Nordic model

The Nordic model comprises the economic and social policies as well as typical cultural practices common to the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden).[1] This includes a comprehensive welfare state and multi-level collective bargaining based on the economic foundations of free-market capitalism,[2] with a high percentage of the workforce unionised and a large percentage of the population employed by the public sector (roughly 30% of the work force).[3] The Nordic model began to gain attention after World War II.[4][5]

This article is about the social and economic model in Northern Europe. For the socioeconomic models in continental Europe, see Dirigisme and Rhenish model. For the political ideology often associated with the Nordic model, see Social democracy. For the type of prostitution law, see Nordic model approach to prostitution.

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The three Scandinavian countries are nominally monarchies while Finland and Iceland have been republics since the 20th century. Currently, the Nordic countries are described as being highly democratic and all have a unicameral form of governance and use proportional representation in their electoral systems. Although there are significant differences among the Nordic countries,[6] they all have some common traits. These include support for a universalist welfare state aimed specifically at enhancing individual autonomy and promoting social mobility; a corporatist system involving a tripartite arrangement where representatives of labour and employers negotiate wages and labour market policy mediated by the government;[7] and a commitment to private ownership (with some caveats) within a market-based mixed economy.[8]

The distinctive defining characteristic of the Nordic model is a neo-corporatist collective bargaining system. Due to the disappearance of the structural foundations provided by post-war capitalism and globalization, the traditional Nordic model has been in decline. Since the 1980s, the influence of organized labor has decreased, collective bargaining schemes rolled back, along with reductions in social spending, deregulation, and an expansion of privatization of public services.[9][10]

As of 2018, all of the Nordic countries rank highly on the inequality-adjusted HDI and the Global Peace Index. In 2019, all five of the Nordic countries ranked in the top 10 on the World Happiness Report.[11]

History

The Nordic model traces its foundation to the "grand compromise" between workers and employers spearheaded by farmer and worker parties in the 1930s. Following a long period of economic crisis and class struggle, the "grand compromise" served as the foundation for the post-World War II Nordic model of welfare and labor market organization. The key characteristics of the Nordic model were the centralized coordination of wage negotiation between employers and labor organizations, termed a social partnership, as well as providing a peaceful means to address class conflict between capital and labor.[12]

Although often linked to social democratic governance, the Nordic model's parentage actually stems from a mixture of mainly social democratic and (in Finland and Iceland also) centrist and right-wing political parties along with the social trust that emerged from the "great compromise" between capital and labor. The influence of each of these factors on each Nordic country varied as social democratic parties played a larger role in the formation of the Nordic model in Sweden and Norway whereas in Iceland and Finland right-wing political parties played a much more significant role in shaping their countries' social models.[13]

Social security and collective wage bargaining policies were rolled back following economic imbalances in the 1980s and the financial crises of the 1990s which led to more restrictive budgetary policies that were most pronounced in Sweden and Iceland. Nonetheless, welfare expenditure remained high in these countries, compared to the European average.[10]

Norway

Norway's "grand compromise" emerged as a response to the crisis of the early 1930s between the trade union confederation and Norwegian Employers' Association, agreeing on national standards in labor-capital relations and creating the foundation for social harmony throughout the compromises' period. For a period between the 1980s and the 1990s, Norway underwent more neoliberal reforms and marketization than Sweden during the same time frame, with the traditional foundations for supporting the "social democratic compromise" being specific to Western capitalism between 1945 and 1973.[14]

As of 2007, the Norwegian state has large ownership positions in key industrial sectors (petroleum, natural gas, minerals, lumber, seafood, and fresh water). The petroleum industry accounts for around a quarter of the country's gross domestic product (GDP).[15]

