Nordic welfare states working just fine

Posted: October 12, 2005

STOCKHOLM, Sweden — After years of trying to have a baby, Jesper and Sara Liedholm finally went to China to adopt. And wouldn't you know it: A few months after returning with beautiful Mathilda, Sara found out she was pregnant.

Were the Liedholms a typical two-income American couple, their joy probably would have been tempered by anxiety, given the choice ahead: Pay for expensive child care for two babies, or do without one salary.

But that is not how it works in Sweden, home to one of the world's most generous social-welfare states. Here, each parent will get eight months off from work per child, at 80 percent of salary. That's just one of the gold-plated social benefits available to Swedes, who pay some of the world's highest taxes in return.

For years, American critics have argued that this kind of European social model, with its cushy work hours and cradle-to-grave nanny supports, cannot survive in a global economy. Just look at France, Germany and Italy, whose economies have suffered high unemployment and low growth for a decade, these critics say.

But there is more than one European model, and some have been more successful than others. The Nordic countries of Sweden, Denmark, Norway, Finland and Iceland are thriving, despite having even more generous government benefits and higher taxes than their European peers.

These small countries, with a combined population of 24 million, top almost every global measure of quality of life - and also, surprisingly, of economic competitiveness.

"The conventional wisdom, especially coming out of the U.S., is that high taxation discourages innovation and leads to capital flight," said Augusto Lopez-Claros, chief economist for the Switzerland-based World Economic Forum. "What these countries are suggesting is that it's not so simple."

Indeed, the vibrancy of the Nordic states is flatly at odds with the commonly heard American economic mantra about the destructiveness of massive European welfare states. It suggests, some analysts argue, that Europe's generous social systems are not inherently flawed - and that they can survive globalization, if they can do away with rigid job protections and adjust their benefits to encourage work, as the Nordic states have done in recent years.

For anyone who cares to look, the success of the Nordic states could inject a new perspective into the American debate about issues such as family leave, taxes, and universal health insurance.

In last year's United Nations Human Development Index of "most livable countries," Norway ranked first and Sweden second, and the United States eighth. And the World Economic Forum this year ranked the top three most competitive economies as Finland, the United States and Sweden, in that order.

The Nordic countries, home to Finland's Nokia and Sweden's Ericsson, are also among the world's leaders in Internet penetration, cell-phone use, and technology infrastructure.

They have maintained this edge, despite leveling steep taxes on the wealthy and redistributing the money through government benefits, thereby avoiding the huge increases in inequality that have developed in postindustrial America since the 1970s.

What's more, despite the widely held notion that the United States is the world's greatest opportunity society, studies show that parental wealth is a greater precursor to financial success in the United States than in Scandinavia.

This is not to say that the Nordic systems are problem-free. Sweden, for example, is grappling with huge abuse of its generous sick-leave policy. In recent years, it also has admitted large populations of poor, uneducated immigrants, many of whom are failing to assimilate and living on public aid.

Like the rest of Europe, most of the Nordic countries have fallen behind America over the last decade in economic output, largely because Americans work more hours.

But the Nordic states have grown faster, with lower unemployment and better-quality jobs, than the big continental European economies.

What makes the Nordic states stand out in Europe? After all, most European countries have generous welfare states.

The difference, analysts say, is in how the Nordic states spend the money, and how they structure their benefit programs.

While France, Italy and Germany are hamstrung by job-for-life cultures that erect myriad legal barriers to firing workers, the Nordic countries make it easier for companies to downsize. That in turn paves the way for new industries and new jobs.

The Nordic governments offer generous unemployment benefits and extensive government-funded retraining. But while Germans, French and Italians tend to linger on unemployment benefits for years, the Nordic states force people to take other jobs that come along.

Though their citizens take as much vacation as their European counterparts - two to three times as much as Americans do - the Nordic societies work more, because there is less early retirement and more women in their workforces.

Sweden and Finland also lead the world in research-and-development spending. The Swedes spent 4.3 percent of their gross domestic product on research last year, compared with about 2.6 percent for the United States and less than 2 percent for the European Union as a whole.

Another key factor: The Nordic states are widely perceived to have the world's least corrupt, and the most efficient, governments and court systems. Foreign investors can count on fair and evenhanded treatment from regulators.

Few expect the United States ever to emulate Scandinavia. Nearly 80 percent of Swedes are in a union, for example, compared with 12.5 percent of Americans. But last year, bellwether California became the first state in the country to require big employers to offer paid childbirth leave - six weeks at 55 percent of pay.

Women are the main beneficiaries of family leave and child-care benefits, experts say, and therefore it is no accident that Sweden has the highest percentage of working mothers, the highest share of female parliamentarians, and the highest percentage of advanced degrees awarded to women. With long paid parental leaves, women don't face the kind of "mommy track" penalty they do in the United States and elsewhere.

The Nordic countries weren't always doing so well. They made some economic mistakes in the 1980s that led to a collapse in the early 1990s. But since then, they have gotten their finances in order, reforming central-bank policies and curbing some of the excesses in their welfare systems.

Some argue that the Nordic states would be doing much better if their taxes and public sectors did not consume so many resources. Conservative economist Johan Norberg likes to point out that Sweden has slipped from the world's fourth-richest country in 1960 to the 26th richest. If Sweden were a U.S. state, it would be the fourth poorest, measured in output per person.

But in recent years Sweden has started to close that wealth gap with America. And when the center-right political party promised to cut taxes deeply in 2002, it lost the election.

"We've never had a problem with paying high taxes," said Jesper Liedholm, 35, who works for Sweden's Foreign Ministry.

In addition to the family leave, the Liedholms enjoy a subsidized neighborhood child-care center, excellent public schools, free health care, and a free university or vocational education for each child.

He earns $69,000 a year; Sara earns about $40,000. That means she pays the base tax rate of 32 percent. On his income above $40,000, he pays a 51 percent rate.

They live in a medium-size, three-bedroom house in a leafy Stockholm suburb, but they don't have a lot of disposable income to spend on flat-screen TVs and vacations, especially with a 25 percent sales tax on nearly everything.

"I think it's worth it," said Sara Liedholm, 34, who works for a nonprofit.

One of the Liedholms' neighbors, Mary Hyll, is an American from Bellingham, Wash., who married a Swede and has lived here for 15 years. A hospital dietitian, she is home on paid maternity leave after she and her husband also adopted a Chinese baby.

The high taxes were a shock, Hyll said, but "you start thinking, 'Wow, I'm really getting my money back.' It is worth it for me. It's just been wonderful."

Contact staff writer Ken Dilanian at 215-854-2405 or kdilanian@fastwebnet.it.

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