how well is the nordic model doing? a review of the economic performance of the nordic economies...
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How well is the Nordic model doing? A review of the economic performance of the Nordic
economies
Lars CalmforsETLA
30 October 2013
Three issues
• Is there a distinct Nordic model? - structural characteristics - economic outcomes• Developments over the last two decades• Challenges for the future
Structural characteristics
• Not so particular with respect to the size of government
• Different degrees of income protection in the case of unemployment
• Some labour market institutions are similar, others are very different
• Similar degrees of product market regulations• The Nordic countries are not so disticnt a group
as commonly believed
Figure 1 Total government expenditure, percentage of GDP, 2012
USA
Irelan
d
Luxe
mbourg
Norway
German
y
Icelan
d
Spain
Portuga
l UKEU
-15
Netherl
ands
Italy
Austria
Swed
en
Greece
Belgium
Finlan
d
France
Denmark
0
10
20
30
40
50
60
70
Nordic countries Continental Europe
Southern Europe
UK USA0
10
20
30
40
50
60
Figure 3 Total tax revenues, percentage of GDP
Nordic countries Continental Europe
Southern Europe UK USA0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
United St
ates
Irelan
d
Greece
Portuga
lSp
ain
United Kingd
omIce
land
German
y
Luxe
mbourg
Netherl
ands
Austria
Finlan
dFra
nce
Norway Ita
ly
Belgium
Swed
en
Denmark
05
101520253035404550
Figure 2 Government employment, percentage of total employment, 2012
Nordic countries Continental Europe
Southern Europe UK USA0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Netherl
ands
Portuga
l
Irelan
dIta
lyEU
-15USA
Luxe
mbourgSp
ain UK
Belgium
France
Finlan
d
Swed
en
Norway
Denmark
0
5
10
15
20
25
30
35
Figure 4 Net income replacement rate for short-term unemployed (first year), 2009
Nordic countries Continental Europe
Southern Europe UK USA0
10
20
30
40
50
60
70
80
USA
Irelan
d UK
Austria
Swed
en
Greece
German
y EU Italy
Finlan
dSp
ainFra
nce
Belgium
Norway
Denmark
Portuga
l
Icelan
d
Netherl
ands
Luxe
mbourg0
102030405060708090
Figure 6 Trade union density, percentage of employees, 2010
Nordic countries Continental Europe
Southern Europe UK USA0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
France USA
Spain
German
y
Netherl
...
Portuga
l
Greece UK
Austria
Irelan
dIta
ly
Belgium
Norway
Swed
en
Denmark
Finlan
d0
10
20
30
40
50
60
70
80
Figure 7 Coverage of collective bargaining agreements, percentage of employees, 2010 or latest
Nordic countries Continental Europe
Southern Europe UK USA0
102030405060708090
100
United St
ates
United Kingd
omIre
land
Portuga
l
Luxe
mbourg
German
y
Greece EU
Norway
Denmark Ita
ly
Netherl
ands
Spain
Icelan
d
Finlan
dFra
nce
Swed
en
Belgium
Austria
0102030405060708090
100
Figure 8 Strictness of employment protection, 2012
Nordic countries Continental Europe Southern Europe UK USA0.0
0.5
1.0
1.5
2.0
2.5
3.0
USA UK
Irelan
d
Icelan
d
Belgium
Spain
Denmark
Austria
Greece
Norway
Luxe
mbourg
Finlan
d
Swed
en Italy
France
German
y
Netherl
ands
Portuga
l0
0.5
1
1.5
2
2.5
3
3.5
Table 1 Expenditure on active labour market programmes, 2011
Figure 9 Product market regulation, 2008
Nordic countries Continental Europe Southern Europe UK USA0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
United Kingd
om
United St
ates
Irelan
d
Netherl
ands
Spain
Denmark
Icelan
d
Finlan
d
Norway
Swed
en
German
y
New Ze
aland
Italy
Portuga
l
Belgium
Austria
France
Luxe
mbourg
Greece
0
0.5
1
1.5
2
2.5
Economic outcomes
• High income equality• High employment - females - elderly workers• Differences in working time• Strong public finances (except Iceland)• Different levels of GDP per capita• More similarities among the Nordic countries in terms
of outcomes than in terms of structural characteristics
Figure 13 P90/P10 percentile ratio, disposable income, households, 2010
Nordic countries Continental Europe Southern Europe UK USA0
1
2
3
4
5
6
7
Icelan
d
Denmark
Norway
Austria
Finlan
d
Swed
en
Belgium
Luxe
mbourg
Netherl
ands
France
German
y UKIta
ly
Estonia
Greece
Portuga
lSp
ain USA0
1
2
3
4
5
6
7
Figure 14 Employment rate, percentage of population, 20-64 years old, 2012
Nordic countries Continental Europe Southern Europe UK USA0
102030405060708090
Greece
Spain Ita
ly
Irelan
d
Portuga
l
Belgium
EU-27
France
Luxe
mbourg
Finlan
d
United Kingd
om
Denmark
Austria
German
y
Netherl
ands
Swed
en
Norway
Icelan
d0
10
20
30
40
50
60
70
80
90
Figure 15 Employment rate, percentage of females, 2012
Nordic countries Continental Europe Southern Europe UK USA0
10
20
30
40
50
60
70
80%
Greece Ita
lySp
ain
Irelan
d
Belgium
Portuga
l
EU-15
Luxe
mbourg
France USA UK
Austria
German
y
Netherl
ands
