The Nordic Welfare System: What is it?

Authors: Jacob Tran Vu Son Tung & Lee Cheng Jun

Research Head: Sasthaa Gingee Babu (Uday)

The Nordic model is commonly associated with the countries that adopt this system, of which includes: Sweden, Norway, Finland, Denmark and Iceland. These countries are normally described as being highly democratic and having a unicameral form of governance and uses proportional representation in their electoral system (Wikipedia Contributors, 2021). The model is perceived as the perfect model of equilibrium between social structures and capitalism which many countries desire to adopt. It combines features of capitalism, such as a market economy and economic efficiency, with social benefits, such as state pensions and income distribution (Kenton, W., 2021).

The focal point of the Nordic model focuses on: having a regulated working life for citizens, tax-finances and universal welfare benefits, free healthcare and education, equality between genders, active labour market policies, a high degree of employment, a strong public sector and small, open economies. These benefits come with a cost, they are being funded by the taxpayers and administered as policies and regulations for all citizens.

The transition of the semi-feudal agrarian states into affluent welfare states was surprisingly relatively seamless. In the periods of 1920 ~ 1950, these countries saw formations of labour unions, cooperative societies and extension of social rights to broader groups, which was followed by a Golden Period of Welfare in 1950 ~ 1980 when the welfare model was extended to include education, health care, pension plans and more (Iqbal, R., & Todi, P., 2015).

The Nordic model has been proven to be extremely successful and popular with citizens. In 2021, Finland was featured at the top with two other Nordic countries in the top 3 positions of the World Happiness Report 2021. The Nordic countries have been holding onto the top 3 positions ever since 2017 (Yardney, M., 2021). In terms of income-equality, the Nordic countries have been rated as one of the countries with lowest income inequality based on the GINI coefficient (World Population Review, 2021).

There are certain factors that contribute to the success of the Nordic model.

1. Social cohesion

For the welfare state to function, the population needs to agree to high taxes and universal access, irrelevant of economic ability or needs, i.e. subscribing to a “social contract”. There is a degree of social cohesion in Nordic countries that allow the redistributive process to happen.

The Nordic countries are widely acknowledged to be relatively homogenous, and this is often cited as a reason for the model’s success. The truth is Nordic countries have never been “exceptionally homogenous”, and narratives of such have increasingly been dispelled since the immigration waves of the 60s. Studies suggest that segregation and inequality have a more dominant effect on social cohesion compared to heterogeneity (Keskinen et al., 2019). Rather than homogeneity, the distinct enabler of the model seems to be the willingness of the countries to welcome immigrants.

The Nordic progress in equality also seems to play a role in shaping its residents’ mindset. Perceived equality in many aspects is really high, for example gender equality (World Population Review, 2021). Racial equality is also high, although racism is still documented (U.S News, 2021). Where perceived equality is high, it is easier to subscribe to the universal welfare state, as people are less likely to feel exploited (for the wealthier) or stigmatized (for the disadvantaged).

2. High employment rate and high educational standards

Another enabler of the Nordic model is a focus on maintaining high employment rates and human capital accumulation. While unemployment benefits are generous, working is an expected outcome of able-bodied adults. Governments invest heavily on active labor market programs to help the unemployed find work, which allow a balance to sufficiently provide for the unemployed. This is evidenced by very high employment rates.

A heavy focus on education is also crucial, and these countries do it by making education free up to the PhD level[1] . Nordic states, with service being the primary provider of the GDP, demands high quality labor. The universal provision of education, including higher education, supplies this quality labor who, in turn, contributes back into the economy to fund education for the later generations. The Nordic have created many of these social virtuous cycles from their starting point, and these keep sustaining the welfare state that we see today.

3. Government trust and state capacity

To implement such an ambitious welfare program, the state needs to have sufficient capacity. Trusts in institutions and government are therefore of great importance. Nordic countries are all predominantly social democratic, have been relatively stable politically and report high trust in national governments (OECD, 2020).

The state also oversees a huge public sector in these countries, which is the basis for universal provision of goods. A stable and efficient public sector ensures the effective usage of the tax funds, maintaining trust in the state and allowing the state to keep monitoring the welfare program.

Capital and financing for such a model

However, the success and implementation of the Nordic model was partially due to the affluence of these countries. These Scandinavian nations have based their economic successes on extractive industries, Norway’s oil, Sweden’s iron ore or Finland's forests, they also enjoy the luxury of having relatively small, homogeneous populations across which to spread their wealth.

