Nima Sanandaji
Nordic countries are often used internationally to prove that socialism works. It’s true that social democratic parties are enjoying success in this part of the world. Yet while Nordic countries are seeing a partial comeback for social democratic parties, their policies aren’t in fact socialist, but centrist.
Nordic nations—and especially Sweden—did embrace socialism between around 1970 and 1990. During the past 30 years, however, both conservative and social democratic-led governments have moved toward the center. Today, the Nordic social democrats have adopted stricter immigration policies, tightened eligibility requirements for welfare benefit systems, taken a tougher stance on crime, and carried out business-friendly policies.
The Nordic welfare system that people like to point to as a flourishing example of socialism was developed around 1970, when there was a policy shift throughout Nordic societies toward higher taxes and generous public benefits. In the century preceding that turn, Nordic countries had combined small public sectors and free markets to achieve strong economic growth. From around 1870 to 1970, for instance, Sweden’s per capita GDP increased around tenfold, the highest growth rate in all of Europe. It was after this period of rapidly growing prosperity that there was a shift to high-tax policies. The public remained skeptical of direct tax raises, and the shift largely occurred through gradual rises in the indirect payroll tax.
It wasn’t an unusual trajectory: Researchers have shown that countries with higher trust levels tend to have larger and more generous welfare systems. And trust and social responsibility have historically been strong in this region, in part due to the need for collaboration in the unforgiving Nordic climate—stronger, indeed, than in the rest of Europe.
As a result of the shift away from low-tax policies, however, economic growth stagnated. Over the past 50 years, for instance, Swedish GDP per capita has only grown by a factor of 2.1. More importantly, the norms relating to hard work and responsibility have started to erode, according to measurements by the World Value Survey, as welfare has increased. For example, in the early 1980s, 19 percent of Swedes agreed that it could be justified to some degree for someone to claim public welfare when they weren’t eligible. This share gradually increased to 40 percent in 2011, and it has since fallen to 36 percent following stricter control of welfare systems and public campaigns warning against overuse.
Today, Nordic nations still have higher taxes and more generous welfare systems than most parts of the world. But since the 1990s, Sweden and other Nordic nations have focused on strengthening those norms of social responsibility again by increasing the control of public welfare systems, reducing generosity in the welfare models, and lowering taxes.
Indeed, many Nordic policies now promote free trade and free enterprise. The Heritage Foundation’s Index of Economic Freedom, which measures how capitalist a country is by studying regulation and taxation in different areas of the economy, ranks Denmark and Iceland as the 10th and 11th most capitalist countries in the world. Finland comes in at 17th, Sweden at 21st, and Norway at 28th. By comparison, the United States is ranked 20th. Property rights, business freedom, monetary freedom, and trade freedom are strong in the Nordic nations.
This move toward the center is playing out in electoral politics, even as social democrats are winning elections again. Nordic social democrats, for instance, are increasingly relying on forming alliances with parties in the middle. Take Finland: In the 2019 election, incumbent Prime Minister Juha Sipila, the leader of the Centre Party, lost to the Social Democratic Party’s Antti Rinne. But Rinne had to form a broad coalition government including the Centre Party, which has, for example, pushed not to raise total taxes.
Sweden, the most populous Nordic nation, has followed a similar trajectory. Social Democrat Stefan Lofven has served as prime minister since 2014. In the Swedish political landscape, though, only a minority of voters support the three main center-left and left-wing parties, so Lofven has relied on support from the right-of-center Centre Party and, previously, the right-of-center Liberals party.
In early 2020, Lofven’s government abolished the varnskatt, a 5 percent tax on the highest incomes, significantly reducing the marginal tax rate. Other recent reforms include the partial privatization of the state employment service and becoming tougher on crime. One of the Social Democratic Party’s main focuses this year, for example, is abolishing the punishment rebate for young criminal offenders, which would lead to longer sentences for those committing multiple offenses. The Social Democrats have also promised tax cuts as part of their platform for the 2022 elections, where the party will likely be represented by Magdalena Andersson, Sweden’s finance minister.
