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Saturday, May 31, 2008

Does the Nordic Model need to be reformed?

Does the Nordic model need to be reformed to face up to the challenges of globalisation? What exactly are these challenges and what are the causes which make the model work successfully, creating strong economic performances? Is the Nordic approach sustainable? Can its characteristic elements be used in other economies? Here are some of the main questions posed at the OECD conference "Embracing Globalisation in the 21st Century: a Dialogue about the Nordic Approach".

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To better understand this issue I present a synthesis of the OECD Secretary-General’ keynote, , at the conference in Paris, on 21 May 2008. [1]
Is there a "Nordic model"? (Characteristics of the Nordic Model)

In fact, there is no one single model among the 5 Nordic countries. However, they share some common approaches:

1.Labour market institutions and policies that provide:

- relatively low employment protection

- high unemployment protection (coupled with high income-support benefits)

- strict activation policies

- high degree of centralized wage coordination

2.Comprehensive social benefits and publicly provided social services and:

- large investment in education and research

- development financed by taxes

3.Openness to trade and competitive product markets

4.High taxes

Together, these features offer:

- a collective mechanism for risk sharing

- play a key role securing the political acceptability of structural reforms

"Inflation has generally remained low over the last three years, although as elsewhere, recent increases in food and energy prices are exerting upward pressures."

Labour markets are characterized by:

- high participation rates

- generally low unemployment

- a small incidence of long-term unemployment

- high job mobility.

Nordic countries’ tax and welfare systems have generally ensured that the winners from structural transformation have shared their gains with the losers - "Nordic countries have expanded the size of “the economic pie”, the distribution of this “pie” has been widely shared."

"For example, in the Nordic countries, older workers’ employment rate in 2006 was well above the OECD average of 53%, reaching nearly 85% in Iceland."
"Income equality and poverty rates were lower in Denmark and Sweden than in any other OECD country, and they were below the OECD average in Finland and Norway."

Traditional commitment to free trade

- barriers to trade and investment are low (apart from agricultural products)

- measures of Nordic country participation in the international trading system are high

- Nordic countries score well in terms of competition-friendly regulation in markets for goods and services

High tax burden

- needed to finance the comprehensive and generous social expenditures and spending on education

- tax revenue is put to efficient use

"Taxation revenue to GDP last year was close to 50 per cent in Denmark and Sweden and over 40 per cent in Finland and Norway"

To what degree can the strong economic performance be attributed to the Nordic model?

Many attribute the combination of:

- solid economic growth

- well-performing labour market

- an equal distribution of income and social cohesion

Others recognize the recent good economic performance, but question:

- whether the incentives associated with high taxes and a generous social security system are compatible with long-term sustainability.

Nordic countries in particular have managed to seize the opportunities offered by globalization for higher productivity and living standards. OCDE attribute this to two forces:

- a lower exposure to globalisation, in the sense that the export sectors are geared towards fast growing and relatively profitable products.

"Finland and Sweden, for instance, specialize in the telecoms sector."

- a higher ability to cope with change


- education levels

- the quality and public confidence in the institutions of government

- and their strong innovation frameworks.

Is the Nordic approach sustainable?

Moving on to the challenges, the Nordic Report [2] identified the risks for the Nordic model. The authors, six Nordic professors, focus on the implications of globalization and demographic change. The conference was organised against the background of the debate generated by this report. The authors think that the financial dilemma faced by the welfare state cannot be solved by increased growth, higher taxes, higher birth rates or increased immigration.

Globalization has accelerated:

- emergence of new players in the international trading system, bringing additional workers ( 1 billion over the last decade).

- new relationships such as cross-border out-sourcing and in-sourcing.

The globalization of innovation:

- many OECD-based businesses are setting up R&D operations in China and India, attracted by their abundant supply of highly skilled scientists and engineers.

The Report’s authors note that the costs of funding the Nordic model are likely to rise faster than nominal GDP. This is due to:

- expected demographic changes, leading to a higher proportion of retirees relative to the number of workers, as the baby boom generation retires, and life expectancy continues to lengthen.

- governments’ room for manoeuvre has become more limited, with taxation levels already high, and tax bases becoming more mobile (especially on capital and labour income). Both forces exert tensions on the long-run sustainability of the Nordic model.

"How can the essentials of the Nordic model be preserved going forward, especially its underlying philosophy of collective mechanisms for sharing risks? "

Can elements of the Nordic approach be transferred?

