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The Nordic model (also called Nordic capitalism or Nordic social democracy) refers to the economic and social policies common to the Nordic countries (Denmark, Finland, Norway, Iceland, and Sweden). This includes a combination of free market capitalism with a comprehensive welfare state and collective bargaining at the national level. The Nordic model began to earn attention after World War II.
Although there are significant differences among the Nordic countries, they all share some common traits. These include support for a "universalist" welfare state aimed specifically at enhancing individual autonomy and promoting social mobility; a corporatist system involving a tripartite arrangement where representatives of labor and employers negotiate wages and labor market policy mediated by the government; and a commitment to widespread private ownership, free markets and free trade.
Each of the Nordic countries has its own economic and social models, sometimes with large differences from its neighbours. According to sociologist Lane Kenworthy, in the context of the Nordic model, "social democracy" refers to a set of policies for promoting economic security and opportunity within the framework of capitalism rather than a system to replace capitalism.
"The Nordic Model – Embracing globalization and sharing risks" characterises the system as follows:
- An elaborate social safety net in addition to public services such as free education and universal healthcare.
- Strong property rights, contract enforcement, and overall ease of doing business.
- Public pension plans.
- Low barriers to free trade. This is combined with collective risk sharing (social programs, labour market institutions) which has provided a form of protection against the risks associated with economic openness.
- Little product market regulation. Nordic countries rank very high in product market freedom according to OECD rankings.
- Low levels of corruption. In Transparency International's 2015 Corruption Perceptions Index, Denmark, Finland, Sweden, and Norway were ranked among the top 10 least corrupt of the 167 countries evaluated.
- High percentage of workers belonging to a labour union. In 2013, labour union density was 85.5% in Iceland, 69% in Finland, 67.7% in Sweden, 66.8% in Denmark, and 52.1% in Norway. In comparison, labour union density was 13.6% in Mexico and 10.8% in the United States. 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.
- A partnership between employers, trade unions and the government, whereby these social partners negotiate the terms to regulating the workplace among themselves, rather than the terms being imposed by law. Sweden has decentralised wage co-ordination, while Finland is ranked the least flexible. The changing economic conditions have given rise to fear among workers as well as resistance by trade unions in regards to reforms. At the same time, reforms and favourable economic development seem to have reduced unemployment, which has traditionally been higher. Denmark's Social Democrats managed to push through reforms in 1994 and 1996 (see flexicurity).
- Sweden at 56.6% of GDP, Denmark at 51.7%, and Finland at 48.6% reflect very high public spending. One key reason for public spending is the large number of public employees. These employees work in various fields including education, healthcare, and for the government itself. They often have greater job security and make up around a third of the workforce (more than 38% in Denmark). Public spending in social transfers such as unemployment benefits and early-retirement programmes is high. In 2001, the wage-based unemployment benefits were around 90% of wage in Denmark and 80% in Sweden, compared to 75% in the Netherlands and 60% in Germany. The unemployed were also able to receive benefits several years before reductions, compared to quick benefit reduction in other countries.
- Public expenditure for health and education is significantly higher in Denmark, Sweden, and Norway in comparison to the OECD average.
- Overall tax burdens (as a percentage of GDP) are among the world's highest; Sweden (51.1%), Denmark (46% in 2011), and Finland (43.3%). The Nordic countries have relatively flat tax rates, meaning that even those on medium and low incomes are taxed at relatively high levels.
- The United Nations World Happiness Report 2013 shows 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.
- The Nordic countries received the highest ranking for protecting workers rights on the International Trade Union Confederation's 2014 Global Rights Index, with Denmark being the only nation to receive a perfect score.
Labor market policy
The Nordic countries share active labor market policies as part of a corporatist economic model intended to reduce conflict between labor and the interests of capital. The corporatist system is most extensive in Sweden and Norway, where employer federations and labor representatives bargain at the national level mediated by the government. Labor market interventions are aimed at providing job retraining and relocation.
The Nordic labor market is flexible, with laws making it easy for employers to hire and shed workers or introduce labor-saving technology. To mitigate the negative effect on workers, the government labor market policies are designed to provide generous social welfare, job retraining and relocation to limit any conflicts between capital and labor that might arise from this process.
