Lessons
The secret of their success
The Nordic countries are probably the best-governed in the world
Why has this remote, thinly populated region, with its freezing winters and expanses of wilderness, proved so successful? There was a time when most of its population would have unhesitatingly praised their government, which for most of the 20th century meant the social democrats in one of their various national guises. The government had provided the people with cradle-to-grave welfare services, rescuing them from the brutal life of their 19th-century forebears, and stepped in to save the capitalist economies from their periodic crises.
But free-marketers have poked holes in the pro-government explanation and offered a powerful alternative. In the period from 1870 to 1970 the Nordic countries were among the world’s fastest-growing countries, thanks to a series of pro-business reforms such as the establishment of banks and the privatisation of forests. But in the 1970s and 1980s the undisciplined growth of government caused the reforms to run into the sands. Free-marketers put the region’s impressive recent performance down to its determination to reduce government spending and set entrepreneurs free.
Government’s role in improving equality is also being questioned. Andreas Bergh, of Sweden’s Research Institute of Industrial Economics, argues that the compression of Swedish incomes took place before the arrival of the welfare state, which was a consequence rather than a cause of the region’s prosperity—and almost killed the goose that laid the golden eggs.
This special report has supported some of the free-marketers’ arguments. The Nordic countries had got into the habit of spending more on welfare than they could afford and of relying more on a handful of giant companies than was wise. They are right to try to trim their states and make life easier for business. But it would be wrong to ignore the role of government entirely.
The Nordic countries pride themselves on the honesty and transparency of their governments. Nordic governments are subject to rigorous scrutiny: for example, in Sweden everyone has access to all official records. Politicians are vilified if they get off their bicycles and into official limousines.
The Nordics have added two other important qualities to transparency: pragmatism and tough-mindedness. On discovering that the old social democratic consensus was no longer working, they let it go with remarkably little fuss and introduced new ideas from across the political spectrum. They also proved utterly determined in pushing through reforms. It is a grave error to mistake Nordic niceness for softheadedness.
Pragmatism explains why the new consensus has quickly replaced the old one. Few Swedish Social Democratic politicians, for instance, want to dismantle the conservative reforms put in place in recent years. It also explains why Nordic countries can often seem to be amalgams of left- and right-wing policies.
Pragmatism also explains why the Nordics are continuing to upgrade their model. They still have plenty of problems. Their governments remain too big and their private sectors too small. Their taxes are still too high and some of their benefits too generous. The Danish system of flexicurity puts too much emphasis on security and not enough on flexibility. Norway’s oil boom is threatening to destroy the work ethic. It is a bad sign that over 6% of the workforce are on sick leave at any one time and around 9% of the working-age population live on disability pensions. But the Nordics are continuing to introduce structural reforms, perhaps a bit too slowly but stolidly and relentlessly. And they are doing all this without sacrificing what makes the Nordic model so valuable: the ability to invest in human capital and protect people from the disruptions that are part of the capitalist system.
The Nordics are hardly blushing violets when it comes to advertising the virtues of their model. Nordic think-tanks produce detailed studies in English about how they reformed their states. Nordic politicians fight their corner in international meetings and Nordic consultants sell their public-sector expertise around the world. Dag Detter played a leading role in restructuring the Swedish state’s commercial portfolio in the 1990s, representing more than a quarter of the business sector. He has since advised governments in Asia and across Europe.
Yet it is hard to see the Nordic model of government spreading quickly, mainly because the Nordic talent for government is sui generis. Nordic government arose from a combination of difficult geography and benign history. All the Nordic countries have small populations, which means that members of the ruling elites have to get on with each other. Their monarchs lived in relatively modest places and their barons had to strike bargains with independent-minded peasants and seafarers.
They embraced liberalism early. Sweden guaranteed freedom of the press in 1766, and from the 1840s onwards it abolished preference for aristocrats in handing out top government jobs and created a meritocratic and corruption-free civil service. They also embraced Protestantism—a religion that reduces the church to a helpmate and emphasises the direct relationship between the individual and his God. One of the Lutheran church’s main priorities was teaching peasants to read.
The combination of geography and history has provided Nordic governments with two powerful resources: trust in strangers and belief in individual rights. A Eurobarometer survey of broad social trust (as opposed to trust in immediate family) showed the Nordics in leading positions (see chart below). Economists say that high levels of trust result in lower transaction costs—there is no need to resort to American-style lawsuits or Italian-style quid-pro-quo deals in order to get things done. But its virtues go beyond that. Trust means that high-quality people join the civil service. Citizens pay their taxes and play by the rules. Government decisions are widely accepted.
Nordic people take this attitude to government with them when they go abroad. In the 19th and early 20th centuries some 1.3m people, a quarter of the Swedish population at the time, emigrated, mostly to the United States. America created an entire genre of jokes about “dumb Swedes” and their willingness to obey rules. These dumb Swedes created the best-governed enclaves in America, such as Minnesota. Even today Americans with Nordic roots are 10% more likely than the average American to believe that “most people can be trusted”.
The Surprising Ingredients of Swedish Success -- Free Markets and Social Cohesion
Nima Sanandaji
September 5, 2012A new paper demonstrates that Swedish economic success is a result of the free market and not the welfare state, says Nima Sanandaji of the Institute of Economic Affairs (U.K.).
Indeed, Sweden did not become wealthy through social democracy, big government and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. It also benefited from positive cultural norms, including a strong work ethic and high levels of trust.
- As late as 1950, Swedish tax revenues were still only around 21 percent of gross domestic product (GDP).
- The policy shift toward a big state and higher taxes occurred mainly during the next 30 years, as taxes increased by almost one percent of GDP annually.
- The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden's relative economic performance. In 1975, Sweden was the fourth richest industrialized country in terms of GDP per head. By 1993, it had fallen to fourteenth.
- After 1970, the establishment of new firms dropped significantly.
- Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.
Since the economic crisis of the early 1990s, Swedish governments have rolled back the state and introduced market reforms in sectors such as education, health and pensions. Economic freedom has increased in Sweden while it has declined in the United Kingdom and United States. Sweden's relative economic performance has improved accordingly, says Sanandaji.
Source: Nima Sanandaji, "The Surprising Ingredients of Swedish Success -- Free Markets and Social Cohesion," Institute of Economic Affairs (U.K.), August 27, 2012.