If the Danes can do it, why can't others?

Bob Kuttner spends some time in Denmark and has wise things to say about the welfare state in Denmark and advanced countries in general:

Reading Adam Smith in Copenhagen -- the center of the small, open, and highly successful Danish economy -- is a kind of out-of-body experience. On the one hand, the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).

On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate, after Sweden; strong trade unions; and one of the world's most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world's most creative system of worker retraining.

Does Denmark have some secret formula that combines the best of Adam Smith with the best of the welfare state? Is there something culturally unique about the open-minded Danes? Can a model like the Danish one survive as a social democratic island in a turbulent sea of globalization, where unregulated markets tend to swamp mixed economic systems? What does Denmark have to teach the rest of the industrial world?

These questions brought me to Copenhagen for a series of interviews in 2007 for a book I am writing on globalization and the welfare state. The answers are complex and often counterintuitive. With appropriate caveats, Danish ideas can indeed be instructive for other nations grappling with the enduring dilemma of how to reconcile market dynamism with social and personal security. Yet Denmark's social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.

At the heart of the Danish model, Kuttner says, is the idea known as flexicurity.  What this means, in part, is that in Denmark there are simply no restrictions against laying off workers other than the requirement of advance notice. But: 

What makes the flexicurity model both attractive to workers and dynamic for society are five key features: full employment; strong unions recognized as social partners; fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut; a comprehensive income floor; and a set of labor-market programs that spend an astonishing 4.5 percent of Danish GDP on initiatives such as transitional unemployment assistance, wage subsidies, and highly customized retraining.

In the U.S. by contrast, "spending on all forms of government labor-market subsidies -- of which meager and strictly time-limited unemployment compensation makes up the most part -- is about 0.3 percent of GDP."

The focus on economic security also enables a remarkable degree of consensus and enthusiasm on free trade.  Denmark is probably one of the few places in the world where you will find, as Kuttner did, trade unionists arguing that industry should engage in more outsourcing!

If you want to learn from and adopt the Danish model, Kuttner says, you cannot do it on the cheap.  The trade adjustment or wage insurance remedies that are circulated in the U.S. context do not include

the other key elements that make flexicurity both a political and a policy success. Most seek to buffer the dislocations of trade on the cheap. But the Danish model cannot be understood as a strategy merely of "compensating losers" or even of reinforcing political consent for free trade. It is part of a far broader national commitment to maintaining a highly egalitarian society in which there are no bad jobs and to the use of ongoing labor-market subsidies to create a highly skilled and dynamic work force as the essence of global competitiveness. The other northern European nations have their own successful variants of active labor-market policy, but most of the proposals outside Scandinavia that invoke the Danish model would appropriate the flexibility without the security. None is politically serious about the necessary scale of public outlay or social collaboration.

Kuttner's bottom line is that the Danish model is too specific to Denmark to be exported wholesale.  But, as he hastens to add, the ideas in it are simply too good to ignore.

Comments

[Sebastian]

this can't seriously be news in economists' country? Political scientists and sociologists have been drooling over Denmark for the last decade and flexicurity is a buzz-word in both the ILO and the OECD. While Denmark is indeed impressive, some major caveats are in order:
1. Denmark really is quite a small country. As Uwe Becker
has pointed out, if you pick successful regions of the same size in, e.g. Germany, they do about as well as Denmark.
2. The Danish industrial structure is quite distinct (this an argument by David Soskice, one of the leading economists/political scientists in the debate), with hardly any large firms and mainly medium-size employers.
3. The politics of welfare state reform (in the 1990s) in Denmark may be more ugly than meets the eye immediately. Hyper-nationalism and xenophobia, combined with perhaps Europes strictest anti-immigrant strategies, were part of the strategy to legitimize the reform packet.

So with all due respect for Denmark, it maybe a good idea to curb some enthusiasm.

[Jacob Christensen]

Just to accentuate the positive - which may be difficult to translate to other countries:

Danish trade unions are and have always been pragmatic and relatively cooperative as a rule in their relations with employers. This goes back to 1899 when the September Agreement was reached.