The Nordic model is underpinned by a free market capitalist economic system that features high degrees of private ownership with the exception of Norway, which includes a large number of state-owned enterprises and state ownership in publicly listed firms.
The Nordic model is described as a system of competitive capitalism combined with a large percentage of the population employed by the public sector (roughly 30% of the work force). 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". 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, and contrast it with the more "cut-throat" capitalism of the United States, which has high levels of inequality and a larger concentration of top incomes.
Beginning in the 1990s, the Swedish economy pursued neoliberal reforms that reduced the role of the public sector, leading to the fastest growth in inequality of any OECD economy. However, Sweden's income inequality still remains lower than most other countries.
Nordic welfare model
The Nordic welfare model refers to the welfare policies of the Nordic countries, which also tie into their labor market policies. The Nordic model of welfare is distinguished from other types of welfare states by its emphasis on maximizing labor force participation, promoting gender equality, egalitarian and extensive benefit levels, the large magnitude of income redistribution, and liberal use of expansionary fiscal policy.
While there are differences among different 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 maximizing 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.
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.
The Nordic model has been successful at significantly reducing poverty. 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. Compared to the US, 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. In comparison to France (27 p.p. reduction) and Germany (24.2 p.p. reduction), however, the taxes and transfers in the Nordic countries are smaller on average.
Religion as a factor
Scandinavian countries have lutheranism as their main religion. Schroder argues that Lutheranism promotes the idea of a nationwide community of believers and it promotes state involvement in economic and social life. This allows nationwide welfare solidarity and economic coordination. Countries more influenced by conservatism (ex: Germany, Italy, Spain) share (with the exception of Japan) an adherence to Catholicism. Catholicism advocates that the social order should not be upset, neither through the market, nor through the state. Instead, the Catholic principle of subsidiarity promotes cooperation within one’s social group, but not beyond it. It therefore promotes a conservative welfare state and a group-coordinated production system. Anglophone countries (with the exception of Ireland) tend to be majority Calvinist or closely related forms of Protestantism. The individualism that Calvinism propagates tends to influence both the welfare state and the production system towards economic liberalism.
Jerry Mander has likened the Nordic model to a kind of "hybrid" system which features a blend of capitalist economics and socialist values. Lane Kenworthy advocates for the U.S. to make a gradual transition to an economic system similar to those of the Nordic countries. United States Senator Bernie Sanders (I-VT), a self-described democratic socialist, has been a strong proponent of the Nordic system. Nobel Prize-winning economist Joseph Stiglitz has noted that there is higher social mobility in the Scandinavian countries than in the United States, and argues that Scandinavia is now the land of opportunity that the United States once was. American author Ann Jones, who lived in Norway for four years, contends "the Nordic countries give their populations freedom from the market by using capitalism as a tool to benefit everyone," whereas in the United States "neoliberal politics puts the foxes in charge of the henhouse, and capitalists have used the wealth generated by their enterprises (as well as financial and political manipulations) to capture the state and pluck the chickens."
According to Naomi Klein, former Soviet leader Mikhail Gorbachev sought to move the USSR in a similar direction to the Nordic system, combining free markets with a social safety net—but still retaining public ownership of key sectors—ingredients that he believed would transform the USSR into "a socialist beacon for all mankind."
The Nordic combination of extensive public provision of welfare and a culture of individualism has been described by Lars Trägårdh, of Ersta Sköndal University College, as "statist individualism".
George Lakey, author of Viking Economics, asserts that Americans generally misunderstand the nature of the Nordic "welfare state":
Americans imagine that “welfare state” means the U.S. welfare system on steroids. Actually, the Nordics scrapped their American-style welfare system at least 60 years ago, and substituted universal services, which means everyone—rich and poor—gets free higher education, free medical services, free eldercare, etc. Universal totally beats the means-testing characteristic of their dreadful old welfare system that they discarded and that the United States still has.
