GIE ASSIGNMENT

Nordic Model: The Challenge of

Globalization

Report Submitted to:

Prof. Sangeeta Kamdar

As on 17th March 2010

Submitted by Team 3
SHILPA JHAMB 316
ANKUSH SHAIK 337
ANKIT JAIN 353
MADHU KUMAR M 358
AMIT NAGESHRI 359
HARSH KOTHARI 364
 Table of Contents

About the NORDICS...............................................................................................................................3

The Nordic Model..................................................................................................................................4

Impact of Globalization of Nordics........................................................................................................5

Why ROW likes Globalization of Nordics?.............................................................................................7

Analysis of Globalization Impact on NORWAY.......................................................................................9

Nordics vs. United States - Decent vs. indecent wages.......................................................................10

Recent Performance of Nordics after Globalization............................................................................11

About the NORDICS
The Nordic countries include five countries

 Denmark (Constitutional monarchy with a Parliamentary system -- an autonomous

constituent country within the Danish Realm),
 Finland (Semi-presidential republic, independent since 1917),
 Sweden (Constitutional monarchy with a Parliamentary system, de facto independent
kingdom since 1523),
 Iceland (Parliamentary republic, independent since 1918, although in a union with and a
dependency of Denmark until 1944),
 Norway (Constitutional monarchy with a Parliamentary system, independent since 1905).

Two of them: Iceland & Norway are members of the NATO1 but not of the EU

Three of them: Denmark, Finland & Sweden are members of the EU, but two of those Finland &
Sweden are not members of the NATO

Denmark does belong to NATO but not to the Western European Union which seeks to co-ordinate
defence policies and procurement for European countries within NATO.

One of the three EU members, Finland is also a member of the EMU2 and so has the Euro as its
currency. Denmark and Sweden are still using their own kroner.

Three of the Nordic countries are monarchies and two, Iceland & Finland are republics

The Norwegians & Icelanders feel prosperous and comfortable outside the EU:

 Partly because of their huge oil revenues (they do not want to come under any restrictions
by joining the EU).
 Also they have a national interest that they share strongly with Iceland: fish. Neither country
wants to have its seas and fish stocks included in the Common Fisheries Policy. Iceland
remains a member of EFTA3 together with Switzerland and Liechtenstein.

The Nordic Passport Union allows citizens of these countries to travel & reside in other Nordic
countries without a passport or a residence permit.

1
North Atlantic Treaty Organization
2
Economic & Monetary Union
3
European Free Trade Association
The Nordic Model
It is distinguished from other welfare states with similar goals by its emphasis on
 Maximizing labour force participation
 Promoting gender equality
 Egalitarian and extensive benefit
levels
 Large magnitude of redistribution
 Liberal use of expansionary fiscal
policy
There is actually no single model that among the five Nordic countries, they however share some
common characteristics:
 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.
 High taxes

There are three major pillars of the modern Nordic welfare state: social security, health care and
free education. 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 in the euro area. Inflation has generally
remained low over the last 3 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 OECD4 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 investments are low, and measures of Nordic country participation
4
Organization for Economic Co-operation & Development
 in the international trading system are high. Similarly, Nordic countries score well in terms of
competition-friendly regulation in markets for goods and services.

Impact of Globalization of Nordics

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 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 boom5 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 bases6
becoming more mobile (especially on capital
and labour income). Both forces exert
tensions on the long-run sustainability of the
Nordic model.

