Home .Change and innovation Time for a Nordic model?
Time for a Nordic model?
Friday, 12 September 2008 11:07

Is it time for a Nordic model ?  Not Ursula, but an economic and social model for embracing globalisation and sharing its risks ? 

The answer may be no longer.  The bumble bee was able to fly for some decades (although it has been claimed that the laws of aerodynamics prove this to be impossible) despite high tax wedges, a generous social security, an egalitarian distribution of income, strong labour unions and wage coordination. But its flight may now be in jeopardy as globalisation proceeds and ageing populations put pressures on government budgets according to Torben M. Andersen, Bengt Holmstrom, Seppo Honkapohja, Sixten Korkman, Hans Tson Soderstrom and Juhana Vartiainen in their recent publication entitled "The Nordic

Model" (http://www.etla.fi/files/1892_the_nordic_model_complete.pdf).

So, how has been the performance of the Nordics (defined as Finland, Denmark and Sweden)?  Compared to other European countries, very good indeed in terms of employment and productivity levels. In contrast to most other EU15 countries, they have more or less managed to keep up with the US in terms of PPP-adjusted GDP over the last 25-30 years.  This good growth performance has also been associated with increased use of new information and communications technologies.  The Nordic countries have also succeeded better than other countries in combining economic efficiency and growth with a peaceful labour market, a fair distribution of income and social cohesion.  

So what is the Nordic model?  Essentially, there are two key elements: open markets and collective mechanisms for risk sharing.  Thus, the Nordic countries have benefited from their openness to globalisation in the form of higher productivity and incomes.  They have also invested R&D and innovation, and welcomed skilled migrants. 

By the same token, the welfare state and labour market institutions have given protection against the risks associated with economic openness.  Collective risk-sharing facilitates acceptance of globalisation by reconciling the flexibility required by open markets with the security that workers and citizens aspire to.  This has been important in mobilising political support for openness to new technology, trade and competition.

Interestingly, the authors note that the Nordic countries are small and ethnically homogeneous, especially at the time when the welfare state developed.  Ethnic homogeneity is conducive to the emergence of trust, the key element in social capital, which is widely believed to improve the efficiency of society by facilitating coordinated action.  A high level of trust is also associated with low corruption. 

But will the bumble bee continuing flying in the face of population ageing and continued globalisation ?

Financial stability of the welfare state is at risk as populations age.  Less and less workers will have to pay for more and more ageing pensioners.  These dependency ratios will start increasing dramatically from 2010.

Also, globalization will likely impose greater adjustment presses as the emerging economic giants in Asia and Latin America compete more and more on global markets. 

Will the Nordic model survive population ageing ?  In fact, there is no simple solution.  More rapid economic growth will not solve the problem, nor would more children or immigration.  Higher taxes are not a realistic option.

While there is no easy solution, a solution is necessary.  Ideally, they should reform the Nordic model by building on its strengths, such as by starting work careers earlier, raising labour force participation, raising the retirement age, controlling pension costs, better controlling welfare services and raising the productivity of welfare services.  There is a need to re-emphasise the importance of work and employment as well as of a proper balance between entitlements and obligations of citizens for the Nordic model to be viable in the future.

But pushing through such changes may undermine the social equilibrium which is at the heart of the Nordic model.  And social capital itself is also being challenged by more diverse societies arising from immigration.
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