The socialist economists John Roemer and Pranab Bardhan criticize Nordic-style social democracy by questioning its effectiveness at promoting relative egalitarianism as well as its sustainability. They point out that social democracy requires a strong labor movement to sustain the heavy redistribution required, arguing that it is idealistic to think such redistribution can be accomplished in other countries with weaker labor movements. They note that, even in the Scandinavian countries, social democracy has been in decline since the weakening of the labor movement, arguing that the sustainability of social democracy is limited. Roemer and Bardham argue that establishing a market socialist economy by changing enterprise ownership would be more effective at promoting egalitarianism than social democratic redistribution.
Historian Guðmundur Jónsson argues that it would be inaccurate to include Iceland in one aspect of the Nordic model, that of consensus democracy. He writes, "Icelandic democracy is better described as more adversarial than consensual in style and practice. The labour market was rife with conflict and strikes more frequent than in Europe, resulting in strained government–trade union relationship. Secondly, Iceland did not share the Nordic tradition of power-sharing or corporatism as regards labour market policies or macro-economic policy management, primarily because of the weakness of Social Democrats and the Left in general. Thirdly, the legislative process did not show a strong tendency towards consensus-building between government and opposition with regard to government seeking consultation or support for key legislation. Fourthly, the political style in legislative procedures and public debate in general tended to be adversarial rather than consensual in nature."
Rasmus Landersøn and James J. Heckman, in their paper "The Scandinavian Fantasy: The Sources of Intergeneration Mobility in Denmark and the U.S.", compared American and Danish social mobility and found that social mobility is not as high as figures might suggest in the Nordic countries. When looking exclusively at wages (before taxes and transfers), Danish and American social mobility are very similar. It is only after taxes and transfers are taken into account that Danish social mobility improves, indicating that Danish economic redistribution policies simply give the impression of greater mobility. Additionally, Denmark's greater investment in public education did not improve educational mobility significantly, meaning children of non-college educated parents are still unlikely to receive college education, though this public investment did result in improved cognitive skills amongst poor Danish children compared to their American peers. The researchers also found evidence that generous welfare policies could discourage the pursuit of higher-level education due to decreasing the economic benefits that college education level jobs offer and increasing welfare for workers of a lower education level.
- Collective bargaining
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- Social corporatism
- Social democracy
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- Swedish welfare
- Welfare capitalism
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- Democracy Index
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- List of countries by Social Progress Index
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The Nordic model is a term coined to capture the unique combination of free market capitalism and social benefits that have given rise to a society that enjoys a host of top-quality services, including free education and free healthcare, as well as generous, guaranteed pension payments for retirees. These benefits are funded by taxpayers and administered by the government for the benefit of all citizens.
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By the late 1950s, labor had been incorporated alongside Swedish business in fully elaborated corporatist institutions of collective bargaining and policy making, public as well as private, supply-side (as for labour training) as well as demand side (e.g., Keynesian). During the 1950s and 1960s, similar neocorpratist institutions developed in Denmark and Norway, in Austria and the Netherlands, and somewhat later, in Belgium and Finland.
- James E. McWhinney (June 25, 2013). "The Nordic Model: Pros and Cons". Investopedia. Retrieved September 16, 2015.
The model is underpinned by a capitalist economy that encourages creative destruction. While the laws make it is easy for companies to shed workers and implement transformative business models, employees are supported by generous social welfare programs.
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Liberal corporatism is largely self-organized between labor and management, with only a supporting role for government. Leading examples of such systems are found in small, ethnically homogeneous countries with strong traditions of social democratic or labor party rule, such as Sweden’s Nordic neighbors. Using a scale of 0.0 to 2.0 and subjectively assigning values based on six previous studies, Frederic Pryor in 1988 found Norway and Sweden the most corporatist at 2.0 each, followed by Austria at 1.8, the Netherlands at 1.5, Finland, Denmark, and Belgium at 1.3 each, and Switzerland and West Germany at 1.0 each…with the exception of Iceland all the Nordic countries have higher taxes, larger welfare states, and greater corporatist tendencies than most social market economies.
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You go to Scandinavia, and you will find that people have a much higher standard of living, in terms of education, health care, and decent paying jobs.
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