Bursting the myth of Scandinavian Socialist Utopia

 

To the obvious objection from the right that Socialism failed catastrophically in Venezuela and the Soviet Union, a quick response from the "left" is that Socialism (or democratic Socialism) works just fine in Sweden, Norway and Denmark. While it is certainly true that Sweden, Norway, Finland and Denmark are notable economic successes. What is false is that these countries are particularly Socialist. It is certainly wrong to assume that these countries are Socialist paradise.

There are couple of things wrong with the left's romance with these countries, as Swedish analyst Nima Sanandaji notes in his monograph. It doesn't fully appreciate the sources of Nordic success or how Scandinavia had turned away from the socialism so alluring to its international admirers.

Economic Success but not a Socialist

Under the conventional definition of Socialism which requires government ownership and distribution of the means of production, nationalisation of all industries, the Scandinavian countries -Denmark, Finland, Norway and Sweden are not Socialist as democratic presidential contenders insist.

The myth of Nordic Socialism is partially created by a confusion between Socialism, meaning government exerting control and ownership of businesses and the welfare state in the form of government provided social safety net programs. To the extent that the left wants to point to an example of successful Socialism, not just generous welfare states the Nordic countries are actually a poor case to cite. Regardless of the perception, in reality the Nordic countries practice mostly free market capitalist economy mixed with high taxes exchanged for generous government entitlement programs.

What's so great about Scandinavia?

The Scandinavian countries share certain geographical and cultural characteristics that make them totally different from other parts of the world. The countries always rank within the top 10 countries on many economic, political and social indexes. Some of which are: -

·         They are one of the happiest countries in the world.

·         Per capita incomes of Scandinavian countries are one of the highest.

·         All Scandinavian countries rank in top 7 in democracy index.

·         These countries are one of the most equal countries when it comes to Gender equality.

·         They are one of the least corrupted countries in the world.

·         The Gini Coefficient of these countries is very low, telling that these countries are one of the most equal countries in the world.

·         Poverty rate of Nordic countries is much less than developed countries like United States.

·         It gives social and unemployment benefits to its citizens.

·         They have free higher education, free health care, free retirement, high minimum wage and So ON.

·         Nordic countries occupy the top positions across the world for social support and are all in top countries when it comes to economic and political freedom.

·         They have high women labour force participation, long and paid parental leaves, illiteracy rates have been much lower in these countries than in most other countries for centuries.

The list is endless, but it is safe to say that these countries are prosperous, progressive and highly egalitarian in nature.

Economic History

Regardless of what one thinks about the Nordic welfare model a mandatory prerequisite for it even to function in the first place was a substantial capital stock to tap into. Many on the left tend to ignore the fact that these countries achieved remarkable economic growth in the late 19th and 20th century through free market Capitalism where investment boomed, job creation increased and they became wealthy. So essentially, they became extremely wealthy before turning into a welfare state.

To understand in detail, let us consider the example of Sweden. The century long period from 1870s to the 1970s comprises the most successful part of Swedish industrialization and the growth. During the 1880s the investment had an extensive nature where capital was largely employed. During this period, Sweden evolved from a largely agricultural economy into an industrialised and urbanised one. Much of the credit for this remarkable economic growth goes to free markets and mechanisation.

By the mid nineteenth century the Swedish economy was mainly agriculturally based and their average income level was close to average global level and was much lower than European perspective. From an European perspective Sweden was a rather poor country. But by the 1970s, however the Swedish income level was more than three times higher than the global average and among the highest in Europe. Similar kind of trend could be observed in other Nordic countries over these years and only Norway suffered economic stagnation till 1914. The fact that Socialists should know is, the remarkable economic growth over these years in Scandinavia was only successful due to rapid industrialization, liberalisation of economy and opening up to world markets. These are the reasons they accumulated so much of wealth before turning into a welfare state in 1970s.

Socialism was actually tried in 1970s

Yes, these countries, after becoming comparatively wealthy through the free market system at the end of 19th century and most of the 20th, did become welfare states in the 1970s. They experimented Socialist economy by increasing taxes, expanded government benefits, introduction of rigid labor market regulations and so on. The tax rates were so high that in some cases for example, the effective marginal tax exceeded 100 percent. Such adoption of tight economic and structural policies resulted in serious macroeconomic problems for the Nordic countries. Such as: -

·         Skyrocketed government debts.

·         High price inflation

·         Job creation rates plummeted

·         Very high unemployment rates

·         High trade and budget deficits

·         High fiscal imbalances

·         Some countries like Finland and Norway experienced a severe recession in the mid-1970s.

·         Repeated Devaluation of the currency's exchange rate to boost exports.

 

1980s - Did away with Socialism

In the 1970s, the Swedish Government instituted a scheme to confiscate corporate profits and hand them over to labour union. As discussed earlier, taxes were so high during 1970s which resulted in macroeconomic challenges. The socialist golden years of the next two decades weren't so golden for economic performance. Since then, the Scandinavian story has been a turn against Socialism. Taxes have fallen and markets liberalised. In the 1980s, a more market-based system with liberalisation and deregulation was also adopted in these countries which boosted development and the growth. By the mid-1980s all the Nordic economies had recovered and the economies boomed. Sweden was quick to learn from its Socialist experiment and implemented a series of reforms such as school choice, tax cuts, pension reforms and the abolition of taxes on inheritances and gifts. This is not exactly what you would expect from an allegedly "socialist" country. Today, Nordic countries are back to what made them prosperous - a free market driven economy.

