Ed Miliband’s ‘Borgen tour’ highlighted Labour’s interest in Scandinavia. But what does the famed ‘Nordic model’ actually mean? Katrine Kielos explains
THE ‘Nordic model’ is a popular concept but also a disputed one. Is the success of the Nordic economies due to high taxes and universal benefits? Or is it due to school vouchers and public sector privatisations of a kind that Margaret Thatcher could only dream of? How can all these things even exist within the same model?
The left likes to tell the story of a Nordic model of efficiency and egalitarianism that has since been corrupted by the centre-right. The centre-right likes to tell the story of a model that went too far and has now been made affordable.
Prestigious international publications write special reports about how the Nordic economies are performing better than Anglo-Saxon ones, and then conclude that they would perform even better if they became more Anglo Saxon. No wonder this debate has provided Swedish ministers of all parties with well-paid speaking engagements abroad.
The Nordic countries succeed better than others in combining high growth with a fair distribution of income, although there are, of course, important differences between the different countries. Norway and Iceland are probably best discussed separately since they are not members of the European Union and their economies are highly reliant on oil and fishing.
The shared attributes of the Nordics include a generous welfare state, a particular set of labour market institutions and a high rate of investment in human capital and work-life balance. There is a story of an American visiting Stockholm asking ‘what’s with all the gay nannies?’ This was her interpretation of all the fathers she saw pushing prams in the middle of the day. Sweden spends around four per cent of its GDP helping people combine work and family. That is approximately the same share the US spends on its military. The system is costly but since it delivers a high female employment rate it also delivers high tax revenues, making it sustainable if not profitable.
Sweden is a small country with a long history of free trade and openness to foreign competition and international markets. The structural transformations of the Swedish economy have always been very dramatic: jobs and industries disappear abroad at a very high rate. ‘Secure people dare’ is a famous slogan of the Swedish social democrats. If you do not protect workers, they will soon demand that you protect jobs. Countries with weak safety nets tend to become protectionist.
The Rehn-Meidner model is a unique Swedish contribution to macroeconomics. It was developed in the 1950s by Gösta Rehn and Rudolf Meidner, two trade union economists, and it is one of the few coherent visions of economic policy beyond Keynesianism. While the particulars of the model have been abandoned due to changing circumstances it is the reason why low inflation, a tight fiscal policy and strong safety nets remain so important to Nordic policy thinking. The origin of the Danish notion of ‘flexicurity’ (advocated by the EU commission in the late 2000s) or the social democrats’ commitment to slashing the Swedish deficit after the financial crisis of the early 1990s stem from this model.
The Rehn-Meidner model is both an economic and wage policy programme and a theory of inflation, growth, wages and profits. Rehn and Meidner aimed to reconcile the goals of full employment, economic growth, redistribution and low inflation. From the late 1950s to the early 1970s Swedish economic and wages policy was inspired by it. It consisted of tight fiscal and monetary policies (Rehn and Meidner wanted to replace the Keynesian approach with a policy that kept inflation permanently under control), a centralised wage bargaining system and employment subsidies, vocational training and work for the unemployed that could be used to counter downturns in the economy.
According to the model, structural change in the economy should be embraced and even encouraged. This was, indeed, in the interest of the working classes because it would lead to higher productivity and, in turn, higher wages. Unproductive companies should not be subsidised, either through the market (with low wages), or through the state (with bailouts or handouts). Thus through a centralised system wages should be set ‘too high’ for firms that were inefficient and uncompetitive, and ‘too low’ for highly competitive and productive ones. Firms that fell into the former category faced the choice of either improving or going out of business, while those in the latter would increase their profitability. To compensate workers who lost their jobs, the state offered retraining and help relocating people to take advantage of new ones. The term ‘social bridges’ is often used to describe these measures. These ‘bridges’ have taken different forms in different Nordic countries. There is, however, a shared commitment to generous employment benefits and large investments in retraining and education. Strong trade unions have also played an active role in helping to restructure the economy.
Many of the reforms to the Nordic model in recent years have come as a response to the economic crisis which the region experienced in the 1990s. Finland and Sweden had a number of very turbulent years but emerged as high-growth, innovative economies and home to some of the world’s most successful companies. In Denmark the crisis came earlier and was not as severe.
Some of the reforms that have since become famous were actually almost accidental: the conservative minister who signed the school voucher bill in Sweden thought it was the right thing to do but did not think it would have any effect. After all, who would want to start ‘free schools’? Twenty years later, his decision has completely transformed the Swedish school system. But since then results have been falling and alarming articles about profits disappearing into tax havens regularly feature in the media. There is now a consensus growing that the sector needs to be better regulated. The idea behind the public sector reforms was to provide people with choice, not to turn Swedish schools and hospitals into a paradise for private equity companies.
In 1994 Sweden had the largest deficit of any OECD country. Rumours on the financial markets suggested that the International Monetary Fund would come in and take over. In three years, public debt had doubled, unemployment tripled, and the budget deficit increased tenfold. The social democrats returned to power in 1994 knowing they had to reduce the deficit dramatically. It took them four years to balance the budget, and they did so by proposing harsher cuts than any other party.
Alongside the budget consolidation several structural reforms were introduced. Sweden joined the EU, the pension system was reformed, the central bank was made independent and parliament’s term was extended from three to four years. Most importantly the harsh cuts were combined with investments in future growth. The government introduced an adult education programme unmatched in size and scope anywhere in the world. A scheme that allowed people to obtain a home computer through a very favourable leasing agreement with their employers was created to ensure that the then new information technology was widely available. Computer penetration soon outpaced every other country in the world and it is no coincidence that Sweden has gone on to produce companies such as Spotify and Skype.
The Nordic model is often reduced to the sum of its particular policies. But to understand the thinking behind them one needs to understand the basic equation it is based on: the idea that globalisation needs to be embraced and risks need to be shared. Aside from the public sector reforms of the 1990s much of what is now put forth as recent aspects of the model, like the commitment to fiscal discipline and low inflation, in fact have deep roots. Indeed, this kind of thinking goes back to the Rehn-Meidner model of the 1950s. The picture of the Nordic model as a social democratic project that has since been reformed by the centre-right is not really true. It is both much more complicated, and interesting, than that. When Swedish social democrats come to Britain they cannot understand why anyone would ringfence spending on the NHS in the middle of a fiscal crisis (or why the British do not pay to go to the doctor). And when Swedish conservatives cross the North Sea they are puzzled as to why the Conservative party does not view the EU as a free market project. To them it seems self-evident. The ability of the Nordic model to shape politics beyond left and right is what makes it into a real social model. It is also what makes it so interesting.
Katrine Kielos is a columnist for Aftonbladet
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