Analysis of the Sustainability of Nordic Welfare Model in Times of Economic Recession - Essay Example

? Is the Nordic Welfare Model sustainable in times of Economic Recession? by The Nordic welfare model is also called as the Nordic social democracy. The Nordic countries are unique in combining the best qualities of market liberalism and socialism in order to produce societies which are wealthy but yet egalitarian (Anderson, 2007). These countries have been strictly pro trade and suspicious of any kind of protectionism but at the same time they have made policies which ensure a large degree of equality and welfare of the children, unemployed, sick and the old. However the Nordic model is increasingly become unsustainable due to pressures of an ageing population, globalisation, immigration and the financial crisis which has engulfed the whole world. This paper examines whether the model is sustainable in these difficult economic times and the age of globalisation. Before discussing the sustainability of the Nordic welfare model, we need to discuss the main features of the model. Some of the main features of the economy and the welfare model are presented below (Kvist & Greve, 2011) – Open Competitive economy with no protectionist measures. A Social contract with the population which consists of high tax rate and need based emoluments from the government to the people Universal Child care facilities with generous leaves and family allowances which boosts the participation of females in the workforce. Generous benefits to the unemployed in the form of social assistance and an activation programme to help them enter the workforce. Universal and egalitarian health services for the ill. Facilities and subsidies are provided equally to both public and private institutes in order to keep costs low. Universal minimum pension to all the citizens irrespective of the contribution made to the economy during working years. This is supplemented by special supplements and dependent supplements but everyone is entitled to a minimum pension rate. Free and quality education to all students up to the age of 16.higher education is also publicly financed and remains free even for foreign students although recent changes means that students from outside Europe do not get monthly stipend. In this section we will analyse the main challenges which the Nordic Welfare model is facing. The first challenge for Nordic countries is the demographic shift. The population in the entire developed world is greying and Nordic countries are no exception. With the increase in longevity of people and reduced child births, the number of people above the age of 65 is rapidly increasing (Adema, 2001). All Nordic countries provide generous pension facilities to enable the old to live a life of dignity. Thus if the number of dependents increase, it becomes increasingly difficult to finance their pension out of the income of working population. It has been assumed that in the next 3 decades the old age dependency ration will increase from 0.25 to 0.40 in the Nordic countries. The dependency ratios over the next 40 years in three Nordic countries is shown in the graph below – Source: (Kvist & Greve, 2011) Thus it is clear from the above figures that it will be unsustainable for Nordic countries to provide pension to their elderly without significantly deteriorating their finances. It is assumed that Denmark will suffer deterioration of finances up to 4% of GDP; it will be 6% of GDP for Norway and up to 4.5% of GDP for Sweden (Kvist & Greve, 2011). Clearly no country can suffer such an impact on its finances. It is often said that the problems of a welfare state can be circumvented by ensuring a high GDP growth. The Nordic countries should focus on increasing their GDP growth rate to mop up extra finances for their welfare schemes. In this section I will discuss the challenges of achieving high GDP growth for Nordic countries in this era of recession and globalisation. The Nordic countries have historically seen higher growth rates as compared to other European economies. However the problem for these open and free economies has been attracting investment in this climate of recession (Nordic Council of Ministers, 2012). With the Euro zone sovereign debt crisis still not being resolved, companies are hesitant to invest in Nordic countries whose tax rates are higher because of the welfare provisions. Low growth rates of 1-2% are not going to help these countries. They need to grow at a rate of 3 % or more in order to counter the huge pressure of demographic shift they are going to face in coming decades. Such high growth is not foreseeable which puts great pressure on these countries to shed their social welfare model. Nordic countries have historically been accused of charging a high individual tax rates as well as high corporate taxes. In this section I will discuss the impact of high tax rates on the economic growth and investment scenario in Nordic countries.The following table compares the tax rates of Nordic countries