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an Turing once said, “Sometimes it is the people no one can imagine anything of, who do the things no one can imagine.”


The only difference being, it is not a singular person or a group of people in this context, it is a small group of countries in Northern Europe. Often discarded in the political arena of the world, this group of countries shot into the limelight after the Subprime Mortgage Crisis of 2008 where one country managed a GDP growth of a stellar 6% even though other developed economies of the world had come to a standstill. On further digging, it was found out that this group of countries was topping the charts in areas like the World Happiness Index (2nd), Legatum Prosperity Index (3rd), Human Development Index (8th), Corruption Perception index (2nd), World Press Freedom Index (1st), Gender Inequality Index (3rd), Global Gender Gap Index(1st), Ease Of Doing Business (6th) and Environment Performance Index (5th). In​ a world plagued with economic disparities, geopolitical tensions, poverty, trade wars and whatnot, this select group of countries has emerged, and their names have become synonymous to the phrase “materialistic paradise”. Thanks to their unique economic and social model they have been able to become almost pollution-free, no slums disfigure their cities, neither unemployment nor does old age pose any financial hardships to the citizens of these countries. The BBC and The Economist covered these countries when the western world finally took a look at them, wondering where they had gone wrong and how had these countries managed to establish this paradise.

Welcome, to the economic and social policies common to the countries of Denmark, Finland, Norway, Iceland and Sweden A.K.A The Nordic Model.


So, what exactly is this Nordic Model?

The Nordic Model is a comprehensive welfare state with collective bargaining at the national level and a high percentage of the workforce unionized while being based on the economic foundations of free-market capitalism. In spite of the differences among the demographics, politics and economies of the Nordic Countries, they share some common traits. These include a vision for a “utopian” welfare state which aims specifically at promoting social mobility and enhancing individual autonomy along with a corporatist system of tripartite arrangement which includes employers, unions and the government. They aim to provide free trade and free markets along with a commitment to widespread private ownership of resources and manpower. This unique model focuses on:

  • Providing top-class health and education facilities.

  • Increase the ease of doing business along with strong contract enforcement and property rights.

  • Post-retirement and unemployment benefits.

  • Lower barriers to trade and lesser market regulation.

  • Low levels of corruption and heavy public spending.

  • Higher unionization and collective risk-sharing.

How does it actually work?

The Nordic Model fully depends on trust- the trust between the government and the people. The government trusts that the public pays the requisite amount of taxes without any scope of black money circulation. In return, people trust that the government is transparent and it would efficiently utilize the taxes for the benefit of the public at large. What do we get? One of the most transparent and efficient governments in the world which is evident from the fact that in Transparency International’s 2015 Corruption Perceptions Index, Denmark, Finland, Sweden and Norway were ranked among the least corrupt countries of the world. It is their citizens’ belief that both public institutions and private companies have their best interests in mind through a general social contract among them, with an emphasis on fairness and transparency.


To maintain economic growth while providing social welfare services, the Nordic countries are required to emphasize workforce participation. The Nordic economies have to create and provide incentives to their citizens to continue to work despite having generous wealth benefits. There is a steady economic growth in the Nordic economies along with strong finances which help them to work in the best of their citizens’ interests. There is a high public expenditure by the government which leads to the Nordic Countries having the world’s best public education, health and social overhead system. They also include the private sector by giving the contracts of building and maintaining this system partly to the private sector which is funded and paid for by the public sector. The entire system is funded by the tax revenues collected by the government which also leads to the Nordic Economies being one of the most heavily taxed economies with individual income taxes and payroll taxes forming 26.4% of the GDP of Denmark, 19.7% of the GDP of Norway, 22.1% of the GDP of Sweden. The marginal effective income tax rate in Denmark is 60.4%, Sweden’s 56.4% and Norway’s 39%. In these economies, the individual flat tax structure is followed where the rich, as well as the poor, are heavily taxed.


The model is reinforced by a capitalist economy that encourages creative destruction. Their business-friendly laws make it easy for them to shed non-productive workers and implement transformative business models, whereas the employees are supported by the model’s generous social welfare programmes. This results in a system which treats all its citizens equally and improves workforce participation by both the genders. Moreover, in these countries, the concept of heritage companies is not present and a company is allowed to fail and go bankrupt, even it has a rich history and a glorified past.


Moreover, these economies maintain a budgetary surplus of 3% like in Norway and Sweden or a very less deficit (3% in Finland) which gives them a cushion to fall back on and act and react accordingly to the various economic shocks and financial crises which try to disrupt their economies.


Thus, they have created a model which not only reduces the gap between the rich and the poor and has a vibrant public sector but at the same time retains the benefits of capitalism. In fact, at the turn of the Financial Crisis of 2008, experts thought that the model would falter due to heavy welfare consumption but what ensued was quite the opposite, the countries maintained sustained growth levels and had minimal effects of the economic downturn which showed the ability of the model to tackle problems and come up with effective solutions.


If I am a citizen of one of these Nordic countries, paying such a huge proportion of my income as taxes to the government, what incentives do I actually get?

