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Will Scandinavian economies afford

the welfare model in the next

decade

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Nordic countries

• The Nordic model is widely regarded as a benchmark. Anumber of comparative studies of economic and socialperformance have ranked the Nordics high.

• A common finding of cross-country comparisons isthat the Nordics succeed better than other countries incombining economic efficiency and growth with apeaceful labour market, a fair distribution of incomeand social cohesion.

• The model is pointed to as a source of inspiration forother people in their search for a better social andeconomic system.

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• Critics have been looking for inner contradictions

in the model and they have questioned its

sustainability. Some argue that the economic

performance of the Nordic countries is simply aresult of exceptional and temporary advantages,

bound to disappear over time.

•

The model will remain viable and successful onlyif the challenges and the need for reform are

understood – and if action is taken.

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• Globalization is primarily an opportunity and

not a threat. It has been the very basis of the

growth in productivity and living standards

that the Nordics have achieved.

• However, the continued trend of globalization

will put the model under pressure.

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• The emerging economic giants in Asia andLatin America will force us to restructure oureconomies at a rapid pace; relocation of 

production and job losses need to becompensated for through innovations andgrowth in new activities. Simultaneously,globalization may undermine the financial

viability of the welfare state by increasinginternational factor mobility and taxcompetition between nations

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• Demographic change – in the form of an ageingpopulation – increases the size of the passivepopulation (retirees), while tending to decreasethe size of the active population (workers).

• The result is a dramatic rise in the dependencyratio and a strong pressure towards increasedsocial spending and higher tax rates.

• The combination of ageing populations and high

ambitions for welfare services will strain publicfinances, even more so if globalization increasesthe mobility of jobs and labour.

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• In addition, we emphasize that a high rate of labour forceparticipation is an indispensible ingredient of the model.There must be sufficient incentives – in the form of financial rewards and/or workfare elements – to participatein the labour force and to work.

• There is also a need to define the core tasks of the welfarestate and to clarify the scope of the services that citizensare entitled to and should be able to expect. Higherproductivity in the provision of welfare services isimperative and can be enhanced by, inter alia, privatization

and outsourcing of public services• investment in human capital should not be the victim of 

increasingly tight budget constraints

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• We believe that the basis of the model is acombination of collective risk sharing andopenness to globalization.

•The Nordics are open to globalization, and stateintervention in the business sector iscomparatively limited, as is regulation of markets

• Many features of the Nordic model amount to

mechanisms designed to give somecompensation to those suffering from negativeeffects of structural change

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• The Nordic welfare state is vulnerable to changes inemployment and the age structure of the population

• First, demand for (some) welfare services tends toincreasefaster than income (a phenomenon known by

economists as“Wagner’s law”). Second, by their verynature, productivity in theproduction of welfareservices tends to increase at a lower rate,if at all, thanin the production of goods (or other services).Assuming equal wage developments across sectors,

unit costs must then increase faster in the productionof welfare services than in the economy as a whole (aphenomenon known by economists as “Baumol’s law”). 

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• The two phenomena taken together imply atendency for total spending on welfareservices to rise faster than GDP over time. As

long as the production of these servicesremains in the public domain, or as long asthey are tax-financed, the tax burden mustalso exhibit a tendency to rise continuously

with GDP. This is a problem of the welfarestate that we have been living with fordecades now.

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• The welfare state –social security and

redistribution – has alleviated the fear of 

market forces

• Both the welfare state and macroeconomic

stability have contributed to the acceptability

of local and individual wage negotiations

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FIG : 1 GROSS

NATIONAL EXPENDITURE

GROSS NATIONAL EXPENDITURE

= C + I + G 

FIG:2 INFLATION RATE

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FIG:2 INFLATION RATE 

PRICE CONST SO INFLATION RANGE IN BETWEEN -2 TO 4.25 

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FIG: 3 GDP 

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AD’ 

C+G+I+NX=AD

YY0 Y1

AD

DD

SS

SS’ 

P(e)

P(e0)

P(e1)

$$0 $1

MSMS’ 

Md (P,Y1)

Md (P,Y0)

MMs = Md Ms = Md

r d= r w

rd> r w

LM’ LM

IS

YY1Y0

e0

e1

e

0 0

0 0