Sweden

In Sweden, the grand compromise was pushed forward by the Saltsjöbaden Agreement signed by employer and labor union associations at the seaside retreat of Saltsjobaden in 1938. This agreement provided the foundation for Scandinavian industrial relations throughout Europe's golden age. The Swedish model of capitalism developed under the auspices of the Swedish Social Democratic Party which assumed power in 1932 and retained uninterrupted power until the 1976. Initially differing very little from other industrialized capitalist countries, the state's role in providing comprehensive welfare and infrastructure expanded after the Second World War until reaching a broadly social liberal consensus in the 1950s.[12]

In the 1950s, Olof Palme and Prime Minister Tage Erlander formulated the basis of Swedish social democracy and what would become known as the "Swedish model", drawing inspiration not from reformist socialism but from the American economist John Kenneth Galbraith and the liberal ideas he articulated in The Affluent Society. The ideological basis of the Swedish "affluent society" rested on a universal welfare state providing citizens with economic security whilst simultaneously promoting social solidarity, representing a break with earlier notions of selective welfare provision in Sweden. The Swedish model was characterized by a strong labor movement as well as inclusive publicly-funded and often publicly-administered welfare institutions.

By the early 1980s, the Swedish model began to suffer from international imbalances, declining competitiveness and capital flight. Two polar opposite solutions emerged to restructure the Swedish economy, the first being a transition to socialism by socializing the ownership of industry and the second providing favorable conditions for the formation of private capital by embracing neoliberalism. The Swedish model was first challenged in 1976 by the Meidner Plan promoted by the Swedish Trade Union Confederation and trade unions which aimed at the gradual socialization of Swedish companies through wage earner funds. The Meidner Plan aimed to collectivize capital formation in two generations by having the wage earner funds own predominant stakes in Swedish corporations on behalf of workers. This proposal was supported by Olof Palme and the Social Democratic party leadership, but it did not garner enough support upon Palme's assassination and was defeated by the conservatives in the 1991 Swedish general election.[16]

Upon returning to power in 1982, the Social Democratic party inherited a slowing economy resulting from the end of the post-war boom. The Social Democrats adopted monetarist and neoliberal policies, deregulating the banking industry and liberalizing currency in the 1980s. The economic crisis of the 1990s saw greater austerity measures, deregulation and the privatization of public services.

Denmark

Social welfare reforms emerged from the Kanslergade Agreement of 1933 as part of a compromise package to save the Danish economy.[12]

Overview
Flags of the Nordic countries from left to right: Finland, Iceland, Norway, Sweden and Denmark

The Nordic model has been characterised as follows:[17]