Can you get Wal-Mart to accept trade unions - and get US trade unions to accept that labour market policies are about creating rather than keeping existing jobs? (I'm painting a slightly rosy picture here)

Even if a lot of things can be said about Danish immigration policy, then I'm not really sure that the link between labour-market reforms and anti-immigration policies is that simple. The Swedish trade unions were anti-immigration following the eastern enlargement of the EU.

Oh, well. Maybe I'll return with more comments later. Much can be said about this.

[Peter]

Denmark is also home to one of the most interesting approaches to regulation, the "action plan" framework. This is a collaborative model in which social actors (unions, civil society groups, even government agencies) agree to work for cooperative solutions with business, while business cedes a significant measure of autonomy. Imagine a joint venture structure, but with for-profit and social partners trying to solve health, environmental and other problems. I don't know of a comprehensive study of this system in English; maybe Kuttner can take this on in his spare time....

[Barkley Rosser]

Sweden's policies are very similar, with less xenophobia, but also less flexibility. However, despite long moaning and negative publicity by foreigners, especially in the US, Sweden is doing pretty well again these days. Free trade with a lot of adjustment assistance and income equality does well.

[Justin Rietz]

Another great example of the benefits of free trade & free markets - they can even overcome high tax rates and large government spending.

Imagine how well Denmark would do if it downsized its government?

[Justin Rietz]

Another great example of the benefits of free trade & free markets - they can even overcome high tax rates and large government spending.

Imagine how well Denmark would do if it downsized its government?

[alex]

Sebastian: "Hyper-nationalism and xenophobia, combined with perhaps Europes strictest anti-immigrant strategies"

Do you have any specifics on these claims or, better yet, link(s)?

Also, how anti-immigrant can Denmark be when the EU requires that a citizen of any EU country that's been in the union more than a few years be allowed to live and work in any EU country?

[Barkley Rosser]

Justin,

Not obvious it would do any better and might well do worse. That is the point here: Denmark has among the world's very best stats on various fronts, with several of its closest rivals being other Nordic states with pretty similar systems. Part of what makes it work is exactly all those social safety nets provided by that large govenment. Take those away, and a lot of the support for the vigorous free trade is going to disappear.

alex,

I don't have a link, but the anti-immigrant sentiment is directed at non-EU citizens, many of them refugees from troubled Middle Eastern countries, many of them Muslims.

[Justin Rietz]

Barkley -

"Part of what makes it work is exactly all those social safety nets provided by that large govenment"

Your statement is exactly my point - you can make whatever blanket statements you want about the benefits of free trade / free markets in regards to Denmark's economy, and the prima facie case will support it. What is needed is analysis.

"Take those away, and a lot of the support for the vigorous free trade is going to disappear."

I more or less agree. This doesn't change the benefits (or downfalls) of free trade.

[Winston]

For an indication of the degree of xenophobia in Denmark, one need only consider the relative success of the anti-immigrant Danish People's Party in the 2007 parliamentary election: it received 13.9% of the popular vote.

Anyone interested in racism in Europe should check out some of the publications of the European Union Monitoring Centre on Racism and Xenophobia (EUMC), which can be found at http://www.eumc.at/fra/index.php?fuseaction=content.dsp_cat_content&catid=1.

[DC]

"most of the proposals outside Scandinavia that invoke the Danish model would appropriate the flexibility without the security."

Too true - flexicurity and "le modele danois" have been all the rage on the French right for a couple of years, but how can anyone trust that a neo-liberal government that says it wants to go in that direction will in fact deliver on the security part?

Path dependency, lock-in effect, collective action problem, prisoners' dilemmas, call it what you will, the political economy problems for any transition from the more tightly regulated continental European labour markets are formiddable.

Plus, I find this all very persuasive, but why doesn't any great link between employment protection legislation and unemployment show up in empirical studies (according to a couple of papers I've read anyhow).

[gordon]

"...fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut..."

This sort of income compression (if that is what Kuttner is talking about) is often condemned as reducing productivity. Pity there's no discussion of productivity in Kuttner's piece. I would bet that he found it no worse than Denmark's trading partners.