One example of capital success would be Norway. Oil extraction has accounted for nearly 18% of the country’s GDP in 2020 and accounts for 62% of exports in the country (European Commission, n.d.). Most of the capital made has then been invested by the Government Pension Fund Global in Oslo. In 2020, the sovereign wealth fund’s investments returned a rate of 10.9% despite a year characterized by uncertainty and major fluctuations, the return was equivalent to 1.07 trillion Norwegian kroner ($124.9 billion) and most of the funds will be reinvested in future (Pensions & Investments, 2021). Thus, the Norwegian government has been commonly represented as “The guy who wins the lottery, but keeps his day job and invests in stock portfolios”.

Why the Nordic model is so hard to replicate

The Nordic Model is revered worldwide as a type of utopia, of being able to balance capitalism free market with economic equality. Many times other countries have dreamed of adopting this structure. However, we can see the model’s absence outside of Scandinavia, and after understanding the conditions needed to make the model successful, it’s not hard to understand why.

Regarding the first point about social cohesion, it is unlikely that the Nordic viewpoint on equality can be applied widely elsewhere. With equality still struggling to progress in many areas of the world, it is hard for citizens to believe in benevolent universal access, as they will feel exploited or stigmatized. Furthermore, the rise of nationalist narratives are further dividing many countries, threatening social cohesion, and making a replica of the Nordic system particularly challenging.

Secondly, on the point of high employment and high education, the Nordic are lucky to have an advanced education system ready in place and ready to sustain high employment. It is tremendously costly to start implementing the same system elsewhere, and the idea of having a high-skilled workforce that’s effective enough to cover for unemployment benefits is far-fetched for many countries.

Thirdly, a consistent social democratic government that is able to implement the Nordic model is hard to establish in other countries. Many states oppose the idea of social democracy, while others simply lack the necessary stability and historical background to support one.

Lastly, with regards to the point on capital and finance, the Nordic countries were fortunate to have natural resources that can be extracted from. Thus, raising their sovereign wealth funds and GDP tremendously. However, not all countries are able to rely on it’s natural resources, an example will be Singapore, with zero natural resources, the country only relies on competitiveness, a free market economy and strong international trading links. Thus, for countries without a strong sovereign wealth fund, it's improbable to have such a Nordic model implemented.

Footnote:

[1] for EU/EEA, other Nordic countries and Switzerland citizens

References

1. European Commission. (n.d.). Norway - Trade - European Commission. EU Trade. https://ec.europa.eu/trade/policy/countries-and-regions/countries/norway/

2. Kenton, W. (2021, January 11). Nordic Model Definition. Investopedia. https://www.investopedia.com/terms/n/nordic-model.asp

3. Keskinen, S., Skaptadottir, U. & Toivanen, M. (2019). Undoing Homogeneity in the Nordic region. Retrieved from https://tandfbis.s3-us-west-2.amazonaws.com/rt-files/docs/Open+Access+Chapters/9781138564275_oachapter1.pdf

4. Iqbal, R., & Todi, P. (2015). The Nordic Model: Existence, Emergence and Sustainability. Procedia Economics and Finance, 30, 336–351. https://doi.org/10.1016/s2212-5671(15)01301-5

5. OECD (2020). Trust in government. Retrieved from https://data.oecd.org/gga/trust-in-government.htm

6. Pensions & Investments. (2021, January 28). Norwegian wealth fund posts 10.9% return in 2020. https://www.pionline.com/sovereign-wealth-funds/norwegian-wealth-fund-posts-109-return-2020

7. U.S. News (2021). Best countries for racial equality. Retrieved from https://www.usnews.com/news/best-countries/best-countries-for-racial-equality

8. Wikipedia contributors. (2021, October 1). Nordic model. Wikipedia. https://en.wikipedia.org/wiki/Nordic_model#cite_note-8

9. World Population Review (2021). Gender equality by country. Retrieved from https://worldpopulationreview.com/country-rankings/gender-equality-by-country

10. World Population Review. (2021). Gini Coefficient By Country 2021. https://worldpopulationreview.com/country-rankings/gini-coefficient-by-country

11. Yardney, M. (2021, April 20). Revealed: The 20 happiest countries in the world for 2021. Yahoo!Finance. https://au.finance.yahoo.com/news/revealed-the-20-happiest-countries-in-the-world-for-2021-210035590.html