  • An elaborate social safety net, in addition to public services such as free education and universal healthcare[17] in a largely tax-funded system.[18]
  • Strong property rights, contract enforcement and overall ease of doing business.[19]
  • Public pension plans.[17]
  • Free trade combined with collective risk sharing (social programmes and labour market institutions) which has provided a form of protection against the risks associated with economic openness.[17]
  • Little product market regulation. Nordic countries rank very high in product market freedom according to OECD rankings.[17]
  • Low levels of corruption.[17] In Transparency International's 2015 Corruption Perceptions Index, Denmark, Finland, Norway and Sweden were ranked among the top 10 least corrupt of the 167 countries evaluated.[20]
  • High percentage of workers belonging to a labour union.[21] In 2013, labour union density was 88% in Iceland, 69% in Denmark, 67% in Sweden, 66% in Finland and 51% in Norway. In comparison, labour union density was 18% in Germany, 11% in the United States and 8% in France.[22] The lower union density in Norway is mainly explained by the absence of a Ghent system since 1938. In contrast, Denmark, Finland and Sweden all have union-run unemployment funds.[23]
  • A partnership between employers, trade unions and the government, whereby these social partners negotiate the terms to regulating the workplace among themselves, rather than the terms being imposed by law.[24][25] Sweden has decentralised wage co-ordination while Finland is ranked the least flexible.[17] The changing economic conditions have given rise to fear among workers as well as resistance by trade unions in regards to reforms.[17] At the same time, reforms and favourable economic development seem to have reduced unemployment, which has traditionally been higher. Denmark's Social Democrats managed to push through flexicurity reforms in 1994 and 1996.
  • The United Nations World Happiness Reports show that the happiest nations are concentrated in Northern Europe. The Nordics ranked highest on the metrics of real GDP per capita, healthy life expectancy, having someone to count on, perceived freedom to make life choices, generosity and freedom from corruption.[26] The Nordic countries place in the top 10 of the World Happiness Report 2018, with Finland and Norway taking the top spots.[27]
  • The Nordic countries received the highest ranking for protecting workers rights on the International Trade Union Confederation's 2014 Global Rights Index, with Denmark being the only nation to receive a perfect score.[28]
  • Sweden at 56.6% of GDP, Denmark at 51.7% and Finland at 48.6% reflect very high public spending.[29] One key reason for public spending is the large number of public employees. These employees work in various fields including education, healthcare and for the government itself. They often have greater job security and make up around a third of the workforce (more than 38% in Denmark). Public spending in social transfers such as unemployment benefits and early-retirement programmes is high. In 2001, the wage-based unemployment benefits were around 90% of wage in Denmark and 80% in Sweden, compared to 75% in the Netherlands and 60% in Germany. The unemployed were also able to receive benefits several years before reductions, compared to quick benefit reduction in other countries.
  • Public expenditure for health and education is significantly higher in Denmark, Norway and Sweden in comparison to the OECD average.[30]
  • Overall tax burdens (as a percentage of GDP) are high, with Denmark at 45.9% and both Finland and Sweden at 44.1%.[31] The Nordic countries have relatively flat tax rates, meaning that even those with medium and low incomes are taxed at relatively high levels.[32][33]

Aspects

Labour market policy
See also: Social corporatism

The Nordic countries share active labour market policies as part of a corporatist economic model intended to reduce conflict between labour and the interests of capital. The corporatist system is most extensive in Norway and Sweden, where employer federations and labour representatives bargain at the national level mediated by the government. Labour market interventions are aimed at providing job retraining and relocation.[34]

The Nordic labour market is flexible, with laws making it easy for employers to hire and shed workers or introduce labour-saving technology. To mitigate the negative effect on workers, the government labour market policies are designed to provide generous social welfare, job retraining and relocation services to limit any conflicts between capital and labour that might arise from this process.[35]

Economic system

The Nordic model is underpinned by a mixed-market capitalist economic system that features high degrees of private ownership,[36] with the exception of Norway which includes a large number of state-owned enterprises and state ownership in publicly listed firms.[37]

The Nordic model is described as a system of competitive capitalism combined with a large percentage of the population employed by the public sector (roughly 30% of the work force).[3] In 2013, The Economist described its countries as "stout free-traders who resist the temptation to intervene even to protect iconic companies" while also looking for ways to temper capitalism's harsher effects and declared that the Nordic countries "are probably the best-governed in the world".[3][38] Some economists have referred to the Nordic economic model as a form of "cuddly capitalism", with low levels of inequality, generous welfare states and reduced concentration of top incomes, contrasting it with the more "cut-throat capitalism" of the United States which has high levels of inequality and a larger concentration of top incomes.[17][39][40]

Beginning in the 1990s, the Swedish economy pursued neoliberal reforms[41][42] that reduced the role of the public sector, leading to the fastest growth in inequality of any OECD economy.[43] However, Sweden's income inequality still remains lower than most other countries.[44]

Norway's particularities

The state of Norway has ownership stakes in many of the country's largest publicly listed companies, owning 37% of the Oslo stock market[45] and operating the country's largest non-listed companies including Equinor and Statkraft. The Economist reports that "after the second world war the government nationalised all German business interests in Norway and ended up owning 44% of Norsk Hydro's shares. The formula of controlling business through shares rather than regulation seemed to work well, so the government used it wherever possible. 'We invented the Chinese way of doing things before the Chinese', says Torger Reve of the Norwegian Business School".[45]