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.
The following other points show deeper impacts:
1. It limited their capacity to raise tax rates or to maintain high tax rates, given competitive pressures,
particularly on the taxation of mobile factors of production—viz., capital.
2. It provides pressure for a restructuring of tax policies away from taxes on factors (particularly
payroll taxes) and toward general sales taxes as a means of limiting the impact on employment; in
this regard, it thus also creates pressures for changing the financing basis of welfare benefits away
from those that are employment-linked. In a similar vein, it creates incentives for a restructuring of
welfare policies to those which are of a personal account nature—e.g., defined contribution pension
schemes, personal medical accounts. In the above context, and as noted above, one cannot ignore

5
A baby boom is any period marked by a greatly increased birth rate
6
The sum of taxable activities, collective value of real estate, and assets subject to tax within a community.
 that these fiscal effects of globalization on the Nordics are occurring at the same time as the forces
of demographic change will be independently pressuring the costs of the welfare state in industrial
countries. Limits on the capacity to raise taxes at a time of growing social insurance burdens
particularly those faced by PAYGO systems—will force reforms that both contain benefit growth and
put pressure to ensure an adequate safety net for the poorest of the elderly population.
3. Globalization, combined with rapid technological change, accentuates the competitive pressures
faced by domestic producers, with several important effects—restraining the capacity of labour to
realize wage gains, maintaining pressure on producers for a lean labour force, and increasing the
risk of unemployment. If anything, this accentuates the importance of social safety net policies—
welfare and unemployment benefits—as well as policies to facilitate the more effective functioning
of labour markets.

4. Another facet of globalization, which will only continue to be reinforced in the future, will be
pressures for migration arising from the largely predetermined growth in the global labour force in
coming years (despite the drop in fertility rates globally and the obvious aging of industrial country
populations). Given the large disparity in incomes between aging industrial countries and less
developed countries, and the labour force needs of industrial countries, pressures for migration will
continue to be an important policy challenge in industrial countries. Such immigration pressures
have been felt as a double edged sword by the Nordics, providing some additional financial support
for financially weak welfare systems but also raising questions as to the eligibility for benefits of
these migrant groups.

5. Globalization has also enhanced the uncertainty and risk faced by domestic producers to global
market changes. The last year has illustrated powerfully the way in which critical global commodity
prices can be affected by supply and demand shocks as well as by speculative forces in the capital
market. The ripple effects of such shocks can be transmitted quickly to local production markets,
whether in low income or advanced economies. Witness the impact of high oil prices on the
competitiveness of a whole range of industries in the United States, creating pressures on both
established social insurance programs (unemployment benefits) and for relief outlays outside the
formal welfare structure. (As an aside, out formal definition of the welfare state does not normally
include the provision of financing to shore up financial institutions or strengthen deposit protection
schemes, etc.). Also note the uncertainty created for producers who have created global supply
chains as the cost of transport has risen sharply, rendering business models involving decentralized
production processes less efficient. Such pressures could lead to greater competitiveness of
domestic producers, either in advanced countries or neighbouring countries whose labour costs may
now be more competitive. The important point is that uncertainty may be heightened, increasing
the returns to being able to flexibly respond.

6. One facet of globalization that has proved relatively efficient in the last decade has been the ability
of capital markets to recycle capital from current account surplus to current account deficit
countries. The recent pressures on commodity prices may have tilted current account surpluses to
high savings rate countries, thus dampening global demand pressures and weakening growth
prospects in many industrial countries. Higher rates of unemployment inevitably put pressure on
the Nordic countries that critically depend on maintaining relatively high employment rates.
Globalization is in general beneficial to economic growth as it provides an opportunity to increase
the returns to factors of production via international exchange of goods and services and/or via
international factor mobility.

Nevertheless, increasing international mobility of labour also poses, if it continues unabated for
long, a threat to the Nordic model. The entitlements to education and retirement as well as to care
or benefits in the case of sickness, disability and unemployment belong to all citizens as individuals
in this model, while the cost of these entitlements are born collectively and shared by all via the tax
system. With higher mobility of labour it becomes increasingly possible to benefit from the
entitlements without sharing the cost (paying the taxes). There are many examples:

Graduates from domestic tax financed universities increasingly make their careers (and pay their
taxes) abroad. Citizens who have spent most of their working lives (and paid their taxes) abroad,
return to their home country after retirement to collect the benefits of free (or cheap) hospital care
and care for the elderly.

Unemployment rates and the frequency of disability pensions tend to be higher for certain
immigrant groups than for domestic citizens.

