- Purav Menon
How Effective Is The Nordic Welfare Model?
Editors Note: This is a modified version of an essay originally written for Purav's economics A level coursework
The Nordic model is the umbrella term for the economic systems employed by the Nordic countries Sweden, Norway, Iceland, Finland and Denmark. Rooted in social democracy, the Nordic model combines capitalistic foundations like the market economy and economic efficiency with social benefits like state pensions, income distribution and collective bargaining. The Nordic model is seen around the world as an example of a system that combines high living standards with low-income disparity, and an example of stellar economic opportunity and equality, with all of the Nordic countries ranking highly on the Human Development Index and Global Peace Index. However, the Nordic model has also received some criticism for numerous reasons, namely environmental damage and a homogenised population, both of which may have contributed to a fall in support for social-democratic parties in these countries. This criticism has led many to question its effectiveness, both on a domestic and global stage; are diversity and sustainability a fair trade-off to ensure a good life for citizens? And is the Nordic model really a utopia that other countries should strive towards emulating?
The Model’s background
The history of the Nordic Model differs depending on the country, but its foundations generally date back to the 1930s, when farmer and worker parties in the region spearheaded a “grand compromise” between workers and employers following an extended period of class struggle and economic crises. This compromise created coordination between workers and employers over wage negotiations, which was described as a “social partnership”, and provided a peaceful way to achieve workers’ rights. Agreements such as Denmark’s 1933 Kanserlgade Agreement and Sweden’s 1938 Saltsjöbaden Agreement helped shape a means for employers and unions to bargain on matters such as wages. The Model became more prolific following the Second World War and sustained widespread popularity across the Nordic region until the 1980s.
The model comprises of the aforementioned collective bargaining and a comprehensive welfare state. All the countries possess an extensive social safety net (benefits), as well as tax-funded public services like free education and universal healthcare. A high percentage of the workers in these countries belong to a labour union; 89% in Iceland, 66% in Denmark, 67% in Sweden, 65% in Finland and 49% in Norway. By comparison, this number is 23.5% in the UK, 17% in Germany and just 10% in the United States. The collective bargaining system means that workplace regulations and wages are not imposed by the law, but rather are negotiated among the employers and the unions themselves.
Due to the large provision of public services, public spending as a proportion of GDP is relatively high; Sweden’s is 56.6% of GDP, Denmark’s is 51.7% and Finland’s is 48.6%. For comparison, the UK’s is 38%. The reason for this is due to a large proportion of public employees; roughly 30% of the workforce across the region is employed in the public sector, with Norway having the OECD’s highest at 32.4%, compared to 16.7% in the UK and just 13.3% in the United States. In addition, public expenditure on health and education is significantly higher in Denmark, Norway and Sweden than it is in comparison to the OECD average. To pay for this, tax burdens in Nordic countries are high as a percentage of GDP; Finland and Sweden’s are at 44.1%, with Denmark’s at 45.9% - the UK’s is 34%. In addition, those with medium and low incomes are still taxed at relatively high levels.
The Nordic model is distinct from socialist countries due to its use of a mixed-market capitalistic economic system with large amounts of private ownership (though Norway is an exception to this, featuring high degrees of state-owned enterprises). As a result, some economics have referred to the Nordic model as a type of “cuddly capitalism”, with The Economist describing it as “[tempering] capitalism’s harsher effects”, especially in comparison to the Anglo-Saxon model (more traditional capitalism found in the UK, US, Australia and others).
The political spectrum of those who achieved social models differed; in Sweden and Norway, social democratic parties played a role in the formation of the Nordic model, whereas in Iceland and Finland it was right-wing parties that shaped the model, meaning that while its ideas of the welfare state can be largely tied to social democracy, they are not the same. For example, Denmark, Norway and Sweden do not hold a statutory minimum wage, with the bargaining system acting as a method to ensure living wages for workers.
The Nordic model has yielded a large number of benefits to its citizens, a number of which are not found in numerous other economic systems.
All the countries in the model are well-known for their very high living standards and low level of income inequality, as well as for the well-funded and adequate services. On the 2020 report of the inequality-adjusted Human Development Index (HDI), the five Nordic model countries are all within the top seven most developed countries in the world, with Norway being at the highest in the world.
