The Nordic Model - Embracing globalization and sharing risks

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Private enterprise is all about profits – the public sector has to deal with much fuzzier objectives The public sector ends up with tasks that the private sector handles poorly the most basic government infrastructure and leave efficiency to market forces alone. At the other end is the extreme public interest view stating that any service that serves the public at large should be provided by the public sector. Our goal is to offer a balanced view based on insights from organizational economics as well as evidence on how a heavier reliance on private services have worked out in public sectors around the world. The basic premise must be that privately supplied and publicly supplied services each have their comparative advantages. They shift over time, which is why boundary questions have to be revisited continuously. The great strength of the private sector is its single-minded pursuit of profits – a clearly defined, easily measured objective that is very effective in providing incentives for efficient production and innovation. But profit maximization can also become a liability in environments where it is too narrow an objective. 1 The public sector’s comparative advantages are just the opposite. It has the capacity to consider broader objectives than profit maximization, but the imprecise nature of its objectives, translated into missions for its agencies and bureaus, makes it a much more challenging organization to run. To coordinate and direct its work force to achieve objectives that are much fuzzier than profit maximization, the public sector is forced to employ a much heavier layer of bureaucracy than private organizations (which can be quite bureaucratic, too). Also, the government’s need for public legitimacy and trust calls for procedures and rules that are unnecessary in the private sector, thanks to competition. Excessive bureaucracy and inertia are often seen as public sector diseases, but they appear more purposeful through the lens of organizational economics. Bureaucracy is a rational response to organizational problems that are more challenging for the public sector, because it operates without the performance feedback from competition and consumer choice. The differences in performance between the private and the public sector are also exacerbated by the way tasks get allocated between the two. The public sector tends to be handed tasks that the private sector does poorly, namely tasks that are hard-to-meas- The proper scope of the public sector · 135
ure. This selection bias alone will make public agencies appear operationally less efficient than private enterprises. These observations should not be taken as excuses for all inefficiencies in the public sector. The purpose is to caution against the belief that the public sector could be made internally more efficient simply by using stronger performance incentives and less bureaucracy. The ability to commit to weak performance incentives is often essential for handling some of the tasks that the public sector is charged with. The upshot is that the public sector is an expensive form of organization (measured by cost) and should be used only where its unique qualities – the ability to serve broader social goals – are especially valued. Consequently, the best route towards higher productivity of public services will much of the time come from leveraging the private sector using outsourcing, Private-Public- Partnerships (PPPs) and other hybrid forms of organization that exploit the benefits of competition without losing sight of the broader mission that is the rationale of having public services in the first place. Finding the right hybrids is not easy and will require trial and error – and patience. The discussion of the Danish Flexicurity model in Chapter 6 illustrates the point. It took a long time before the missing piece was found that made Flexicurity effective in reducing unemployment. Experimentation is a challenge for the government, because it does not have the competitive urge to innovate. In the public sector errors tend to get punished, while successes are less noticed. Understandably, there is also a lot of resistance within the public sector to reforms. To break these barriers requires political action and administrative initiative at the highest levels. The public sector is an expensive, but at times indispensable form of organization 8.1 THE VIRTUES OF COMPETITION It is useful to start by reviewing the virtues of competitive markets and the circumstances in which profit maximization leads to desirable social outcomes. Publicly provided services need to be considered only when competition does not work well. Free competition ensures that all mutually advantageous trades are carried out and no others, under the right conditions 136 · The Nordic Model
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The Nordic Model Embracing globaliz
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ETLA B232 ISBN 978-951-628-468-5 IS
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THE AUTHORS Torben M. Andersen is P
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CONTENTS PREFACE THE AUTHORS 1 INTR
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8.5 The future of public services -
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Globalization is primarily an oppor
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ices financed by taxes, which are h
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14, respectively, out of a total of
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are the effects of technical change
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- and, particularly, their effect o
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not contesting economic growth as t
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1.6 AN EFFECTIVE WAGE BARGAINING PR
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etter be tried in individual cases
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The scheme of the social contract c
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is worthy and realistic. But the de
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supportive interaction of openness
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The financial deregulations in the
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horizontal axis). These indices are
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does can nowadays be seen, in a bro
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employment increases in the public
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are not at the top of the league, t
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ENDNOTES 1 Wikipedia refers to popu
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consider employment and productivit
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from the mid-1980s. Finland has gra
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% 7 6 5 4 3 2 1 0 IT expenditure, %
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As technological change is to a sig
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3.3 SOCIAL EQUALITY Economic effici
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0.9 0.8 0.7 Net Fin Den 0.9 Composi
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ANNEX: GROWTH ACCOUNTING The Nordic
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sources of GDP growth in the EU15,
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11 These decompositions have been c
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4.1 THE WELFARE STATE AS A SOCIAL C
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The extent, coverage and quality of
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% % 80 80 60 60 40 20 0 OECD max Fi
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% 80 Total Old age % 80 60 60 40 40
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tem is seriously affected. Today, t
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Historically, however, the share of
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More children. Since the problem is
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Actually higher growth may make the
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dependency ratio driven by the baby
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82 · The Nordic Model
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Page 87 and 88: Table 5.1 Projections of public hea
Page 89 and 90: 5.4 AN EASY FIX - BRING SERVICES BA
Page 91 and 92: Box 5.1 Growth and the welfare stat
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Page 97 and 98: One may ask why this problem arises
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Page 105 and 106: ily policies that Nordic demographi
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Page 111 and 112: Table 6.2 The activity rate, aggreg
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Page 117 and 118: Box 6.2 What is the Danish “flexi
Page 119 and 120: ENDNOTES 1 In his history of the ec
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Page 123 and 124: 7.2 COORDINATION AND DECENTRALIZATI
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Page 127 and 128: ut not in any dramatic way (cf. fig
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Page 131 and 132: model stem from an age in which the
Page 133 and 134: mostly in the years 1980-2000. For
Page 135: Table 8.1 Government expenditure by
Page 139 and 140: that everyone gets their worth as m
Page 141 and 142: 8.3 THE CASE FOR GOVERNMENT PROVIDE
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Page 149 and 150: The demands for objectivity limit w
Page 151 and 152: assessed case by case. The importan
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Page 157 and 158: ENDNOTES 1 The private sector inclu
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Page 161 and 162: ment has a higher return when spent
Page 163 and 164: REFERENCES Adema, W. and Ladaique,
Page 165 and 166: Jonung, L. and Hagberg, T. (2005):
Page 167: Is there a Nordic model? What are t
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