How Norway Dispels the Private vs Public Sector Myth

A strong state capable of building infrastructure is not enough. It must also be an inclusive state.

By David Sloan Wilson and Sigrun Aasland

It’s no secret that the Scandinavian nations are doing something right. They consistently lead the world in measures of happiness and quality of life. Political guru Francis Fukuyama called the search for the good society “getting to Denmark”. Even The Economist magazine featured a goofy looking Viking on its cover with the headline “The Next Supermodel”.

How the Nordic countries achieve their success–and whether they can be copied by other nations–is another matter. Bernie looks upon them as a model. Hillary disagrees. Hell will freeze over before Ted and Donald cast their eyes in such a “socialist” direction.

Perhaps some of the new economic thinking featured on Evonomics can help. One key insight is to dispel the myth, pervasive in America and dangerously infective elsewhere, that the private sector does everything well and the public sector does everything poorly. Modern society requires an extensive infrastructure, which does not emerge bottom-up from unregulated markets. This has always been the case, in America as elsewhere, as my recent interview with Daron Acemoglu attests. One reason that the Nordic nations work well might be because they have not—yet—succumbed to the siren’s song of free market fundamentalism.

A strong state capable of building infrastructure is not enough. It must also be an inclusive state that works for the benefit of everyone, as opposed to an extractive state that works only for the benefit of an elite few, as my interview with Acemoglu also makes clear. Inclusiveness requires a balance of power among the various sectors of the society. Perhaps the Nordic nations work well for this reason also—strong states working collaboratively with a strong private sector, strong labor unions, and a strong, well-informed, and trusting electorate.

Even this is only necessary and not sufficient. A national economy that works well is a complex adaptive system, like an automobile with many interdependent parts. Even a strong and inclusive state won’t work well if it doesn’t put the parts of its economy together in the right way, which is not an easy matter for any complex system. Centralized planning won’t work and neither will unregulated markets. Something in between is required, which David Colander calls “activist laissez faire” in this excerpt of his book with Roland Kupers titled Complexity and the Art of Public Policy.

For the last three years, the Evolution Institute has been making a special study of Norway as an example of cultural evolution leading to a high quality of life. We now have an extensive network of associates to help us combine their detailed knowledge of Norwegian society and economics with our distinctive theoretical perspective—including Sigrun Aasland, Director of Analysis at Agenda, a think tank focused on Norwegian domestic politics and international affairs. My interview with Aasland provides a glimpse of the complex adaptive system that operates under the hood of the Norwegian economy.

DSW: Greetings, Sigrun, and welcome to Evonomics.com.

SA: Thank you, David. I am really excited to be part of this discussion

DSW: To begin, tell us about your own background. I know from our previous conversations that part of your economic training took place in the USA, so you have personally experienced the very different economic philosophies of the two nations.

SA: Sure. I was lucky enough to get my Master’s degree at the Johns Hopkins School of Advanced International Studies in Washington, DC. I also worked at the World Bank for five years after graduating. SAIS is a great programme – what’s more perfect for policy geeks to study policy in the heart of global policymaking? It also has a truly international student body – so you learn economics and policy alongside people from China, Japan, Sweden, Poland, Ecuador, Canada, Morocco, and the US.

You know they say it is a good thing to challenge our own worldviews from time to time. I grew up in Norway and the welfare state has always been self-evident. At SAIS not so much. I remember someone had scribbled in the basement bathroom: “How many Scandinavians does a right wing policy school really need?” Quite a few Scandinavians it turned out, partly since we had part of the tuition covered by our own welfare states and could attend expensive grad school simply because we had the grades for it.

DSW: Well, there is one benefit of a welfare state!

SA: In SAIS labor economics class we argued not over the level and design of social policies, but just as often over the welfare state as a concept. The contrast was significant to the US tradition, but also the Eastern European students were quite libertarian – having grown up just after the fall of Communism. You learn a lot from having to look at your own system from the outside. At least I did.

DSW: Now tell us a bit about Agenda and your role as Director of Analysis. Where is Agenda located on the Norwegian political spectrum, and where is the entire spectrum located on the American political spectrum?

SA: Agenda is a think tank and the centre-left of Norwegian politics. The concept of think tanks is quite new in Norway. We’ve had political parties and research institutions, and gradually I think it has become increasingly clear that there was a gap between the two. Politics tend to get conflict-oriented and there is this scramble for attention and shortage of time and space. At the other end of the spectrum, researchers hesitate to engage in political debate in fear of being oversimplified or misunderstood. Our job is to create a space for open-minded policy-debate. And we are explicitly not value-free. We are not affiliated with any party. Yet our philosophy is that liberty is only possible when opportunities are truly equal. Today we are seeing that they are not. Capital and resources accumulate, inequality is on the rise, and your possibilities depend largely on your parent’s economic situation. Robert Putnam’s research, among others, show this very clearly. We invite researchers – including Putnam, to contribute and we try to create both a space for longer thoughts and a bridge between research and politics. We also produce our own analyses on policy issues including work and economic policy, the future of the welfare state, climate and energy policy, migration, and development. I’ve been in this job for just short of a year, coming from a background in consulting and before that the World Bank.

DSW: Thanks for this background—very helpful. Now let’s dive in. I first met you at a talk I gave at BI, Norway’s largest business school. My talk was titled “The Competitive Advantage of Cooperation” and you were present as a commentator. I was struck by how you described the Norwegian economy as a complex adaptive system with interlocking parts. Could you please repeat that succinct description?

SA: I would love to. My main point – well illustrated recently by the Economistand others, is that the Nordic model makes sense economically. It is not just about justice and equality. It is also – and more importantly – about using all the talent, using all the technology possible and changing all the time. That means high productivity.

