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Northern lightsThe Nordic countries are reinventing their model of capitalism, says Adrian Wooldridge

THIRTY YEARS AGO Margaret Thatcher turned Britain into the world’s leading centre of“thinking the unthinkable”. Today that distinction has passed to Sweden. The streets ofStockholm are awash with the blood of sacred cows. The think-tanks are brimful of newideas. The erstwhile champion of the “third way” is now pursuing a far more interestingbrand of politics.

Sweden has reduced public spending as a proportion of GDP from 67% in 1993 to 49%today. It could soon have a smaller state than Britain. It has also cut the top marginal taxrate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes onproperty, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from26.3% to 22%.

Sweden has also donned the golden straitjacket of fiscalorthodoxy with its pledge to produce a fiscal surplus overthe economic cycle. Its public debt fell from 70% of GDP in1993 to 37% in 2010, and its budget moved from an 11%deficit to a surplus of 0.3% over the same period. Thisallowed a country with a small, open economy to recoverquickly from the financial storm of 2007-08. Sweden hasalso put its pension system on a sound foundation,replacing a defined-benefit system with a defined-contribution one and making automatic adjustments forlonger life expectancy.

Most daringly, it has introduced a universal system of schoolvouchers and invited private schools to compete with publicones. Private companies also vie with each other to providestate-funded health services and care for the elderly. AndersAslund, a Swedish economist who lives in America, hopes that Sweden is pioneering “anew conservative model”; Brian Palmer, an American anthropologist who lives inSweden, worries that it is turning into “the United States of Swedeamerica”.

There can be no doubt that Sweden’s quiet revolution has brought about a dramaticchange in its economic performance. The two decades from 1970 were a period ofdecline: the country was demoted from being the world’s fourth-richest in 1970 to

The Nordic countries

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14th-richest in 1993, when the average Swede was poorer than the average Briton orItalian. The two decades from 1990 were a period of recovery: GDP growth between1993 and 2010 averaged 2.7% a year and productivity 2.1% a year, compared with 1.9%and 1% respectively for the main 15 EU countries.

For most of the 20th century Sweden prided itself on offering what Marquis Childs called,in his 1936 book of that title, a “Middle Way” between capitalism and socialism. Globalcompanies such as Volvo and Ericsson generated wealth while enlightened bureaucratsbuilt the Folkhemmet or “People’s Home”. As the decades rolled by, the middle wayveered left. The government kept growing: public spending as a share of GDP nearlydoubled from 1960 to 1980 and peaked at 67% in 1993. Taxes kept rising. The SocialDemocrats (who ruled Sweden for 44 uninterrupted years from 1932 to 1976 and for 21out of the 24 years from 1982 to 2006) kept squeezing business. “The era ofneo-capitalism is drawing to an end,” said Olof Palme, the party’s leader, in 1974. “It issome kind of socialism that is the key to the future.”

The other Nordic countries have beenmoving in the same direction, if moreslowly. Denmark has one of the most liberallabour markets in Europe. It also allowsparents to send children to private schoolsat public expense and make up thedifference in cost with their own money.Finland is harnessing the skills of venturecapitalists and angel investors to promoteinnovation and entrepreneurship. Oil-richNorway is a partial exception to thispattern, but even there the government ispreparing for its post-oil future.

This is not to say that the Nordics areshredding their old model. They continue topride themselves on the generosity of theirwelfare states. About 30% of their labourforce works in the public sector, twice theaverage in the Organisation for Economic Development and Co-operation, a rich-countrythink-tank. They continue to believe in combining open economies with public investmentin human capital. But the new Nordic model begins with the individual rather than thestate. It begins with fiscal responsibility rather than pump-priming: all four Nordiccountries have AAA ratings and debt loads significantly below the euro-zone average. Itbegins with choice and competition rather than paternalism and planning. The economic-freedom index of the Fraser Institute, a Canadian think-tank, shows Sweden and Finlandcatching up with the United States (see chart). The leftward lurch has been reversed:rather than extending the state into the market, the Nordics are extending the market into

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the state.

