Sweden, Norway, Finland and Denmark (collectively the Nordic countries) have a combination of high living standards and low income disparity that has captured the world’s attention. At a time when the growing gap between the rich and poor has become a political hot button in developed nations, the region known as Scandinavia has been cited by many scholars as a role model for economic opportunity and equality.

The Nordic Model

The Nordic model is a term coined to capture the unique combination of free market capitalism and social benefits that have given rise to a society that enjoys a host of top-quality services, including free education and free healthcare, as well as generous, guaranteed pension payments for retirees. These benefits are funded by taxpayers and administered by the government for the benefit of all citizens. The citizens have a high degree of trust in their government and a history of working together to reach compromises and address societal challenges through democratic processes. Their policy makers have chosen a mixed economic system that reduces the gap between the rich and the poor through redistributive taxation and a robust public sector while preserving the benefits of capitalism.

The model is underpinned by a capitalist economy that encourages creative destruction. While the laws make it is easy for companies to shed workers and implement transformative business models, employees are supported by generous social welfare programs. The nation’s tax structure is based on individual rather than household income, coupled with a flat-tax. The result is a system that treats all citizens equally and encourages workforce participation. Gender equality is hallmark trait of the culture that not only results in a high degree of workplace participation by women but also a high level of parental engagement by men.

History Helps

What makes the Nordic model work? A combination of shared history and societal development are credited with much of its success. Unlike areas that developed around the formation of large corporate-owned farms, the history of Scandinavia is largely one of family-driven agriculture. The result is a nation of small entrepreneurial enterprises directed by citizens facing the same set of challenges. Solutions that benefit one member of the society are likely to benefit all members. This collective mentality results in a citizenry that trust its government because the government is led by citizens seeking to create programs that benefit everyone. Accordingly, the citizens willingly chose to pay higher taxes in exchange for benefits that they and their family members will get to enjoy. The result is publicly funded services, such as healthcare and education that are of such high quality that private enterprise has no reason to offer these services or room to improve them. This mindset remained intact as capitalist enterprises developed.

Challenges

The Nordic model faces some notable pressures to its sustainability. Two of the largest concerns are an aging population and influx of immigrants. In terms of an aging population, a large base of young taxpayers and a smaller population of older residents receiving services is the ideal scenario. As the population balance shifts the other way, benefit reductions are a likely outcome. Fortunately for their citizens, the Nordic nations have willingly chosen a path of greater equality for all citizens and have demonstrated an ability to work through their political differences for the greater good of all.

In terms of immigration, Scandinavia attracts a notable influx of newcomers seeking to enjoy the generous public benefits. These new arrivals often come from nations that do not have a long, shared history of making decisions on behalf of the common good. While native Scandinavians tend to have a high degree of participation in the workforce as part of their collective decision to support the amenities their society offers, immigrants do not always share this vision. These new arrivals present a significant burden to the system and could, ultimately, result in its demise. (For more, see: How Globalization Affects Developed Countries)

Two other concerns include native citizens taking advantage of the generous benefits system and the impact of poor global economic conditions. Again, the culture of cooperation and shared interest in a strong social safety net has enabled these countries to adjust their benefit programs and continue to deliver a wide range of services even in the aftermath of the Great Recession.

A Model for Other Nations?

The Nordic model has attracted a significant amount of attention from other nations. Many wonder if it provides a template for smaller countries where citizens are more homogeneous in terms of their opinions and experiences yet live in poverty or repression as a result of Marxist government policies. Others believe it provides a template for reforming the unchecked capitalism that has created notable income inequality and dramatic differences between the quality of life between the rich and the poor in prosperous nations. Sitting between the controlled economy of Marxist regimes and unchecked capitalism at the other end of the spectrum, the Nordic model is sometimes referred to as “the third way.”

Politics and Controversy

The Nordic model has created quite a bit of controversy outside of Scandinavia, Many people in countries operating under what is often referred to as “the American model” of capitalistic enterprise see the Nordic model as an attractive alternative to the winner-take-all brand of capitalism that has resulted in poverty, a lack of affordable quality health care and education, a deteriorating social safety net, a lack of retirement security, massive scandals in the financial markets and tremendous income disparity. They point out that public services, such as education and government run programs in America are of poor quality and that the rich have access to far better resources than the poor and that implementation of the Nordic model could solve these issues.

Opponents of the Nordic model criticize the high taxes, high degree of government intervention and relatively low gross domestic product and productivity, noting that these all limit economic growth. They point out that the Nordic Model redistributes assets, limits the amount of money available for personal spending and consumption and encourages reliance on government subsidized programs.

The Bottom Line

The unwillingness of Marxists governments to make changes is likely to mean that philosophical discussions about implementation of the Nordic model will remain just that: discussions. The inability of developed nations to move beyond vitriolic political rhetoric coupled with their lack of shared culture due to geographically and ethnically diverse populations that lack shared experiences will similarly serve as barriers to implementation of the Nordic model in those countries.

In any event, while outsiders argue vigorously in favor of social democracy or against so-called welfare states, the Scandinavians themselves make no effort at all to induce or coerce other nations into adopting the Nordic model. Rather, they seem content to work through their problems together in a collective manner that consistently results in placing them at the pinnacle of global surveys of the happiest people in the world.

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