Social democrats in Norway find themselves in a similar situation to their Swedish counterparts: having to cooperate with a center party that opposes socialist policies in order to secure power. And there are more signs that Norwegian Prime Minister Jonas Gahr Store’s social democratic Labour Party, which just defeated incumbent Conservative Prime Minister Erna Solberg in September’s election, will govern with more centrist policies than some might expect. Store is a millionaire who was previously affiliated with Norway’s Conservative Party. Moreover, he was a state secretary and chief of staff in 2000 and 2001, when the social democratic Prime Minister Jens Stoltenberg oversaw widespread privatization policies.
Nordic social democratic parties have also had to modify their migration policies as their working-class voters have shifted to more conservative parties that push for migration control. In Denmark’s 2019 general election, when Social Democracy party leader Mette Frederiksen defeated the center-right incumbent to become prime minister, she gained support on a platform that combined traditional social democratic policies with a strict immigration policy.
Nordic nations’ electoral politics mirror broader trends away from socialism over the past few decades. In the 1970s and 1980s in Sweden, for instance, the state monopolized elder care, health care, and education. As schools were taken over by the state, the education model shifted away from adult authority, and pupils began to lead their own learning. Pupil-led education became an important part of Sweden’s socialist policies and remains one of the main holdovers of that period. But since the 1990s, the government has allowed the private sector to have a larger role. Sweden currently has 823 private schools, mainly operated as for-profit companies with public funding. Some, such as the school chain Internationella Engelska Skolan, are offering teacher-led rather than pupil-led education, with considerably better results than the public schools.
Health care is also gradually moving away from public monopolies. As of 2019, more than 40 percent of the 1,100 health centers of Sweden are run by private, for-profit actors. While Sweden has universal health care, private sector employees are increasingly covered by private health insurances paid by their employers. In the capital region of Stockholm, 62 percent of elder care home-visit hours are carried out by private, for-profit companies. The old state-run systems do live on in parts of Sweden, for example in the northern region of Norrbotten, where only 2 percent of elder care home visits are carried out by for-profit companies. But the welfare models are increasingly giving way to more centrist ones, with a role for both the private and public sectors.
Sweden’s pension system has also gradually become more connected to individuals’ work performance. Part of citizens’ pensions is invested in the market, and individuals can choose to invest in pension savings products from numerous private firms. Complementary private saving through employers is also becoming more important in future pension income. Throughout the region, pension reforms have included stricter rules for early retirement, a flexible retirement age, and a closer link between earned wage and accrued pensions.
Much of the strength of Nordic societies lies in the advanced free market system.
These are the trends that are contributing to the economic and social success of Nordic countries once again. It’s simply a common misconception that favorable social outcomes, such as long life expectancy and even income distribution, are a direct result of their welfare systems. In truth, these advantages largely evolved well before the rise of large welfare states.
As Swedish economists have shown, Sweden had an unusually even income distribution in 1920, and equality continued to grow until 1980. The lion’s share of income equality growth thus occurred during the free market era, predating the rise of the generous welfare state. In another study, economists showed that income equality in Denmark has increased since the 1920s, with much progress happening before the shift to higher taxes.
Much of the strength of Nordic societies lies in the advanced free market system, which is why it’s essential that they are returning to their centrist roots. As I have previously written with Klas Tikkanen, chief operating officer of Nordic Capital, Sweden is a leading innovation hub in Europe that’s able to attract foreign capital to growing companies. One reason for this success is its smart tax policy, where funds from a successful investment in one company may be invested in new companies, and taxation only applies when gains are realized. Thus, growth capital can be attracted to a high-tax country.
There are many reasons to admire the Nordic model. Sweden has the highest concentration of “brain business jobs” among European Union countries. As Bloomberg explained earlier this year, Stockholm has “bred more tech unicorns per capita” than the rest of the world outside of Silicon Valley. Nordic nations are successfully combining entrepreneurship with a shift toward green energies, where governments work with the private sector to push for environmental sustainability.
Ultimately, the comeback of social democratic parties in the Nordic countries can be explained by their focus on centrist solutions to the greatest problems nations face today. It is centrist pragmatists, rather than socialists, who should hold up the Nordics as role models worldwide.
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