Economies of Nordic Countries

This study is an introduction to Nordic economies. Is there a Nordic model? Are Nordic economies unique? Is Nordic model replicable? There has been a large amount of studies done on these questions. The jury is still out. However it is possible to identify some common characteristics of Nordic economies as well as their differences. They are basically market economies open to the world economy. Finland, Denmark and Sweden are members of EU. Finland is in Eurozone, Denmark is a member of ECU, and Sweden is a member of neither. Norway and Iceland are members of the European Economic Area and European Free Trade Area which give them full access to EU market with little restriction. Social democracy has been historically important in the development of Nordic countries and in the formation of economic and political institutions and traditions. However the basic tenets of the Nordic system are held together by strong institutions of macroeconomic governance, organized working life, and public welfare system which are interconnected through markets and the intervention by stakeholders not by social democracy alone. While social democratic ideology provided the framework for the equity and participation dimension, there are other factors such as the history, traditions and the advantages of being homogenous small countries which have made the system work. The political pendulum swung between left-leaning governments and conservatives several times in the four large Nordic countries, but they remained as the countries with the highest union density and collective bargaining rates in Europe. Even Iceland which has had conservative governments for extended periods has continued to maintain its traditional structure of collective bargaining and tripartite cooperation with the government. The economic liberalization of the 1980s and 1990s was not accompanied by dismantling the labor relations or the welfare state. Examination of historical data shows some interesting findings. Statistical analysis of pooled data on 167 countries for the 1600-2016 period shows that both the starting level and the rate of increase of per capita real GDP are higher in Nordic countries than in other countries. More recent period of 1950-2016 shows slightly different results. For example, the average rate of increase in real GDP per capita was statistically higher for Nordic countries, at a 95% level of confidence, but not with a 99% level of confidence. Furthermore, population growth was statistically significantly lower during the 1950-2016 period in Nordic countries than other countries. The growth record of Nordic economies are not uniform. The growth rates in Sweden show a positive trend from 1620 to 2017. The standard deviation of growth rates shows a decrease in seven-year moving standard deviations indicating a slightly less volatile growth rates, a higher stability. On the other hand, in Norway both the trend and cyclical component get bigger in time. In Denmark, the 1940-1979 period was the one with the highest average annual growth rate. On the other hand, the standard deviations of residuals (cyclical component) were also higher during 1900-2016 period, that is, a more volatile growth. In Finland, the 1917-1929 period was the one with the highest average annual growth rate, followed by the 1930-1939 period and the 1948-1969 period with a higher cyclical component slightly higher during 1900-2016 period. In Iceland, with available data starting in 1950, the growth was significantly higher during the 1950-1982 period compared with the 1983-2016 period. Cyclical component was higher during the 1960-2000 period. The labor market outcomes are result of some form of democratic corporatism. Labor unions, employers’ unions, government and some other institutions are involved in wage determination. In this process general economic conditions, competitiveness of the particular industry, and employment outcomes are taken into account. Even central banks are involved in this process through determination of interest rates and exchange rates. The leading objective is to have high levels of employment. If certain policies lead to unemployment, the unemployed are protected through generous unemployment benefits. This brings flexibility to firing and hiring procedures. If capitalist economies are ranked on the power of markets Nordic economies would be at one end and USA on the other end. It was hypothesized that in Nordic economies the lack of competition and incentives would lead to stagnation and low level of technological development. The data do not support this hypothesis. Nordic economies up to now kept their welfare system, labor market institutions and polices and still performed well in terms of economic growth and employment compared to other advanced economies. The recent test was globalization and the Great Recession and these economies overall did well. The welfare system and labor market outcomes led to reduction of inequalities and poverty. Nordic economies have not followed the trend in some other advanced economies where distribution of income deteriorated in the recent decades. The question is whether this system of welfare and labor market outcomes are sustainable. This is a subject widely discussed particularly in Nordic countries. The following areas are considered as putting pressure on Nordic labor markets. Firstly labor union density is declining, though still high compared to other countries. More importantly union membership is falling among vulnerable groups in the private sector. Secondly, due to the increased migration the structure of labor force has been changing. This coupled with international low-wage competition is weakening the collective bargaining system and the cooperation between companies in some industries. Thirdly, the national autonomy in the regulation of worker rights and industrial relations has been eroded because of EU. These developments reduces the wage floor as well as the social floor. Lastly, some reforms were introduced which tended to weaken incentives for organization and bargaining. All these pressures are not helping to maintain a system of negotiated flexibility, balanced tripartite cooperation, increased union organization, and active participation at company and workplace levels. Furthermore the political parties are moving towards the center. Fiscal policy is the key policy instrument to make the welfare state work both in terms of revenue and the expenditure sides. The Nordic countries have one of the highest tax burdens in the world, but also the most inclusive, almost free of charge social services with the highest quality available to their residents. Most of the revenues come from direct taxes on income and profits which are progressive as opposed to regressive taxes on goods and services. Norway which is an outlier cycles its hydrocarbon revenues through the Government Pension Fund Global, using only a fraction of it to finance the current budget. While health spending is in line with the EU countries, education and social protection spending is higher than the EU average. Despite these common characteristics, there are significant differences in the organization of the delivery of social services. On the other hand, monetary policy is not one of the distinguishing characteristics of Nordic model. The studies on Nordic model very rarely include a chapter or a section on monetary policy. The Nordic countries are small and open countries. It would be very difficult for them to have an independent monetary and exchange rate policies. Whether they are members or not they have a very close relationship with the European countries. Consequently Norway, Sweden and Iceland closely shadow ECB policies.