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:
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.
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.
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.
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