Are there lessons for other countries that can be drawn from the Nordic model? Certainly (second OCDE).

- regulation does not buy security; in fact, the opposite appears to be true.

- to caution against trying to emulate directly the Nordic model. The precise balance between the different policy planks depends on country circumstances and institutions.

"For example, the quality of industrial relations, and agreement among trade unions and employer organizations on common objectives may play a key role in labour market performance, as well as the political feasibility of reforms. Establishing how countries can implement coherent policy packages in practice also takes time. The Danish version of the Nordic model, for example, is the result of a long series of reforms, started in 1994 and has required considerable fine-tuning to reach its present format."

Dealing with the political economy of reform

"Coping with globalization is about coping with change, and success in implementing policy reform requires winning broad support for change. But as you are well aware, that is not an easy task. There are winners and losers across countries and within each country. Even if a country benefits overall, the adjustment costs cannot be ignored."

*end of synthesis*

The compatibility between reformism and capitalism

The actual dominant ideology of global capitalism - designated as “neo-liberalism” by some and “open trade” by others - has its proper strong discourse to impose the program of “creative destruction” of collective structures contrary to the market logic, across the world.

Through agencies such as the OECD, “neo-liberalism” promotes the economics of the free market like an incontestable scientific theory - a logic of flexibility, competitiveness and extreme individualism that has no alternative. Indeed, the OECD is not ideologically neutral and, like other transnational bodies, it has the corporate speak characteristic of the corporate world.

We know that the compatibility between a true reformism and capitalism is measured by the relationship between the policies of labour organisations and the vital institutions of capital (private property and labour market).

Reform seeks to improve the economic system like it is. One neo-liberal reform, whose main goal consists in the “free market”, is quite different from a reform focused on progressive transition to social justice and job security. It is not a question of competition - “winners and losers”. It is a question of social justice and human rights, and the crucial factor for that change resides in the mobilized collective power of the workforce, which cannot be measured in economic terms.

We don’t need a "reformist reform", which simply supports the system and allows capitalism to function more effectively. We need a "non-reformist reform", a "structural reform” or a "revolutionary-reformism", that in a cumulative way tends to transform the actual system in all its economic, social and environmental dimensions. [3]

So, the governments and academic institutions that read these international reports should not to be so influenced. They should have in consideration the political and economical objectives that are behind them, and above all, that they have not passed through a democratic scrutiny.

[1] Angel Gurría's keynote, Seminar on "Embracing globalisation in the 21st century: a dialogue on the Nordic approach","Reform the Nordic model"
ETLA’s report “The Nordic Model – Embracing globalization and sharing risks” Read the book [PDF] ; Image: frontcover of the book
[3] Andre Gorz, Austrian and French social philosopher, Wikipedia article

POLL: Does the Nordic model need to be reformed? (top of left column)

Other related posts:
Fed eyes Nordic Model
Manufactured Landscape - Landscape as Architecture
The Global Business
The current capitalist system



RennyBA said...

This is a delicate and comprehensive question and of course not easy to comment since I'm a Norwegian.
In total, I would say no or to make it simple: Why change a winning team?
What I like in the Nordic model, is the focus on collectivism and not individualism.
The strong coalition between the government and the association for employers as well as employees - and of course the willingness to negotiate and participate in building a human society is essential.
High taxes are no problem as long as it benefits all. I rather pay taxes than a high health insurance which only benefits the insurance industry.
Like I always say on my blog about this - living a long life in this society: I was born ultra conservative, I'm yet proud of living in a social democracy and I've probably dye as a communist. :-)
Btw: I've done the poll.

Leena said...

I think one of the essential factors for the model to work at least in Finland is the "Finnish spirit" and I think the other Nordic countries don't differ much in that respect. Regarding that transferring the model elsewhere might not succeed.
One of the flaws in the model is the unemployment benefit. The regulations are too inflexible giving the unemployed better benefits when they don't work at all instead of rewarding them for short periods of working!
The social democrat equality has lead to an impossible situation in my field; education. We are at the lead of the PISA survey, but the equality prevents from giving the top students more advanced studies than the average students. Our higher education is already in a crisis because of that.
In some cases the governement has two opposite roles: On the other hand we have high taxes on alcohol, cars and gasoline, on the other hand we are tried to convince to quit drinking and using cars. What would happen if everybody followed that advice?

There are many things that are not working the optimal way but in general the system is good.
I have doubts about the model working elsewhere, we Nordic people are different living in these extraordinary conditions :)