The Welfare State and Economic Performance

  The so-called Nordic model is well known for relying on a large public sector and pursuing egalitarian objectives, and yet average incomes are among the highest within the OECD. How have Sweden and the other Nordic countries managed to square large public sectors and high tax burdens with comparatively strong economic performance?

Professor Torben M. Andersen in a new report to the Swedish Long Term Survey investigates theoretical and empirical findings on the relation between the size of public sector and economic performance measured in terms of e.g. per capita income or growth. He concludes that The Nordic comparative position with respect to both economic performance and inequality reflects policy designs. Underlying this are several factors. One is that an extended welfare state relies on a high employment rate. If the employment rate falls, tax revenue decreases and social expenditures increase. Therefore the model has a built-in requirement of an employment focus. Likewise, being small and open economies facing international competition has been a background factor all along.

In a forward perspective some of the trends to be coped with are ageing, globalization and requirements to publicly provided services. These challenges are as such global and not specific to the Nordic model, and some countries face larger challenges than e.g. Sweden and Denmark, which have been front-runners in pension reforms. The quest is to find solutions in accordance with the goals of the Nordic model.

The Welfare State and Economic Performance