage coordination, while Finland is ranked the least flexible.[2] Like in other European countries, the powerful labor unions tend to block reform attempts.[2] Reforms and favorable economic development seem to have reduced unemployment, which has traditionally been high. Both countries have allegedly high hidden unemployment.
    • Denmark's social democrats managed to push reforms in 1994 and 1996. Denmark's flexible market differs radically from other Nordics (see Flexicurity). According to World Bank data, Denmark has almost no labor market regulation, ranking the first European country in labor freedom.[1]
  • High public sector expenditures and taxation.
    • Sweden at 56.6% of GDP, Denmark at 51.7%, and Finland at 48.6% reflects very high public spending, compared to 46.9% in Germany, 39.3% in Canada, and 33.5% in Ireland.[1]
    • A key reason for public spending is the very large number of bureaucrats. They are often jobs-for-life and make around a third of workforce (more than 38% in Denmark), compared to around 16% in Germany and 8% in Japan. The public sector's low productivity growth has been compensated by Europe's pioneering privatization and outsourcing programs.[2]
    • Public spending in social transfers such as unemployment benefits and early-retired programs is high. In 2001, the wage-based unemployment benefits were around 90% of wage in Denmark and 80% in Sweden, compared to 75% in Holland and 60% in Germany. Unemployed were also able to receive benefits several years before reductions, compared to quick benefit reduction in other countries.
    • Public spending in areas such as education or health is not far from the OECD median.[2]
    • Pension systems are privatized. In Sweden, savers can invest in any funds. In Finland, a pension fund is chosen by the employer. Pension funding rate is higher than in most European countries, but still below needed. Without reforms, the aging is having particularly heavy impact on Finland.[2]
    • Tax burdens are among the world's highest. Overall tax burden is 51.1% of GDP in Sweden, and 43.3% in Finland, compared to 34.7% in Germany, 33.5% in Canada, and 30.5% in Ireland.
    • The tax burden focused on income taxes. Median employee's tax wedges is between 57%-65%. All income groups suffer from high effective marginal tax rates[2], which often exceed 100% for low-skilled when lost benefits are accounted. Value-added tax rates are over 20% and corporate tax rates around the OECD median at around 26%. Property taxes are low or non-existent. Inheritance taxes have been abolished in Sweden.
    • Taxation has particularly great impact on service sector. Karlson, Johansson & Johnsson estimates that the percentage of the buyer’s income entering the service vendor’s wallet (inverted tax wedge) is around 15% in Nordic countries, compared to 10% in Belgium, 15% in Germany, 25% in France, 30% in Ireland and 50% in the United States.[4] Some taxation is avoided by self-service and in the black market.

Until the 1970s, Nordics featured relatively low taxation, low labor market regulation, and the world's highest income levels. Taxation and regulation were heavily increased and the relative positions have been in decline. Between 1970 and 1990, Sweden and Denmark fell around 10 places in GDP per capita ranking. For instance, today Sweden's retail consumption per capita is just half of that in the United States and Swedish households rank poorly in various measures of wealth.[4] Between 1984 and 2002, Sweden's GDP growth was 36% compared to 111% in Ireland. Recent reforms have helped to halt the relative decline in all Nordic countries. For instance, GDP growth per capita rates have recently been relatively good compared to other Western European countries.

Contents

[edit] Business environment

[edit] Product and financial markets

[edit] Labor market

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In the Nordic countries, social regulations do not come from the law, like in southern Europe, but are defined in collective agreement. Thus, for example, minimum wages do not exist in Sweden, Finland or Denmark; each branch determines its own rules. The high unionization rate (more of 85%) is partly coming from a historic tradition following violent conflicts in the 30s, partly from the importance of Nordic Trade Unions in the political life of the countries, and also by the services provided (unemployment insurance, support for the negotiation of individual salaries, bank and insurance services, holidays, etc.). The importance and influence of the Trade Unions is very high in the Nordic countries.

[edit] Education and research

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The Nordic countries are the highest spenders in Europe, both through the government training schemes and private sector, for education, training and research:

  • According to the OECD, Denmark spends each year more than 7% of its GDP on education, Sweden 6,5% and Finland 6%, as opposed to 5,5% in United Kingdom.
  • More than 80% of the Swedes are following a training each year, which is twice the European average
  • Sweden and Finland spend each year more than 4% of their GDP on research, Denmark 2,6% and the UK less than 2%. The Nordic countries, including Norway and Iceland, protected in 2002 more patents that France or United Kingdom, with less than 25 millions of inhabitants.

[edit] Public sector

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Sweden and Denmark were in 2004 the countries of the European union where the expenses of the public administrations were the highest, with respectively 57,2 and 56,3%, Finland a little on this side with 50,7%. The Nordic countries are quite near France (53,8%) and very distant from the British model, where taxes and public expenditure in general are much lower, but where people are generally expected to manage more of their own affairs for themselves.

The Nordic countries are spending a large amount on social protection, as much as France and the UK: between 26,4% and 32,5% of the GDP for 30,6% in France and 27,6% in United Kingdom in 2004. The social benefits are high, with a high level social net: the welfare system payments are higher than anywhere else in Europe, including Germany, Italy, Spain or France. Such a level can cause problems: Finland reviewed its social and fiscal system because, for some groups, the fact of leaving unemployment for a job was too expensive. This last point is considered a major issue by many in all of the Nordic countries.

