Scandinavian socialism - a long-lived cliché?

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The Scandinavian model is a good laboratory for studying what can and cannot be done with a state's economy. Despite the fairly steady development and success of the Nordic countries over the decades, today the effectiveness of "Nordic socialism" is often questioned. In fact, less state and more economic freedom over the last two decades has led to renewed growth.

The Nordic model is presented as a combination of a large welfare state, a dynamic economy and an egalitarian society, and it is as if these factors are inextricably linked. However, an analysis of the evidence shows that in this case causation and correlation are two very different things.

Consider the example of Sweden. Between 1870 and 1936, Sweden had the best growth among industrialized countries - very good economic performance persists until the 1970s, and the state has advanced liberal structures. Between 1975 and 1995, when very generous social protection policies were gradually introduced, it fell from fourth to thirteenth place among the richest countries in the world. Similar observations can be made for other Scandinavian states. We can see that in fact the period of the "socialist experiment" in Scandinavia was negative for economic growth and some structures in these states are still feeling its effects today.

During the so-called "third way" policy promoted by the French socialists, the level of entrepreneurship was the lowest in the Scandinavian countries. None of the 100 largest Swedish companies operating today were founded after 1970. Companies such as Volvo, Scania, Electrolux and IKEA all originated at a time when these countries were models of economic liberalism. It is no secret that excessive government intervention eventually leads to the suppression of private initiative.

Life expectancy in these countries is one of the highest in the OECD, but it has been that way since the 1960s. As for the homogeneity of social conditions, this began to develop in the late 19th century, not with the social safety nets introduced in the 1970s and 1980s. One explanation for the gravitation towards egalitarianism in the Nordic countries may be the special character of the Nordic peoples, which is expressed in the desire for equality and modesty even at the domestic level. Some go so far as to trace the origins of egalitarianism back to the Middle Ages: these countries did not have feudal structures typical of other European countries. Farms were small and far apart, dependent on difficult climatic conditions. To survive, they had to show determination and resilience. You could not rely on social structures or even the landowner to let you farm his land. This early period still fosters individualism and entrepreneurship to this day. "Hunger is the best medicine," says an old Swedish proverb.

Excessive taxation and economic freedom

In the mid-1990s, the developed countries with the highest tax rates were the Scandinavian states: 49% in Sweden and Denmark, 47% in Finland and 41% in Norway. If we look at the same figures in 2012, we find high rates that are closer to the European average (44% in Sweden and Finland, compared to 45% in France). These countries seem to have approached the top of the Laffer curve, the point at which tax revenues peak, only to then fall back down again. So how did these countries manage to compensate for the persistently high level of taxation while maintaining a high level of economic dynamism? The answer is simple: they have increased the level of economic freedom.

The Danish flexicurity system is one of the best examples of combining a profitable unemployment insurance system with a flexible labor market. In France, for example, it was regularly discussed by both right-wing and left-wing governments, but was not successful in application. Sweden was the most socialist of the Nordic countries during the experimental "socialist" period, and yet it is the country that has implemented the best reforms since then, showing impressive economic performance during the 2008 crisis.

Scandinavian countries are often perceived as bastions of socialism, but in fact they are much more liberal and capitalist than they appear. Therefore, supporters of command economies will have to look elsewhere for examples of successful socialist policies. Ultimately these countries succeeded precisely in spite of their social model, not because of it. Growth and a society based on trust must first be achieved before resorting to social welfare, not the other way around.

Refugees in Sweden

Social challenges

The Nordic countries have always provided their citizens with high quality public services in important areas such as health, education and infrastructure. Since the 1980s, this approach has evolved towards increasingly generous benefits, especially for the unemployed. Since the 1990s, one-fifth of Sweden's working-age population has received unemployment, sickness or early retirement benefits. A blatant example of the system's dysfunctionality is the following paradox: people in the Nordic countries are generally in good health, but their costs for sick leave and disability are among the highest in the OECD. There are even cases of 30-year-olds receiving early retirement benefits. In reality, these benefits are disguised unemployment benefits that keep part of the population on long-term assistance.

There are other manifestations, such as absenteeism from work, which is increasingly considered acceptable (during the 2002 World Cup, absenteeism among male employees rose 41% over the annual average!)

Another relevant issue affecting the labor market in these countries is the poor integration of migrants. Sweden has a higher unemployment rate for foreigners than other Western European countries and one of the highest in the OECD! Studies have shown that the most highly skilled migrants choose countries with the highest wages and lowest taxes; the least skilled, on the contrary, choose countries with the most generous benefits and social security.

According to a recent study by the European Commission, only 1.6% of the most highly skilled jobs in Sweden are held by foreign nationals. At the same time, the level of pay for such workers is usually lower, and their work often does not correspond to their qualifications. Also, a Swedish study compared the wages of migrants from Turkey and Iran who migrated to the United States and Sweden. Their average wages were respectively 61% and 74% of the average Swedish wage, while the average wages of such migrants in America were 114% and 136% of the American wage.

A final point that is often emphasized is gender equality, which is one of the successes of the Scandinavian model, where government and parliament have perfect parity. On the other hand, the Nordic countries have one of the lowest proportions of women in senior positions in companies.

Thus, the "Nordic model" remains a rather controversial experiment. The Scandinavian countries' deep integration into the European Community, their neutrality in the World Wars and the special mentality of their population are also important success factors. At the same time, although the "socialist" economy allowed to overcome certain financial difficulties, it can be said today that it rather hindered the economic development of these countries, including by suppressing private initiative.

Jonathan Rowe

Jonathan Rowe

The creator and main author of the site is Jonathan Rowe. Trader and investor with many years of experience. A graduate of the Massachusetts Institute of Technology with over a decade of experience developing applications for financial and investment institutions.

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