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Tuesday, January 22, 2008

The Scandinavian Economies vs. the US's: 4th in a Series

In late December 2007, at the Marginal Revolution web site, Prof Bug began his last exchange with some intelligent and courteous Scandinavians on their countries' recently improved economic performance the last few years.  What follows is a revised and much longer version of that exchange, with lots more empirical evidence.  Note that the argument as it unfolds is likely to be fairly long and will divide into several parts.


Many thanks for your general comments, unusually balanced in their pros and cons about the US and Scandinavian economic systems.  A similar compliment is due Mogens, I believe.  I also thank Barkley, even though, I suspect, it will likely take far more evidence than can be mustered here, or maybe anywhere, to modify his apparently strong Social-Democratic leanings.  No matter.  He shows himself to be noticeably intelligent and articulate, and I appreciate my exchanges with him as well.


To grasp just how markedly more vigorous the economic performance of Scandinavian countries has been since 2003 --- at any rate, except for Norway (always an outlier) --- consider the following table that ranks the various countries of the world by several dozen criteria, all summarized as each country's overall competitiveness. 




United States
























United Kingdom






Korea , Rep.



Hong Kong SAR






Taiwan , China






























New Zealand



As you can see, Denmark and Sweden are ranked 3rd and 4th in overall competitive prowess world-wide, while Finland comes in 6th place.  Norway is much further down the rankings --- not that this is a surprise for buggy readers of this series on the Nordic countries.  As has been noted at least a couple of times before, it is something of an outlier in Scandinavia for two major reasons: its large oil exports, 3 million barrels a day at roughly $100 per barrel, and its high social spending without major economic reforms.  Obviously, the two go together.  Norway's vast oil revenues have helped to subsidize such social spending, though in fairness the Norwegian government has also invested large revenues in diverse financial funds world-wide for long-term capital gains and projected returns on the capital.  At the same time, the oil income has blunted much of the urgency that other Scandinavian governments have sensed to overhaul their regulations and reduce their taxes and welfare spending in order to regain much of the competitive vigor they had seen wane in the 1980s and 1990s.

In short, the Scandinavian countries have to be commended for finding ways to stimulate economic growth and innovation while maintaining a large regulatory and welfare-state system that their populations clearly desire.  If there's any black mark to be singled out, it's the failure of the Swedish Social Democratic government in power until late 2006 for finagling the country's unemployment figures rather than emulate the laudable Danish reforms of their labor market.  Even that failure, though, is being remedied by the current centrist-conservative coalition government that, when you get down to it, won the parliamentary elections in September 2006 largely over the issue of unemployment.  Everyone in Sweden seemed to know someone who had either been laid off or moved over to some sort of tax-paid support system.  In many ways, the centrist-conservative electoral victory was historic.  It was only the 2nd or 3rd time since 1933 that the centrist and moderate-right parties have won a general election in that country, and the best showing of those parties, taken together, since 1928!

The German-Japanese Performances

In passing, if nothing else right now, note that in the WEF table the US ranks 1st, a position it has dominated since the early 1990s when it turned out that the heavily touted new dynamos --- both destined to overtake the US in per capita income in that decade, with Japan's total GDP slated, on top of that, to best the US's by 2010 --- were sunk in a mire of self-created economic troubles, all the result of excessive state regulations, subsidies, and lack of entrepreneurial vigor, along with very high taxes and social security burdens in Germany. 

The contrast between the mediocre German and Japanese performance compared to the US's since 1991 has been stunning, nothing less.  Take entrepreneurship start-ups.  By 1997, a good ¾ of the Fortune 500 giant companies in the US hadn't even existed 22 years earlier, at the start of the new information-age economic revolution; in Japan and Germany, there was scarcely a new giant company even visible in their equivalent ranks.  Ten years later, despite a strong export performance of the big trade-oriented companies in both countries, there are still no new giants except for SAP, a very good German multinational that leads the global pack in business software.  Small wonder, then, that Germany and Japan have vied with one another ever since to see which country could rack up the worst economic performance since the era of the 1930s' Great Depression.  Slowly, it's true, both began to reform and open up to more competition in their home markets', and German export companies have especially made notable progress in responding to the high value of the euro in dollar terms since 2003.  Even so, neither economy --- despite their wealth and large size (80 million Germans, 120 million Japanese) --- has managed to switch to domestic-led growth.  Throughout this decade, the economic growth of both has been fitful and mediocre. 