The government also operates a sovereign wealth fund, the Government Pension Fund of Norway—whose partial objective is to prepare Norway for a post-oil future, but "unusually among oil-producing nations, it is also a big advocate of human rights—and a powerful one, thanks to its control of the Nobel peace prize".[46]

Norway is the only major economy in the West where younger generations are getting richer, with a 13% increase in disposable income for 2018, bucking the trend seen in other Western nations of Millennials becoming poorer than the generations which came before.[47]

Nordic welfare model

The Nordic welfare model refers to the welfare policies of the Nordic countries, which also tie into their labour market policies. The Nordic model of welfare is distinguished from other types of welfare states by its emphasis on maximising labour force participation, promoting gender equality, egalitarian and extensive benefit levels, the large magnitude of income redistribution and liberal use of expansionary fiscal policy.[48]

While there are differences among the Nordic countries, they all share a broad commitment to social cohesion, a universal nature of welfare provision in order to safeguard individualism by providing protection for vulnerable individuals and groups in society and maximising public participation in social decision-making. It is characterised by flexibility and openness to innovation in the provision of welfare. The Nordic welfare systems are mainly funded through taxation.[49]

Despite the common values, the Nordic countries take different approaches to the practical administration of the welfare state. Denmark features a high degree of private sector provision of public services and welfare, alongside an assimilation immigration policy. Iceland's welfare model is based on a "welfare-to-work" (see workfare) model while part of Finland's welfare state includes the voluntary sector playing a significant role in providing care for the elderly. Norway relies most extensively on public provision of welfare.[49]

Poverty reduction

The Nordic model has been successful at significantly reducing poverty.[50] In 2011, poverty rates before taking into account the effects of taxes and transfers stood at 24.7% in Denmark, 31.9% in Finland, 21.6% in Iceland, 25.6% in Norway and 26.5% in Sweden. After accounting for taxes and transfers, the poverty rates for the same year became 6%, 7.5%, 5.7%, 7.7% and 9.7% respectively, for an average reduction of 18.7 p.p.[51] Compared to the United States, which has a poverty level pre-tax of 28.3% and post-tax of 17.4% for a reduction of 10.9 p.p., the effects of tax and transfers on poverty in all the Nordic countries are substantially bigger.[51] However, in comparison to France (27 p.p. reduction) and Germany (24.2 p.p. reduction) the taxes and transfers in the Nordic countries are smaller on average.[51]

Gender equality

When it comes to gender equality, it can be said that the Nordic countries hold one of the smallest gaps in gender employment inequality of all OECD countries,[52] with less than 8 points in all Nordic countries according to International Labour Organization (ILO) standards.[53] They have been at the front of the implementation of policies that promote gender equality. For example, the Scandinavian governments were some of the first to make it unlawful for companies to dismiss women on grounds of marriage or motherhood. Mothers in Nordic countries are more likely to be working mothers than in any other region and families enjoy pioneering legislation on parental leave policies that compensate parents for moving from work to home to care for their child, including fathers.[54] Although the specifics of gender equality policies in regards to the work place vary from country to country, there is a widespread focus in Nordic countries to highlight "continuous full-time employment" for both men and women as well as single parents as they fully recognize that some of the most salient gender gaps arise from parenthood. Aside from receiving incentives to take shareable parental leave, Nordic families benefit from subsidized early childhood education and care and activities for out-of-school hours for those children that have enrolled in full-time education.[52]

The Nordic countries have been at the forefront of championing gender equality and this has been historically shown by substantial increases in women's employment. Between 1965 and 1990, Sweden's employment rate for women in working-age (15–64) went from 52.8% to 81.0%.[53] In 2016, nearly three out of every four women in working-age in the Nordic countries were taking part in paid work. Nevertheless, women are still the main users of the shareable parental leave (fathers use less than 30% of their paid parental-leave-days), foreign women are being subjected to under-representation[52] and a nation like Finland still holds an important gender pay-gap (on average, women only receive 83 cents for every euro a male counterpart gets).[55]

