Welfare benefits, a controversial subject: Do they slow down a country’s economic growth?
Prior to the Covid-19 pandemic, according to the United Nations, the global economy experienced its lowest growth of the decade in 2019, declining by 2.3%. In its World Economic Situation and Prospects 2020 annual report, it has forecasted only modest global growth acceleration, largely concerned about the slowing of global growth (Deloitte n.d.). In many Western states, many are concerned that the key cause of this economic downturn is the distorting impact of their welfare states; in turn, such arguments are utilised to support social provisioning amendments and reductions. It is therefore integral to examine to what extent there is an empirical basis for the hypothesised negative growth consequences of welfare states (Korpi 2005, p. 186). The Nordic model is commonly regarded as the blueprint for successful economic and social performance. Many cross-country comparative studies find that the Nordic region is successful in its pursuit of economic growth in combination with equal distribution of income, social cohesion and a peaceful labour market (Korpi 2005, p. 186). This paper critically examines the Nordic model in this context and finds the neo-classical assumption that welfare will undermine economic growth to be unfounded. We argue that although it may be a success story, for now, it will be subjected to specific challenges that will bring into question the models level of sustainability (Andersen et al. 2007, p. 13).
Some scholars have dedicated their academic careers to promoting the concept of a Nordic model and deciphering their characteristics. Conversely, others have claimed that such a model does not exist, but instead, country-specific development paths and outcomes are more appropriate areas of welfare comparison (Kangas & Palme 2005, p. 2). Suggesting that rather than a Nordic model approach, we should study the Danish, Finnish, Norwegian and Swedish models, respectively (Kangas & Palme 2005, p. 2). The assumptions regarding the merits and failures of such models also differ widely among those in the field. On the one hand, many argue that the Nordic welfare state is the superior model, providing high levels of well-being and optimal opportunity to all those in the population regardless of their circumstance Kangas & Palme 2005, p. 2). Namely, the key achievement produced from such is poverty reduction as Nordic countries exhibit some of the lowest poverty rates globally. For these proponents, the Nordic region is a prime case for how it is possible to enhance equality, provide maximum welfare opportunities accompanying high levels of taxation with economic growth. Conversely, on the other hand, critics largely in the neo-classical camp would suggest the situation in the Nordic region is vastly different. Through the equalisation of incomes provided for by lavish welfare benefits, the state actually produces work disincentives and fosters creative destruction, establishing a barrier to economic growth (Korpi 2005, p. 207). Moreover, as an effect, with increasing taxation in order to fund the welfare state expansion, labour supply will likely suffer. In turn, a long term consequence of this will be largely detrimental to both growth rates and low-income individuals, drawing out questions of the model’s sustainability (Kangas & Palme 2005, p. 2).
A Nordic Model Exists
We suggest that although no generally accepted notion exists, in order to understand the current debate, it is important to arrive at a theoretical understanding for the purposes of analysis. The Nordic or Scandinavian model of welfare is driven from Titmuss’s (1958) understanding of welfare as command over resources (Kvist & Fritzell 2011, p. 2). Johansson (1970), a key founder of Nordic welfare research, defines it as an individual’s level of living “as the command over resources in terms of money, possessions, knowledge, psychological and physical energy, social relations, security etc. in which an individual can control and consciously direct their conditions of life”.
As Greve (2007, p. 44) puts it in a perhaps more succinct and modern way, at the core of the Nordic model is the attempt to improve the population’s ability to master its problems and to both equalise and enrich the living standards of families and individuals. To this point, in practice, there is a social and economic system that could be suggested to be the Nordic model (Andersen et al. 2007, p. 14). Although, it is important to acknowledge that variances among the economies and policies of the Nordic countries are evident. For the purposes of this paper, the Nordic group consists of Norway, Iceland, Finland, Denmark and Sweden (Andersen et al. 2007, p. 17). There are apparent striking similarities that exist among these countries, namely, the following key features:
· An in-depth welfare state that prioritises transfers to both households and publically provided social services which are financed through taxes, typically considerably high for wage income and consumption.
· The government invests heavily in human capital, specifically within child care and education and research and development.
· Labour market institutions actively influence labour market policies. These include labour unions, employer associations, policies to encourage wage coordination, unemployment benefits.
Economic Growth?
The Nordic region has performed relatively well historically, according to most indicators. More recently, strong economic performance relating to employment and productivity levels in combination with growth of its GDP per capita has been evidenced (Andersen et al. 2007). They are ranked as the 13th largest combined economy in the world and have been forecasted to expect economic growth this year, despite the pandemic, with Sweden at growth rate of 3.5%, Norway at 3.6% and Denmark at 3.5% (Reuters 2020; DFAT 2019). Moreover, they are leaders in gender equality, with gender employment gaps among the smallest within the OECD (OECD 2018). In conjunction with this, the Nordic region has a very low degree of income inequality, vastly below that of the OECD average (Deloitte n.d.). It is important to acknowledge that economic performance reflects a variety of economic and non-economic factors. These can be categorised into three groups; 1) exogenous factors of the economic system such as climate, natural resources, location, or religion, 2) institutional factors relating to the economic system such as political freedoms, property rights, corruption levels, the state of the judicial system, and health and educational standards, 3) factors that are an inherent result of economic policies, such as trade and factor mobility, tax systems and labour supply, and infrastructure (Andersen et al. 2007, p. 17). Namely, this paper is concerned with the third category, growth-enhancing economic policies.
