The Scandinavian Welfare States: Achievements, Crisis and Prospects

Scandinavian countries have enjoyed an international reputation for combining generous welfare state entitlements with rapid economic growth, low unemployment and very high levels of labour force participation, particularly among women. Over the past few years, they have nevertheless confronted serious economic difficulties, involving historically unprecedented levels of unemployment. Some analysts have linked poor economic performance with the requirements of welfare states, arguing that expensive entitlements make Scandinavian economies uncompetitive in world markets. This critical view appears to have won a degree of acceptance even among the principal architects of the welfare state, the Social Democratic parties and trade unions, which have recently agreed to cuts in some entitlements.

In his study of the Nordic experience, however, John Stephens argues that welfare state entitlements have played little part in the current economic problems of the Scandinavian countries. Far from undermining competitiveness, a well-trained and secure work force increases the ability of these economies to compete in international markets. Furthermore, in his view, there is no reason to assume that with the opening of the European market, the competitive advantage of low wages will be more important than that of capital intensity and highly qualified labour.

High levels of unemployment stem from the increase in international interest rates and a simultaneous internationalization of financial markets, which have affected a key element in the post-war model of growth in Scandinavian countries: the ability of the government to maintain low interest rates and to privilege borrowing by industry over other consumers of credit. Moreover, the decline in centralized bargaining has affected another important tool of macro-economic management in Scandinavia: negotiated wage restraint. Finally, stagnation in other advanced industrial economies has reduced international demand, on which the export-oriented economies of the region are heavily dependent.

With the rise in unemployment, demands on the welfare state increased, while revenue for social security contributions and taxes fell, making the existing level of entitlements unaffordable. In consequence, a series of reforms were made. Stephens discusses these changes on a country-by-country basis. In general terms, one can say that qualifying conditions have been tightened in a number of programmes; the level of benefits has been reduced, as people recuperate a lower proportion of lost income from unemployment, illness, and so forth; and there has been some trend toward privatization of social service delivery, although these programmes are still funded by the state.

The author concludes that these steps toward retrenchment do not represent a qualitative change in the Scandinavian welfare system. With very few exceptions, benefits today are still more generous than they were in 1970. There is, however, a longer-term shift in emphasis: fewer resources are being destined to maintaining the guaranteed level of income through citizens’ entitlements (independent of participation in the labour force); and more is being invested in strengthening labour training and mobilization. There has also been an increase in the use of market principles to evaluate public services.

Will the Scandinavian states eventually be forced to adjust their welfare programmes to the “least common denominator” in the international arena? Stephens does not think so. The Nordic economies have high levels of labour productivity. They are also particularly resistant to changes induced by international competition because their export-oriented growth models have long depended upon competitiveness: increasing internationalization represents a quantitative, but not a qualitative, change in the existing economic environment.

Finally, the welfare state enjoys broad political support in Scandinavia, extending far beyond the social strata and parties originally responsible for establishing the world-famous programme of social protection. Short-term reform is therefore of a limited nature. Profound changes would require longer-term secular shifts in party support throughout these countries.