The whole region’s success is striking: in the past 15 years, Scandinavian economies robustly outperformed the euro area and the OECD. The growth in private consumption is even more remarkable – comparing 1986-1996 with 1997-2007, the rate of private consumption growth tripled in Sweden, and more than doubled in Denmark, Norway and Finland.
As Graeme Leach argues in a new report for the Legatum Institute, it does not make sense to argue that a large public sector explains Scandinavia’s prosperity. Public spending in Nordic countries has plummeted over the past 20 years. Between 1993 and 2007, public spending as a fraction of GDP fell by more than 20 per cent in Sweden. The smallest decrease took place in Denmark, where public spending nonetheless fell by 10 percent of GDP.
Scandinavian countries slashed government budgets after the financial crisis of the early 1990s. Like the US in 2008, a housing price bubble deflated in Sweden between 1991 and 1993. The government initially provided explicit guarantees to the banking sector, leading to a fiscal crisis. In the aftermath of this crisis, Sweden succeeded in consolidating its public finances, through a combination of cuts and expansionary monetary policy. Other Scandinavian countries followed suit, and a virtuous process of competition has led to the reduction in the size of government and a much lower tax burden.
Besides downsizing the state, Scandinavian governments have privatised railways, airports, air-traffic control, motorways, postal services, fire departments, water systems and schools. In Sweden, Carl Bildt’s cabinet made it possible to privatise health care at the county level. Sweden also put in place a system advocated by Milton Friedman – school vouchers.
Meanwhile, Denmark enjoys one of the most flexible labour markets in the world. Hiring and firing can occur at a very low cost and within one day, making it easy to create jobs. This is combined with a very generous system of welfare benefits – hence the popular name for the system, “flexicurity.”
Denmark’s welfare system has not been strained as elsewhere in Europe. This is largely because flexible labour markets leave little room for unemployment. The country also has high levels of social capital and abusing the welfare system is still frowned upon.
Nordic countries demonstrate that in order to make the welfare state work, we need a large dose of free-market economics. The left is right: the UK should indeed aspire to be more like Scandinavia – in liberalising its markets and bringing public spending under control.
Dalibor Rohac is the acting director of economic studies at the Legatum Institute. Economic Lessons from Scandinavia by Graeme Leach is published by the Legatum Institute this month. It is available at: http://www.li.com/Publications.aspx.