The Nordic model has been very successful in reducing poverty and income equality. The post-tax poverty rates in 2011 for the countries averaged 7.3%, in comparison to the U.S.’s rate of 17.4% (OECD). Access to included healthcare and education means that even the poor in Nordic countries still have access to high-quality services, and are not crippled by financial debt for seeking healthcare, as is in America. Corruption rates are also very low, with Denmark ranked as the least corrupt country in the world in 2020 by the Corruption Perceptions Index.
The Nordic countries hold one of the smallest gaps in gender unemployment inequality in all of the OECD countries, according to the International Labour Organisation (ILO). In addition, the United Nations Development Programme’s Gender Inequality Index placed them highly in their 2019 rankings (within the top 10). This rose as a result of existing laws in the countries, for example, Scandinavian governments making it illegal for companies to dismiss women due to marriage or pregnancy. The Nordic countries place an emphasis on continuous full-time employment, both for men and women, as well as benefitting from subsidised childhood education, making it easier for mothers to work. That said, improvement is still necessary.
As a result of the Nordic model’s positive effects, many people worldwide see the Nordic model as an attractive and viable alternative for reforming capitalism in the countries where such a system has resulted in poverty, lack of affordable healthcare and a deteriorating social net. The system was praised by some socialists, for example, Mikhail Gorbachev, whose “perestroika” and “glasnost” policies intended to shift the Soviet Union in a direction similar to that of the Nordic countries (introducing free markets while retaining public ownership and social safety nets). Across the globe, from capitalist countries, American author Jerry Mander described the model as a “hybrid” system that blended capitalistic economics with socialist values, a sentiment that was echoed recently by U.S. Senator Bernie Sanders (VT), who supported their voter turnout, healthcare, access to education and childcare, and prioritisation of the middle class.
Politicians aside, the model has also been praised by various economists. Jeffrey Sachs described the model as “proof that modern capitalism can be combined with decency, fairness, trust, honesty”, while Stiglitz commended the higher social mobility found in its countries.
The Nordic Model has been undeniably effective in improving the lives of its citizens. Pursuit of high quality of life, access to essential provisions, and lack of corruption are all examples of ideals that all countries should strive to achieve, along with the other benefits that come with the Nordic model, and many countries in the Western world can take lessons from their positives.
However, while the global perception of the Nordic Model has been rightfully positive, much of the praise that is heaped upon it paints it as a utopia. This is problematic, as it fails to acknowledge several negatives that come with the model, along with specific conditions that mean the Nordic Model may not entirely be viable in other countries. Many critics of the Nordic Model come from those on opposing ideologies, many of whom oppose either its heavy taxation or its association with capitalism; rather than political criticisms, this essay will focus on the more objective failures associated with the model, namely issues with sustainability and diversity.
The Unmentioned Consequences
a. The Environment and Toxic Consumerism
The biggest consequence of the Nordic economic model, one that is not mentioned frequently, is the hidden ecological disaster that it masks. From a distance, it seems inconceivable, due to the abundance of and reliance on renewable energy, fresh air and clean parks. But in reality, the Nordic countries are “an ecological disaster”.
One reason for this is that Nordic countries are notorious for their overconsumption. While ecologists generally recommend somewhere in the region of 7 tonnes of material footprint per capita, Nords consume 32 tonnes per year on average. In terms of consumption, Norway appears to be the worst offender, having the second-highest level in Europe, behind only Luxembourg. This overconsumption generally concerns most products, from “meat to cars to plastic”. If everyone in the world consumed as the Scandinavians did, five Earths would be needed to sustain us. In addition, Norway is one of the world’s biggest exporters of oil (Denmark too, to a lesser extent), despite relying largely on renewable energy itself.
Data indicates that the Scandinavian countries generally fall toward the lower end of global sustainability rankings, with 3 of the countries (Norway, Finland, Iceland) following in the bottom 11 of the Sustainable Development Index, worse than most of Europe, and only just above the world’s worst, like the US, Canada and the United Arab Emirates. This has not always been the case but has been a product of recent decades; Sweden, for example, plunged from the top seven on the SDI to number 143 between the 1990s and the present day.
