Sunday, February 25, 2007

SLOVENIA IS NOT SCANDINAVIA

In Slovenia, the myths about Scandinavia are widespread and largely exist in various fields of academics, politics and social life. The essence of the myths is carefully hidden behind the rethorics of politicians who repeatedly try to adjust the economic and structural policy to the course of the features of Scandinavian countries; Sweden, Denmark and Finland are the most frequently cited countries in this particular case.

What Slovenian politicians imagine under the term of Scandinavia is an exploding full-fledged welfare spending and high tax rates on corporate and individual income. There upon, Scandinavia is used to be given as an example of "social justice" exercised through the vast redistribution of wealth and income.

In our high school textbook on economics, Sweden's image is described in the following way:
"In our country the social security is high. That gives people a good sense of safety. As well as child-care, education and health care are free of charge. Scholars, pupils and students get scholarship and free textbooks. Unemployed receive unemployment support and the government integrates them into public work. On the other side, salaries and wages are relatively low and luxury goods are very expensive."

What works in Scandinavia may not actually work somewhere else. Scandinavian societies are largely homogenous while in Slovenia homogeneous society is non-existable respectively. Trying to copy the Swedish model in a way that copying imposes the most turbulent and economically illogical features, may result in the loss of economic growth and in the increase of spending. In supply-side approach, there're seven killers of economic growth and job creation; excessive government spending and high tax rates are the foremost dangerous features which undermine the economic performance and especially growth potentials of the economy itself.

Slovenian politicians, poisoned with the socialistic influx, have oriented their policy proposal in exactly the same way that involves copying Nordic problems instead of solutions. In the field of labor market, Slovenian dominantly left-leaning politicians have instituted rigid rules that hamper the growth of employment. Tax rates on individual income is still strongly progressive despite being recently reduced from top 50 percent tax rate on individual income to 41 percent. Unemployment benefits schemes have been copied from Sweden. Thus, trade unions and collective bargaining coupled with commonly high tax rates present a major obstacle for a dynamic labor market. Therefore, additional unemployment benefits further instituted a preference of not looking for a job and rather remain unemployed meanwhile receiving a substantial unemployment support and similar benefits.

As trade unions limit the supply of labor, employers are forced to adjust the employment dynamics to an evenly lower level. Consequently, this means that the accumulation of human capital becomes less attractive as high tax rates prevent employers from employing the most productive and prosperous individuals who can rapidly improve the level of competitiveness, innovation and productivity in the business sector as well as they in every way largely contribute to the improvement of welfare standards. It is said that minimum wage is a kind of necessary subsidy for the individuals with low incomes. As empirical evidence and some applied research show, minimum wage means that there is an instituted wage below which employers are not allowed to hire workers.

If there is a perspective field of work where wages usually start at a lower level and where the growth potentials are skyrocketing, then a minimum wage causes quite the opposite effect from its intention. It prevents employers from hiring workers and destimulates individuals from looking for a job they want and thus being unemployed and receiving unemployment subsidy again become more attractive. Minimum wage is thus a gateway to unemployment as it makes hiring and firing very costly. Sweden has no minimum wage but collective bargaining is so strong that the effect of its impact is nearly similar to minimum wage laws. In comparision with Denmark, Slovenian labor market is marred by unflexible employment regulation and government involvement. In Slovenia, the rate of employers' contribution for the financing of the insurance and health care system is very high. Non-salary costs of employment are among the highest in Europe.

The question that matters is how Nordic countries became rich and what kind of sets of solutions the policies of Nordic policymakers include.

Transparency International reports that cases of corruption in Scandinavia are hardly ever seen. In Slovenia, corruption is widespread among the judiciary and in the legal system while in business sector where the government ownership of bigger companies is substantial, the level of corruption is lower than in the legal system, despite still being high. In every Nordic country, freedom of doing business and the business framework are of the high quality. According to Index of Economic Freedom, the level of business freedom in Scandinavia varies between 90 and 95 percent. In Slovenia, the level of business freedom is 74,2 percent.

Financial markets in Scandinavia are highly liquid and flexible as they offer numerous incentives and high quality products to growth companies. Icelandic stock exchange is due to the size quite similar to Slovenian stock market but contrary to Slovenian stock market, ICEX is highly active and dynamic and greatly supported by an international participation which boosts growth potential and substantially contributes to the growth of returns on investment. The result of liquid and dynamic financial market, the creation of Icelandic multinationals such as Actavis, grew significantly. In Slovenia, the financial market is highly concentrated and pillared as the government owns a majority share in Slovenia's three largest banks. According to the abovementioned index, Slovenia's rate of financial freedom is only 50 percent, slightly beyond the world average.