with emerging economies of India and China. Tax Denmark Norway Sweden India china Corporate Tax 25% 28% 22% 30% 25% Income Tax 51.7% 47.8% 57% 33% 45% VAT/Sales Tax Up to 25% Up to 25% Up to 25% Up to 15% Up to 17% Source: (Global finance, 2012) Combined with lower taxes is the fact the cost of skilled manpower is lower in India and China, they produces a larger number of engineers and most of their population is young .The Nordic countries have also been open and competitive but with their high tax rates and an ageing population, they will be hard pressed to fight off competition from the emerging economies. Earlier globalisation for Nordic countries meant competition from rest of Europe or America which had similar demographic challenges. But now the competition also comes from the emerging Asian economies. In this age of globalisation, companies find it ridiculous to pay such high tax rates when they can operate at lower tax rates in other countries. The only advantage Nordic countries have now is the ease of doing business, good infrastructure and a corruption free environment (The Economist, 2013). But as developing countries improve their infrastructure and governance, the high tax rates of Nordic countries will be unsustainable and without high tax rates, the welfare provisions cannot be maintained. OECD has said in its reports that the way forward for developed economies is to move up the value chain (Adema, 2001). As manufacturing industries move to China and back office services being shifted to India, the developed world needs to focus on research and development to stay relevant and competitive. The same holds true for Nordic countries as well. To be able to do this, Nordic countries need to ensure that they produce greater number of engineers, doctors and a large number of doctorates. The problem is more severe in Nordic countries as education is completely financed by the public sector unlike USA where the individual has to take educational loans for higher studies. Thus demand for higher skilled labour means more expenses for the government. The expenditure on education also has a high gestation period which will put severe pressure on the finances of these countries in the short to medium term before the expenditure begins to show results. Another interesting problem for Nordic countries is the problem of Migration. There are two sides to migration of population – emigration and immigration. Emigration means moving out of the population from Nordic countries to other countries and immigration means influx of population from other countries. Both these phenomenon present challenges for all the countries but challenges for Nordic countries are unique in this respect. Emigration is still not a major issue for the Nordic countries .However as the world economy becomes more integrated; large amount of skilled labour force is likely to move out from these countries to avail the low tax rates of other countries. For countries like USA and UK where the education is funded privately, this does not pose a big issue but for Nordic countries this means subsidising the growth of other countries (Nordic Council of Ministers, 2012). The skilled labour force likely to move out is educated from public money of Nordic countries but they will contribute to the economy of some other countries. This will lead to a net flow of money out of these countries posing a serious challenge to their growth. All developed countries have been facing pressure of immigration from low incoming countries and Nordic countries are no exception to this phenomenon. The young immigrant population from developing countries is seen by many as a potential solution to the ageing of Nordic countries. Although the immigrants provide the much needed labour power but they come with their own set of challenges. The foremost challenge is the social and cultural integration of immigrants with the local population. The lack of integration can lead to riots like the one witnessed in Britain and France (Kvist & Greve, 2011). The other problem with immigrants is the low employment ratio of the immigrant population as compared to the locals, especially the female immigrant population. The employment gap between immigrant females and local females in Sweden is 40 %, 35% in Norway and 38 % in Finland (Kvist & Greve, 2011). This is because the immigrants from developing countries prefer their wives to take care of children and preserve their culture in a foreign land as men go out to work. The Nordic welfare model is based on high employment ratio in the working population. If 40 % of immigrants are not working, the net outgo in the forms of welfare schemes for immigrants will be greater than the net gain in the form of taxes. The first and the most important reform measure which Nordic countries need to implement is linking retirement age to longevity. Since 1960, increased access to medical facilities has meant that life expectancy has increased for all the Nordic countries .In all countries it is above 75 years for