The Myth of the Scandinavian Model
From the desk of Martin De Vlieghere on Fri, 2005-11-25 18:27
This article was written by Martin De Vlieghere, Paul Vreymans and Willy De Wit.
“America’s social model is flawed, but so is France’s,” the Parisian newspaper Le Monde recently wrote. According to Le Monde Europe should adopt the “Scandinavian model,” which is said to combine the economic efficiency of the Anglo-Saxon social model with the welfare state benefits of the continental European ones. On the eve of the EU’s Hampton Court Summit (October 27), one could even read that “Britain might be forced to discuss the advantages of Scandinavian models, which rely on more social security.”
The praise for the Nordic model comes from Bruegel, a new Brussels-based think tank, “whose aim is to contribute to the quality of economic policymaking in Europe.” The think tank is a Franco-German government initiative and is heavily funded by EU governments and corporations. In October Bruegel published a study “Globalisation and the Reform of European Social Models” [pdf] propagating the Nordic model.
A paper [pdf] from the economics department of Ghent University does the same. This paper, Fiscal Policy Employment and Growth: Why is the Euro Area Lagging Behind, was also subsidized by the government. In the selection of data comparing the performance of EU economies, the authors arbitrarily eliminated Ireland, Spain and Portugal (three of the four best performing EU economies) from their research and added oil-producing non-EU member Norway (which has a GDP more than 20% of which is based on income from oil). It is hardly imaginable that professors of one of Belgium’s major universities would not be aware of how this arbitrary selection must distort the results. Hence one must read their text as an ideological pamphlet rather than a scientific study.
However, despite Bruegel, distorted academic studies and the European media’s praise, the efficiency of the major Scandinavian economies is a myth. The Swedish and Finnish welfare states have been going through a long period of decline. In the early 1990s they were virtually bankrupt. Between 1990 and 1995 unemployment increased five-fold. The Scandinavian countries have not been able to recover.
The implosion of the welfare state
In 1970, Sweden’s level of prosperity was one quarter above Belgium’s. By 2003 Sweden had fallen to 14th place from 5th in the prosperity index, two places behind Belgium. According to OECD figures, Denmark was the 3rd most prosperous economy in the world in 1970, immediately behind Switzerland and the United States. In 2003, Denmark was 7th. Finland did badly as well. From 1989 to 2003, while Ireland rose from 21st to 4th place, Finland fell from 9th to 15th place.
Together with Italy, these three Scandinavian countries are the worst performing economies in the entire European Union. Rather than taking them as an example, Europe’s politicians should shun the Scandinavian recipes.
While a poorly performing economy such as Belgium’s was able to create 8% new jobs between 1981 and 2003, Sweden and Finland were unable to create any jobs at all in over two decades. Denmark did a little better because it “activated” its labour market by making it more “flexible.” It became easier for employers to fire people. For workers in the construction industry the term of notice was reduced to five days. Unemployment benefits were restricted in time, while those who had been unemployed for a long time, and young people could lose benefits if they refuse to accept jobs, including low-productivity jobs below their level of training or education. The result is that productivity growth in Denmark is lower than in Sweden and Finland.
These draconian measures reduced the unemployment rate, but did not eliminate the cause of unemployment, namely the total lack of motivation on the part of employees and employers resulting from the extremely high taxation level. Despite the painful measures, the growth of Danish productivity and prosperity has been substandard. Disappointment in Danish politicians is one of the reasons for the rise of the far right.
Weak government, bad government
Why are the Scandinavian countries doing such a bad job, despite their Protestant work ethic and devotion to duty? The main cause is the essence of the nanny state: its very high tax level. Between 1990 and 2005 the average overall tax burden was 55% in Finland, 58% in Denmark and 61% in Sweden. This is almost one and a half times the OECD average.
In his research into the causes of growth differences between OECD economies the American economist James Gwartney showed that there was a direct correlation between economic growth and tax burden. The higher the level of taxation, the lower the growth rate. The explanation for this phenomenon is as logical as it is simple. The higher the tax level, the lower the incentive for people to make a productive contribution to society. The higher the fiscal burden, the more resources flow from the productive sector to the ever more inefficient government apparatus.