Influence of Lutheranism

Some academics have theorized that Lutheranism, the dominant religious tradition of the Nordic countries, had an effect on the development of social democracy there. Schröder argues that Lutheranism promoted the idea of a nationwide community of believers and therefore led to increased state involvement in economic and social life, allowing for nationwide welfare solidarity and economic co-ordination.[56][57][58] Pauli Kettunen presents the Nordic model as the outcome of a sort of mythical "Lutheran peasant enlightenment", portraying the Nordic model as the end result of a sort of "secularized Lutheranism".[58][59] However, mainstream academic discourse on the subject focuses on "historical specificity", with the centralized structure of the Lutheran church being but one aspect of the cultural values and state structures that led to the development of the welfare state in Scandinavia.[60]

Reception

The Nordic model has been positively received by some American politicians and political commentators. Jerry Mander has likened the Nordic model to a kind of "hybrid" system which features a blend of capitalist economics with socialist values, representing an alternative to American-style capitalism.[61] Senator Bernie Sanders (I-VT) has pointed to Scandinavia and the Nordic model as something the United States can learn from, in particular with respect to the benefits and social protections the Nordic model affords workers and its provision of universal healthcare.[62][63][64] According to Naomi Klein, former Soviet leader Mikhail Gorbachev sought to move the Soviet Union in a similar direction to the Nordic system, combining free markets with a social safety net, but still retaining public ownership of key sectors of the economy—ingredients that he believed would transform the Soviet Union into "a socialist beacon for all mankind".[65][66]

The Nordic model has also been positively received by various social scientists and economists. American professor of sociology and political science Lane Kenworthy advocates for the United States to make a gradual transition toward a social democracy similar to those of the Nordic countries, defining social democracy as such: "The idea behind social democracy was to make capitalism better. There is disagreement about how exactly to do that, and others might think the proposals in my book aren't true social democracy. But I think of it as a commitment to use government to make life better for people in a capitalist economy. To a large extent, that consists of using public insurance programs—government transfers and services".[67]

Nobel Prize-winning economist Joseph Stiglitz has noted that there is higher social mobility in the Scandinavian countries than in the United States and argues that Scandinavia is now the land of opportunity that the United States once was.[68] American author Ann Jones, who lived in Norway for four years, contends that "the Nordic countries give their populations freedom from the market by using capitalism as a tool to benefit everyone" whereas in the United States "neoliberal politics puts the foxes in charge of the henhouse, and capitalists have used the wealth generated by their enterprises (as well as financial and political manipulations) to capture the state and pluck the chickens".[69]

Economist Jeffrey Sachs is a proponent of the Nordic model, having pointed out that the Nordic model is "the proof that modern capitalism can be combined with decency, fairness, trust, honesty, and environmental sustainability".[70]

The Nordic combination of extensive public provision of welfare and a culture of individualism has been described by Lars Trägårdh of Ersta Sköndal University College as "statist individualism".[46]

A 2016 survey by the think tank Israel Democracy Institute found that nearly 60 percent of Israeli Jews preferred a "Scandinavian model" economy, with high taxes and a robust welfare state.[71]

Misconceptions

George Lakey, author of Viking Economics, asserts that Americans generally misunderstand the nature of the Nordic "welfare state":

Americans imagine that "welfare state" means the U.S. welfare system on steroids. Actually, the Nordics scrapped their American-style welfare system at least 60 years ago, and substituted universal services, which means everyone—rich and poor—gets free higher education, free medical services, free eldercare, etc.[72]

In his role as economic adviser to Poland and Yugoslavia in their post-socialist transitional period, Jeffrey Sachs noted that the specific forms of Western-style capitalism such as Swedish-style social democracy and Thatcherite liberalism are virtually identical:

