Changes in regulation, taxation, and increased state involvement had reduced the growth potential of the previously dynamic Swedish economy. As shown in the table above, the policy shift that occurred dramatically slowed down the growth rate. Sweden dropped to 13th place in the mids.
As late as Sweden was ranked as the fourth richest nation in the world. The policy shift that occurred dramatically slowed down the growth rate.
Norway has, thanks to enormous oil wealth, climbed in the rankings. Finland almost dropped out of the top 20 ranking during the mid s, until recovering to 14th place in This recovery coincided with long-term reforms towards more economic freedom. Denmark fell from seventh place to tenth place between and Three decades later, Denmark had regained its previous ranking, after an impressive array of market-oriented reforms. Of significant sized economies, only Japan, which has experienced decades of lost growth and has huge demographic problems, has come anywhere near to dropping so many places as Sweden.
It is interesting that the Left rarely discusses this calamitous Swedish growth performance from to , when promoting Swedish-style Third Way policies.
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In he explained:. During recent decades, Nordic nations have implemented major market liberalizations to compensate for the growth-inhibiting effects of taxes and labor market policies.
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Indeed, Denmark has even moved towards a flexible labor market. One reason for this change is that the countries have learned their lessons from the failures of socialism. Today few, even among the hard Left, openly point to the Nordic Third Way policies as a positive experience.
In the edition of the Economic Freedom of the World Index, Denmark was ranked as the 11th freest economy in the world, one place above the United States and two above the United Kingdom. Denmark stands out as having an unusually high tax share of GDP as well as uniquely market-friendly regulations. But opening up markets does not fully compensate for the effect of high taxation. Such policies affect the living standard of the average Dane. Therefore the private spending of the average Danish citizen dropped from being the sixth highest in the world in to being the 14th highest in Sweden experienced a fall from eighth to 16th place during the same period.
Even after the normalization of Nordic policies, the effects of high taxes and burdensome regulations on entrepreneurship are evident. One measure of high-impact entrepreneurship is the number of entrepreneurs who have earned a billion-dollar fortune by creating or expanding a business. We find that, in Scandinavian countries, the rate of high-impact entrepreneurship per capita is almost one-third that of countries with an Anglo-Saxon legal system. Political barriers have reduced the rate of successful firm creation in otherwise knowledge-intensive and innovative countries.
Sanandaji is a research fellow at the Centre for Policy Studies in London. His book Debunking Utopia will be published this summer. Taxes Targeting Business Owners Swedish economist Magnus Henrekson has concluded that the effective marginal tax rate marginal tax plus the effect of inflation that was levied on Swedish businesses at times reached more than percent of their profits. Sign up for our weekly emails.
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Journal for International Politics, public download scandinavian unexceptionalism culture, effectively. If one studies Nordic history and society in depth, however, it quickly becomes evident that the simplistic analysis is flawed. The experience in Sweden, Denmark, Finland and Norway could also easily be used to argue for the benefits of policies oriented towards free markets. It can also be used as a warning of the economic and social problems that can arise when government involvement in society becomes too large.
To understand the Nordic experience one must bear in mind that the large welfare state is not the only thing that sets these countries apart from the rest of the world. The countries also have homogeneous populations with non-governmental social institutions that are uniquely adapted to the modern world. High levels of trust, a strong work ethic, civic participation, social cohesion, individual responsibility and family values are long-standing features of Nordic society that predate the welfare state.
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These deeper social institutions explain why Sweden, Denmark and Norway could so quickly grow from impoverished nations to wealthy ones as industrialisation and the market economy were introduced in the late 19th century. The same norms explain why large welfare systems could be implemented in the midth century. A strong work ethic and high levels of trust made it possible to levy high taxes and offer generous benefits with limited risk of abuse and undesirable incentive effects.
It is important to stress that the direction of causality seems to be from cultures with strong social capital towards welfare states that have not had serious adverse consequences, and not the other way around. Also, cultural traits adapt slowly. It took time to build up the exceptionally high levels of social capital in Nordic cultures. And it took time for generous welfare models to begin undermining the countries' strong work ethic. Why do Nordic societies have unusually strong emphasis on individual responsibility and strong social capital?
Religion, climate and history all seem to have played a role in forming these unique cultures. Over a hundred years ago, German sociologist Max Weber observed that Protestant countries in northern Europe tended to have a higher living standard, more high-quality academic institutions and overall stronger social cohesion than Catholic and Orthodox countries.
Weber believed that the cause of the success of Protestant nations was to be found in a stronger 'Protestant work ethic' see, for example, Nelson According to Swedish scholar Assar Lindbeck, it has historically been difficult to survive as an agriculturalist without working exceptionally hard in the hostile Scandinavian environment. The population therefore out of necessity adopted a culture with a great emphasis on individual responsibility and hard work see, for example, Lindbeck , What is unique about Nordic nations is not only that they are cold, but also that throughout most of their recent history they have been dominated by independent farmers.
Most other parts of Europe had feudal systems, where much of the population were serfs who lacked private ownership of their land. With the exception of Denmark, feudalism did not manage to get the same grip in the Nordics. Many farmers have historically owned their own land in Scandinavia. Hard work has historically not only been a necessity in the cold north, but also been clearly rewarding due to the presence of widespread private ownership. The homogeneous Nordic countries have adopted cultures with strong social cohesion, resulting in the highest levels of trust in the world Delhy and Newton ; Berggren et al.
This is maintained when Scandinavians move abroad: among the US population those with Scandinavian origins have the highest levels of trust. Americans of Scandinavian descent even have slightly higher levels of trust than the populations of Scandinavian countries themselves Uslander ; Sanandaji a.
This suggests that the origin of the Nordic culture of success predates modern welfare states. After all, large-scale migration of Scandinavians to the US occurred during the late 19th century and the early 20th century, before the shift towards welfare state policies. High levels of trust, a strong work ethic and social cohesion are the perfect starting point for successful economies. They are also cornerstones of fruitful social democratic welfare policies — a pre-existing high level of social cohesion allows welfare states and high taxes to be implemented without the same impact on work habits as such policies might have in a different environment.
As argued below, however, welfare policies can affect culture in the long term.
Even the well-functioning societies in Nordic nations have with time been adversely impacted by welfare dependency and the impact of high taxation on incentives. The Nordic countries have not only introduced welfare states, but also experimented with socialism in the form of a planned economy. This is at least true of Sweden, which through its famous third-way policies attempted to achieve a form of 'market socialism'.
Third-way policies were, however, reversed and can be viewed as a short-lived and failed experiment. Throughout most of its modern history Sweden has had a favourable business environment.