Ireland: the efficient alternative
Ireland has proved that a substantial lowering of the taxation level can become the motor for launching even the most slackish economy into full gear. A drastic reduction of the Irish tax rate, from 53% in 1986 to its current 35% , has led to a continuous boom of wealth creation at an average rate of 5.6% during the past two decades, while the number of jobs has grown by over 50%. In barely 18 years Ireland jumped from the 22nd to the 4th place in the OECD prosperity ranking. Ireland did not reduce its social welfare benefits. On the contrary. The unprecedented growth led to an increase of fiscal revenue and social expenditure. It was sufficient to improve the productivity of the government.
One crucial element of the Irish model is its “fair tax” system, in which there is less emphasis on taxing labour and profit and slightly more on taxing consumption. This balance between direct and indirect taxation motivates labourers and entrepreneurs to make productive contributions. It stimulates new initiatives and guarantees a high degree of participation.
Such a fiscal system does not put the entire burden of financing social security on domestic production. Indeed, a consumption tax ensures that foreign production also contributes evenly.
The Irish model combines the so-called “active welfare state” of continental Europe with the Anglo-Saxon liberal economy in a balanced fashion. The model is efficient. Ireland surpasses all other EU members in prosperity, job creation, social expenditure and productivity per working hour.
Investing in the future
The difference between the wealth destructive Scandinavian model and the booming Irish alternative is obvious for all to see. Strangely enough, however, the French and German governments do not seem to notice. Those in Belgium do not, either. The Belgian government recently proposed a new policy plan inspired by the Danish model. The tax level is not reduced, the fiscal burden is not being shifted from production to consumption, but instead from one production factor (labour) to another (capital) which is already overburdened.
Saving is discouraged, too. After deducting inflation and the witholding tax, which under the European savings taxation directive will soon amount to 35%, the real net interest rate will be –2%. This means that every person in his thirties who is saving 1.00 euro today, will only have the equivalent of 0.54 euro when he turns 60. In barely six years the Belgian savings rate has already dropped by more than a quarter: from 12.4% in 1998 to 9.1% in 2004. The savings rate will drop even further, thereby drying up all reserves for investment. Like work, saving and investing, too, must be profitable if people are to engage in these activities.
2004 witnessed a record world economic growth of 5%. China and India are booming, the US and Japan are recovering. Gwartney’s findings explain why continental West European countries, such as Belgium, did not see their economies grow. The Belgian tax burden is 9% higher than the OECD average and 15% higher than the tax level in the US and Japan. If continental Western Europe does not change its policies, its relative impoverishment today will soon turn into absolute pauperization.
Its tax structure is not adapted to the challenges of globalization. Taxes on production are the opposite of import taxes. They double Europe’s production costs and, in doing so, halve its productivity. Like protectionism they lead to distortions in world trade, but they do so in the opposite direction. Ever more rapidly, continental Western Europe is losing its semi labour-intensive sectors to countries where productivity is even lower than in Western Europe. This move from high productivity to low productivity countries is a waste. It is not only a catastrophe for Western Europe’s employment. It is also bad for the world at large because the highly productive production apparatus and infrastructure of Western Europe is not used to its full capacity. This leads to less than optimal global labour division and wealth creation.
Politicians must realize that economic growth is not brought about by fiscally punishing productive citizens, nor by collective impoverishment and social welfare cuts, but by cutting taxes and bureaucracy. Ireland has shown that it can be done and how to do it.
The Danish Model Of Welfare Was Convicted From The Beginning
Submitted by Joern on Fri, 2010-09-03 14:41.
When real research shown on http://en.wikipedia.org/wiki/IQ_and_Global_Inequality says IQ-average in nations of Africa show figures from 59-84 and IQ-average in the Middle East shows 83-87 I would think that a German in a nation with IQ-average of 99 is able to understand that total average IQ resulted from a weighed average with the presence descendants’ original regions as weighs shall be drawn down even though you might have a non-mathematically background. The last comment I hope you accept as sarcasm.
