Nordic experiences: Challenges galore

The Nordic model, however, faces huge challenges such as financial viability of welfare services, demographic change, and more immigration. Bold reform is required to tackle these challenges

The Nordic countries (Sweden, Denmark, Norway, Iceland, and Finland) set a benchmark in terms of economic and social performance. The Nordic countries embody free-market capitalism that breathes in juxtaposition with a large welfare state. The Nordic model blends both features of capitalism and socialism. The Nordic model encompasses some features of capitalist society such as free-market mechanisms, globalisation and private property rights. In the socialist economy, tax rate, income equality, labour unions, retirement and unemployment benefits, public expenditure on education and healthcare are very high.

These features prevail in the Nordic model, but not as high as the socialist economy. Politically speaking, the Nordic model is often termed as social democracy. The Nordic model’s economic system has been termed as the free-market welfare state.

From 1870 to 1970 AD, the Nordic countries were among the world’s fastest-growing countries. This was the time when they adopted free-market policies with a series of pro-business reforms such as the establishment of banks and the privatisation of forests. Small public sectors and low or moderate taxation led to wealth creation. The Nordic countries were the earliest upholder of free trade and embraced globalisation. They rank among the top of league tables in the Global Competitiveness Report 2019 published by World Economic Forum. From 1970 to 1980, the Nordic countries adopted pure socialist policies (centrally controlled and strong regulations), which was considered as an economic disaster. As the size of the government increased, the growth decreased in the Nordic region. The Nordic region enjoyed and still enjoy the fruits of free-market policies. These are the policies that enabled the Nordic region to prosper in the 20th century. The Nordic countries survived the financial crisis of 2007 and recovered faster than other European countries. Strong investment capacities and high financial potential of the Nordic companies enabled to increase the income-generating capacities around the world.

Nordic nations are the forefront leader to achieve the targets of the UN’s 2030 Agenda for Sustainable Development. The Nordics are also known as Europe’s hotbed of innovation and entrepreneurship. The Global Innovation Index 2017 lists Sweden, Denmark and Finland in the top ten most innovative countries globally.

In a welfare state, the state plays a vital role in providing and protecting the economic and social well-being of denizens. It is based on the principals of opportunity, equal distribution of wealth and safeguards minimal provisions for a good life for those who cannot afford it. It is funded through redistributed taxation. The Nordic countries have a high marginal tax rate to support public expenditure.

The socialist countries like Cuba and North Korea have a higher proportion of their GDPs as government expenditure. Public expenditure as a percentage of GDP stood at 60 per cent for Cuba and 100 per cent for North Korea whereas capitalist countries like the United States, Singapore have a comparatively lower proportion of public expenditure as part of their GDP i.e. 40 per cent and 29.7 per cent. For the Nordic countries, the public expenditure as a percentage of GDP stands somewhere between the averages of the capitalist and socialist economies i.e. 51.314 per cent.

Many people believe that the Nordic welfare system is the main reason leading to economic and social success. On the flipside, Nordic values and culture led to achieving both economic and social outcomes. The Nordic values provide a strong foundation for Nordic societies. Nordics values comprise culture with a great emphasis on a high level of trust, a strong work ethic, civic participation, social cohesion, and individual responsibility. According to the Corruption Perception Index 2018 by Transparency International, Denmark is the least corrupt country, with Finland, Sweden and Norway occupying the top 10 positions. A good cultural background of the Nordic region paved the way for achieving good economic outcomes.

The Nordic model, however, faces huge challenges such as financial viability of welfare services, demographic change, and more immigration. Bold reform is required to tackle these challenges. The rising cost and demand for welfare services continue to put pressure on the Nordic model. The cost of welfare services is mainly financed through taxation. Therefore, the Nordic country cannot sustain on taxation because of two main reasons. First, taxation is already high in the Nordic region. Second, the high tax rate will disincentives economic agents reducing labour supply who choose to work less. Demographic change is another challenge - increasing aging population will lead to increased size of passive population. The culture of dependency which is passed on from parents to children has been widely prevalent. In order to protect the special features of the Nordic modal, collective risk-sharing and safety net are required to help workers and their families to adapt to risks and changes. Therefore, the incentives and the balance between entitlements and obligations must support a high rate of labor participation. The problems have started to emerge with the influx of foreign immigration in the Nordic region. This might threaten the foundation of the Nordic values.