Nordic model

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Nordic model
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The Nordic model comprises the economic and social policies as well as typical cultural practices common in the Nordic countries (Denmark, Finland, Iceland, Norway, and Sweden).^[1] This includes a comprehensive welfare state and multi-level collective bargaining^[2] based on the economic foundations of social corporatism,^[3][4] and a commitment to private ownership within a market-based mixed economy^[5] – with Norway being a partial exception due to a large number of state-owned enterprises and state ownership in publicly listed firms.^[6]

Although there are significant differences among the Nordic countries,^[7] they all have some common traits. The three Scandinavian countries are constitutional monarchies, while Finland and Iceland have been republics since the 20th century. All the Nordic countries are however described as being highly democratic and all have a unicameral legislature and use proportional representation in their electoral systems. They all support a free market and universalist welfare state aimed specifically at enhancing individual autonomy and promoting social mobility, with a sizable percentage of the population employed by the public sector (roughly 30% of the work force in areas such as healthcare, education, and government),^[8][9] and a corporatist system with a high percentage of the workforce unionized and involving a tripartite arrangement, where representatives of labour and employers negotiate wages and labour market policy is mediated by the government.^[10] As of 2020, all of the Nordic countries rank highly on the inequality-adjusted HDI and the Global Peace Index as well as being ranked in the top 10 on the World Happiness Report.^[11]

The Nordic model was originally developed in the 1930s under the leadership of social democrats,^[12] although centrist and right-wing political parties, as well as labour unions, also contributed to the Nordic model's development.^[13] The Nordic model began to gain attention after World War II^[14] and has transformed in some ways over the last few decades, including increased deregulation and expanding privatization of public services.^[15][12] However, it is still distinguished from other models by the strong emphasis on public services and social investment.^[15]

The Nordic model has been characterized as follows:^[16]

• An elaborate social safety net, in addition to public services such as free education and universal healthcare^[16] in a largely tax-funded system.^[17]
• Strong property rights, contract enforcement and overall ease of doing business.^[18]
• Public pension plans.^[16]
• High levels of democracy as seen in the Freedom in the World survey and Democracy Index.^[19][20]
• Free trade combined with collective risk sharing (welfare social programmes and labour market institutions) which has provided a form of protection against the risks associated with economic openness.^[16]
• Little product market regulation. Nordic countries rank very high in product market freedom according to OECD rankings.^[16]
• Low levels of corruption.^[19][16] In Transparency International's 2022 Corruption Perceptions Index, Denmark, Finland, Norway and Sweden were ranked among the top 10 least corrupt of the 180 countries evaluated.^[21]
• A partnership between employers, trade unions and the government, whereby these social partners negotiate the terms to regulating the workplace amongst themselves, rather than the terms being imposed by law.^[22][23] Sweden has decentralised wage co-ordination while Finland is ranked the least flexible.^[16] The changing economic conditions have given rise to fear among workers as well as resistance by trade unions in regards to reforms.^[16]
• High trade union density and collective bargaining coverage.^[24] In 2019, trade union density was 90.7% in Iceland, 67.0% in Denmark, 65.2% in Sweden, 58.8% in Finland, and 50.4% in Norway; in comparison, trade union density was 16.3% in Germany and 9.9% in the United States.^[25] Additionally, in 2018, collective bargaining coverage was 90% in Iceland, 88.8% in Finland (2017), 88% in Sweden, 82% in Denmark, and 69% in Norway; in comparison collective bargaining coverage was 54% in Germany and 11.7% in the United States.^[26] The lower union density in Norway is mainly explained by the absence of a Ghent system since 1938. In contrast, Denmark, Finland and Sweden all have union-run unemployment funds.^[27] Union density has declined in Denmark, Finland and Sweden, but is relatively stable, although at a lower level (about 50%), in the non-Ghent Norway.^[28]
• The Nordic countries received the highest ranking for protecting workers rights on the International Trade Union Confederation 2014 Global Rights Index, with Denmark being the only nation to receive a perfect score.^[29]
• Significant public spending, with Norway at 48.3% of GDP, Sweden at 49.4%, Iceland at 49.8%, Denmark at 50.8% and Finland at 55.8%. This is high even compared to the OECD average of 46.3%.^[30]
• Overall tax burdens as a percentage of GDP are high, with 35.9%, 41.4%, 41.4%, 42.4% and 43.4% for Iceland, Norway, Sweden, Finland and Denmark respectively. This is compared to the OECD average of 33.9%.^[31] The Nordic countries also have a relatively progressive taxation system in place; this along with their generous welfare systems have made them among the least unequal countries in the world.^[32]
• The United Nations World Happiness Reports show that the happiest nations are concentrated in Northern Europe. The Nordics ranked highest on the metrics of real GDP per capita, healthy life expectancy, having someone to count on, perceived freedom to make life choices, generosity and freedom from corruption.^[33] The Nordic countries place in the top 10 of the World Happiness Report 2018, with Finland and Norway taking the top spots.^[34]