With increasing claims on entitlements due to “social tourism” and eroding tax bases due to factor
mobility and tax competition between nations, the long-run sustainability of the Nordic model could
be in serious jeopardy.
 Why ROW7 likes Globalization of Nordics?
 Strong property rights, contract enforcement, and overall ease of doing business.
 Low barriers to free trade.
 Little product market regulation. Nordic countries rank very high in product market freedom
according to OECD rankings.
 Little financial market regulation. Denmark and Finland have the lowest regulation burden in EU-15
according to OECD rankings.
 All Nordics have been pioneers in privatization alongside competitive public services. For instance,
Sweden privatized education with education vouchers in 1992.
 Pension systems are privatized. Systems have higher pension funding rates than in most European
countries. They still have deficits, however.
 Sweden has decentralized wage coordination, while Finland is ranked the least flexible. As in other
European countries, the powerful labour unions tend to block attempts at reform. Reforms and
favourable economic development seem to have reduced unemployment, which has traditionally
been higher.
 Denmark's Social Democrats managed to push through reforms in 1994 and 1996. Denmark's
flexible market differs radically from other Nordics (Flexicurity 8). According to World Bank data,
Denmark has almost no labour market regulation, and ranks first in Europe in labour freedom.
 Sweden at 56.6% of GDP, Denmark at 51.7%, and Finland at 48.6% reflects very high public
spending, compared to 46.9% in Germany, 39.3% in Canada, and 33.5% in Ireland.
 A key reason for public spending is the very large number of public employees. They often have jobs-
for-life and make up around a third of the workforce (more than 38% in Denmark). The public
sector's low productivity growth has been compensated by Europe's pioneering privatization and
outsourcing programs. Public spending in social transfers such as unemployment benefits and
early-retired programs is high. In 2001, the wage-based unemployment benefits were around 90% of
wage in Denmark and 80% in Sweden, compared to 75% in Holland and 60% in Germany.
Unemployed were also able to receive benefits several years before reductions, compared to quick
benefit reduction in other countries. Public spending in areas such as education or health is not far
from the OECD median.
 Overall tax burden are among the world's highest; 51.1% of GDP in Sweden, and 43.3% in Finland,
compared to 34.7% in Germany, 33.5% in Canada, and 30.5% in Ireland. Median employee's tax
wedge9 is between 57%-65%. Value-added tax rates are over 20% and corporate tax rates around
the OECD median at around 26%. Property taxes are low or non-existent. The tax burden is
particularly heavy on service sectors. The percentage of the buyer’s income entering the service
vendor’s wallet (inverted tax wedge) is around 15% in Nordic countries, compared to 10% in
Belgium, 15% in Germany, 25% in France, 30% in Ireland and 50% in the United States. Some
taxation is avoided by self-service and in the black market.

7
Rest Of the World
8
Flexicurity (a portmanteau of flexibility and security) is a welfare state model with a pro-active labour market
policy
9
The tax wedge is the deviation from equilibrium price/quantity as a result of a taxation, which results in
consumers paying more, and suppliers receiving less
Analysis of Globalization Impact on NORWAY
Norway is highly dependent on international trade, and has evolved into a very open economy with
some notable exceptions. Measured as a share of GDP, gross trade flows are higher than in most
other countries. Exports of goods and services accounted for 46 per cent of GDP in 2001, while
imports accounted for around 30 per cent. The importance of shipping, which represents Norway’s
second largest source of export revenue, has also contributed to support for a liberal trade regime.
As 90 per cent of the Norwegian fleet is engaged in cross trades, the Norwegian shipping industry
depends on open market solutions and a well functioning multilateral trading system.

The overriding objective of Norwegian trade policy is to provide for an open, liberal and predictable
trading environment that also contributes to sustainable development. These policy objectives are
pursued along two tracks: a closer European integration and through multilateral liberalization.

