Politicians from both right and left could learn from the Nordic countries
SMALLISH countries are often in the vanguard when it comes to reforming government. In the 1980s Britain was out in the lead, thanks to Thatcherism and privatisation. Tiny Singapore has long been a role model for many reformers. Now the Nordic countries are likely to assume a similar role.
That is partly because the four main Nordics—Sweden, Denmark, Norway and Finland—are doing rather well. If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking. The Nordics cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality. Development theorists have taken to calling successful modernisation “getting to Denmark”. Meanwhile a region that was once synonymous with do-it-yourself furniture and Abba has even become a cultural haven, home to “The Killing”, Noma and “Angry Birds”.
As our special report this week explains, some of this is down to lucky timing: the Nordics cleverly managed to have their debt crisis in the 1990s. But the second reason why the Nordic model is in vogue is more interesting. To politicians around the world—especially in the debt-ridden West—they offer a blueprint of how to reform the public sector, making the state far more efficient and responsive.
From Pippi Longstocking to private schools
The idea of lean Nordic government will come as a shock both to French leftists who dream of socialist Scandinavia and to American conservatives who fear that Barack Obama is bent on “Swedenisation”. They are out of date. In the 1970s and 1980s the Nordics were indeed tax-and-spend countries. Sweden’s public spending reached 67% of GDP in 1993. Astrid Lindgren, the inventor of Pippi Longstocking, was forced to pay more than 100% of her income in taxes. But tax-and-spend did not work: Sweden fell from being the fourth-richest country in the world in 1970 to the 14th in 1993.
Since then the Nordics have changed course—mainly to the right. Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%.
On public services the Nordics have been similarly pragmatic. So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.
All Western politicians claim to promote transparency and technology. The Nordics can do so with more justification than most. The performance of all schools and hospitals is measured. Governments are forced to operate in the harsh light of day: Sweden gives everyone access to official records. Politicians are vilified if they get off their bicycles and into official limousines. The home of Skype and Spotify is also a leader in e-government: you can pay your taxes with an SMS message.
This may sound like enhanced Thatcherism, but the Nordics also offer something for the progressive left by proving that it is possible to combine competitive capitalism with a large state: they employ 30% of their workforce in the public sector, compared with an OECD average of 15%. They are stout free-traders who resist the temptation to intervene even to protect iconic companies: Sweden let Saab go bankrupt and Volvo is now owned by China’s Geely. But they also focus on the long term—most obviously through Norway’s $600 billion sovereign-wealth fund—and they look for ways to temper capitalism’s harsher effects. Denmark, for instance, has a system of “flexicurity” that makes it easier for employers to sack people but provides support and training for the unemployed, and Finland organises venture-capital networks.
The sour part of the smorgasbord
The new Nordic model is not perfect. Public spending as a proportion of GDP in these countries is still higher than this newspaper would like, or indeed than will be sustainable. Their levels of taxation still encourage entrepreneurs to move abroad: London is full of clever young Swedes. Too many people—especially immigrants—live off benefits. The pressures that have forced their governments to cut spending, such as growing global competition, will force more change. The Nordics are bloated compared with Singapore, and they have not focused enough on means-testing benefits.
All the same, ever more countries should look to the Nordics. Western countries will hit the limits of big government, as Sweden did. When Angela Merkel worries that the European Union has 7% of the world’s population but half of its social spending, the Nordics are part of the answer. They also show that EU countries can be genuine economic successes. And as the Asians introduce welfare states they too will look to the Nordics: Norway is a particular focus of the Chinese.
The main lesson to learn from the Nordics is not ideological but practical. The state is popular not because it is big but because it works. A Swede pays tax more willingly than a Californian because he gets decent schools and free health care. The Nordics have pushed far-reaching reforms past unions and business lobbies. The proof is there. You can inject market mechanisms into the welfare state to sharpen its performance. You can put entitlement programmes on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and vested interests. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum. The world will be studying the Nordic model for years to come.
TWO years ago crowds of protesters in Tahrir Square persuaded Egypt’s army to take the side of the people and oust the dictator, Hosni Mubarak. The disruption that marked the second anniversary of the country’s revolution was of a far darker sort. On January 25th thousands demonstrating against President Muhammad Morsi and his Muslim Brotherhood clashed with the police in Cairo and other cities, leaving at least a dozen dead. Things worsened the next day, when at least 30 more people died in riots after a court in Port Said sentenced 21 people to death for their part in a football riot a year ago in which 72 fans had been killed. Mr Morsi imposed a month-long state of emergency in three of Egypt’s steamiest provinces, telling the army to take control (see article). The army chief’s loose talk of a state heading towards collapse fed rumours of unrest and disloyalty within the armed forces.
For the young, mostly secular, revolutionaries of Tahrir Square whom the West cheered on, things could hardly have gone worse. A little over a year ago the Islamist party that sprang out of the long-oppressed Muslim Brotherhood handsomely won a general election held in stages over several months; last June, with the Islamists still on top but already beginning to lose popularity, Mr Morsi narrowly won the presidency. Since then he has rushed through an Islamist-tinted constitution endorsed in a derisorily low turnout by only a fifth of eligible voters.
Mr Morsi has spent the past few months seeking to entrench his group’s power rather than building a consensus that might tackle Egypt’s most daunting problems. The country’s economy, as a result, is somewhere between paralysis and meltdown. Many of the 83m people in the Arab world’s most populous country are growing increasingly fearful and angry as their currency falls, prices rise and jobs get scarcer. He has insisted that the sitting upper house of parliament, which was elected by only a tenth of voters and had been seen by many as a talking shop, is the sole legitimate legislature, even as it writes rules empowering the Islamists, whose media spew forth sectarian hatred, claiming that anyone who rebukes them is an agent of foreign powers. The proceedings that led to the recent death sentences for the football hooligans were secretive. Meanwhile, not a single policeman has been jailed for killing any of the 800-odd people who lost their lives for protesting against Mr Mubarak’s dictatorship.