The Nordic model is underpinned by a mixed-market capitalist economic system that features high degrees of private ownership,^[35][36] with the exception of Norway which includes a large number of state-owned enterprises and state ownership in publicly listed firms.^[6]

The Nordic model is described as a system of competitive capitalism combined with a large percentage of the population employed by the public sector, which amounts to roughly 30% of the work force, in areas such as healthcare and higher education. In Norway, Finland, and Sweden, many companies and industries are state-run or state-owned^{[37][38][39][40]} like utilities, mail, rail transport, airlines, electrical power industry, fossil fuels, chemical industry, steel mill, electronics industry, machine industry, aerospace manufacturer, shipbuilding, and the arms industry.^[41] In 2013, The Economist described its countries as "stout free-traders who resist the temptation to intervene even to protect iconic companies", while also looking for ways to temper capitalism's harsher effects and declared that the Nordic countries "are probably the best-governed in the world."^[9][42] Some economists have referred to the Nordic economic model as a form of "cuddly capitalism", with low levels of inequality, generous welfare states, and reduced concentration of top incomes, contrasting it with the more "cut-throat capitalism" of the United States, which has high levels of inequality and a larger concentration of top incomes, among other social inequalities.^[16][43][44]

As a result of the Sweden financial crisis of 1990–1994, Sweden implemented economic reforms that were focused on deregulation and the strengthening of competition laws. Despite this, Sweden still has the highest government spending-to-GDP ratio of all the Nordic countries, it retains national-level sectoral bargaining unlike Denmark and Iceland, with over 650 national-level bargaining agreements,^[45] and it retains the Ghent system unlike Norway and Iceland and consequently has the second-highest rate of unionization in the world.^[46][27][47] Despite being one of the most equal OECD nations, from 1985 to the 2010s Sweden saw the largest growth in income inequality among OECD economies.^[48][49] Other effects of the 1990s reforms was the substantial growth of mutual fund savings, which largely began with the government subsidizing mutual fund savings through the so-called Allemansfonder program in the 1980s;^[50] today 4 out of 5 people aged 18–74 have fund savings.^[51]

The state of Norway has ownership stakes in many of the country's largest publicly listed companies, owning 37% of the Oslo stock market^[6] and operating the country's largest non-listed companies, including Equinor and Statkraft. In January 2013, The Economist reported that "after the second world war the government nationalised all German business interests in Norway and ended up owning 44% of Norsk Hydro's shares. The formula of controlling business through shares rather than regulation seemed to work well, so the government used it wherever possible. 'We invented the Chinese way of doing things before the Chinese', says Torger Reve of the Norwegian Business School."^[6] The government also operates a sovereign wealth fund, the Government Pension Fund of Norway, whose partial objective is to prepare Norway for a post-oil future but "unusually among oil-producing nations, it is also a big advocate of human rights – and a powerful one, thanks to its control of the Nobel peace prize."^[42]

Norway is the only major economy in the north of Europe where younger generations are getting richer, with a 13% increase in disposable income income for 2018, bucking the trend seen in other european-northern nations of Millennials becoming poorer than the generations which came before.^[52]