World-class educational and medical facilities with a sound social overhead structure of such a quality that the private sector has no room to improve it. Pensions and survivor benefits (continued pensions for spouse and children), old-age benefits, sickness and maternity benefits, workers medical benefits, dependent’s medical benefits, temporary disability benefits, permanent disability benefits, unemployment benefits and family allowances- all paid for by the government and employers with the employee contributing by paying taxes.


Seems too good to be true. Is It even Real?

Even though it has its roots back in the pre-industrial era, the system has survived the transition of the Nordic economies from semi-feudal agrarian economies to power affluent welfare states. This system is based on an egalitarian society with a vision to embrace globalization along with the existing welfare state. Despite having bits similar to both Socialism and Capitalism, it is distinct.


Indeed, this Third Model, which can be clearly justified in the performance for the Nordic countries. The Nordics have consistently ranked highest on GDP per capita, healthy life expectancy, perceived freedom to make life choices, and generosity. Besides the aforementioned, they have also regularly topped charts like the Human Development Index and Corruption Perception Index and now stand as a role model for the emerging economies.


CHART SHOWING NORDIC REGION’S POSITION IN DIFFERENT BENCHMARKS



The Other Side of The Coin

Like every aspect of life and economics, this model isn’t perfect. Due to rapid globalization and the generous social benefits provided by the state in the past few years, these countries have caused Wagner’s Law to kickstart which essentially means that the demand for these social services provided is increasing at a faster rather than the income of the people which could soon create a bubble in the economy.


The main crux of this problem is that countries have attracted a swarm of immigrants who unlike the natives don’t share the vision of working hard and be an active part of the workforce for the collective development of the society. This brings us to the question of moral hazard, where the taxpayers’ hard-earned money is being enjoyed by those who don’t deserve it.


Another serious challenge at hand is that the demographics of these countries have been quickly shifting and the average age has been steadily increasing in recent times. Now, this not only leads to the increase in cost to the state in terms of additional pension plans, health benefits and other services required by the senior citizens but also keeps on adding to the burden on the currently working taxpayers of the country and this is where cracks start to appear.


A Model for Other Nations?

The Nordic Model has gathered a significant amount of attention from other economies. It is often looked upon as a template, a rough draft for smaller communist countries where citizens are more homogeneous in terms of their opinions and experiences but still are poor and oppressed due to the draconian policies of their Marxist governments.


The westerners believe it provides a draft for reforming the free-flowing, unchecked capitalism that has created high-income inequality and drastic differences between the quality of life of the rich and the poor. Many people living and operating under “the American Model” of Capitalism see the model as an attractive alternative as it provides affordable quality health care and education, a strong social safety net with retirement security, massive public expenditure for the benefit of its citizens and low-income disparity.


Opponents of the Model criticize the high level of taxes, a high degree of intervention by the government and relatively low GDP and productivity as factors limiting economic growth. They show that the economies of the Nordic Model redistribute assets, decrease disposable income and encourage reliance on government-subsidized programmes.


PERSONAL INCOME TAX RATE – NORDIC REGION

The redundancy of the communist governments to make changes and the unwillingness of the Capitalists to change their free markets means that the discussions about the possibility of adopting and implementing the Nordic Model will remain as it is: in discussions. The inability of the geographically and ethnically diverse nations that lack a culture of shared experiences to move beyond common political rhetoric will further cripple the possibility of the introduction of the Model in these countries.

Therefore, lying between the control of the Communists and free run of the Capitalists, the Nordic Model is often referred to as “the third way”.


A Model for India?

In an ideal world, Yes! The model could serve as a messiah to India since the country has a very young and a massive workforce, is full of emerging markets and has high rates of growth of GDP. But unfortunately, with the current state of India, where a skewed distribution of wealth and soaring corruption run rampant throughout the country, it comes with a big threat to the sustainability of this model in the Indian economic and social environment. Also, a large percentage of the workforce working in the informal sector raises further challenges. And the final nail in the coffin to India’s dream of adopting such a model is the poor education, healthcare facilities provided by the state which are nowhere near the standards of the Nordics and the existence of black money in the economy on an unfathomable scale. Just to give an idea about how massive this problem is, India ranks 81 in the transparency index out of 180 countries and for India, it almost seems a distant dream to even come close to the top-ranking Nordic countries.


The Bottom Line

The Model has continuously gone through massive changes as it has tried to adapt itself with the ever-changing economic conditions of the world and needless to say, it has to continue to change and adapt itself if it wants to survive the future. But the thing which will not change is the basic structure of the model such as the welfare state, universalism and social cohesion and free markets. Though some may say that the model only works in principle, isn’t practical and would collapse soon, but time and again it has proved them wrong. Even though these countries are not immune to economic downturns, but undoubtedly, they have been able to bounce back more quickly than any other First World Countries. With the backing of the citizens as well as the political parties, the model has shared a sense of economic and social equality throughout its 60+ years of history.


In any case, while the world argues furiously in support of this social democracy or against these so-called welfare economies, the Scandinavians make no efforts at all to coerce or coax other nations into adopting their model. Rather, they are content in working and solving their problems together while continuously upgrading themselves which results in them being placed consistently at the pinnacle of the global surveys of the happiest people in the world.


By Abhishek Sancheti and Kshitij Maheshwari

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