“Socialhilfe” in Germany 300%, In Denmark 330% when you take amount of welfare (proved by the official Welfare Commission) implies the folowing:
Germany : x/(1-x) * 0,90/0,10 = 3,00 result in x = 25 percent of all “Socialhilfe”
if Germany has 10% immigrants – when the German statistics have been corrected, eventually from Denmark. Notice: births of foreign citizens and births of naturalised (children after “die Einbürgerungen”) are not included in what you read from Statistisches Bundesamt. It matters if you agree that a letter from Bundesamt does not change the identity of an individual and their children.
In Denmark 330% when you take all amounts of welfare of payments/tranfers and wage to public service staff included and all foreign descendants (proved by the official Danish Welfare Commission) analogic implies the following:
Denmark: x/(1-x) * 0,877/0,123 = 3,30 result in x = 31,6 percent of all amounts of public welfare
This is also a 100% correct use of mathematics or a true
projection of universial bricks, even though it is at least 101%
Joern E. Vig
Submitted by kappert on Wed, 2010-01-27 22:50.
Ireland in 2004/2005? Please, give 2009 numbers!
We can't expect any
Submitted by alaman (not verified) on Wed, 2010-01-27 22:10.
We can't expect any financial model to reach perfection, we are still too far from that but what we can do is to constantly find better ways to make economy work. I doubt that mixing different economical levels will bring anything good, I think it would only bring confusion. Each country has it's own financial pattern, changing that pattern is very hard work that takes time and it's not a guarantee that things will get better. We can only work on improvements.
Alaman, finance los Angeles
Excellent, incisive article that can be very useful
Submitted by effe on Sun, 2006-10-01 09:37.
The Author did a great job. This kind of short, incisive and informative articles is what is needed to launch debates among informed readers and decision-makers.
The Irish model is almost totally unknown here in Italy, but it could be exactly what is needed by our suffering, overburden economy.
Submitted by Damien Blake (not verified) on Wed, 2005-11-30 12:30.
EU subsidy has helped us in Ireland, in that it has allowed the country to reduce taxes without hampering infrastructural development.
I make no bones about it; EU subsidies have been vital to Ireland. Every piece of capital infrastructure being built in the Country has a big blue "supported by the EU" sign on it. I mean everything- Schools, Hospitals, Roads, Bus Stations and beyond.
Ireland's model, none the less, shows the potential for rapid growth which can come from a low taxation structure. As has been outlined in some of the other comments, many other areas have seen similar levels of aid from the EU without experiencing the growth. One important point overlooked in the article is intent; Ireland's economy grew massively, which was the intention, but the Scandinavian model is not intended to stimulate growth.
Ireland was starting from a very low level, so rapid growth was both possible and necessary. Scandinavian countries were coming from a stronger starting point. The intent of their high-tax economy is to reduce inequity. Sweden, for example with a tax burden of 61%, uses it's tax system to take money away from the individual and towards the good of the community. This works for Sweden as it's citizens have a (relatively) high standard of living. Ireland, on the other hand, used a reduced tax burden to incentivise individuals to become more productive, as they would then benefit highly on an individual level.
We're happy with our growth in Ireland, but I'm sure that many Swedes are happy with how their country is going. The two models are different in their result, but they are also different in intent. That's the big difference that has been overlooked in an otherwise excellent piece of writing.
The question is actually:
Submitted by Anonymous (not verified) on Wed, 2005-11-30 19:18.
The question is actually: should Belgium adopt the Irish or the Swedish model? I can understand that Swedes are happy with their system. But that's completely out of the question when high taxation is causing negative growth - and thus more people who need government support. Such a system simply cannot last. It is bound to collapse.
However, if we adopt a more Irish view, it is possible to create bigger wealth. More people become independent of government support. The Scandinavian model however, only redistributes wealth without any progress in society. In the long run, there will be equality, but I think it will more resemble equal poverty than equal wealth.
As an Irish person who lived
Submitted by Anonymous (not verified) on Tue, 2006-01-17 01:29.
As an Irish person who lived in Antwerp between 1994 and 1999, it is true what you say about wealth. There is a huge amout of money in Ireland at the moment. However wealth is much less equally spread in Ireland. If you are able to work then you will do well. But if you are old, sick, retired or lazy :) then Belgium is a better place to live.