The eastern countries must reject any lingering ideas about a "third way", such as a chimerical "market socialism" based on public ownership or worker self-management, and go straight for a western-style market economy. [...] The main debate in economic reform should therefore be about the means of transition, not the ends. Eastern Europe will still argue over the ends: for example, whether to aim for Swedish-style social democracy or Thatcherite liberalism. But that can wait. Sweden and Britain alike have nearly complete private ownership, private financial markets and active labour markets. Eastern Europe today [in 1990] has none of these institutions; for it, the alternative models of Western Europe are almost identical.[73]

In a speech at Harvard's Kennedy School of Government, Danish Prime Minister Lars Løkke Rasmussen addressed the American misconception that the Nordic model is a form of socialism, stating: "I know that some people in the US associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy".[74]

Criticism

Socialist economists John Roemer and Pranab Bardhan criticise Nordic-style social democracy for its questionable effectiveness in promoting relative egalitarianism as well as its sustainability. They point out that Nordic social democracy requires a strong labour movement to sustain the heavy redistribution required, arguing that it is idealistic to think similar levels of redistribution can be accomplished in countries with weaker labour movements. They note that even in the Scandinavian countries social democracy has been in decline since the weakening of the labour movement in the early 1990s, arguing that the sustainability of social democracy is limited. Roemer and Bardham argue that establishing a market socialist economy by changing enterprise ownership would be more effective than social democratic redistribution at promoting egalitarian outcomes, particularly in countries with weak labour movements.[75]

Historian Guðmundur Jónsson argues that it would be inaccurate to include Iceland in one aspect of the Nordic model, that of consensus democracy. He writes that "Icelandic democracy is better described as more adversarial than consensual in style and practice. The labour market was rife with conflict and strikes more frequent than in Europe, resulting in strained government–trade union relationship. Secondly, Iceland did not share the Nordic tradition of power-sharing or corporatism as regards labour market policies or macro-economic policy management, primarily because of the weakness of Social Democrats and the Left in general. Thirdly, the legislative process did not show a strong tendency towards consensus-building between government and opposition with regard to government seeking consultation or support for key legislation. Fourthly, the political style in legislative procedures and public debate in general tended to be adversarial rather than consensual in nature".[76]

In a 2017 study, economists Rasmus Landersøn and James J. Heckman compared American and Danish social mobility and found that social mobility is not as high as figures might suggest in the Nordic countries—although they did find that Denmark ranks higher in income mobility. When looking exclusively at wages (before taxes and transfers), Danish and American social mobility are very similar. It is only after taxes and transfers are taken into account that Danish social mobility improves, indicating that Danish economic redistribution policies simply give the impression of greater mobility. Additionally, Denmark's greater investment in public education did not improve educational mobility significantly, meaning children of non-college educated parents are still unlikely to receive college education, though this public investment did result in improved cognitive skills amongst poor Danish children compared to their American peers. There was evidence that generous welfare policies could discourage the pursuit of higher-level education due to decreasing the economic benefits that college education level jobs offer and increasing welfare for workers of a lower education level.[77]

Nordic model and social democracy
Vote percentage over time of the main social democratic parties[78] in Denmark, Finland, Sweden and Norway
  Labour Party (Norway)
  Swedish Social Democratic Party
  Social Democrats (Denmark)
  Social Democratic Party of Finland

Social democrats have played a pivotal role in shaping the Nordic model, with policies enacted by social democrats being pivotal in fostering the social cohesion in the Nordic countries.[79] Among political scientists and sociologists, the term social democracy has become widespread to describe the Nordic model due to the influence of social democratic party governance in Sweden and Norway. According to sociologist Lane Kenworthy, the meaning of social democracy in this context refers to a variant of capitalism based on the predominance of private property and market allocation mechanisms alongside a set of policies for promoting economic security and opportunity within the framework of a capitalist economy as opposed to a political ideology that aims to replace capitalism.[80][81]

See also

Lists

References
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