Almost all residents have access to a very comprehensive health system and social protection. Some Nordic economists believe that high social contributions put a positive weight on national production, when VAT is paid also on imported products. Some economists such as the Mises Institute have a conflicting view criticising the socialist approach of the Nordic countries as being detrimental to the potential success of their economies.

2004 health cost in Finland was 7,5% of GDP, 15,3% in the US, 10,5% in France and 8,1% in the UK. Management costs of social programs were, in 2005 according to Eurostat, 4% in France and 2,9% to Denmark.

The crisis of the Nordic models at the end of the 80s and in the beginning of the 90s pushed the Nordic countries to search for ways of making their social democratic systems more efficient. This was partly in an effort to install in the citizens’ minds a clear link between the taxes and the services they received, but also because the old systems were too costly to maintain. This decentralization has been in some countries quite extreme: in Finland, the whole sanitary and social system is under the responsibility of municipalities, which are sometimes quite small.

Denmark recently reviewed the number of municipalities, dividing their number by 3 from 300 to 99, partly in order to oblige them to provide services to at least 30 000 inhabitants, and also to try and improve local government efficiency. Finland, Sweden, Norway are going in the same direction, but slowly.

Sweden invented in the 1950s a labour market activation policy, when it decided to oblige unemployed people either to actively look for a job in support groups, or to train with a specific objective, or to participate as a trainee in the private or public sector. These activation schemes cost a lot: in 2003, Denmark dedicated 1,529% of its GDP to active employment measures, Sweden 1,042% and Finland 0,748%, the EU average being below 0,7%.

[edit] Other features

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[edit] Environment

The Nordic countries, and specially Sweden, claim to be defending these concepts in the international arena.

Denmark is adopting heavy use of wind energy, mainly through its national champion in this field, Vestas. This is currently meeting 20% of the country's energy requirements.

Sweden is attempting to adopt a policy of being energy self-dependent by 2020 with an Oil phase-out in Sweden.

[edit] Gender equality

Nordic countries generally have very high rates of gender equality by most measurements.

[edit] Performance

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We could sum up our description of the Nordic models: the productive private sector needs to be efficient and generate exports due to the small indigenous populations. the workforce is highly unionised and therefore the unions have a major say in both the running of business and that of government. The Governments ultimately have the biggest say in the management and development of the economy. Salaries (and taxes) are high, and there is a comprehensive social security system open to all.

There has been an overall strong economic recovery since the extreme economic malaise in the Nordic countries, especially Denmark and Sweden, suffered up to the 1990s when their currencies came under attack when members of the European Exchange Rate Mechanism.

In recent years the following official figures have been reported:

  • High growth in the last years, (10,05 percent for the EU to 15 on 2000-2004, 15% for Finland 12,3% for Sweden, 4,4% for Sweden and 5,5% for Finland in 2006.
  • Low unemployment, the lowest of the European union for Denmark (3,4% in March 2007…) after having known high levels 10 years ago (9,1% in Sweden, 9,6% to Denmark and 16,3% in Finland for 1993
  • Po Official Official poverty risk rate are 9% in Sweden, 10% in Denmark, 11% in Finland, 13%in France and 19% in United Kingdom.
  • However, when measured by wealth, the poor have less wealth than in the United States. For instance, they live in smaller apartments, have lower home ownership, and have less household equipment[4]
  • Governments have committed to fiscal responsibility. In 2004, Sweden, Finland and Denmark presented an excess of the public accounts (respectively of 1,2%, 1,9% and 2,6% of the GDP), whereas France presented a deficit of 3,7% and United Kingdom a deficit of 3,1%.

[edit] Risks to the Nordic Model

  • Flight of Capital, as is often seen in any country where taxes are significantly higher than their neighbors, incentive to move ones financial dealings outside of the country to avoid taxation can become a problem. As a result, some Danes and Swedes have emigrated or based their financial affairs outside of their home countries. Examples of this include Ingvar Kamprad, the Swede who founded furniture retail chain IKEA, who has lived in Switzerland for the past 30 years, while the Ikea business operates through a Netherlands-based holding company. Janus Friis, the co-founder of Skype, is now based in the UK and another very recent Danish example is the boxer Mikkel Kessler, who rebased to Monaco in 2007. Stephen Kinnock, son of former UK Labour Party leader Neil Kinnock, and the husband of the Danish Socialist party leader Helle Thorning Schmidt also doesn't base himself in Denmark.
  • The extensive social services network can potentially lead to situations where a statistically significant amount of people live exclusively on unemployment benefits, without seeking employment. The magnitude of this problem is not certain, but it is worth noting that the countries following the Nordic model have very low unemployment.
  • As globalisation becomes a more accepted part of business and personal life, many companies are becoming more aware of international opportunities to cut costs, as with the high taxes and high cost of living, they are finding they can recruit employees cheaper abroad. Thus outsourcing and offshoring are becoming very common, especially in sectors such as IT and manufacturing, and many building construction companies are importing labour from the new Eastern European members of the European Union, rather than recruit internally and pay Nordic salary levels.

[edit] References

  1. ^ a b c d Index of Economic Freedom
  2. ^ a b c d e f g h i The Nordic Model
  3. ^ Made in Sweden: the new Tory education revolution, The Spectator
  4. ^ a b c EU versus USA, Fredrik Bergström & Robert Gidehag

[edit] External links