In Ireland you can wait 3 years or more for a hip replacement operation on the public health system. You pay €60 each time you go to the doctor, and maybe €30 for antibiotics if you need them - i.e. full market price.
Many primary schools are in temporary buildings, pupil/teacher ratio can go up to 35:1.
People live in a society - not just an economy.
Submitted by Paul Vreymans (not verified) on Fri, 2005-12-02 18:08.
1. GROWTH AND EU-SUBSIDIES.
The relation between EU subsidies and Ireland's explosive Growth is statistically insignificant.
Ireland benefited from European subsidies long before 1985, with no growth effect noticable at all.
Ireland's growth explosion continued its steady 5,6% pace when European subsidies dramatically were reduced, and the Irish boom continues even today (5% growth expected once again). The spread diagram between subsidies and growth consequently shows no relationship at all. Other regions such as Greece or Wallonia received comparable subsidies, but apparently could not use them for the benefit of their economies at all.
The graph shown at
clearly illustrates that Ireland's continuous wealth explosion has a neat starting point in 1985, and that this starting point coincides with the moment they reduced their tax burden.
2. SCIENTIFIC PROOF.
The conclusion that big government harms growth and that high direct taxes on income and labour are the most distortive taxes (as opposed to consumption taxes) does not originate from single country comparisons, but from the scientific multiple regression analysis in which 17 European countries were involved. In this investigation WorkForAll examined 25 possible causes of growth differentials over an 18 year period. The regression model explains for over 93% of the growth differentials and left only 7% unexplained for. The conclusions are undisputeable and clear: "big government" is detrimental to growth, and "countries with a higher proportion of consumption taxes" have very significant higher growth rates.
Full report of the study can be read at:
And the abstract at :
3. THE CENTRAL POINT
The central point is do we choose for Irish policies which have proven realistic and successfull for over 20 years, or do we believe socialist dogma's and choose a Scandinavian nanny type of government that proved so catastrophic for both wealth and job creation, and robbed the individual from his dignity as a free and responsable being?
As anonymous posted here before: if we adopt a more Irish view, it is possible to create bigger wealth. More people become independent of government support. The Scandinavian model however, only redistributes wealth without any progress in society. In the long run, there will be equality, but it will more resemble equal poverty than equal wealth.
Take a look on the Gross
Submitted by Panteren on Wed, 2006-08-16 18:42.
Take a look on the Gross National Income. It is a far better way to measure actual wealth than GNP/cap, and if measured in GNI/cap then both Norway, Denmark and Sweden is in the top ten again, while Ireland is down on a 15-20 place.
Do not take a look....
Submitted by marcfrans on Wed, 2006-08-16 23:43.
...and certainly not "on the gros". But do take a look AT gross national product, or net national product, or gross/net domestic product, etc...
1) I am afraid that you are confused about "national income accounts", which is a part - but ONLY a part - of "macroeconomic accounts".
In an economy as a whole there is always equality between income, spending and production (or output). Thus the following accounting identity holds always in any economy:
total income = total output (production) = total spending
2) The most common variable used to compare TOTAL INCOME/OUTPUT between countries is "Gross national product at market prices", or GNP. One can make all sorts of further complications or distinctions, for instance between GROSS and NET concepts, or between DOMESTIC and NATIONAL concepts, or between TOTAL and PER CAPITA, or between MARKET PRICES and FACTOR COST.
3) But there is no such thing as your "Gross National Income" (GNI). The term "national income" is sometimes used to refer to "NET NATIONAL PRODUCT at market prices." That would be GROSS NATIONAL PRODUCT minus DEPRECIATION (technically called 'consumption of fixed capital').
4) Also, the fact that you refer to this non-existant concept of GNI as a measure of "wealth", suggests further (worse) confusion in your mind. "Wealth" is not the same as "income". "Wealth" is always a stock concept. It refers to available assets (valuable things) at a given MOMENT IN TIME (like a picture or a photograph). By contrast, statistical measures of income or output are always measured over a TIME PERIOD (for instance like a month, or a year, etc...) and are expressed PER time period.
other reason for irish economies transformation
Submitted by henno (not verified) on Tue, 2005-11-29 16:31.
