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.
Moreover, economic growth in the Nordic countries has been similar to that in the US in recent years. Income levels are higher on average in the US, but mainly because the Nordic countries work fewer hours per week. In any case, all of the Nordic countries have very high incomes and Norway's per capita income actually exceeds the US.
Several factors appear to explain the Nordic countries' economic success. Taxation is broad-based and relatively non-distorting, while open international trade, market forces and private ownership of industry are relied on to maintain incentives.
The Nordic countries are not "socialist" economies, based on state ownership and planning, but "social welfare" economies, based on private ownership and markets, with public provision of social protection. Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.
Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a "road to serfdom." Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US.
According to Transparency International, the Nordic countries have the world's least corrupt political systems (with Iceland and Finland ranking as the least corrupt), while the US, with its big money politics, is fairly far down on the list.
But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness.
Jeffrey Sachs is professor of economics and director of the Earth Institute at Columbia University.
Copyright: Project Syndicate
In a summer of intense political maneuvering, Taiwanese, whose democratic vibrancy is a constant rebuke to Beijing’s authoritarianism, delivered a powerful verdict not on China, but on their own political leaders. Two high-profile recall campaigns, driven by the ruling party against its opposition, collapsed in failure. It was a clear signal that after months of bitter confrontation, the Taiwanese public is demanding a shift from perpetual campaign mode to the hard work of governing. For Washington and other world capitals, this is more than a distant political drama. The stability of Taiwan is vital, as it serves as a key player
Much like the first round on July 26, Saturday’s second wave of recall elections — this time targeting seven Chinese Nationalist Party (KMT) lawmakers — also failed. With all 31 KMT legislators who faced recall this summer secure in their posts, the mass recall campaign has come to an end. The outcome was unsurprising. Last month’s across-the-board defeats had already dealt a heavy blow to the morale of recall advocates and the ruling Democratic Progressive Party (DPP), while bolstering the confidence of the KMT and its ally the Taiwan People’s Party (TPP). It seemed a foregone conclusion that recalls would falter, as
The fallout from the mass recalls and the referendum on restarting the Ma-anshan Nuclear Power Plant continues to monopolize the news. The general consensus is that the Democratic Progressive Party (DPP) has been bloodied and found wanting, and is in need of reflection and a course correction if it is to avoid electoral defeat. The Chinese Nationalist Party (KMT) has not emerged unscathed, either, but has the opportunity of making a relatively clean break. That depends on who the party on Oct. 18 picks to replace outgoing KMT Chairman Eric Chu (朱立倫). What is certain is that, with the dust settling
Mainland Affairs Council Deputy Minister Shen You-chung (沈有忠) on Thursday last week urged democratic nations to boycott China’s military parade on Wednesday next week. The parade, a grand display of Beijing’s military hardware, is meant to commemorate the 80th anniversary of Japan’s surrender in World War II. While China has invited world leaders to attend, many have declined. A Kyodo News report on Sunday said that Japan has asked European and Asian leaders who have yet to respond to the invitation to refrain from attending. Tokyo is seeking to prevent Beijing from spreading its distorted interpretation of wartime history, the report
RSS