Zlatica Hoke, May 25, 2006
Scandinavia's Success Story or Myth
Citizens of the northern European countries -- Sweden, Denmark, Finland, Iceland and Norway -- enjoy high living standards, and free health care and education. But they also pay high income taxes. Many economists say Europe’s socialist democracies are economically unsustainable. But others point out that Nordic economies are experiencing healthy growth.
When full-time workers in Sweden lose a job, they remain on full pay for a year. During that time, they are eligible for retraining at government’s expense. And if they remain unemployed after a year, they may qualify for unemployment compensation, equivalent to an average income, indefinitely.
High Taxes and High Growth
Education, including university study, is available to everyone at no cost as are health care and numerous social services. Swedish citizens pay for these benefits through taxes, which by American standards are very high. For example, personal income tax in Sweden can be as high as 55 percent and in Denmark can exceed 60 percent, compared to a maximum rate of about 35 percent in the United States.
The outlook for the future is also good, says Jacob Kirkegaard. This year, most Scandinavian economies are expected to grow by about three percent -- Sweden by nearly four percent -- compared to a little more than two percent forecast for other western European economies. He says one reason for the growth of Scandinavian economies is that they encourage investment.
“Obviously they are small, which means that they tend to trade a lot with other countries, much more so than a big country such as the United States or, for instance, Germany," he says. "But also, in terms of investments. For instance, Sweden sold their car companies to U.S. firms G.M. and Ford. Or, for instance, in Denmark, just last year, a couple of private equity funds [investment firms] from the U.S. and Britain actually bought the former telecommunications incumbent [firm] in what was the biggest private equity deal in Europe in 2005. So these are really countries that are extremely open and hospitable to both trade and investments.”
Kirkegaard says low corporate taxes -- ranging from 18 to 28 percent, compared to about 40 percent in the United States -- as well as low corruption and violence make Scandinavian countries attractive to foreign and domestic investors.
Although Scandinavian labor is highly organized, unions are focused on creating jobs, rather than protecting them. They foster a system popularly called “flexicurity,” which includes generous unemployment benefits, but also an obligation on the part of workers to accept government sponsored training for new jobs.
Expensive Welfare State
But many economists point to flaws in the Scandinavian economic model. Marian Tupy, a policy analyst at the Cato Institute in Washington, says expensive social welfare systems sooner or later run out of money. He notes that in the past 15 years, northern European countries have had an average economic growth rate of just 1.5 percent per year, compared to three percent in the United States.
“Sweden and Norway and Finland and Denmark are still very rich countries. That’s not at issue here. The issue is what will happen to these countries and to the welfare state they have 10, 20, 30, 40 years down the line, says Tupy. "And if you look at their economic performances in the past 15 years, then you have to conclude that it should be very difficult for them to maintain the current rates of taxation and redistribution and financing of the welfare state while at the same time remain rich."
Tupy says we can already see that. For example, he says, the Timbro Institute in Sweden came up with a ranking of all countries of the E.U. vis-à-vis the 50 states of the American union. "And it is very interesting that all the Scandinavian countries come at the bottom of the league. In fact, Denmark is poorer than Kentucky,” says Tupy.
During the 1980s, Swedish income taxes ran as high as 90 percent. As a result, Swedish households accumulated almost no savings. This made them even more dependent on social programs when the economy soured in the early 1990s. Swedes revolted at the ballot box, electing a neo-liberal coalition led by Carl Bildt, who lowered taxes. And without those changes, many economists point out, Sweden's economic rebirth in the late 1990s would have been impossible.
Still, the combination of social welfare and the ability of Scandinavian countries to integrate into the global economy has attracted the attention of a number of countries seeking to improve their socio-economic model. South Korea is one of them.
Branko Milanovic, an analyst at the Carnegie Endowment for International Peace here in Washington, notes that South Korea shares some common traits with northern Europe. “It has a tradition of consensus building. It has very ethnically homogeneous population. It has a fairly high level of education of its population. It has several of these features that are also similar to the Scandinavian countries. So I don’t think it is impossible that some form or variant of the Scandinavian model could be applied, " says Milanovic. "I am a little more skeptical of the applicability of the Scandinavian model to other countries.”
Most economists agree that the Scandinavian economic model is very hard to emulate, especially in poor nations that cannot afford to impose the high taxes needed to support an expensive welfare state. This model may work in small, rich countries with homogeneous and well-educated populations and a long history of income sharing. But some analysts argue not forever.
July 5, 2014
Here is the conclusion of an article in The Economist Magazine of February 2013:
"The main lesson to learn from the Nordics is not ideological but practical. 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. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum. The world will be studying the Nordic model for years to come."
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