The Nordic region has been a group of free-trading nations for nearly a century with a low level of protection in commodity trade, this has led to repeated structural exchanges and extensive specialisation in specific areas of comparative advantage (Andersen et al. 2007, p. 17). Moreover, the region has been largely open to migration, specifically open to the immigration of peoples that are specialists or entrepreneurs with sought after skill-sets in the technical or commercial fields (Andersen et al. 2007, p. 17). A more recent arrangement is that of free enterprise with limited government intervention within the business arena. These developments have also encouraged a strong track record of attracting foreign investment and global talent, enhancing economic growth in the region (DFAT 2020). Although the labour unions hold political influence, they have not rejected such policies, nor have they opposed the implementation of new methods or the off-shoring of specific enterprise techniques, which have resulted in increases in productivity and displaced labour. Perhaps, one way to conceptualise the Nordic model’s success is the examination of its public spending (Andersen et al. 2007, p. 17). This is largely spent on education and child care, infrastructure, research and labour market agendas. The funnelling of public spending into these areas may counteract the detrimental impacts of high taxes (Andersen et al. 2007, p. 17).
Productivity, Employment and Competitiveness
Perhaps most importantly, the Nordic region has also been receptive to technical advancements and the reallocation of factors according to movements in the global pattern of specialisation to increase productivity, employment and business competitiveness. Increased productivity is the key factor for economic growth and enhanced prosperity (Deloitte n.d.). Utilising the GNI indicator for per hours worked, this demonstrates the extent to which a country can generate income for every hour worked. According to the OECD (2016), the Nordic region is one of the strongest at generating income.
To this point, the Nordic countries are consistently ranked in the top 10 internationally regarding their competitiveness, economic freedoms, minimal corruption levels, ease of doing business, and entrepreneurship, specifically advanced to increase productivity and thus income (Deloitte n.d.). However, competition can produce detrimental consequences for some, such as the closure of businesses, job losses and the displacement of labour. Free trade and open markets are advanced under the economic assumption that while there will be losers, the winners have much to gain and theoretically will compensate for those who lose out in the process (Andersen et al. 2007, p. 17. This compensation in practice is not always achieved. Under the Nordic model, international trade and technical change have increased welfare through the process of structural change, which produces both winners and losers (Andersen et al. 2007, p. 17). The Nordic model is considered to generate public support for growth-enhancing technical change, free trade and open markets through the establishment of various mechanisms in which the winners from the structural change, to some extent, make up for the losers (Andersen et al. 2007, p. 17). The assumption is not made that markets are self-equilibrating, and therefore specific compensation mechanisms and actives measures offset these negative effects, using mechanisms such as wage setting. In both Demark and Sweden, collective agreements are used in order to enforce minimum wages, covering around 89% of employees in Sweden and around 84% in Demark (International Labour Organisation n.d.). As well as labour market policies; promoting work as valuable to both society and the individual, movement of income via tax-transfer schemes, in-depth unemployment insurance schemes and various social safety nets (Andersen et al. 2007, p. 18). For instance, unemployment benefits are typically based on ones’ previous wages. In Sweden, unemployment insurance provides 80% of one’s income in the year prior to one’s unemployment (Armistead 2020). These safety nets have produced labour participation rates that are among the highest in the world, and unemployment rates are typically low (Whitcombe 2021). As economic growth in the region continues to grow, these social and labour market policies have been critically important for maintaining public support in the Nordic region for free international trade and competition and the subsequent detrimental features these may bring to groups within Nordic society (Andersen et al. 2007, p. 17).
Discussion
The neo-classical assumption that taxes and other political policies implemented in accordance with maintaining a welfare state will produce distortions in the functioning of markets, such as labour supply shortages or work disincentives, has been evidenced as inaccurate with respect to the case study of the Nordic region (Korpi 2007, p. 186). Instead, we find in the Nordic case that generally the welfare state does not harm economic growth. This paper suggests that there are important implications for this finding. Particularly, as functional as it may be for economic growth, we suggest that the Nordic model may be placed under serious pressure regarding its future sustainability.
First, while globalisation has provided beneficial returns for the Nordic region, enhancing economic growth through free and open trade, the rise in international labour mobility poses a risk (Andersen et al. 2007, p. 20). The welfare entitlements such as retirement and unemployment benefits are accessible to all citizens within the model, and the cost of such entitlements are shared collectively through the tax system. However, increasing mobility of labour may lead to individuals benefiting from the system without sharing the cost in the form of paying taxes (Andersen et al. 2007, p. 20). With the growing claims to entitlements as a result of “social tourism” and the diminishing tax bases as a result of mobility and tax competition among states, the future sustainability of the Nordic model may be at risk. Second, changing demographics in the region may play a significant role in impacting the public sector in issuing age-dependent social provisions. It is likely that in the coming decades, the age composition of the population will drastically change, with the share of those over 65 shifting from 16% to 26% of the population and those above 85 rising from below 2% to over 6%, in Finland for instance. This dramatic shift may undermine the financial sustainability of the welfare state and have broader impacts on economic growth (Andersen et al. 2007, p. 20).
Lastly, it is important to note there are numerous smaller countries such as Singapore or Switzerland that are markedly different in terms of institutional traits to that of the Nordic region while still exhibiting high levels of economic prosperity (Tiemer 2018, p. 214). Moreover, larger and authoritarian countries such as China also demonstrate strong economic performance without following a Nordic model of welfare and equality. In that sense, the Nordic model should not be conceptualised as the only blueprint in which to enhance economic growth. It is, however, an economic growth blueprint conducive to the greatest degrees of civil liberties and welfare (Tiemer 2018, p. 214).
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