The disparity in the Nordic countries’ positions in the SDI and the HDI highlight the very reasons why the SDI was created in the first place; because the Human Development Index does not account for sustainability well enough for it to be an accurate enough measure of development. The ecological breakdown of the Nordic countries is not often talked about, and why would it? Much of the ecological impact that industry and overconsumption have is outsourced to other, less economically developed countries, meaning that much of the countries’ carbon footprints lie outside of their borders. This largely shows that while the Nordic model exists as a model for how a country should treat its citizens, it does not function in what it delivers to the world.
b. Homogenisation and the Fall of Social Democracy
The Nordic countries as a whole are quite homogenised and have been for many decades, having a majority white population with small numbers of minorities in comparison to countries in the West such as the UK or the US. It is important to note that, while the United Kingdom has an 87% “white” population, which seems to be greater than that of the Nordic countries, the UK takes into account all-white backgrounds; in the case of the demographics of the Nordic countries, they group the population by what generation of immigrant they are.
However, Nordic countries have experienced a spate of immigration from even beyond Europe in recent years, a change that has had a remarkable effect on its native population. Racially motivated politics are beginning to play a large part in politics across the world, and constituents in these countries appear to be abandoning the traditional social-democratic parties under which the Nordic model has prevailed in favour of right-wing, anti-immigration, populist parties.
The reason for this is the lingering idea of “trust” within the model; wages, for example, are built based on a mutual ‘trust’ between the employer and the worker. That idea of trust means that the largely homogenised Nordic population feel alienated by the establishment of social-democratic parties favouring the introduction of immigrants, creating a vacuum. This vacuum seems to be perfect to be filled in by right-wing populists, who exaggerate the idea of racial mistrust in comparison to class mistrust to successfully win over voters.
While the rise of populism and fall of social democracy is a far wider global problem (see the fall of the Labour Party’s Red Wall in the UK), the fact that it is beginning to occur now within the strongest social-democratic economic model that exists in the world is very telling about the cracks that already existed in the system. Furthermore, the importance that Nordic citizens seem to be placing on racial barriers indicate that the Nordic model, seen as a utopia by Western social democrats, simply may not work in such an ethnically diverse society as is found in Anglo-Saxon model countries.
It is often said that happiness is the best indicator of a country’s development; indeed, the Nordic countries take up five of the top seven spots on the 2020 World Happiness Report, which takes into account real GDP per capita, social support, life expectancy, freedom, generosity and corruption.
But all that glitters is not gold. The 21st century so far has shown that, as a species, humanity needs to take climate change much more seriously, to curb the damage that we wreak upon the planet. And when activists like Greta Thunberg, a Swede herself, are brought to the forefront of global attention, it is an indicator that the environment should be the governments’ chief concern going forward. Thus, it is clear that the overconsumption and ecological impact that the Nordic Model promotes must be reduced with immediate effect. As for the homogenisation, the consequences of lack of racial integration can be damaging – the idea of using foreigners and minorities as a scapegoat has been implemented by numerous populist, authoritarian regimes throughout history, something which must not be repeated.
Yet as a social democrat myself, I see many merits with the Nordic Model’s system of governance that do not come in other developed countries. In an age where corporations like Amazon seek to prevent their U.S. workers from unionising, it is welcoming to see a functioning bargaining system that truly values its workers and class solidarity. In a year that has seen millions suffer across the world due to exacerbated inequality brought on by Covid-19, it is refreshing to see countries prioritise the wellbeing of their citizens through fiscal policy and provision of services. And while Scandinavia’s carbon footprint may be high, its domestic use of chiefly renewable energy is an important first step towards global reliance.
While the numerous drawbacks of the model mean it may not be sustainable on a global level, it is without a question that it teaches important lessons to foreign governments. The pandemic has proven that prioritising citizens’ wellbeing is more important than ever; if Mr Boris Johnson and his government seek advice on this matter, he should look no further than his Nordic neighbours.