The Nordic Model - Embracing globalization and sharing risks

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Does the welfare state undermine individual and family responsibility? and what should be left to individual responsibilities. Public arrangements may have the consequence that individuals provide too little effort on their own part and have excessive expectations concerning what society can or should do to solve their problems. There is also a need to consider other aspects related to gender equality, family values and the socialization process when pondering whether certain activities should be within the family, the market or the public sector. The point here is only that the basic financial problem related to public service provision is not solved by shifting it back to the private sphere. 5.5 COMBINING THE SERVICE AND DEMOGRAPHIC CHALLENGES The two challenges that we have considered – demographics and services – have different sources, but the problems are magnified by the fact that they both appear simultaneously. To assess the orders of magnitude of the overall challenge, let us return to the projection of public finances set out in chapter 4 above (in figure 4.7, reproduced in figure 5.2). The baseline in figure 5.2 basically shows the effects of changing demographics on public finances (revenue less expenditures). Let us modify the baseline by two additional scenarios: (A) First, assume an increase in the overall growth in productivity by 0.5 percentage points per annum starting in 2005 and continuing up until 2050. As in box 5.1, it is assumed that the increase in productivity growth concerns only the private sector but not the provision of welfare services (the “Baumol” hypothesis). (B) Assume, in addition to the better productivity development, that the volume growth of welfare services is 0.25 percentage points higher. This reflects our version of the “Wagner law”, according to which increasing income raises demand also for welfare services. The results of these two scenarios are set out in figure 5.2. Scenario A is seen to make the budget deterioration less fast and Welfare services: rising costs and increasing demand · 89
Box 5.1 Growth and the welfare state It is argued in chapter 4 that growth is not a solution to the demographic challenge and in this chapter that growth may actually worsen the financial problems. These points are crucial and they are often neglected or not understood in policy debates. This box brings out the basic arguments underlying these statements. Before explaining the effect of general growth (productivity increases) on public finances it should be noted what we are not saying. We are not contesting the importance of achieving strong economic growth, which is indeed the key to higher living standards in the future. Also, we are not discussing how the growth rate of the economy could be raised – which is clearly a complicated issue (discussed in chapter 3). Instead, we are just saying that economic growth, however desirable it may be for other reasons, is unlikely to resolve the financial dilemma of the welfare state that we see looming in coming decades. Consider a situation where growth is driven by a higher rate of growth of productivity in the production of goods, while productivity is unchanged in the provi- Figure 5.1 The welfare state and the growth dilemma Budgetary effects of an increase in the growth of private sector productivity Rise in tax revenues A Bigger tax base B Increase in public wage bill Rise in all wages C Increase in public transfers Distributional constraint Increase in D provision of welfare services Higher incomes and higher demands 0 Budget deterioration Budget improvement 90 · 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
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 and 86: to handle much bigger fields today,
Page 87 and 88: Table 5.1 Projections of public hea
Page 89: 5.4 AN EASY FIX - BRING SERVICES BA
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
Page 137 and 138: ure. This selection bias alone will
Page 139 and 140: 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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