Norway has a liberal trade and investment regime, with the agricultural sector being a prominent
exception. Agricultural tariffs are among the highest in the OECD and unpredictable temporary tariff
reductions which tend to favour nearby suppliers are used. Budgetary support to the sector also
remains high, amounting to around 70 per cent of all budgetary support in 2001, despite having
been reduced by around 25 per cent in real terms the past ten years. Some restrictions on foreign
investments remain in the fisheries sector, which is also extensively regulated.

For almost all industrial goods (which includes fish and fish products), however, tariffs are zero, and
non-tariff import restrictions are minor. Norway has consistently built down barriers to trade
through participation in successive trade rounds in the GATT, and has a long-standing practice of
providing market openings for the developing countries. It is the Government’s expressed goal to
remove all tariffs on industrial goods, in order to reduce costs for business and to save resources in
customs treatment.

Norway runs a wide ranging GSP 10-scheme granting almost all industrial imports from the developing
countries duty free entry. Most agricultural products enter either duty-free or with reduced tariffs
under the scheme. With effect from July 1 2002, all products from the least developed countries can
enter free of duty and without quantitative restrictions. Norway has also dismantled all quantitative
restrictions on textiles and clothing and has duty-free treatment of textiles.

Norway’s WTO GATS schedule grants unlimited market access and national treatment in a large
number of services. Norway has not taken recourse to anti-dumping or countervailing-duties, or
safeguard measures, since the mid 1980s. Norway has not participated as a defendant in a dispute
since the inception of the WTO, and has only participated as a plaintiff on one occasion.

Norway has used the substantial revenue generated by the offshore oil and gas sector to build up a
GPF11 for long-term investment in financial assets overseas. While income from the offshore sector
has benefited the Norwegian economy and made it possible for Norway to maintain and strengthen
an extensive welfare system, it has also masked the need for structural reforms and has made their
implementation more difficult. The traditional manufacturing industries are in decline, and rapid
wage gains have caused a sharp deterioration in competitiveness since the mid-1990s. The country
is currently witnessing lower investments in the mainland business sector, and a weaker
development in the exports of traditional goods, while consumption growth has been buoyant
10
Generalized System of Preferences
11
Government Petroleum Fund
Nordics vs. United States - Decent vs. indecent wages
What makes a country rich is not whether it has oil or something like that. It is productivity-- how
much it produces per hour. The latest OECD figures, from 2008, indicate that the level of productivity
is roughly the same in both the U.S. and Norway.
American Nordic
Comparison:
Model Model
Productivity 100 100
Average hourly
100 100
wage
Top hourly wage 20,000 1,000
Minimum wage 30 60
Working hours 125 100
Per capita income 125 100
Poverty 20% 5%
Prison population 1.5% 0.5%
As a result, the level of hourly wages is also more or less the same, given that real wages are closely
tied to productivity. In Norway, the real wage in 2008 was about 130 krones (NOK 12) per hour, after
adjustment for differences in purchasing power.
The big difference between the Nordic countries and the U.S. is the wage spread. The main reason is
that the lowest-paid workers in the U.S. have very low incomes, indeed. The minimum wage there is
equivalent to NOK 45 per hour, and that is the actual wage for many millions of workers. The
minimum wage in Norway is twice as much, NOK 90 per hour, and even that level is regarded as too
low.
But there is quite a difference between earning less than NOK 100,000 per year and almost NOK
200,000 per year. It means that, in the Nordic countries, workers earning the minimum wage can
have a decent standard of living. But their counterparts in the U.S. normally cannot; they need to
have two or three jobs, social assistance, or some other kind of support.

The most dramatic difference between the two models has to do with the highest income levels.
These figures refer to the average incomes of corporate management, in comparison with the
average income of workers. In Norway, the incomes of corporate leaders are, on average, about ten
times those of workers, i.e. 1000 vs. 100 per hour. The corresponding level in the U.S. is 200 times
the average wage (These figures are from 2007; the differential may be even greater now).

Of course, these are the extremes of the income scale, but they say a lot about wage structure in
general. This is very important for the distribution of wealth in society, since wages account for
nearly eighty percent of all income. For the individual, wages provide the basis of pensions,
insurance coverage, credit rating and other components of the living standard.

