Welcome remarks by Angel Gurría, OECD Secretary-General at the Seminar on “Embracing globalisation in the 21st century: a dialogue on the Nordic approach”
Paris, 21 May 2008
Ladies and Gentlemen,
I would like to join Ambassador Majanen and the Nordic countries in welcoming you to this joint seminar. I am pleased to see such an impressive turnout, with guests from our member countries, BIAC and TUAC, and members of the Secretariat. I would like to thank the Nordic Ambassadors for taking the iniative to suggest such a dialogue on the occasion of the Nordic report entitled The Nordic Model: Embracing Globalisation and Sharing Risks, and I welcome its authors who are with us today.
My remarks today will touch upon some of the issues you will be addressing throughout the meeting. Where has the Nordic approach delivered strong results, and where do its weaknesses lie? Can it remain sustainable going forward, particularly in the context of major demographic shifts and new players in the global economy? And can elements of the Nordic approach be borrowed and put into practice by other countries who may not share the same policy context?
Is there a “Nordic model”?
Let me begin by saying that there is really no one single model among the five Nordic countries. They do however share some common approaches, for example:
labour market institutions and policies that provide relatively low employment protection, high unemployment protection, coupled with high income-support benefits, strict activation policies and a high degree of centralized wage coordination;
comprehensive social benefits and publicly provided social services, as well as large investment in education and research and development financed by taxes; and
openness to trade and competitive product markets.
These features together offer a collective mechanism for risk sharing and play a key role securing the political acceptability of structural reforms.
The Nordic economies have performed well in recent years, both relative to past performance and in comparison with other OECD members, particularly the larger countries in the euro area. Inflation has generally remained low over the last three years, although as elsewhere, recent increases in food and energy prices are exerting upward pressures. And labour markets are characterized by high participation rates, generally low unemployment, a small incidence of long-term unemployment and high job mobility. For example, in the Nordic countries, older workers’ employment rate in 2006 was well above the OECD average of 53%, reaching nearly 85% in Iceland.
At the same time as the Nordic countries have expanded the size of “the economic pie”, the distribution of this “pie” has been widely shared. This in part reflects these countries’ tax and welfare systems, which have generally ensured that the winners from structural transformation have shared their gains with the losers. Income equality and poverty rates were lower in Denmark and Sweden than in any other OECD country, and they were below the OECD average in Finland and Norway.
An additional well-known feature of the Nordic model is the high tax burden. Taxation revenue to GDP last year was close to 50 per cent in Denmark and Sweden and over 40 per cent in Finland and Norway This of course is needed to finance the comprehensive and generous social expenditures and spending on education. But equally important is that in the Nordic countries, tax revenue is put to efficient use.
Less well known internationally is the traditional commitment to free trade. Barriers to trade – apart from agricultural products – and investment are low, and measures of Nordic country participation in the international trading system are high. Similarly, Nordic countries score well in terms of competition-friendly regulation in markets for goods and services.
To what degree can the strong economic performance be attributed to the Nordic model?
Many attribute the combination of solid economic growth, a well-performing labour market, an equal distribution of income and social cohesion in the Nordic countries to the policies I have just described. Others recognize the recent good economic performance, but question whether the incentives associated with high taxes and a generous social security system are compatible with long-term sustainability.
At the OECD, we recognize the merits of all social models. In our Jobs Strategy and other analysis, we note that both the Nordic and the so-called Anglo-Saxon models have performed well, and that the Nordic countries in particular have managed to seize the opportunities offered by globalization for higher productivity and living standards. We attribute this to two forces. First, a lower exposure to globalisation, in the sense that the export sectors are geared towards fast growing and relatively profitable products. Finland and Sweden, for instance, specialize in the telecoms sector. The second force is a higher ability to cope with change.
Nordic countries are also well placed to cope with globalization because of their education levels, the quality and public confidence in the institutions of government and their strong innovation frameworks.
Is the Nordic approach sustainable?
Moving on to the challenges, the Nordic Report has done an excellent job in identifying the risks for the Nordic model. The authors focus on the implications of globalization and demographic change. To be sure, globalization is a long-standing phenomenon, and in a sense, the Nordic model is itself a response to the challenge of globalization.
But the pace of globalization has accelerated, with the emergence of new players in the international trading system, bringing additional workers – 1 billion over the last decade – and new relationships such as cross-border out-sourcing and in-sourcing. In addition, the globalization of innovation means that many OECD-based businesses are setting up R&D operations in China and India, attracted by their abundant supply of highly skilled scientists and engineers. These developments could pose challenges for the Nordic model, and will need to be addressed to maintain Nordic competitiveness.
The Report’s authors note that the costs of funding the Nordic model are likely to rise faster than nominal GDP. This is due to expected demographic changes, leading to a higher proportion of retirees relative to the number of workers, as the baby boom generation retires, and life expectancy continues to lengthen.
At the same time, governments’ room for manoeuvre has become more limited, with taxation levels already high, and tax bases becoming more mobile (especially on capital and labour income). Both forces exert tensions on the long-run sustainability of the Nordic model.
How can the essentials of the Nordic model be preserved going forward, especially its underlying philosophy of collective mechanisms for sharing risks? The dialogue today will allow us to exchange views on this question.
Our analyses are broadly in line with the prescriptions of the Nordic Report, which will be presented a bit later. But the OECD also recommends additional areas for reform. For instance, in Going for Growth 2008, we call for:
reform of disability benefits in Denmark to keep disabled people with significant work capacity in employment;
tighter rules and implementation of procedures governing sickness benefit and disability pension management in Sweden;
prevention and rehabilitation to be developed further to facilitate declines in the number of disability recipients.
We also caution against raising taxation and call for putting more emphasis on immobile tax bases, such as property taxes and reducing high marginal tax rates on labour income.
Can elements of the Nordic approach be transferred?
Are there lessons for other countries that can be drawn from the Nordic model? Certainly. For one, regulation does not buy security; in fact, the opposite appears to be true. Another is to caution against trying to emulate directly the Nordic model. The precise balance between the different policy planks depends on country circumstances and institutions.
For example, the quality of industrial relations, and agreement among trade unions and employer organizations on common objectives may play a key role in labour market performance, as well as the political feasibility of reforms. Establishing how countries can implement coherent policy packages in practice also takes time. The Danish version of the Nordic model, for example, is the result of a long series of reforms, started in 1994 and has required considerable fine-tuning to reach its present format.
Dealing with the political economy of reform
Coping with globalization is about coping with change, and success in implementing policy reform requires winning broad support for change. But as you are well aware, that is not an easy task. There are winners and losers across countries and within each country. Even if a country benefits overall, the adjustment costs cannot be ignored.
Moreover, since globalization nowadays is increasingly based on changing patterns of specialization coming from differences in factor endowments, rather than the intra-industry trade deepening, the adjustment costs are greater and more narrowly concentrated.
Once again, I welcome the initiative for this dialogue, which highlights the key strengths of the OECD as an Organisation: multidisciplinary and cross-cutting approaches, backed by peer dialogue and learning. I wish you very fruitful discussions, which I hope will make at least a small contribution to an enhanced knowledge base for policy formulation, better functioning economies, and greater prosperity.