Why are Nordic Economies so successful?

Author: Ng Xiao Yan, Joshua Yuen Jia Jun, Mrunali Doshi

Research Head: Mrunali Doshi

Editor: Sakshi Sanganeria

Illustration by Ka Ling

Abstract

The article explores the reasons behind the economic prosperity of the Nordic countries. It evaluates the success of the Nordic Economic Model and consolidates what can be learnt and implemented from it in other countries.A common characteristic of Nordic countries are their high income and corporate taxes. In return, they receive free education, heavily subsidised healthcare, and public pensions plans. The characteristic Nordic Economic Model is a ‘social and economic system’ which focuses on balancing the economic and social needs of a country. Its success can be attributed to the high transparency of the governments which has effectively built the trust of the people. These factors, coupled with the Nordic countries’ long standing history of economic productivity and free trade along with favourable financial regulations have made this model a successful international standard. Although there are some fundamental flaws to the model, other countries can have social policies that improve the long-term capabilities of its citizens by adopting features from this model. However, for long term benefits, the countries also need to modify their culture and attitudes.

The Nordic countries are often idealized for their economic and social success and its citizens are considered to be the happiest in the world-as these countries rank the highest in terms of individual happiness (Helliwell, Layard, & Sachs, 2019). The 2019 Legatum Prosperity Index ranked the Nordic countries in the top 10 positions, taking into account various factors such as safety and security, governance, social capital, investment environment, market access and infrastructure, health, education, living conditions, and economic quality amongst others (Legatum Institute, 2019). Denmark ranks 1st, followed by Norway on 2nd, Sweden on 4th, Finland on 5th, and Iceland on 10th (Legatum Institute, 2019)

At the same time, the Nordic countries have extreme weather, low population, and remote locations which usually hinder economic growth.

So what makes them so successful and what are the common characteristics between these countries?

1. The Nordic Way Of Life

Two of the most striking and evident characteristics of the Nordic countries are the high income levels and corporate taxes. In fact, Denmark, Finland, and Iceland have the highest income tax levels at55.89, 53.75 and 46.24 percent respectively (Pas, 2019). One would think people would be unhappy with such high tax rates but that is not entirely true. Despite high income taxes, people do not mind paying these dues because of the welfare they receive in the form of free education, heavily subsidised healthcare, and public pensions plans.

These high taxes fund public services that support the labour supply, resulting in high employment rates (cite & give numbers). By means of Sweden’s liberal leave of absence policy, full-time workers have the right to take a six-month leave of absence to launch a company (Savage, 2019) -alongside excellent childcare benefits like 480 days of paid leave (Expat, 2019) allowing a more conducive environment for work and in turn, creating higher productivity.

As seen in the 2019 Global Retirement Index that bases their overall score on material well-being, health, finances in retirement and quality of life, Nordic countries (such as Iceland)finished 1st (Natixis Investment Managers, 2019). Although citizens co-pay for healthcare on top of government coverage, there is a low limit to how much they pay (McAuley, 2014). Higher education is free in the Nordics (Välimaa,2015).2. The base rock of Nordic Success: The transparent political system The key to the success of the Nordics lies in the design and implementation of political systems.

2. The base rock of Nordic Success

The transparent political system The key to the success of the Nordics lies in the design and implementation of political systems.

State governments are highly transparent and work together with corporations for the success of the economies. According to the Corruptions Perceptions Index (2019), the Nordic countries reigned in the top 10(Transparency International, 2019).

This transparency leads to high levels of social trust by its citizens (Høybråten, 2014) in the government. A Euro barometer survey of broad social trust (as opposed to trust in the immediate family) showed the Nordics in leading positions (The Economist, 2013). People know where their money is spent and how it is used, showing the trust in their government system, which is also known as the Bjorn’s Beer effect (Worstall, 2017).

Moreover, there isa high level of cooperation between the private and public sectors. In the Sovereign Fund of Norway, the government is a‘mere manager’ of natural resources(like oil)and shares the profit with its citizens. The Natural resources are thought to belong to the citizens, thus the political design promises them their share of revenue from the profiting of these resources. The proceeds of the natural resource revenue is then invested in areas like the National Insurance Scheme’s expenditure on pensions (Norges Bank Investment Management, 2015). The Fund consists of a diverse portfolio consisting of stocks, bonds, and commodities in foreign currency. (This means that the Fund’s performance is independent of Norway’s economy.)