Denmark
Finlan
d
Swed
en
Norway
Icelan
d0
10
20
30
40
50
60
70
80
90
Figure 19 Employment rate, percentage of population 55-64 years, 2012
Nordic countries Continental Europe
Southern Europe
UK USA0
10
20
30
40
50
60
70
80%
Greece
Belgium
Italy
Luxe
mbourg
Austria
Spain
France
Portuga
l
Irelan
dEU
-15 UK
Finlan
d
Netherl
ands
USA
Denmark
German
y
Norway
Swed
en
Icelan
d0
10
20
30
40
50
60
70
80
90%
Figure 20 Annual hours worked per employed, 2011
Nordic countries Continental Europe
Southern Europe UK USA0
200400600800
100012001400160018002000
Netherl
ands
German
y
Norway
France
Denmark
Irelan
d
Belgium
Austria
Luxe
mbourg
United Kingd
om
Swed
en
Finlan
dSp
ain
United St
ates
Portuga
l
Icelan
dIta
ly
Greece
Mexico
0
500
1000
1500
2000
2500
Figure 23 Government consolidated gross debt, per cent of GDP, 2012
Nordic countries Continental Europe
Southern Europe UK USA0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Luxe
mbourg
Norway
Swed
en
Denmark
Finlan
d
Netherl
ands
Austria
German
y
Spain
EU-15 UK
France
Icelan
d
Belgium
USA
Irelan
d
Portuga
l Ita
ly
Greece
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
Table 2 The degree of trust
Similarities in developments: Denmark, Finland, Norway and Sweden
• Crises in the early 1990s• Fiscal reforms• Deregulation of product markets• Labour market reforms - less generous unemployment insurance and EITCS (not Norway) - more emphasis on activation• More decentralised wage-setting but large elements of
co-ordination retained
Differences in developments in Denmark, Finland and Sweden
• Exchange rate systems• Most labour market reforms in Denmark and Sweden, the
least in Norway• R&D-intensive growth in Finland and Sweden – ICT-sector• Credit-fuelled house price bubble that burst in Denmark
Iceland is a special case
• Gradual transition from a heavily regulated economy to a more market-oriented one
• Unsustainable expansion of banks, credit boom and financial collapse
• Deep recession
Figure 25 GDP, 1991=100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201280.0
100.0
120.0
140.0
160.0
180.0
200.0SE DK FI NO IS EU15 DE
Figure 26 Labour productivity: GDP per employed person, 1991=100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201280.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
160.0
SE DK FI NO IS EU15 DE
Table 3 Contributions to labour productivity growth (GDP per employed person)
1995-2007 2008-2012
Denmark 1.5 0.2 0.5 0.8 0.0 0 0.1 0 0.7 -0.8Finland 3.0 0.2 0.2 0.8
1.8 -0.4 0.2 0.3 0.9 -1.8
Norway 2.4 0.2 1.6 0.5 0.2 0.3 0.1 1.7 0.4 -2.0Sweden 2.8 0.3 0.7 0.5 1.4 0.6 0.1 0.6 0.6 -0.6Austria 2.4 0.3 0.5 0.4 1.2 0.7 0.1 0.3 0.3 0Belgium 1.6 0.3 0.7 0.5 0.1 0 0.2 0.4 0.4 -1.0France 1.9 0.3 0.8 0.3 0.4 0.1 0.2 0.9 0.1 -1.0Germany 1.7 0.0 0.3 0.3 1.1 0.4 0.1 0.2 0.4 -0.3Italy 1.0 0.2 0.7 0.3 -0.1 -0.5 0.1 0.2 0.1 -0.9Netherlands 2.0 0.3 0.5 0.5 0.7 -0.1 0.1 0.3 0.2 -0.6Spain 1.8 0.5 1.2 0.5 -0.4 0.7 0.3 0.7 0.3 -0.6UK 2.6 0.5 0.6 0.8 0.7 -0.6 0.2 0.4 0.1 -1.2US 2.4 0.3 0.7 0.8 0.6 0.9 0.2 0.3 0.4 0.1
Labour Labour ICT-kapital Non- TFP Labour Labour ICT-kapital Non- TFP productivity composition ICT-kapital productivity composition ICT-kapital
Table 3 Contributions to labour productivity growth (GDP per employed person)
Figure 29 Unemployment, per cent of labour force
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
SE DK FI NO IS EU15 DE
Figure 33 Government net lending, per cent of GDP
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-20
-15
-10
-5
0
5
10
15
20
25
SE DK FI NO IS EU15
Figure 34 General government net debt, per cent of GDP
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-250
-200
-150
-100
-50
0
50
100
SE DK FI NO IS
Figure 36 Relative unit labour costs, 1995=100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201260
70
80
90
100
110
120
130
140
150
SE DK FI NO
Figure 37 Export market shares, 2000=100
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
201240.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
Denmark
Germany
Finland
Sweden
United Kingdom
Norway
United States
Table 4 Changes 2008-2012
Challenges
• Productivity growth• Education• Tax system• Fiscal sustainability• Fiscal framework• Financial stability• Employment
Productivity growth• Earlier high TFP growth in Finland and Sweden• Low productivity growth during the crisis - cyclical developments? - lower trend growth? (decline in Sweden and Norway already before the crisis)• Slower technological development• Long-run effects of the downturn• Smaller ICT-sector and slower productivity growth there• Investment in immaterial assets• Service sector – deregulations - government-dominated sectors (health sector) - loosening of zoning restrictions in retail sector
