The Nordic Model - Embracing globalization and sharing risks

The financial deregulations in the late 1980s were badly
handled in terms of timing, sequencing and supporting policies,
and they were associated with a severe banking crisis in the early
1990s in Sweden and Finland, preceded by a milder crisis a decade
earlier in Denmark. By the mid-1990s, Sweden and Finland had
experienced the most severe slump since the 1930s with recordhigh
unemployment. Nevertheless, the liberalization of financial
markets must be seen as a key step in the development of the
market economy in the Nordic countries. It led to a rapid development
of financial markets with interest rates determined by the
market rather than administrative regulation, improved liquidity,
a broad variety of financing alternatives and investment outlets,
and better possibilities for managing risk.
There were certainly other important forces in addition to the
financial market developments. The deep crisis of the economy and
the prospect of membership in the European Union were, for Sweden
and Finland, instrumental in engineering a more general reassessment
of regulatory and other policies. In these circumstances
the Nordic countries increasingly took action to deregulate and
foster competition in previously regulated sectors of the economy,
such as energy and communication. Tax reform was undertaken
to broaden the tax base while lowering tax rates, the dual income
tax system was introduced, and capital taxation was changed to
enhance its neutrality with regard to financing and investment
alternatives. Macroeconomic policies were reoriented away
from discretionary action targeted to cyclical objectives towards
“norm-based” policies. Monetary policy assumed responsibility for
safeguarding price stability in the medium term, and fiscal policy
was increasingly geared to the sustainability of public finances in
the long run. Benefit levels and other aspects of the welfare state
were also the object of reconsideration and action, as discussed
below. Even the labour market, not particularly tightly regulated
in the first place, underwent changes in the form of moves towards
more decentralized wage bargaining.
The political decision-makers in the Nordic countries did
not opt with any enthusiasm for the process of liberalization. It
was not as if they would suddenly have come to appreciate the
virtues of the market mechanism, though the academic criti-
Financial liberalization,
the deep recession
and EU membership
engineered a
profound reorientation
of the strategy
of economic policies,
though not of the
ultimate goals
More market-friendly
policies have helped
the Nordics to cope
with new technologies
and globalization
34 · The Nordic Model