[Powkat]

14% of the popular vote to an anti-immigrant political party constitutes racism? It's less than half of the 40% of white Democrats who don't want to vote for a man of mixed race. Glass houses, fellas.

[Powkat]

14% of the popular vote to an anti-immigrant political party constitutes racism? It's less than half of the 40% of white Democrats who don't want to vote for a man of mixed race. Glass houses, fellas.

[DragonScholar]

I'm glad to see exploration of other economic models around the world. The more learning the better.

However one thing that comes to mind looking at Denmark, the obvious one to me as an American, is the idea of some kind of cooperative vision.

American's just don't have that. We're far, far too occupied in turf wars, petty politics, flag pins, racial issues, etc. to unify and have a vision of a future we'd like to share.

Every American politician has some "problem" they'll take on, but few talk realistically about the society we want to have and how to get it. Probably as it's going to take work and not everyone will get everything - and people don't want to say that.

[Jane Rocheford]

I am an American from Los Angeles who lived in Denmark for 5 years. I found it to be the most intolerant and xenophobic of places. The Danish tribalism and overall smugness is astounding overall.

The Danes may be evolved in some ways but they have very far to go when it goes to being openminded and general human acceptance.

[Jane Rocheford]

May 07, 2008
If the Danes can do it, why can't others?
Bob Kuttner spends some time in Denmark and has wise things to say about the welfare state in Denmark and advanced countries in general:

Reading Adam Smith in Copenhagen -- the center of the small, open, and highly successful Danish economy -- is a kind of out-of-body experience. On the one hand, the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).

On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate, after Sweden; strong trade unions; and one of the world's most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world's most creative system of worker retraining.

Does Denmark have some secret formula that combines the best of Adam Smith with the best of the welfare state? Is there something culturally unique about the open-minded Danes? Can a model like the Danish one survive as a social democratic island in a turbulent sea of globalization, where unregulated markets tend to swamp mixed economic systems? What does Denmark have to teach the rest of the industrial world?

These questions brought me to Copenhagen for a series of interviews in 2007 for a book I am writing on globalization and the welfare state. The answers are complex and often counterintuitive. With appropriate caveats, Danish ideas can indeed be instructive for other nations grappling with the enduring dilemma of how to reconcile market dynamism with social and personal security. Yet Denmark's social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.

At the heart of the Danish model, Kuttner says, is the idea known as flexicurity. What this means, in part, is that in Denmark there are simply no restrictions against laying off workers other than the requirement of advance notice. But:

What makes the flexicurity model both attractive to workers and dynamic for society are five key features: full employment; strong unions recognized as social partners; fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut; a comprehensive income floor; and a set of labor-market programs that spend an astonishing 4.5 percent of Danish GDP on initiatives such as transitional unemployment assistance, wage subsidies, and highly customized retraining.

In the U.S. by contrast, "spending on all forms of government labor-market subsidies -- of which meager and strictly time-limited unemployment compensation makes up the most part -- is about 0.3 percent of GDP."

The focus on economic security also enables a remarkable degree of consensus and enthusiasm on free trade. Denmark is probably one of the few places in the world where you will find, as Kuttner did, trade unionists arguing that industry should engage in more outsourcing!

If you want to learn from and adopt the Danish model, Kuttner says, you cannot do it on the cheap. The trade adjustment or wage insurance remedies that are circulated in the U.S. context do not include

the other key elements that make flexicurity both a political and a policy success. Most seek to buffer the dislocations of trade on the cheap. But the Danish model cannot be understood as a strategy merely of "compensating losers" or even of reinforcing political consent for free trade. It is part of a far broader national commitment to maintaining a highly egalitarian society in which there are no bad jobs and to the use of ongoing labor-market subsidies to create a highly skilled and dynamic work force as the essence of global competitiveness. The other northern European nations have their own successful variants of active labor-market policy, but most of the proposals outside Scandinavia that invoke the Danish model would appropriate the flexibility without the security. None is politically serious about the necessary scale of public outlay or social collaboration.

Kuttner's bottom line is that the Danish model is too specific to Denmark to be exported wholesale. But, as he hastens to add, the ideas in it are

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