Nordic Countries as Case Studies in Economic Reform
The lead article from the February 2, 2013 edition of the Economist highlights Nordic countries as a case study in economic reform. The four main Nordic countries — Sweden, Norway, Denmark, Finland — have lessons to share, both in terms of the mistakes that got them into an economic mess and the policies they adopted to get out.
The article begins by noting that the Nordic countries had remarkably high ratios of government spending as a share of GDP in the 1970s and 1980s, reaching a peak at 67% in 1993. And it explains what happened next:
Since then the Nordics have changed course—mainly to the right. Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%.
On public services the Nordics have been similarly pragmatic. So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.
As the Economist notes, public opinion in Nordic countries is comfortable with a fairly large government, especially when the services they pay for are delivered more or less efficiently. Given this belief, effective reforms have focused on providing something of a safety net for the least-advantaged (e.g., laid off workers) while not going so far as to protect companies from the consequences of decisions made in a competitive market.
This may sound like enhanced Thatcherism, but the Nordics also offer something for the progressive left by proving that it is possible to combine competitive capitalism with a large state: they employ 30% of their workforce in the public sector, compared with an OECD average of 15%. They are stout free-traders who resist the temptation to intervene even to protect iconic companies: Sweden let Saab go bankrupt and Volvo is now owned by China’s Geely. But they also focus on the long term—most obviously through Norway’s $600 billion sovereign-wealth fund—and they look for ways to temper capitalism’s harsher effects. Denmark, for instance, has a system of “flexicurity” that makes it easier for employers to sack people but provides support and training for the unemployed, and Finland organises venture-capital networks.
What is the lesson for other advanced economies with large budget deficits and even-larger future liabilities? The Economist tries to answer, but only in the most general sense:
The state is popular not because it is big but because it works. A Swede pays tax more willingly than a Californian because he gets decent schools and free health care. The Nordics have pushed far-reaching reforms past unions and business lobbies. The proof is there. You can inject market mechanisms into the welfare state to sharpen its performance. You can put entitlement programmes on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and vested interests.
The challenge for reformers is to determine which government programs should stay — perhaps because they work, or because current public opinion demands it — and which should go. It is no easy task to overcome vested interests. The madmen in authority — the politicians who drive reform, or thwart it — will be even less willing to confront vested interests if the public is happy with the status quo and uninterested in new ideas.
On the other hand, if people see reforms that have worked well elsewhere, in other times and in other places, then a new idea may start to germinate. The commonly held beliefs could start to change. And the possibility of reform could increase dramatically.
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