Something Else Worth Mulling

Germany's huge trade surplus in manufactured goods of $40 billion --- which accounted for 60-70% of whatever GDP growth Germany has recorded since the start of 2005 --- is exaggerated by American standards.  In particular, as a member of a 13-country eurozone --- which numbers about 300 million affluent people --- German exports to Spain or Italy or France or the smaller member-countries would be the equivalent of California (40 million people, with a GDP alone equal to France's with a population of 60 million) counting as exports goods and services it sells to Nevada, New York, or New Hampshire.  Oppositely, Japan's even larger trade surplus in goods is very likely underestimated, with many of its exports assembled in China or Southeast Asia by low-wage labor and then counted as Chinese or Thai or Malaysian exports.  No matter.  The key point is that these two giant countries have failed to stimulate domestic consumption and kick start and sustain economic growth by it and investment in domestic-oriented businesses.  Their failures here are the flip-side of their peoples' high savings rate and lack of confidence in their countries' economic dynamism, a problem that stretches back for nearly two decades now. 

What follows? 

Well, simply this: once again, standard macro-economic theory is sound when it comes to explaining Japan's and Germany's overall lackluster growth record for 16 or 17 years now.  To wit: a trade surplus or a trade deficit is neither good nor bad in the abstract.  Either one reflects more underlying trends, such as the levels of a country's domestic consumption or savings, domestic investment, the size of a government's spending deficit or surplus, and the relative price of its currency in exchange markets.  What can be unequivocally said is that Japanese and German export-oriented companies produce lots of goods that others value --- a good plufs for their competitiveness in foreign markets --- but that, simultaneously, economic dynamism depends on far more than their high levels of domestic savings and the related high levels of their trade surpluses in manufactures.  

Anglo-American Countries:

As we noted, the US has been ranked by the WEF as number 1 competitively almost every year since 1992, and number 2 in the two years when Finland pushed to the fore.  What stands out is that the UK, which has outgrown its major EU competitors on the Continent for two decades now --- thanks to the free-market reforms carried out in the Margaret Thatcher era of the 1980s --- is ranked 9th, which seems a little low; that Canada, ranked 13th --- despite a noticeably dynamic recovery in growth in this decade --- seems to deserve a higher rating toof; that Australia (19th) and New Zealand (24th) are also surprisingly ranked low, despite having markedly improved their own growth performances since the 1980s thanks to similar free-market reforms; and that --- astonishingly --- Ireland is ranked 22nd

 Huh?  As late as 1985, Ireland was one of the three poorest EU countries in per capita income, along with Greece and Portugal.  After systematic pro-business and free-market reforms since then, its growth performance has made it the most dynamic country in the EU, with the result that today, in 2008, it is far and away the richest country in the EU with a per capita income of $44,000 . . . slightly higher than the US's and, more to the point, almost 40% richer than Germany, France, and Britain, and almost 20% richer than Denmark ($37,000 per capita income), the number 2 in the EU-15 on that score.  True, Ireland is scarcely a laissez-faire libertarian paradise, but then neither is the US or any other Anglo-American country.  For one thing, the Irish government does have a fair number of industrial policies --- though no more, and probably less, than advanced EU welfare states --- and the Irish government has an agency that funds lots of new start-up businesses.  Still, Ireland maintains uncommonly low social spending by EU standards, its tax policies are very pro-business --- its tax on corporate profits is an extremely low 12.5% --- and its government and all political parties have never seen a multinational company, especially American, that it didn't embrace.

So what gives?  Why is the richest EU country, aside from tiny Luxembourg (480,000 people), listed so low by the World Economic Forum, especially since it was practically the poorest in the EU just two decades or so ago?

A speculative answer, little else, pushes to the fore here.  Namely?  Well, aside from the US, it appears that the World Economic Forum's ratings are heavily skewed against relatively free-market countries despite their superior growth records compared to the countries of similar population.  Ireland has 4 million people, exactly the same as Finland and Denmark, and not much below Sweden's 9 million or Austria's 9 million or even Holland's 15 million, all ranked much higher than Ireland. 


Some Emerging Differences

Shift your attention now and consider that however much the Scandinavian welfare-states still share in common, there have been some observable divergences of late. 

Denmark, in particular, has become the avant-garde of economic reform not just in Scandinavia itself, but --- according to the Swiss-based World Economic Forum's 2006 report --- in the whole of West Europe.  The reason: it has been ruled since late 2001 by center-right coalitions, determined to introduce a series of free-market reforms to make its economy more flexible and competitive, as well as business friendly to both Danish and multinational firms.  To that end, its governments have cut taxes, freed up its labor market, and encouraged more multinational implants, especially from the United States.  Among the benefits has been a fairly swift and impressive reduction of unemployment; what's more, unlike Sweden's official figures for joblessness, no one believes that the Danes have fiddled their own figures by transferring laid-off workers to various forms of early retirement and welfare support. 

