Thu, Apr 27, 2006 - Page 9 News List

The Nordic economic model has lessons for us all

By Jeffrey Sachs

Fewer debates over economics would be needed if the world spent more time examining what actually works and what does not. Almost everywhere, debate has raged about how to combine market forces and social security. The left calls for an expansion of social protection; the right says that doing so would undermine economic growth and widen fiscal deficits.

But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway and Sweden. While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth and macroeconomic stability. They have also achieved high standards of governance.

To be sure, there are also differences among the Nordic states, with social welfare spending the highest in Denmark, the Netherlands, Norway and Sweden and a bit lower in Finland and Iceland. Nevertheless, whereas the taxes at the national level in the US are equal to around 20 percent of GNP, in the Nordic countries the ratio is more than 30 percent.

High taxation supports comprehensive national health care, education, pensions and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households.

In the US, the poorest 20 percent of households receive just 5 percent of total income, putting their income at around one-fourth of the national average. In the Nordic countries, by contrast, the poorest 20 percent of households receive nearly 10 percent of total income, putting them at roughly one-half of the national average.

American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. But each of these propositions is refuted by the Nordic experience.

Consider the claims of inefficiency and waste. As a result of government-funded national health insurance, the Nordic countries have a higher life expectancy and a lower infant mortality rate than the US. Life expectancy is close to 80 years in the Nordic countries, compared to 78 years in the US, where the government does not guarantee national health insurance and millions of families are too poor to pay for it on their own.

Ironically, the heavy reliance on the private sector in the US system is so inefficient that Americans pay a larger share of GNP for health (14 percent) than do the Nordic countries (11 percent), but get less.

Similarly, although social welfare spending is lower in the US than in the Nordic countries, its budget deficit as a share of national income is much larger. The US spends less in the public sector, but it taxes even less than it spends. Nor has high taxation in the Nordic countries impeded economic performance.

Rather than relying mainly on income taxation, as in the US, the Nordic countries rely on value-added taxation, which provides a relatively high amount of revenue with relatively low rates of evasion and few distortions to the economy.

The Nordic experience also belies conservatives' claim that a large social welfare state weakens incentives to work and save. National saving in the Nordic countries averages more than 20 percent of national income, compared to around 10 percent in the US.

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