Monday, April 16, 2007


Today, we had an opportunity to join Cato daily podcast entitled "Should the United States Be More Like Scandinavia?" featuring Johnny Munkhammar, Dan Mitchell and Ezra Klein.

In an interesting and lively discussion, it was easy to come to conclusion that there is actually no unified Scandinavian model. Nordic countries are very different respectively. In late 1980s and early 1990s,

Finland was hit by a severe external shock, facing high unemployment, rising inflation and falling GDP. The economic policy of deregulation, tax cuts and economy's liberalization galvanized Finnish economic success and rapid growth during throughout the 90s. In economic policy, Finnish policymakers successfully anchored the GDP spending level and cut it by an incredible 10 percent.

Sweden, once the second fastest growing economy in the world (after Japan), reached the third place in OECD Prosperity League. After the 1970, the economy was hampered by expansionary tax increases. The marginal income tax rate was moving closer to 90 percent until the emergence of economic crisis. Aftermath, product markets were liberalized, school vouchers introduced, and business environment unburdened. This enabled Sweden to accelerate its global competitiveness by openning itself to globalization and foreign investment participation.

Denmark, a country with one of the most flexible labor markets in Europe with practically no hiring and firing limits, has the lowest youth unemployment rate in the EU.

Norway, usually regarded as the "Saudis of the North", is able to sustain generous welfare policies mainly because of large oil and gas revenues collected in various forms of mutual generational funds. Despite the generous welfare resources, private health care was introduced as well while deregulated financial markets boosted the investment and competitiveness of Norwegian companies domestically as well as abroad.

By no doubts Iceland belongs to the group of most successful reformers. It enjoyed high-growth rates throughout the 90s despite a mild recession in 2002. In 2003 and 2004, Icelandic economy grew by an incredible GDP growth rate, 4,3 percent annually between 1995 and 2005. Behind economic success, there was the liberalization of financial markets and the privatization of numerous state enterprises and government agencies. Banking in Iceland sparked an incredible success. Today, the three largest Icelandic banks are among Nordic 15 most successful banks. Central bank was given an independence to curb the inflation and the entrepreneurial sector flourished. Credit ratings were high and enjoyed with confidence in international markets. Today, Iceland is still in the front of the most bite-roaring tigers. The country recently instituted the flat tax, nearly eliminated double taxation of savings and investment. Corporate tax rate was slashed from 45 percent in 1991 to 18 percent in 2002. And this explains much of Iceland's incredible success.

In summing the discussion, Nordic tigers have institutional framework built on the foundations of prosperity (rule of law, private property rights and sound money). Free trade and openness to globalization have enabled individuals and companies each Nordic country to absorb its separate comparative advantages (see: Finnair's Asian Route strategy) Further, the liberalization of the financial sector, deregulation, restrictive spending and the privatization of government enterprises have boosted each tiger to sustain robust growth rates and sound structural environment.

These are the features that the United States and other countries can learn.

Otherwise, there is only one simple formula concluding the story of the Nordic models: Admire the best and forget the rest. In fact, government cannot pursue success, but individuals do.

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