Human capital accumulation• Finland topping PISA rankings• Room for improvement in the other Nordic countries• Positive trend for Norway in mathematics and reading• Strong downward trend for Sweden - ambitious reform programme in Sweden takes time to produce results• All the Nordic countries do better for the adult population - Sweden tops the ranking for problem-solving in technology-rich environments - lagged effects - adult education• Overlapping groups of drop-outs, young immigrants and employees in
elementary occupations
Table 6 Proficiency of adult populations, rankings according to PIAAC scores
Tax system
• Tax ratios have fallen in Sweden and Finland, but remained stable in Denmark and Norway, and increased in Iceland
• Less favourable treatment of owner-occupied housing would be preferable
- allocation of capital - balancing of income-distribution effects of lower marginal taxes on labour income• Uniform VAT rates would be desirable• Tax rules for closely held companies - balance incentives for entreprenuership against risk of tax avoidance
Figure 38 Tax revenues, per cent of GDP
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0
10.0
20.0
30.0
40.0
50.0
60.0
SE DK FI NO IS
Fiscal sustainability
• Rising old-age dependency ratio - but less than elsewhere except in Finland• Need for linking retirement age to longevity - Denmark - discussion in Sweden• Need for less generous early retirement - Finland, Norway and Denmark• Trade-off income protection for disbled older workers
against incentives for later effective retirement age
Figure 39 Old age dependency (ratio (65+/15-64), 2010 and 2060
Finland
Sweden
Denmark
Norway
EU 27
Euroarea
0 10 20 30 40 50 60
26.1
28.1
25.3
22.7
26
27.6
21.5
18.2
18.4
20.4
26.5
25.7
2010 Change 2010-2060
Source: The 2012 Ageing Report, EU Commission
%
Figure 40 Sustainability gap, S2-indicator
Denmark
Euroarea
Sweden
EU 27
Finland
0 1 2 3 4 5 6 7
1.7
2.3
2.4
3
6.2
Source: Report on Public Finances in the EMU, EU Commission
Fiscal frameworks• Earlier deficit problems has fostered a consensus on the need for fiscal
discipline - stronger fiscal frameworks• But – desirable – deteriorations of the fiscal balance in the current crisis• Do not take it for granted that prudent fiscal policy will automatically be
restored - stronger legal backing for fiscal targets and expenditure ceilings - guidelines for how deviations are to be handled - expenditure ceilings to cover more categories• Establish fiscal councils - so far only in Sweden and to some extent in Denmark - need for strengthening also in these countries
Financial stability• Risks with elevated house prices and high private-sector debt illustrated in
Iceland and Denmark• What about Sweden, Norway and Finland?• Mismatch between households’ liquid assets and their liabilities - loan-to-value regulations - amortisation requirements• Wholesale funding of banks• Higher capital requirements (and countercyclical) and larger risk weights for
mortgage loans• Roles of monetary policy and financial supervision• Risk that regulation goes too far• Cross-border activities of Nordic banks provide arguemtns for ex ante burden-
sharing agreements• Abolishment of favourable tax treatment for home ownership
Figure 41 Private-sector debt, per cent of GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011120.0
140.0
160.0
180.0
200.0
220.0
240.0
260.0
280.0
300.0
SE DK FI NO DE UK US
Figure 42 House prices, 2000-100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201150.0
100.0
150.0
200.0
250.0
SE DK FI NO DE UK US
Employment• Risk that unemployment becomes persistent - cf Finland and Sweden after the crisis in the 1990s - Iceland and Denmark at risk• Activation programmes - often disappointing results of large-scale programmes - access to ordinary school and university systems• Limits on duration of unemployment benefits and falling benefits over an unemployment
spell• EITCs and stricter gate-keeping in systems of sickness insurance and disability pensions has
kept up labour force participation in Sweden• High low-skilled unemployment• High youth unemployment in Sweden - difficult to improve vocational schooling and to introduce apprenticeship systems as in Denmark• Reduce early retirement in Denmark and Finland• Reduce sickness absence and retirement for disability reasons in Norway and Denmark
Figure 31 Unemployment of unskilled workers, per cent of labour
199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120120
2
4
6
8
10
12
14
16
18
SE DK FI NO IS EU15
Figure 43 Employment rate in Sweden accordning to education, males 25-54
basic, high school, university
Figure 44 Employment rate according to education, females 25-54
basic, high school, university