Why are the Nordic countries doing this? The obvious answer is that they have reachedthe limits of big government. “The welfare state we have is excellent in most ways,” saysGunnar Viby Mogensen, a Danish historian. “We only have this little problem. We can’tafford it.” The economic storms that shook all the Nordic countries in the early 1990sprovided a foretaste of what would happen if they failed to get their affairs in order.

There are two less obvious reasons. The old Nordic model depended on the ability of acadre of big companies to generate enough money to support the state, but thesecompanies are being slimmed by global competition. The old model also depended onpeople’s willingness to accept direction from above, but Nordic populations are becomingmore demanding.

Small is powerfulThe Nordic countries have a collective population of only 26m. Finland is the only one ofthem that is a member of both the European Union and the euro area. Sweden is in theEU but outside the euro and has a freely floating currency. Denmark, too, is in the EU andoutside the euro area but pegs its currency to the euro. Norway has remained outside theEU.

But there are compelling reasons for paying attention to these small countries on theedge of Europe. The first is that they have reached the future first. They are grapplingwith problems that other countries too will have to deal with in due course, such as whatto do when you reach the limits of big government and how to organise society whenalmost all women work. And the Nordics are coming up with highly innovative solutionsthat reject the tired orthodoxies of left and right.

The second reason to pay attention is that the new Nordic model is proving strikinglysuccessful. The Nordics dominate indices of competitiveness as well as of well-being.Their high scores in both types of league table mark a big change since the 1980s whenwelfare took precedence over competitiveness.

The Nordics do particularly well in twoareas where competitiveness and welfarecan reinforce each other most powerfully:innovation and social inclusion. BCG, asthe Boston Consulting Group calls itself,gives all of them high scores on itse-intensity index, which measures theinternet’s impact on business and society.Booz & Company, another consultancy,points out that big companies oftentest-market new products on Nordicconsumers because of their willingness to try new things. The Nordic countries led theworld in introducing the mobile network in the 1980s and the GSM standard in the 1990s.

Explore our interactive guide to Europe's troubledeconomies


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Today they are ahead in the transition to both e-government and the cashless economy.Locals boast that they pay their taxes by SMS. This correspondent gave up changingsterling into local currencies because everything from taxi rides to cups of coffee can bepaid for by card.

The Nordics also have a strong record of drawing on the talents of their entirepopulations, with the possible exception of their immigrants. They have the world’shighest rates of social mobility: in a comparison of social mobility in eight advancedcountries by Jo Blanden, Paul Gregg and Stephen Machin, of the London School ofEconomics, they occupied the first four places. America and Britain came last. TheNordics also have exceptionally high rates of female labour-force participation: inDenmark not far off as many women go out to work (72%) as men (79%).

Flies in the ointmentThis special report will examine the way the Nordic governments are updating theirversion of capitalism to deal with a more difficult world. It will note that in doing so theyhave unleashed a huge amount of creativity and become world leaders in reform. Nordicentrepreneurs are feeling their oats in a way not seen since the early 20th century. Nordicwriters and artists—and indeed Nordic chefs and game designers—are enjoying acreative renaissance.

The report will also add caveats. The growing diversity of Nordic societies is generatingsocial tensions, most horrifically in Norway, where Anders Breivik killed 77 people in aracially motivated attack in 2011, but also on a more mundane level every day. Sweden isfinding it particularly hard to integrate its large population of refugees.

The Nordic model is still a work inprogress. The three forces that haveobliged the Nordic countries to revampit—limited resources, rampant globalisationand growing diversity—are gatheringmomentum. The Nordics will have tocontinue to upgrade their model, but theywill also have to fight to retain what makesit distinctive. Lant Pritchett and MichaelWoolcock, of the World Bank, have coinedthe term “getting to Denmark” to describesuccessful modernisation. This report willsuggest that the trick is not just to get toDenmark; it is to stay there.

The final caveat is about learning from the Nordic example, which other countries arerightly trying to do. Britain, for example, is introducing Swedish-style “free schools”. Buttransferring such lessons is fraught with problems. The Nordics’ success depends ontheir long tradition of good government, which emphasises not only honesty andtransparency but also consensus and compromise. Learning from Denmark may be asdifficult as staying there.

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