 

 

Free markets, Economic Freedom and property rights

Many on the socialist left are critical of free markets. They are of the opinion that free markets make rich better off and the poor worse off. But the "left" also tends to ignore the fact that Nordic countries have free markets. Nordic countries favours business climate and this fact is supported by the "ease of doing business rankings"

According to ease of doing business ranks 2020 which are published by the world bank annually, all Nordic countries rank higher and are always in top 20. It measures areas like starting a business, trading across borders, protecting minority investors and so on. The ease of doing business rankings for 2020 (190 countries) are: -

·         Denmark 4^th

·         Norway 9th

·         Sweden 10^th

·         Hong Kong 3rd

·         Finland 20th

·         New Zealand- 1st

Whereas, Socialist countries like Cuba, Venezuela, Laos and etc rank very low in ease of doing business rankings.

Coming to the Economic freedom, the Nordic countries have one of the highest degrees of economic freedom. This fact is supported by the economic freedom index, released by the Fraser institute annually. Nordic countries always rank in top 30 in this list. Economic Freedom index for 2020 ranks these countries as-

·         Denmark - 8^th

·         Sweden - 22nd

·         Hong Kong- 2nd

·         Norway- 28th

·         Finland 20th

·         New Zealand - 3rd

Singapore tops the list. For good comparison and understanding, notice where South Korea (25th) and Japan (30th) ranks, both are generally considered as pro-free market economies.

Socialist countries do not rank higher on this index either and they normally take the bottom of the 180 countries ranked according to the Economic freedom of the World Index, According to the world bank, those economies that score well on doing business tend to benefit from higher levels of entrepreneurial activity and lower level of corruption. It seems obvious that there is a strong correlation between economic freedom and prosperity. The countries with greater economic, political and social development tend to be more happier, more prosperous and more egalitarian.

Economic freedom and the legal framework that enforces contracts and protects property rights is the starting point that triggers the virtuous cycle of economic growth. Economic freedom tends to more investments in human and physical capital which in turn results in higher productivity and ultimately higher wages and increases in GDP per capita.

Property rights

The property rights index measures the degree to which a country's laws protect private property rights and the degree to which its government enforces those laws. The index also assesses the chances that private poverty will be expropriated and analyzes the independence of judiciary, the existence of corruption within judiciary and so on. According to international property rights index 2019, Nordic countries rank as -

ü  Finland 1st

ü  Norway 8th

ü  Sweden 7th

ü  USA 12th

ü  Italy 46th

ü  Venezuela- 127th

ü  Denmark- 13th

ü  Germany -17th

ü  France 21st

The data shows that Scandinavian countries rank topmost in the private property rights index, somewhat more aggressively that "typical capitalist nations" like USA, UK, France, Germany and etc. This also means state has less control over private enterprise.

On the other hand most of the socialist nations rank lower in the private property index and in some cases data for Cuba and Lao PDR is not available. Less protection of private property ensures Government has excessive control over private enterprises.

Another example of Scandinavian commitment to free markets can be found in Sweden which has complete school choice program. The government provides families with vouchers for each child. These vouchers can be used to attend regular public schools or private for-profit schools. Clearly, the use of government funds to pay for private, for profit schools is the opposite of Socialism. Sweden has even privatized its social security program.

Hey! But what about Minimum wage?

 

None of the Scandinavian countries have Government mandated minimum wage laws. Unions are remarkably strong in many industries and they negotiate contracts but the government does nothing to ensure any particular outcome from those negotiations.

Instead, Nordic countries prefer to have a collective agreement between unions and employers as the reference point for wages, not one set by the government. In some cases, this has led to a very strong degree of cooperation between employers and workers. There is a balance in the level of compromise.

Of course, national minimum wage laws might bring the price of labor down and workers should be paid what they are worth of, not based on government's perception of what is fair.

They pay lots of taxes !!

As for the taxation system, Scandinavian citizens are compelled to endure heavy tax burdens.

Scandinavian governments are able to generate lots of revenue due to high-flat-taxes which further allows them to fund for the welfare programs like free healthcare and free higher education. But contrary to the socialist taxation system which is progressive in nature i.e. High income earners should be taxed exorbitantly high and low income earners should be taxed none. That's not the case with Nordic countries in which taxes are flat and poor and middle class takes the burden of taxes.

Scandinavian countries like Sweden places it's heaviest taxes on the middle and lower classes and all of the benefits they have such as universal health care and etc, comes from these steep taxes. In other words, they tax most people at these high rates, not just high-income taxpayers.

Tax burden is on the middle class According to the Foundation for economic education, Scandinavian tax rates are as following

·         For Sweden, national income tax rate is 25% whereas

·         Municipal income tax rate is 32%.

·         For Denmark, national income tax rate is 15% and

·         Municipal tax rate is 25%.

·         For Norway, income tax rate is 22% flat tax on general

income.

·         For Finland, national income tax rate is upto 31.25%.

They also have other taxes and taken together these taxes on personal income seems daunting. For poor people, the benefits may outweigh the costs but for the middle class, costs can outweigh the benefits of high taxes. So, it is not high-income earners who pay welfare state bill but the lower and middle classes via indirect taxes which are obviously more regressive than taxes on capital gains.

Its safe to conclude that Scandinavian countries are far away from socialist utopia that left leaning people usually believes in, rather Scandinavian economy is based on free market capitalist economy coupled with large welfare programs. Most of their success can also be attributed to their cultural values which resulted in great cooperation among people and there is high level of trust between government and the people. Leftists can appreciate Scandinavian economy as much as they want but its surely not a socialist utopia.