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Decimal Digest
06 Apr 2017

The Nordic model of growth

The Nordic model is cited by liberals as a success story of socialism. The country has universal health care, government funded education, labor unions and unemployment benefits everything that socialists desire. So, the argument goes that Nordic model of socialism is correct and therefore should be replicated by all to get the same results.

The factor that is missed by socialists is the role of culture and trust in societies that can make or break an economy. In 1943, an Irish historian James Beddy wrote a research paper to identify the factors responsible for a 50% growth in per capita income of Denmark over Ireland. All factors affecting agricultural output and natural resources were more abundant in Ireland than Denmark. But still on every economic parameter Denmark outperformed Ireland. The only difference was that Denmark had political stability which fostered the development of institutions which allowed it to implement different economic systems and benefit from market forces.

Thus, one might also hypothesize that the resource curse leads to political instability due to the rent seeking dynamics that evolve out of it. The lack of resources can lead to lowering of cooperation costs and as cooperation increases it fosters institutions which allow for market forces to flourish leading to the development of the economy. This might explain the Nordic countries and Japan’s economic success which occurred despite relative lack of resources.

The Nordic work ethics and thus the strong cultural affinity allows it to sustain large welfare states. Even though trust is a major factor but, some Nordic countries like Norway were able to sustain bigger welfare states due to oil and gas discoveries. The average trust levels in Nordic countries compared to United States is 21% higher1. The argument that welfare states lead to higher trust levels also does not hold ground, as Americans of Swedish and Nordic descent have consecutively 33% and 39% higher trust levels than average Americans2. The unique Nordic culture leads to success in both American and Nordic economy and is thereby the differentiating factor.

“Trust is high in universal welfare states, not because welfare state universality creates trust, but because trusting populations are more likely to create and sustain large, universal welfare states3.”

Therefore, the economic solutions cannot be generalized based on something that works well in some places without considering the whole context. Thereby, economic models based on local context considering trust establishment traits and mechanisms is how the policy debates should be structured.



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