I don't mean to negate your analysis entirely, but one must also consider the factors that Ireland was coming from such a poor and, importantly, agricultural economy. People moving consistently from small agriculture into other sectors is bound to generate growth, regardless of taxation model. Then there is our low tax to encourage foreign investement. Finally, there is our relative openness to immigration, and returning exile community. These factors are easing off now, and we'll see how growth is affected.
The socialist paradise
Submitted by Martin Lindeskog (not verified) on Sun, 2005-11-27 22:17.
I think that the Swedish bureaucrats should pay a visit to e.g., Ireland or Estonia, before it is too late...
All the Best,
Martin Lindeskog - American in spirit.
Portugal one of the 4 best
Submitted by Anonymous (not verified) on Mon, 2005-11-28 05:43.
Portugal one of the 4 best EU economies? Strange we dont notice it. We're are at almost 0 grow after consecutive years of taxes increases. IVA increased from 17 to 19% and last year to 21 % because the Gov. is a sucking elephant...
Portugal is not top 4
Submitted by Mikey (not verified) on Mon, 2005-11-28 21:12.
Portugal one of the best in EU economically?? I don't think so. Portugal's growth rate is basically zero. I wouldn't be surprised if it was negative.
GDP vs GNP Distortion
Submitted by Matt Guerreiro (not verified) on Sun, 2005-11-27 21:46.
I like your article and agree with its main thesis, however, there are some statistical peculiarities with regard to Ireland that you should address to strengthen your argument.
Ireland, because of it's low wage, low tax status within the EU, has attracted a tremendous amount of foreign investment in recent years. Many of these investments have been highly profitable, with many foreign multinationals using Ireland as the manufacturing and services base to serve the EU market.
Now this is all well and good for the Irish economy, and has led to a significant growth in high wage employment. But the profits earned by foreign companies in Ireland are counted as part of Ireland's GDP. Earnings by foreign-owned enterprises are counted in all countries' GDP, but for most developed economies, the difference between GDP and GNP (or net national product, which is the current term, I believe) is not significant. For Ireland, however, the gap between GDP and NNP is (I recall), something like 20% or 25%.
I looked at this a few months ago when Thomas Friedman wrote favorably about the Irish economy in his NYT column. I meant to write it about it then, but never followed up. Hopefully you can address this issue properly.
All the best.
I completely agree
Submitted by Jan Verbeeren (not verified) on Sun, 2005-11-27 13:29.
but there is a practical problem in taxing consumption in a country like Belgium. It is very easy to cross borders for shopping. In my case it makes 25 km to get to Holland and 45 to France. It is already a common practice amongst many Belgians to go to France on friday evening for shopping. The proposed measures should have to be implemented on a larger geographical scale.
If a drop in taxes makes
Submitted by Brigands on Sun, 2005-11-27 20:42.
If a drop in taxes makes items cheaper here people wont go to France or Netherlands. It all depends on how the situation will turn out to be after implementation.
Submitted by sanborn (not verified) on Sun, 2005-11-27 00:58.
"[G]overnment's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Remarks to the White House Conference on Small Business, August 15, 1986 "
"How do you tell a Communist? Well, it's someone who reads Marx and Lenin. And how do you tell an anti-Communist? It's someone who understands Marx and Lenin.
Remarks in Arlington, Virginia, September 25, 1987 "
"Government growing beyond our consent had become a lumbering giant, slamming shut the gates of opportunity, threatening to crush the very roots of our freedom. What brought America back? The American people brought us back -- with quiet courage and common sense; with undying faith that in this nation under God the future will be ours, for the future belongs to the free.
State of the Union Address, February 4, 1986 "
History teaches that wars begin when governments believe the price of aggression is cheap.
Address to the nation, January 16, 1984
Submitted by Anonymous (not verified) on Sun, 2005-11-27 01:13.
In an ironic sense, Karl Marx was right. We are witnessing today a great revolutionary crisis -- a crisis where the demands of the economic order are colliding directly with those of the political order. But the crisis is happening not in the free, non-Marxist West, but in the home of Marxism-Leninism, the Soviet Union.... [Communism will be] left on the ash heap of history.
Submitted by sanborn (not verified) on Sun, 2005-11-27 02:02.
