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Myths and realities of the Nordic welfare state

Myths and realities of the Nordic welfare state •

by Stefan Hedlund

The Nordic countries have a reputation as pioneers of the welfare state. They routinely top quality of life rankings – including markers like per capita income, healthcare, education and absence of corruption.

In the Nordic states’ formative years, a strong tradition of social democracy promoted remarkably high levels of trust in government. Governments stood back and allowed employer associations and labor unions to determine labor market development via collective bargaining.

The strength of that legacy is such that the Nordics now take a very dim view of the European Union’s ambitions to introduce a “social pillar” of rights for EU citizens. The proposal on minimum wages is viewed as an especially odious form of interference in matters that have traditionally been solved with domestic negotiations.

Many outside observers are eager to learn from the Nordic states. A case in point is the long-standing obsession of American liberals with evoking the region’s welfare state for domestic policy purposes. Such wishful projections have often been wide off the mark, and it is often unclear whether they refer to the Nordics, to Scandinavia or to Sweden. 

Despite what liberals like Senator Bernie Sanders believe, learning from the success of others cannot be reduced to copy-paste policies. But even more troublesome is the fact that, in Nordic countries, the ideals and visions presently held up for American audiences have long been altered and even partly dissolved. The neoliberal wave that began in the 1980s, and the subsequent worship of “new public management,” have caused the traditional welfare state to be transformed beyond recognition. 

In fact, there are currently discrepancies both in practical policy and governance norms between Nordic states. In some aspects, Denmark and Sweden are at opposing ends of the spectrum. Given that the two share a common linguistic, cultural and political heritage, their recent divergence in performance is easily attributable to their different policy priorities.

 

Welfare-industrial complex

The Danish government is narrowly focused on providing welfare for its citizens by introducing reforms that enhance the performance of the labor market and systems of welfare provision. Meanwhile, the Swedish government seeks to compensate for politically irreparable malfunctions in those systems by farming out government responsibilities to a host of private actors.

The Swedish strategy should not be confused with potentially beneficial privatization. Taxpayer-funded private actors are allowed to capture rents created by political restrictions and rigidities deemed impossible to remove, creating a deadweight loss for society. The government is captured by powerful vested interests that jointly make up what some refer to as the “welfare-industrial complex.”

The flagship of the Danish model is its widely acclaimed system of promoting labor market flexibility. Known as “flexicurity,” it offers employers legal latitude in hiring and firing without running the risk of litigation. Employees are, in return, offered to join unemployment insurance funds, which may provide benefits for periods of up to two years. And the government assumes responsibility for education and retraining programs to ensure that those who are laid off return to work as quickly as possible.

The “flexicurity” system supports business development and job creation by allowing employers to take risks in making employment decisions. It also supports employees in their personal career development by reducing the trauma that might otherwise be associated with losing a job. It is symptomatic and beneficial that about a quarter of all Danes who work in the private sector change jobs every year.

The Swedish model stands in sharp contrast to the Danish one. Its restrictive labor market legislation prevents mobility and adaptation. Instead of reforming the system to promote flexibility and job creation, governments (left and right) have engaged in lavishly funded schemes to artificially generate employment needs. 

Some schemes include private “job coaching” agencies designed to help the unemployed match their skills to available jobs and write suitable resumes. While such initiatives have helped lower potentially embarrassing unemployment statistics, they have been of dubious value to the system. Many report that the services offered are ineffectual at best. The main beneficiaries have been unscrupulous actors in the “welfare-industrial complex.”  

Large numbers of asylum seekers with poor integration prospects have led private actors to come up with inventive schemes to feed off government expenditure. Recent scandals have also shown how easily criminal organizations can perpetrate large-scale benefit frauds in such a system.

The most egregious case involved setting up private companies (several registered) to provide personal assistance to people with disabilities. Disabled people were “imported” from the owner’s home country. They applied for assistance, and then work visas were issued to other individuals from the same country so they could provide said assistance. When caught, perpetrators often continue to perform the same “services” under a different company.

Denmark also markedly differs from Sweden in its commitment to welfare nationalism. There is a broad political consensus in Denmark that the resident population should be the primary beneficiary of the welfare system. Immigrants have to qualify for rights to benefits, which can be a lengthy process. New arrivals face strict rules. Financial support is minimal, and those who arrive to seek asylum have to give up any financial resource they bring with them, including jewelry.

Sweden, in stark contrast, is committed to extreme welfare internationalism. Claiming that a person’s place of birth must not determine the right to social benefits, powerful political activists in government have produced legislation to ensure that new migrants are given equal access to social welfare benefits. A newly arrived Somali farmer has the same right to welfare as a Swedish metal worker who has contributed to the system for decades.

Immigrants are provided with lavish benefits and pensions on arrival for those in the right age bracket. These measures drain the state budget and threaten the longer-term viability of the pension system. They have also led to extreme political polarization and eroded trust in the government, including willingness to pay high taxes. 

The third and most fundamental dimension where the two countries differ is their respective commitments to upholding the basics of the social contract, such as healthcare, personal security and opportunities for human capital development. While Danes regularly give their government high scores on such services, the Swedish system appears to be going downhill.

Rapid erosion in the quality of Swedish healthcare, along with an explosion in gangland violence, has prompted a growing segment of the population to purchase private health insurance and security solutions, like gated communities. And a deep crisis in the national education system raises doubts about the country’s future as a successful participant in the global knowledge economy.

 

Scenarios

Two different scenarios for the welfare state are likely to develop in parallel. Denmark is looking at a future marked by social cohesion and stability, high economic growth rates and high human capital achievement, coupled with low rates of crime and minimal integration problems. Sweden faces the opposite. 

Deeply rooted rigidities in the Swedish labor and housing market make it more difficult to handle large numbers of new arrivals – often attracted by the promise of instant welfare provisions. Individuals who fail to integrate become easy prey for organized crime, which then overwhelms law enforcement and enhances feelings of state desertion.

Sweden is now sliding far behind its Nordic neighbors. This is made all the more striking by the country’s economic head start in building its welfare system. First, it had reaped the benefits of staying out of World War II. Then it also benefited from European postwar reconstruction, which generated massive demand for its basic industries.

The situation highlights the fundamental link that must exist between the welfare state and the nation-state. Successive Danish governments have demonstrated that the national welfare state may be reformed and adapted to thrive under conditions of globalization and high mobility.

In contrast, one Swedish government after the other has opted for transnational welfare. This choice has earned them the warm glow that comes with being a self-proclaimed “moral superpower,” but it also poses a threat to the country. With a dysfunctional system, Swedes will find it increasingly difficult to raise taxes to finance welfare.

Stefan Hedlund is Professor and Research Director at the Centre for Russian and Eurasian Studies, at Uppsala University, Sweden.

Source: GIS Reports

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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