The Nordic Model - Embracing globalization and sharing risks

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clothes, shelter etc.) are provided for, more attention is given to the satisfaction of other needs. Economists term this the “Wagner effect”, referring to a shift in demand alongside improvements in material living standards. The quality and extent of public service provisions are not given once and for all but follow other trends in society. Public services are expected to meet rising standards. Again, the basic mechanism is present whether provision is private or public. Increases in demand are seen over a wide spectrum. Standards have increased for many privately provided services, and the same is happening for publicly provided services. 1 Advances in medical science make possible new and more costly treatments and medicines, which voters and politicians will want to make widely available The costs for health care and long-term care will increase significantly as a share of GDP – and could double by 2050 Health care – a particular challenge Health care is an important part of the publicly provided services, and an important area where the cost and demand effects outlined above are having significant consequences. Equally important is the fact that the opportunity frontier changes, thereby creating new treatment possibilities and hence new demands. This is particularly the case for health care, where we fortunately see significant advances in medical science. While these advances make some forms of treatments much easier and thus cheaper, they also shift the opportunity frontier and allow new and better treatments for diseases for which no treatments were earlier available. These advances bring important improvements in welfare, but they also create pressure on the health system to make the new (and more expensive) treatments and medicines widely accessible. The effects of these tendencies are basically an empirical question, and the outcome will reflect both technical and organizational/political mechanisms. One issue is the scope for actually improving efficiency and productivity in the provision of welfare services. Another important consideration relates to how increasing demands should be accommodated. In any case, the Baumol and Wagner effects pose difficult challenges for the Nordic model, given its ambition to provide welfare services at a level which meets the needs and requirements of a large part of the population. To illustrate this issue, table 5.1 reports the outcome from a recent OECD study of the challenges facing the health care systems in different countries, taking into account the effects discussed above. In the OECD analysis the new medical techniques Welfare services: rising costs and increasing demand · 85
Table 5.1 Projections of public health and long-term care spending as per cent of GDP, 2005 and 2050 Health care Long-term care Total 2005 2050 2050 2005 2050 2050 2005 2050 2050 Cost Cost Cost Cost Cost Cost pressure containment pressure containment pressure containment Denmark 5.3 8.8 7.0 2.6 4.1 3.3 7.9 12.9 10.3 Finland 3.4 7.0 5.2 2.9 5.2 4.2 6.2 12.2 10.3 Norway 7.3 10.7 8.9 2.6 4.3 3.5 9.9 15.0 12.4 Sweden 5.3 8.5 6.7 3.3 4.3 3.4 8.6 12.9 10.1 OECD 5.7 9.6 7.7 1.1 3.3 2.4 6.7 12.8 10.1 Source: Projecting OECD Health and Long-term care expenditures: What are the main drivers, OECD Economics Department Working Paper 477, 2006. and treatments as well as the relative cost increases are in focus, while the assumption on the income effect on service demand is moderate. The table present two scenarios: “cost pressure” refers to the case where treatment costs rise more rapidly than income, while in the “cost containment” case this rise is assumed to moderate over time. 2 The message of the table is clear. The rise of expenditure is significant for both health and long-term care even in the optimistic scenario, in which cost containment is assumed. For Finland there is an increase in spending from currently 6.2 per cent of GDP to 10.3 per cent – and if costs cannot be contained there will be a doubling. The key point is that the service challenge for public finances is caused by the combination of the cost (Baumol) and demand (Wagner) effect. More is wanted of services at the same time as they are becoming relatively more expensive to provide. The reason why it is more difficult to address this problem for publicly than for privately provided services is the difference in the way in which demand and supply are brought into balance. For privately produced services it is a matter for the individuals themselves to decide whether they want to spend a larger share of their income on these services or not. For public services the choice is much less clear to the citizens since the services are provided free (or at a heavily subsidized price), and hence policy makers are left with 86 · 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
Page 35 and 36: The financial deregulations in the
Page 37 and 38: horizontal axis). These indices are
Page 39 and 40: does can nowadays be seen, in a bro
Page 41 and 42: employment increases in the public
Page 43 and 44: are not at the top of the league, t
Page 45 and 46: ENDNOTES 1 Wikipedia refers to popu
Page 47 and 48: consider employment and productivit
Page 49 and 50: from the mid-1980s. Finland has gra
Page 51 and 52: % 7 6 5 4 3 2 1 0 IT expenditure, %
Page 53 and 54: As technological change is to a sig
Page 55 and 56: 3.3 SOCIAL EQUALITY Economic effici
Page 57 and 58: 0.9 0.8 0.7 Net Fin Den 0.9 Composi
Page 59 and 60: ANNEX: GROWTH ACCOUNTING The Nordic
Page 61 and 62: sources of GDP growth in the EU15,
Page 63 and 64: 11 These decompositions have been c
Page 65 and 66: 4.1 THE WELFARE STATE AS A SOCIAL C
Page 67 and 68: The extent, coverage and quality of
Page 69 and 70: % % 80 80 60 60 40 20 0 OECD max Fi
Page 71 and 72: % 80 Total Old age % 80 60 60 40 40
Page 73 and 74: tem is seriously affected. Today, t
Page 75 and 76: Historically, however, the share of
Page 77 and 78: More children. Since the problem is
Page 79 and 80: Actually higher growth may make the
Page 81 and 82: dependency ratio driven by the baby
Page 83 and 84: 82 · The Nordic Model
Page 85: to handle much bigger fields today,
Page 89 and 90: 5.4 AN EASY FIX - BRING SERVICES BA
Page 91 and 92: Box 5.1 Growth and the welfare stat
Page 93 and 94: it implies that the long-run defici
Page 95 and 96: The level of taxation is already hi
Page 97 and 98: One may ask why this problem arises
Page 99 and 100: globalization may contribute to bot
Page 101 and 102: able to pay to seek private solutio
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Page 105 and 106: ily policies that Nordic demographi
Page 107 and 108: absolute and relative terms than hi
Page 109 and 110: in the participation decision of th
Page 111 and 112: Table 6.2 The activity rate, aggreg
Page 113 and 114: Thus, responsible unions should res
Page 115 and 116: als take part in various unemployme
Page 117 and 118: Box 6.2 What is the Danish “flexi
Page 119 and 120: ENDNOTES 1 In his history of the ec
Page 121 and 122: particularly noteworthy in a euro a
Page 123 and 124: 7.2 COORDINATION AND DECENTRALIZATI
Page 125 and 126: also depends on the business cycle.
Page 127 and 128: ut not in any dramatic way (cf. fig
Page 129 and 130: displays higher nominal rigidity th
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 and 136: Table 8.1 Government expenditure by
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ure. This selection bias alone will
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that everyone gets their worth as m
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8.3 THE CASE FOR GOVERNMENT PROVIDE
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maximizing firms tend to focus exce
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than zero based budgeting) are impe
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sectors, place at or above the medi
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The demands for objectivity limit w
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assessed case by case. The importan
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c. Vouchers Vouchers are issued by
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mechanically in the political debat
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ENDNOTES 1 The private sector inclu
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The biggest hurdle to overcome for
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ment has a higher return when spent
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REFERENCES Adema, W. and Ladaique,
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Jonung, L. and Hagberg, T. (2005):
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Is there a Nordic model? What are t
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