men and over 80 years for women. Source: (Norden.org, 2013) However the official retirement age remains around 65- 67 years. This means a high dependency ratio and unsustainable pressure on the Nordic finances. In order to decrease this dependency ratio, it is necessary to increase the retirement age further and link it to the life expectancy. The various schemes which subsidize early retirement needs to be scrapped to encourage elderly labour participation. Nordic countries need to move away from a universal pension system to a contribution based pension scheme. The state should provide only a minimum basic pension; the rest needs to be financed by the individual himself during his working years in the form of cuts made from his salary (The Research Council of Norway, 2013). The present working population should not finance the pension of the current retirees but they should be financing their own retirement. This may increase pension liabilities in the short term but will eradicate pressure on public finances in the long term. In order to compensate for the low working age population, Nordic countries should encourage immigration of skilled manpower but with strict conditions. In order to ensure a high female labour participant among immigrants only those couples in which both husband and wife are working should be allowed to immigrate. If a man marries later and brings his wife to Nordic countries, his wife should either participate in the labour force and should be suitably qualified to do so or the male should agree to increased taxation to offset the effect of a non-working member. The present unemployment benefits in Nordic countries are very generous and allow a decent standard of life for the unemployed. This should be drastically reduced. The unemployment benefits should be bare minimum which just keeps the person from being poverty stricken (Anderson, 2007). These bare minimum benefits will encourage people to actively look for jobs as they will find it difficult to sustain themselves on unemployment benefits. Free higher education is necessary to provide equal opportunity to all. However emigration of skilled labour force is a serious drain on the finances of Nordic countries. Higher education should remain free but with conditions. The beneficiary should sign a contract with the government to work in Nordic countries for a minimum amount of time. The person who refuses to sign such a contract should pay for his own education. The Human development reports of United Nations have declared the Nordic countries to be the best place to live in the world. This is largely due to the welfare model adopted by the Nordic countries. However the current economic recession and the pressure on the public fiances have ensured that the Nordic welfare model in its current form is unsustainable. This will lead to the financial collapse of these countries. But this does not means that these countries give up their welfare model and leave the citizens to fend for themselves. The welfare model in unsustainable in its current form but can become sustainable if some changes are made to it. These changes which have been mentioned in the previous section will ensure that wasteful expenditures are curtailed but necessary social support remains intact. The Nordic welfare model is unique in the world and is a great combination of market economics and socialism. It needs to be maintained and preserved. References Adema, W. (2001) Net Social Expenditures. OECD Working Papers. [report] OECD. Anderson, T. (2007) The Scandinavian Model - Prospects and Challanges. CESIFO Working Paper no.1903. [report] Aarhus: University of Aarhus, p.10 - 27. Global finance (2012) World's highest Marginal Tax Rates 2012. [online] Available at: http://www.gfmag.com/tools/global-database/economic-data/12151-personal-income-tax-rates.html#axzz2Sh61WeK7 [Accessed: 8 May 2013]. Kvist, J. and Greve, B. (2011) Has the Nordic Welfare Model Been Transformed ?. Social Policy and Administration, 45 (2), p.146 - 160. Available at: http://www.nova.no/asset/4666/1/4666_1.pdf [Accessed: 8th May 2013]. Norden.org (2013) Life expectancy — Nordic cooperation. [online] Available at: http://www.norden.org/en/theme/nordisk-statistik-i-50-aar-1/statistics-from-1962-2012/life-expectancy [Accessed: 8 May 2013]. Nordic Council of Ministers (2012) The Welfare State in a Nordic Perspective. Program for the Norwegian Presidency of the Nordic Council of Ministers 2012. [report] Copenhagen: Nordic Council of Ministers, p.11 - 25. The Economist (2013) The secret of their success . The Economist, [online] 2nd Febuary. Available at: http://www.economist.com/news/special-report/21570835-nordic-countries-are-probably-best-governed-world-secret-their [Accessed: 8th May 2013]. The Research Council of Norway (2013) The Nordic social model: Sustainable prosperity and welfare?. [online] Available at: http://www.forskningsradet.no/en/Newsarticle/The_Nordic_social_model_Sustainable_prosperity_and_welfare/1253964904388 [Accessed: 8 May 2013]. Read More