It's time we asked ourselves if we still know the freedoms intended for us by the Founding Fathers. James Madison said, "We base all our experiments on the capacity of mankind for self-government." This idea that government was beholden to the people, that it had no other source of power, is still the newest, most unique idea in all the long history of man's relation to man. This is the issue of this election: Whether we believe in our capacity for self-government or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capital can plan our lives for us better than we can plan them ourselves.
Address to the nation, October 27, 1964
Submitted by Sanborn (not verified) on Sun, 2005-11-27 02:14.
Are you willing to spend time studying the issues, making yourself aware, and then conveying that information to family and friends? Will you resist the temptation to get a government handout for your community? Realize that the doctor's fight against socialized medicine is your fight. We can't socialize the doctors without socializing the patients. Recognize that government invasion of public power is eventually an assault upon your own business. If some among you fear taking a stand because you are afraid of reprisals from customers, clients, or even government, recognize that you are just feeding the crocodile hoping he'll eat you last.
Address to the nation, October 27, 1964
Excellent article which is
Submitted by Wayne Goodfellow (not verified) on Sat, 2005-11-26 22:21.
Excellent article which is very well illustrated. Too often, economic reports are difficult for the ordinary layperson to understand which is why clear illustrations showing the inverse relationship between high taxation and low economic growth are so important. The reality is that what you tax, your get less of, and what you subsidize, you get more of, which is why here in Canada we are overwhelmed with all the bad polcies and social pathologies of the centralized, welfare state. And I fear that Canadians, already brainwashed by the education system and MSM, are about to be bought off again with their own money in the upcoming Nationa election. It boggles the mind.
Not really news
Submitted by Anonymous (not verified) on Sat, 2005-11-26 10:39.
Interesting article but it's not really news. Ronald Reagan did the same thing in the USA in the 1980s. It boils down to tax what you don't want. If you don't want jobs, savings, citizens with disposable income to fuel a country's economy, raise taxes. If you want to encourage something, don't tax it.
All is well; but what about...
Submitted by Brigands on Sat, 2005-11-26 12:47.
Well, unfortunately I seem to miss some answers on follow-up questions such as:
-To what extend did EU subsidies enhance the Irish situation?
-To what extend would it work on our economy without counting EU subsidies?
-What policy changes must be made?
-To what extend does it imply changes in the State structure? (Federal or regional).
Submitted by sanborn (not verified) on Sat, 2005-11-26 12:42.
This quote is attributed Reagan who comments on Democratic economic theory:
"If moves tax it, if it keeps moving regulate it, if it stops moving subsidize it."
Submitted by Anonymous (not verified) on Sat, 2005-11-26 00:44.
This is a great article, well researched and well written. It needs to be translated and distributed as widely as possible not only in europe but throughout the world.
It is inconceivable that even in the US the Left is denying the reality of the benefits of lower taxation on labor and income. Everytime and everywhere such tax rates are reduced, they result in higher growth and higher tax revenues. The limitations come from the disproven idea of "static budgeting".
Submitted by Ann (not verified) on Fri, 2005-11-25 23:51.
I've had a discussion with someone in Ireland about their economic turn-around. While I pointed to the liberalization of government and labor laws, she responded that it was all due to EU investment.
I think that is one reason why Ireland is not held up as a model. The conventional European wisdom is that Ireland's growth is due to the largesse lavished on Ireland by the European Union. With that alternate explanation readily at hand, no one in Europe needs to look further at Americanization of an economy as the reason for rapid growth.
Of course, Greece also had piles of European cash flowing in, and they aren't exactly booming.
Ireland and Wallonia
Submitted by Paul Belien on Sat, 2005-11-26 09:55.
I think it is true that EU subsidies have helped Ireland, but subsidies do not create an economic boom. Look at Wallonia, the Francophone part of Belgium: Flanders (the Dutch part of Belgium) has been subsidizing it for 175 years, the EU for 50 years: it has not helped Wallonia one bit. On the contrary, it made the Walloons ever more dependent and encouraged them to continue their socialist policies, creating unemployment.
Their economy is one big shambles needing more subsidies every day, until the subsidizers cannot continue bestowing it. The subsidies are just needed to fill holes that grow bigger. The same is happening in East Germany.