Hope to hold on to
A general election, already delayed, is scheduled for April. With Mr Morsi resorting to methods reminiscent of the old regime, the country could be torn further apart before then. The risk is that this surge of violence will tip Egypt into a new bout of revolution, or that the army, with or without Mr Morsi’s connivance, may reimpose a dictatorship.
Yet it is too soon to despair of Egypt’s future. The army, which has retained many of its privileges and powers under the new dispensation, has no wish to rule the country again; and it is both in Mr Morsi’s interests, and within his power, to govern by peaceful rather than violent means.
Instead of rushing to tighten their grip on power and demonise their opponents, the Brothers should grasp that legitimacy in democratic politics comes from inclusive rule and tolerance as well as from the ballot box. Mr Morsi should present himself as president of all Egyptians, whatever part they think Islam should play in public life. He should offer to revise the constitution’s most divisive parts and discuss altering the rules governing the coming election. He should begin to reform the police and the courts and appoint a genuinely independent public prosecutor rather than a Brotherhood stooge.
Above all, Mr Morsi should clinch a long-delayed deal with the IMF, which has promised a vital $4.8 billion in return for tough but crucial reforms, including the targeted removal of fuel subsidies. Economic reform, in turn, should prompt a surge of foreign investment. Indeed, Mr Morsi’s best hope of restoring the Islamists’ popularity is to revive Egypt’s miserably stalled economy.
The outside world can nudge him in the right direction. Although American military aid is a poor bargaining chip—its main purpose is to bind Egypt to its peace treaty with Israel—a threat by Europeans and others to withhold development aid could be a useful lever. But ultimately the foreigners’ clout is limited. The lesson of the past decade is that democracy cannot be forced down unwilling throats: only the Egyptians have the power to decide whether their country eventually fulfils the hopes of two years ago or reverts to darkness and violence. Mr Morsi has a heavy responsibility.
ON FEBRUARY 7th Mark Carney will appear before the Treasury Select Committee for his first formal grilling from British lawmakers since being named the next governor of the Bank of England. This will be an important moment. Mr Carney, hired away from the Bank of Canada, has recently given hints that he wants to shake up British monetary policy. He has talked about the need to stimulate an inert economy until it reaches “escape velocity”; he has said that a central bank might need to “tie its hands” by announcing thresholds to be reached before it reduces stimulus; and he has suggested that the level of nominal GDP—the cash value of output without adjusting for inflation—might be a better target than inflation alone. This willingness to think afresh is admirable. But Mr Carney must now connect the dots between his ideas.
At the moment the Bank of England’s mission, set by the chancellor of the exchequer, is to focus on an inflation target of 2%. That makes sense in normal circumstances. But with short-term interest rates at almost zero, the economy growing at barely 2% in nominal terms (and not at all if you factor in inflation) and many years of austerity ahead, it is worth temporarily reinterpreting that policy and focusing on nominal GDP. Our suggestion is that the bank, backed by the chancellor, George Osborne, should make clear that it will not tighten policy until nominal GDP, currently £1.5 trillion, gets to a level that is at least 10% higher than today.
When short-term interest rates are as low as they are now, central bankers can loosen monetary conditions in two ways. They can use unconventional tools, such as “quantitative easing” (printing money to buy bonds), to push down interest rates further along the yield curve. And they can guide people’s expectations of the future path of interest rates or inflation. If a central bank can credibly promise to keep monetary conditions loose even as the economy recovers and inflation accelerates, it will, in effect, reduce the real level of interest rates today, and so boost the economy.
The Bank of England has been willing to use unconventional tools. It was an early pioneer of quantitative easing; its more recent “funding for lending” scheme for banks is a clever way to bring down banks’ funding costs (and should be used to hit the nominal GDP target). But Britain’s central bank has been less successful at mapping its future policy path. The Bank has interpreted its 2% inflation target in a flexible way, keeping monetary conditions loose even as inflation has stayed higher. But it has not said how long such flexibility will last. Each time its interest-rate-setting committee meets, there is the possibility it will change its mind.
That is where the nominal GDP target comes in. By promising to keep monetary conditions loose until nominal GDP has risen by 10%, the Bank would provide certainty that interest rates will stay low even as the economy recovers. That will encourage investment and spending. At the same time an explicit target of 10% would set a limit to the looseness, preventing people’s expectations for inflation becoming permanently unhinged. It is an approach similar in spirit to the Federal Reserve’s recent commitment not to raise interest rates until America’s unemployment rate falls below 6.5%.
This is not a perfect answer. Critics point out that nominal GDP is hard to measure—and that no one knows exactly how big the shortfall in nominal GDP is, particularly since Britain’s productivity has plunged since the financial crisis. Against that, a 10% increase is a fairly conservative and clear target. Adopting it would be better for the Bank’s credibility than repeatedly missing the inflation target.
Another worry is that all the growth would come through inflation. Sterling would fall, so imports would become pricier. Asset prices might bubble up, though Mr Carney could use other tools to cool them, such as limiting mortgage lending. There is in fact little risk of an unwanted boom. All this will take place as public spending is squeezed and Britain’s main trading partners in the euro zone are likely to be struggling.
The last problem is Mr Osborne. A temporary nominal-GDP target needs his explicit support. He should give it, because against a background of tight fiscal policy, monetary policy is the best macroeconomic lever that Britain has.