The amount of time spent at work is also an important factor in determining income. It is correct to
say that the U.S. is the richest country in the world, but that is very much due to the long working
hours - on average, about 25 percent longer than in Norway. It is this factor which explains the
difference in per capita income. Note that this does not have anything to do with productivity levels
which, as noted previously, are roughly the same in the U.S. and the Nordic countries. Nor does it
affect the poverty rate, which is about four times higher in the U.S. In the case of children, the
difference is even greater.
12
Norwegian Krone, 1 Norwegian krone = 0.170681 U.S. dollars
 The final figure in this brief summary of socio-economic conditions refers to the proportion of the
population in prison, which is about fifteen times greater in the U.S. This has an obvious effect on
unemployment rates: While 1.5 per cent of the U.S. population has been statistically removed from
the labour force and placed in prison, the same proportion of the Norwegian population is involved
in retraining programmes and other measures connected with the labour market.

Recent Performance of Nordics after Globalization

 Between 1984 and 2002, Sweden's GDP growth was 36% compared to 111% in Ireland.
 High growth in the last years, (10,05 percent for the EU to 15 on 2000-2004, 15% for Finland 12.3%
for Sweden, 4.4% for Sweden and 5.5% for Finland in 2006.
 Low unemployment, the lowest of the European union for Denmark (3.4% in March 2007…) after
having known high levels 10 years ago (9,1% in Sweden, 9.6% to Denmark and 16.3% in Finland for
1993
 Official poverty risk rate13 are 9% in Sweden, 10% in Denmark, 11% in Finland, 13% in France and
19% in United Kingdom.
 According to libertarian think tank Timbro, when measured by wealth, the poor have less wealth
than in the United States. For instance, they live in smaller apartments, have lower home ownership,
and have less household equipment. These findings are however contradicted by a peer-reviewed
study in the American Economic Review by American economist Lane Kenworthy who found that the
percentage of household living on less than 40% of U.S. median household income (adjusted for
household size) was lowest in the Nordic countries, and much lower than in the U.S.
 Governments have committed to fiscal responsibility. In 2004, Sweden, Finland and Denmark
presented an excess of the public accounts (respectively of 1.2%, 1.9% and 2.6% of the GDP),
whereas France presented a deficit of 3.7% and United Kingdom a deficit of 3.1%.
 Flight of capital, as is often seen in any country where taxes are significantly higher than their
neighbours, incentive to move ones financial dealings outside of the country to avoid taxation can
become a problem. As a result, some Danes and Swedes have emigrated or based their financial
affairs outside of their home countries. Examples of this include Ingvar Kamprad, the Swede who
founded furniture retail chain IKEA, who has lived in Switzerland for the past 30 years, while the IKEA
business operates through a Netherlands-based holding company. Janus Friis, the co-founder of
Skype, is now based in the UK and another very recent Danish example is the boxer Mikkel Kessler,
who rebased to Monaco in 2007. Stephen Kinnock, son of former UK Labour Party leader Neil
Kinnock, and the husband of party leader Helle Thorning Schmidt of the Social Democrats, also
doesn't base himself in Denmark. This latter case is perhaps unsurprising as he is not Danish has
always worked for British or international organizations based outside of Denmark even though his
wife and children live in Denmark.
 The extensive social services network can potentially lead to situations where a statistically
significant amount of people live exclusively on unemployment benefits, without seeking
employment. The magnitude of this problem is not certain, but it is worth noting that the countries
following the Nordic model have very low unemployment.
 As globalisation becomes a more accepted part of business and personal life, many companies are
becoming more aware of international opportunities to cut costs, as with the high taxes and high
cost of living, they are finding they can recruit employees cheaper abroad. Thus outsourcing and off
shoring are becoming very common, especially in sectors such as IT and manufacturing, and many
13
The at-risk-of-poverty rate is a share of persons with income below the at-risk-of-poverty threshold.
building construction companies are importing labour from the new Eastern European members of
the European Union, rather than recruit internally and pay Nordic salary levels.