When Swedish economy was recovering from economic depression in the very late 80s and in the beginning of early 90s, the government successfully deregulated several sector of economy. Private health-care scheme were allowed and tax rates on individual and corporate income dropped. Swedish policymakers successfully reformed the pension system as well, reducing ageing risk and supporting the creation of private retirement funds completely independent from public schemes of government-supported retirement funds. In the business sector, Swedish business environment is known for a high quality management of big companies with good strategic grounding, flexibly adjusted models of decision making, not least with global strategies and innovation product market.

Denmark enjoys a worldwide reputation for a flexible labor market. Employment regulations do not hamper the productivity growth and index of difficult of hiring and firing is relatively easy with a minimal tax burden compared to labor markets in other countries. Finland opened itself to globalization and its students are ranked 1st on the scale of PISA. Iceland is known for an incredible entrepreneurial miracle since the economy achieved tremendous economic growth rates in the world. Three largest Icelandic banks are among 15 largest Nordic banks. Actavis, Iceland's biggest pharmaceutical company succeeded in Southern Europe with an innovative product and marketing strategy despite not being chosen to acquire Croatia's largest pharmaceutical company Pliva.

If Slovenian policymakers really want to copy the Nordic model then they should focus on finding the right set of solutions and features that made Nordic countries rich. In concrete terms, the Ministry of Education could abolish the licencing of textbooks and thus enable parents and students greater choice. Current system is vastly favorable to bureaucrats who seek rents away from the market. Denmark is known for a great degree of tolerance and personal liberty.

In Slovenia, sexual freedom is legally codified far away from having a respect for an individual self-ownership. Marihuana is still criminalized as well as euthanasia is prohibited. Slovenian policymakers have still not legalized the prostitution. Therefore, they prevent individuals from being free to choose the occupation they desire. Higher degree of economic freedom, the pursuit of privazitation and labor market liberalization, deregulation, healthy public finances, opening to globalization and foreign investment, the fundamental reform of the judiciary, elimination of corruption in various fields, greater personal liberty, highly respectful approach to private property rights are just a few among numerous required features that will help Slovenian economy achieve higher economic growth rates and structural advancement.

Thus, without free choice in every aspect, Slovenian society will hardly ever be able to compete with Nordic counterparts.

2 comments:

Anonymous said...

Ok, mate. I've been in this country for a year n a half now and let me tell you that slovenia is way more homogenous than any of the countries of scandinavia. The reason why it probably would fail here is because the slovenian society is not ready for something that organized.. And the bigest myths about scandinavia are in general spread between americans and in free-market capitalist circles.

Rocks said...

Smaller societies are far more homogenous than its larger counterparts. The problem which we face in Slovenia about Scandinavian countries, say Sweden, is that we copy the worst of the worst (high public spending, generous welfare policies, rigid labor market).

Countries in Scandinavia are beautiful. I've been there and experienced them. Not just in terms of natural beauty but also in terms of several excellent and well-sounded systematic solutions. Take a look at Finland for example. Nokia and several other companies are global success stories (see: NYSE). In Denmark, the majority of individuals has the foremost liberal and casual attitude towards just about everything - say from sex to drinking their beloved bud. In Sweden, the management of the corporate sector and structural quality of its business environment are on the world top (Ericsson, TeilaSonera, H&M, Volvo...). Surprisingly, those system features are rarely mentioned here. The fact that 20 percent of the GDP consists of oil revenue, explain much of Norway's wealth. At last, Iceland is known for its entrepreneurial sector and remarkable metamorphosis from a stagnant economy into one of the wealthiest countries in the world.

As a matter of fact, financial markets are sound and diversfied in every Scandinavian country. Property rights are highly respected and fastly enforced (see the statistics) etc.

None of these features has ever been mentioned here in Slovenia. All that has been told about Sweden is that "high taxes, generous state welfare and high spending will benefit everyone of us." As in many other countries, particular features in each Scandinavian countries are economically and structurally illogical. And I see no empirical reason why exactly those features should be copied and why not copy the solutions that pulled the Nordic countries out of relative stagnation.

Thanks mate. Enjoy the rest of the day.

Regards,
Rocks