Enter Sweden.  Now ruled for the last 16 months by a center-right coalition, the government there has also undertaken a variety of economic reforms and initiated certain pro-business policies too, despite its rigid labor-market policies.  The Finns, too, have undertaken certain reforms, not least in public finance; and their relatively high unemployment rate of 7-8% in the early part of this decade has finally begun inching down.  That leaves Norway.  Fueled by the constant rise in the price of its oil exports --- the country, remember, the world's third biggest oil exporter  --- its economy continues to grow steadily and keep unemployment low, even as it continues to maintain a fairly unreformed regulatory and welfare-state economy.  On the other hand, as with the rest of Scandinavia, the Norwegian government has maintained sound fiscal policies, kept its economy open to international trade except for agriculture, and encouraged a more pro-business attitude toward multinational firms. 

Some Graphic Imagery and Long-Term Worries for the Future

The marked similarities and observable divergences across the Nordic countries are captured in the following four diagrams, which also underscore the differences with the Anglo-American countries --- Britain itself, after almost two decades of free-market reforms, edging back toward a more EU Continental pattern of high government spending in the Tony Blair era. 

The first diagram sets out the relationship between government social spending and GDP per capita income, with Canadian per capita income ranked 100.  Among the Scandinavian countries, Finland spends only 22% of its GDP on various forms of social programs.  At the opposite end, Sweden's government spends 50% more on such programs, a huge difference.  Norway and Denmark fall in between.  Except for Britain, which now devotes about 21% of GDP to social spending, the other English-speaking countries --- Canada, Australia, the US, and Ireland --- all spend less than 18%. 


The high levels of social spending in Scandinavia and most of the rest of the Continental EU countries are food for thought.  In particular, can Sweden and the other advanced welfare states in West Europe maintain such high social spending --- say in another decade or two --- as their European populations rapidly age, their work forces markedly shrinks, and their swiftly growing Muslim communities swell in number, creating in the upshot major divisive social and economic conflicts.  All involve issues of national identity and cohesion. 

On the one side, there are already major grievances being voiced by native European populations that their high taxes are subsidizing several social pathologies in their Muslim communities: poor education, growing disaffection toward European life and values, petty and violent crime alike among more and more angry, alienated Muslim youths . . . even as Eurfopean cities become much more violent and crime-ridden compared to the US.  Right now, you are five times more likely to be mugged in the streets of London than New York.  In huge Muslim enclaves, virtually cut off voluntarily from mainstream European life --- as in Malmo Sweden or Rotterdam Holland or the Paris suburbs or Frankfurt Germany, just to single out some media-reported enclaves --- police authority is hardly existent, drug-dealing is rampant, Islamist radicalism is attracting ever greater numbers of disaffected youth, and Muslim gangs attack European property and persons alike, while young women are increasingly under pressure to resort to the veil or other more elaborate Muslim garb.  wells in size, making it ever harder for the heavily taxed Europeans to identify with those in that increasingly young and alienated minority? 

On the other side, the problem of identity conflicts and growing social strife will invariably envelope, in the next decade or so, the anger of ever larger numbers of young Muslim workers who will resent the big tax burdens they will face in order for the state, all over West Europe, to finance its ambitious retirement pensions and health services for more and more European retirees, living into their 80s and 90s. 

So yes, food for thought . . . pivotal questions about the future of the advanced European welfare states in the EU, as they undergo major, irreversible demographic changes and experience growing social and economic strife over the burdens and benefits of state-largesse.  These questions will be at the center of the next buggy article in this series.  For the time being, shift your attention back to our current concerns today.


More Evidence of Different Economic Strategies in Scandinavia

A noticeably growing divergence across the Nordic countries is brought out in the following chart, put out annually by the Heritage Foundation and the Wall Street Journal: it uses about 10 different criteria to rank all the countries in the world in economic freedom defined in free-market terms.  The Anglo-American countries all rank high, as you can see.  But, impressively, so does Denmark --- number 11 (and praiseworthy tiny Estonia, a new East European member that has quickly moved to develop an impressive market economy since it broke away from the Soviet Union in 1991).  Finland comes in number 16, a decent ranking; but once again, Sweden is found to be a much more state-dominated economy and ranks only 27.  As for Norway, it's way down the list.

Economic Freedom 2008

econ freedom 2008

 Source: Hertiage Foundation/Wall Street Journal Index

of Economic Freedom 2008

The third chart shows just how much harder Americans work each year, logged in hours, compared to the Scandianvian countries.  Note that we haven't really considered tiny Iceland, with roughly 250,000 people . . . far smaller than Santa Barbara county.  Norwegians work noticeably less each year.  The Swedes and Finns the most, and Denmark in between. 

Source: Cato Institute

Well, we've run on quite a lot in this current buggy article, with the rest of the spun-out argument left much better for the next installment in this series.  Oh, wait though!  One more tantalizing chart, whose rich implications will also be dealt later on too.  It shows that if you look at total social spending across industrial countries --- total meaning both public and private --- the US turns out in this study to be more generous to its population.

No need to elaborate on this surprising outcome right now, what with several follow-up commentsslated for the next buggy article.