3. Building on the success

Common Threads The Nordic Economic Model is a ‘social and economic system’ which focuses on balancing the economic and social needs of a country. Countries following the Nordic Economic Model have common threads: a large welfare state, a set of labour market institutions and a high rate of investment in human capital (Bengt et al., 2007).

The Nordic countries have a long standing history of economic productivity and free trade. Since the mid-1990s, these countries have experienced high labour productivity levels fuelled by innovation and technology. For example, in Finland, the high labour productivity growth can be attributed to the high contribution of the ICT-producing manufacturing sectors. “The hourly labour productivity growth observed in the ICT-using service sectors has also contributed to raising labour productivity growth relative to the larger euro area countries” (Annenkov&Madaschi, 2005).

These social and historical factors are complemented by financial regulations. Nordic banks have low or negative interest rates for savings. Sweden made a brave move in 2015 and held to a -0.25% interest rate till December 2019(The Economist, 2019). This encourages disposable incomes to be spent rather than kept in banks for savings, or placed into investments such as stocks and bonds. A low interest rate also encouraged firms and households to take on loans to spend. Taxes paid are used by the government for social benefits and spending allows firms to continue producing to meet demands for the domestic economy as well for future innovation. In Norway, 45.657% of the 2019’s GDP was driven by household spending (CEIC, n.d.), showing that domestic spending has a significant impact on the Nordic’s GDP. By encouraging spending, the economy is boosted.

4. The Constant Challenges

Although the Nordic Economic Model may seem flawless, there are detrimental effects of the model on the countries as well. Some of the Nordic countries have based their economic success on extractive industries such as Norway’s oil, Sweden’s iron ore or Finland’s forests. These all create a huge carbon footprint (Moore, 2014) and resource depletion. However, with the heavy criticisms on the Nordics environmentally unfriendly policies, the Nordics have pledged to achieve carbon neutrality by 2035 and to be carbon negative after that (Rosenburg, 2019). This may result in a decline in these extractive industries but may cause unemployment and reduceGDP growth rates.

Furthermore, the Nordic’s heavy reliance on exports can be a huge issue post-Brexit as the United Kingdom is an important trade partner. In 2019, the United Kingdom was responsible for 6.2% of total Danish exports (World’s Top Exports, 2019). This can result in falling exports, thus reducing GDP growth rate.

Lastly, Sweden’s negative interest rates have garnered much critique and are cited to be the cause the Swedish krona’s depreciation (The Economist, 2019), even though negative rates have helped boost the Swedish economy back to its targeted annual inflation rate (Milne & Arnold, 2020).

5. Picking and Choosing

Economic growth in the Nordics has ranged around 1 to 2% annually (Reuters, 2019).

But why is this successful model not replicated across the globe

As we can see, the Nordic model works because of its social policies that improve the long-term capabilities of its citizens. By improving the lives and welfare of the citizens, it builds trust in government institutions and policies, resulting in higher productivity and growth in the economy.

Even in a strong economy like the United States, the complexities of social and political systems result in higher unemployment rates and societal issues. It can be safely assumed that if such issues are eradicated and more people can contribute to the workforce, there is greater capacity for the US economy to grow.

In developing countries, pure economic growth has not led to solving poverty and unemployment. An article in the World Economic Forum showed that in Indonesia(where GDP has been growing), there is growing inequality and the poor are only getting poorer (Iqbal, 2015). By improving social policies first such as education and healthcare, the economy is thought to follow forward on a clear path of improvement.

If anything can be learned from the Nordics, it is not the massive utilization of its natural resources to get rich, but the intricate link between social and economic policies that work side-by-side.

The success of the Nordic Economic Model would suggest that countries should use the same economic policies to achieve prosperity. But that is not enough. The model is strongly backed by culture and attitudes which aren’t easy to replicate. The ‘pragmatism’ and tough-mindedness’ of Nordics allows them to have continuous structural reforms while protecting the people from their disruptions (The Economist, 2013).

Unfortunately, the culture in other countries around the world is fundamentally different from the Nordic in such aspects. Thus, to truly benefit from the Nordic Economic Model, countries need to modify their culture and attitudes.

While it is difficult, governments should at least take the first step, and try to adopt similar policies in order to achieve economic prosperity.