The Nordic Model - Embracing globalization and sharing risks

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9 GUIDELINES FOR REFORM Our purpose is to identify challenges, discuss trade-offs, reject false solutions and indicate directions for reform The purpose of this report is not to praise the Nordic model, even though we find that it has important strengths and has performed reasonably well. Nor is the purpose to preach doom and gloom unless a specific set of policy recommendations is implemented. The ambition is more modest but no less useful: · to identify and explain the nature of some main challenges faced by the Nordic countries (along with other countries) and to shed light on the trade-offs involved; · to explain why many of the “solutions” suggested in public debate are based on erroneous reasoning or are unrealistic; and · to indicate directions or areas in which new thinking and policy reforms are called for in the Nordic countries, and notably in Finland. In other words, the report assesses the need and directions for reform so as to safeguard the key features of the Nordic model in the face of new challenges – notably those of the demographic transition. By the key features we refer to openness to globalization and risk sharing. Broadly stated, we believe that reform should build on the strengths of the model and focus on proposals that improve work incentives while maintaining the essential elements of collective risk sharing. Guidelines for reform · 157
The biggest hurdle to overcome for policy reform is neither the lack of options for addressing the problems, nor some intrinsic fault of the Nordic model itself. The biggest difficulty is our complacency – understandable enough in the light of past successes. Economic developments have been favourable for many years. Also, the problems associated with ageing populations will materialize fully only after a time interval measured in decades rather than years. It is extremely difficult to engineer the political will for courageous actions that address problems which are not acute, but far in the future – and yet, one generation is a short time span for society and its welfare policies. The virtue of the Nordic model is its ability to reconcile risks and uncertainties with openness and the market economy. This unique “third way” of the Nordics has two tracks: an open and well-functioning market economy, combined with a large public sector that has wide ranging responsibilities. However, globalization, a rapidly ageing population and the Nordic welfare state is a challenging triangle. What has worked well in the past, is unlikely to be good enough in the future. There are at least three areas that call for new thinking and decisive reforms. First, the changing demographics underline the need to reduce benefit dependency and raise employment rates: · the young should start their working careers earlier; the average time spent in tertiary education is excessively long (e.g., tuition fees might be helpful); · changes in labour demand require educational institutions to adjust and call for an enhanced role for employers in designing on-the-job training schemes; also, specific programmes and effective workfare elements can be used to prevent e.g. school dropouts and immigrants from becoming marginalized; · pension and tax policies should encourage the elderly to prolong their working careers through weaker incentives for early retirement, by indexing the pension system to longevity, and by offering a more favourable treatment for the wage income of working pensioners; The biggest hurdle to reform is complacency The Nordics have their own version of the “third way” Globalization, an ageing population and a large welfare state: a demanding triangle Reduce benefit dependency and work more 158 · 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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to handle much bigger fields today,
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Table 5.1 Projections of public hea
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5.4 AN EASY FIX - BRING SERVICES BA
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Box 5.1 Growth and the welfare stat
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it implies that the long-run defici
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The level of taxation is already hi
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One may ask why this problem arises
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globalization may contribute to bot
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able to pay to seek private solutio
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102 · The Nordic Model
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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
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Page 135 and 136: Table 8.1 Government expenditure by
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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: ENDNOTES 1 The private sector inclu
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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