A tribute to the Nordic model

This week's edition of the Economist has a special report on the Nordic economic model.

The image of Nordic countries has too often been one of high spending, big size of government, a huge welfare system, basically a social-democrat paradise. But are their policies all that social, or are they much more pro-market than people are prepared to believe? 

Their model has changed from promoting an equal society to promoting both an equal and dynamic society, where competition strives and market forces are abundant (as opposed to some Anglo-Saxon nations which carried this distinction in the past, but not anymore). This is a great message to Europe which doesn't have to look too far to find a model that comprises both a competitive economy and high levels of social mobility. 

This is their main lesson:

"The main lesson to learn from the Nordics is not ideological but practical. The state is popular not because it is big but because it works. A Swede pays tax more willingly than a Californian because he gets decent schools and free health care. The Nordics have pushed far-reaching reforms past unions and business lobbies. The proof is there. You can inject market mechanisms into the welfare state to sharpen its performance. You can put entitlement programmes on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and vested interests. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum. The world will be studying the Nordic model for years to come."

I've been advocating such an approach to reform for quite some time (recall all the times I pointed out Sweden's 1992 reforms as a lesson to Eurozone economies). An approach which will be based on achieving a more dynamic society but also a society that stresses great importance on social mobility, where no matter where you come from, you will have an equal opportunity to succeed. To change this type of culture within a society (the informal institutions) you need to change the formal institutional model, where political accountability needs to prevent cronyism, where entrepreneurial incentives won't be destroyed by state regulations, where unemployment will stay low because labour market rigdities are removed, where innovation and investments are incentivised through booming competition, where competition is the basis for performing all public sector services, from schooling to health care, and finally where the legal framework is efficient and focused on preserving the rule of law. 

The Nordic model is not perfect. It isn't without flaws and problems of its own, but so far it's the closest thing we have to a dynamic, innovative yet equal society that features all of the conditions above. 

Government size

As for their size of government, it's all about individual preferences towards what the state should or should not do, and how efficient is the state in fulfilling those preferences. As I've written before it's not so much about state size, it's more about state efficiency. Big governments aren't big because of their size, but because of their size relative to efficiency in providing public goods like the rule of law, enforcement of contract, private property and a just legal system.

However in certain countries there are individual preferences towards more or less redistribution, preferences that get allocated on the political market via elections, and which translate into electoral winning coalitions.

But what if the politicians don't do what the voter preference aggregation implies? For that we need a stable institutional system to provide a safety net for the public, strong enough to oust the politicians or to prevent them from a rent-extracting behaviour in the first place.

Freedom matters 

However, what I always admired about the Nordic model is their persistently high scores on Freedom indices: 

Source: The Economist

This table sums it up better than anything. On a weighted index of the most important factors measuring a country's economic success (competitiveness, ease of doing business, innovation, corruption, HDI, prosperity), the four Nordic countries take up first four spots! Followed by Switzerland, New Zealand and Singapore, with the US holding 8th place (corruption and prosperity seemed to have held them back). This is what is implied by good governance and stable pro-growth institutions. If any country is seeking a pattern on how to take itself out of the crisis, look no further than this table and improve as much as you can in all these indicators. Each country will use different ways to apply the reforms, but the message is clear: freedom matters.