Social democrats have played a pivotal role in shaping the Nordic model, with policies enacted by social democrats being pivotal in fostering the social cohesion in the Nordic countries.^{[53]: vi, 159} Among political scientists and sociologists, the term social democracy has become widespread to describe the Nordic model due to the influence of social democratic party governance in Sweden and Norway, in contrast to other classifications such as liberal or Christian democratic.^[54] According to sociologist Lane Kenworthy, the meaning of social democracy in this context refers to a variant of capitalism based on the predominance of private property and market allocation mechanisms alongside a set of policies for promoting economic security and opportunity within the framework of a capitalist economy as opposed to a political ideology that aims to replace capitalism.^[55][56]

While many countries have been categorized as social democratic, the Nordic countries have been the only ones to be constantly categorized as such. In a review by Emanuele Ferragina and Martin Seeleib-Kaiser of works about the different models of welfare states, apart from Belgium and the Netherlands, categorized as "medium-high socialism", the Scandinavian countries analyzed (Denmark, Norway, and Sweden) were the only ones to be categorized by sociologist Gøsta Esping-Andersen as "high socialism", which is defined as socialist attributes and values (equality and universalism) and the social democratic model, which is characterized by "a high level of decommodification and a low degree of stratification. Social policies are perceived as 'politics against the market.'" They summarized the social democratic model as being based on "the principle of universalism, granting access to benefits and services based on citizenship. Such a welfare state is said to provide a relatively high degree of autonomy, limiting the reliance on family and market."^[54]

According to Johan Strang, since the 1990s, politicians, researchers and the media have shifted to explaining the Nordic model with cultural rather than political factors. These cultural explanations benefit neoliberalism, whose rise this cultural phenomenon coincided with. By the 2010s, politics has been re-entering the conversation on the Nordic model.^[12]

Some academics have theorized that Lutheranism, the dominant traditional religion of the Nordic countries, had an effect on the development of social democracy there. Schröder posits that Lutheranism promoted the idea of a nationwide community of believers and led to increased state involvement in economic and social life, allowing for nationwide welfare solidarity and economic co-ordination.^[57][58][59] Esa Mangeloja says that the revival movements helped to pave the way for the modern Finnish welfare state. During that process, the church lost some of its most important social responsibilities (health care, education, and social work) as these tasks were assumed by the secular Finnish state.^[60] Pauli Kettunen presents the Nordic model as the outcome of a sort of mythical "Lutheran peasant enlightenment", portraying the Nordic model as the result of a sort of "secularized Lutheranism";^[59][61] however, mainstream academic discourse on the subject focuses on "historical specificity", with the centralized structure of the Lutheran church being but one aspect of the cultural values and state structures that led to the development of the welfare state in Scandinavia.^[62]

The Nordic countries share active labour market policies as part of a social corporatist economic model intended to reduce conflict between labour and the interests of capital. This corporatist system is most extensive in Norway and Sweden, where employer federations and labour representatives bargain at the national level mediated by the government. Labour market interventions are aimed at providing job retraining and relocation.^[63]

The Nordic labour market is flexible, with laws making it easy for employers to hire and shed workers or introduce labour-saving technology. To mitigate the negative effect on workers, the government labour market policies are designed to provide generous social welfare, job retraining and relocation services to limit any conflicts between capital and labour that might arise from this process.^[64]

The Nordic welfare model refers to the welfare policies of the Nordic countries, which also tie into their labour market policies. The Nordic model of welfare is distinguished from other types of welfare states by its emphasis on maximising labour force participation, promoting gender equality, egalitarian, and extensive benefit levels, the large magnitude of income redistribution and liberal use of expansionary fiscal policy.^[65]

While there are differences among the Nordic countries, they all share a broad commitment to social cohesion, a universal nature of welfare provision in order to safeguard individualism by providing protection for vulnerable individuals and groups in society, and maximising public participation in social decision-making. It is characterized by flexibility and openness to innovation in the provision of welfare. The Nordic welfare systems are mainly funded through taxation.^[66]

