28 December 2017

Scandinavia is no socialist Valhalla

By Madeline Grant

Over the Christmas week, CapX is republishing its favourite pieces from the past year. This was first published on June 28.

Scandinavia occupies a special place in the minds of socialists around the world. The Guardian journalist Polly Toynbee once described Sweden as “the most successful society the world has ever known”.

Over in America, all manner of people, from presidential candidates to Nobel-prize winning economists have argued that policy makers should take Scandinavia as a model for reducing inequality and promoting more balanced growth.

But is it really the socialist Valhalla it’s feted to be?

Addressing Harvard University last year, Danish PM Lars Løkke Rasmussen tried to set the record straight. “I know that some people associate the Nordic model with some sort of socialism’, he said. “I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.”

Indeed, viewing Scandinavian countries as socialist – or even left-wing – overlooks an essential truth about how their economies are organised. While these nations do have high taxes and generous welfare, in many respects, their markets are unusually free, adopting exactly the kind of policies that the British Left, with its rigid adherence to central planning and intervention, spends its time fighting against.

Last week, the Labour Party pledged a minimum wage of £10 that would apply to all workers, including those aged 16-18. This policy would, if implemented, carry hugely perverse side-effects – with young and unskilled workers all but priced out of the job market.

In contrast, the very concept of central government setting a “one-size fits all” policy to cover all jobs and sectors is utterly alien to the Scandinavian economies. Neither Sweden, Norway nor Denmark actually has a minimum wage. Instead, wages are decided by mutual agreement between unions and employers, which usually vary according to the industry or occupation in question. In this respect, Scandinavian labour markets are far more flexible and decentralised than Britain’s.

Corporate tax rates in Scandinavia compare favourably with those of overtly capitalist countries. Sweden and Denmark’s are among the lowest in the EU 15, while Finland’s, at 20 per cent, is on a par with Britain. Norway has the highest rate of the five countries, but, at 27 per cent, is still significantly lower than America’s (nearly 40 per cent).

While British reverence for the NHS has reached an almost religious fervour – and made discussions of outsourcing, or adopting any kind of private provision of healthcare politically toxic – the Swedish have no such qualms.

In a recent count, about 20 per cent of public hospital care and about 30 per cent of public primary care was provided by private companies – compared with around 6 per cent in Britain.

Meanwhile, Sweden’s education system – inspired by the ideas of that well-known socialist thinker Milton Friedman – allows parents to top-up the cost of private schooling with government-funded vouchers, and has led to a surge of choice and competition in schools.

Norway, another nation often held up as an example of a “better way” by the British Left, is also something of a red herring.

It is hard to exaggerate the importance of Norway’s vast oil reserves to its economic success; these have allowed it to build up the largest sovereign wealth fund in the world (predicted to reach $1 trillion by 2020). This gargantuan fund holds around 1 per cent of the world’s shares, and owns more than 2 per cent of all listed companies in Europe, as well as a vast property portfolio.

Thus is Norwegian “socialism”, ironically, funded by investment in capitalist projects around the world. The historically sound investments made by the fund are a large part of the reason why Norway has proven so resilient in the face of fluctuating oil prices in recent years. Last year, for the first time ever, Norway’s government took more money from the fund than the fund itself derives from oil revenues, due to the worldwide slump in the commodity’s price. It is a crucial buffer that allows the nation to maintain its high spending and generous welfare programmes.

Conversely, Scandinavia’s prosperity has only ever been threatened when its nations have embraced genuinely socialist policies.

In the 1970s, the size of the Swedish state began to expand in earnest under successive socialist governments. Punitive taxation, including effective marginal rates that topped 100 per cent in some cases, prompted a mass exodus of wealthy citizens and entrepreneurs, including, famously, the filmmaker Ingmar Bergman and IKEA founder Ingvar Kamprad.

By 1993, when public spending had reached 67 per cent of GDP, Sweden had dropped from being the 4th richest nation in the world in the 1970s, to the 14th. Both Swedish and Danish citizens have since begun to reject “tax and spend” at the ballot box and recent years have seen a growth in support for centre-right parties, promising fiscal restraint.

It is easy to see why Scandinavia is so often mythologised by adherents of socialism. Its citizens enjoy some of the best universal healthcare and education in the world, which receives high levels of government funding and remains (largely) free at the point of use.

But don’t be fooled by the high tax rates. The success of the Nordic Model hinges on its embrace of free-market capitalism, competition and defence of private property – a far cry from the centralised planning system espoused by the socialist Left.

Madeline Grant is digital officer at the Institute of Economic Affairs