Despite the common values, the Nordic countries take different approaches to the practical administration of the welfare state. Denmark features a high degree of private sector provision of public services and welfare, alongside an assimilation immigration policy. Iceland's welfare model is based on a "welfare-to-work" (see workfare) model while part of Finland's welfare state includes the voluntary sector playing a significant role in providing care for the elderly. Norway relies most extensively on public provision of welfare.^[66]

When it comes to gender equality, the Nordic countries hold one of the smallest gaps in gender employment inequality of all OECD countries,^[67] with less than 8 points in all Nordic countries according to International Labour Organization standards.^[68] They have been at the front of the implementation of policies that promote gender equality; the Scandinavian governments were some of the first to make it unlawful for companies to dismiss women on grounds of marriage or motherhood. Mothers in Nordic countries are more likely to be working mothers than in any other region and families enjoy pioneering legislation on parental leave policies that compensate parents for moving from work to home to care for their child, including fathers.^[69] Although the specifics of gender equality policies in regards to the work place vary from country to country, there is a widespread focus in Nordic countries to highlight "continuous full-time employment" for both men and women as well as single parents as they fully recognize that some of the most salient gender gaps arise from parenthood. Aside from receiving incentives to take shareable parental leave, Nordic families benefit from subsidized early childhood education and care and activities for out-of-school hours for those children that have enrolled in full-time education.^[67]

The Nordic countries have been at the forefront of championing gender equality and this has been historically shown by substantial increases in women's employment. Between 1965 and 1990, Sweden's employment rate for women in working-age (15–64) went from 52.8% to 81.0%.^[68] In 2016, nearly three out of every four women in working-age in the Nordic countries were taking part in paid work. Nevertheless, women are still the main users of the shareable parental leave (fathers use less than 30% of their paid parental-leave-days), foreign women are being subjected to under-representation,^[67] and Finland still holds a notable gender pay-gap; the average woman's salary is 83% of that of a man, not accounting for confounding factors such as career choice.^[70]

The Nordic model has been successful at significantly reducing poverty.^[71] In 2011, poverty rates before taking into account the effects of taxes and transfers stood at 24.7% in Denmark, 31.9% in Finland, 21.6% in Iceland, 25.6% in Norway, and 26.5% in Sweden. After accounting for taxes and transfers, the poverty rates for the same year became 6%, 7.5%, 5.7%, 7.7% and 9.7% respectively, for an average reduction of 18.7 p.p.^[72] Compared to the United States, which has a poverty level pre-tax of 28.3% and post-tax of 17.4% for a reduction of 10.9 p.p., the effects of tax and transfers on poverty in all the Nordic countries are substantially bigger.^[72] In comparison to France (27 p.p. reduction) and Germany (24.2 p.p. reduction), the taxes and transfers in the Nordic countries are smaller on average.^[72]

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The term 'peasant republic' is sometimes applied to certain communities in Scandinavia during the Viking Age and High Middle Ages, especially in Sweden, where royal power seems to have been initially somewhat weak,^[73] and in areas of modern day Sweden that were not under the rule of the Swedish king yet, as well as in Iceland where the Icelandic Commonwealth serves as an example of an unusually large and sophisticated peasant republic building on the same democratic traditions.^[74] Some historians have also argued that Gotland was a peasant republic before the attack by the Danes in 1361.^[75] Central for the old Scandinavian democratic traditions was the assemblies called the Thing or Moot.

The Nordic model traces its foundation to the "grand compromise" between workers and employers spearheaded by farmer and worker parties in the 1930s. Following a long period of economic crisis and class struggle, the "grand compromise" served as the foundation for the post-World War II Nordic model of welfare and labour market organization. The key characteristics of the Nordic model were the centralized coordination of wage negotiation between employers and labour organizations, termed a social partnership, as well as providing a peaceful means to address class conflict between capital and labour.^[4]

Magnus Bergli Rasmussen has challenged that farmers played an important role in ushering Nordic welfare states. A 2022 study by him found that farmers had strong incentives to resist welfare state expansion and farmer MPs consistently opposed generous welfare policies.