The so-called Nordic model can be illustrated as a triangle consisting of three interlocking factors: First: a strong tax-funded welfare state providing education, healthcare and social safety nets. Second, an open market economy with active monetary and fiscal policies to ensure stability, distribution, and full employment. And third, strong collaboration in an organized labor market with coordinated wage formation and company-level collaboration.

Now this model has demonstrated the ability to combine relatively high taxes with high productivity. Productivity growth has fallen less in Norway than in many other countries. There are a number of reasons for this.

A collectively bargained and compressed salary structure means that low-skilled labor is relatively expensive while high-skilled labor is relatively cheap. Since high-skilled labor complements technology while low-skilled labor substitutes technology, three things happen. First, employers invest in technology to replace the expensive low-skilled workers. They also choose high skilled over low-skilled workers since the cost differential is small. Second, unless highly productive, the same employers cannot afford to keep workers and have to let them go. This ensures adaptability within companies but also among companies. Adapt or die.

DSW: Cultural evolution in progress…

SA: The latter is important and brings me to the next point. Just to illustrate – in the course of the last two years nearly 30,000 people have lost their jobs in oil and gas as a consequence of falling oil prices and a delay in investing in productivity growth in the sector. In the first wave, these were mainly guest workers but eventually also Norwegian staff. While dramatic on a personal level for those losing their job, this happened without any social crises or unrest. This is manageable because Norwegian workers have social safety, not job safety. Laid-off workers are ensured a certain safety net from the state.

The third thing that happens is good collaboration in the workplace. Norwegian worklife is characterized by limited hierarchy and short distance to the top. This means ideas can be brought forward and decisions made in the production line by trusted and qualified employees. In fact, research also indicates that firms with high levels of organized labor are more likely to restructure or reorganize.

DSW: This will surprise many American readers.

SA: Well they are not alone. It is a well-established myth I would say that organized labor hampers innovation and restructuring. But in a microcosm, most people would agree that good dialogue promotes better solutions for everyone. You know it is not in workers’ interest either to see companies go under. On a macro-level, the strong three-way collaborative of unions, employers and state also have common interests in ensuring responsible wage formation. And together they can also tackle broad and difficult reforms where long-term perspectives are necessary. Two examples: In the annual wage negotiations, the exporting industry always negotiates first and sets the stage for the others, thereby ensuring that wage growth will not exceed what exporters can handle. On a policy level, in 2008 the three partners negotiated the start of a massive pension reform that will give many people less but that will be necessary to ensure labor supply and public budgets with an aging population.

All this, of course, is not to say there are no challenges ahead. One is that as the labor market changes. With more service and knowledge workers and perhaps (not yet) more freelancing, we are seeing a decline in organized labor (membership in unions). It is now at 50 percent of the labor force and at some point may not be representative to uphold collective bargaining and a strong policy role. Second, with immigration comes a higher share of low-skilled workers than the typical Norwegian population. We are already having trouble including the Norwegian less-productive in a highly productive labor market. Allowing lower wages would undermine the above principles, and may even make social benefits more desirable than wages for some. So is not a good solution. Building competence and integrating more immigrants into the labor markets on its own terms seems more sensible, but is of course easier said than done, at least for the first generation immigrants (second generation immigrants in fact do quite well).

DSW: Even a highly adaptive complex system can be destroyed by external forces. Let’s talk more about innovation. Norway is sometimes portrayed as lacking in innovation but your analysis seems to suggest otherwise.

SA: There is an interesting discussion around what models actually foster innovation. To my understanding, Daron Acemoglu and others argue that while equal societies with a strong state and considerable safety nets are nice places to live, they are dependent on others (such as the US) to drive innovation because the main driver for innovation is the possibility to get ahead in an otherwise unequal society. Other researchers have questioned this analysis, questioning inter alia how innovation is measured. These researchers show that if you look at both patents and researchers per capita – Nordic countries perform far better than the US. Joseph Stiglitz also offers alternative theories arguing that high levels of trust and strong safety nets in fact promote innovation because the risk of failing is perceived as much smaller. And as another Nobel laureate, Daniel Khaneman, has illustrated – people tend to pick no risk over possible gain.

The road to innovation and success is paved with failed attempts. So it boils down to two core questions: First – what kind of relationships foster new thinking? And second, do people take risk and think innovatively if they have a lot to gain personally – or if failure in trying comes with low risk?

DSW: Your analysis of what’s “under the hood” of the Norwegian economy nicely illustrates the three factors that I listed in my introduction to this interview: 1) A strong state: 2) An inclusive state; and 3) A state that is adaptable as a complex system. I’d like to hear more about the third factor. How does Norway avoid the dangers of centralized planning on one hand and unregulated markets on the other hand? How does it cope with the fact that any policy intervention will have effects that cascade through a complex social and economic system?

SA: Well that’s a huge question. And I am not here to claim that the Norwegian economy has got it all figured out. But the building blocks are in place. And I want to stress something important that you also alluded to in your introduction: This is not a plan-economy. In fact my main point is not that the state alone makes the Nordic model. It is a complex and stable arrangement involving employers and employees – precisely to ensure private sector growth and exports. The economy is not centrally planned. The public sector share of GDP is high because welfare services and collective goods are either publicly run or publicly financed. But the economy in general has proved highly adaptable.

DSW: Thanks so much for your insider’s view of the Norwegian economy, which I think will be revealing to many American readers. Even better, I and my associates at the Evolution Institute look forward to working with you and your associates at Agenda to become—as I put it—wise managers of evolutionary processes.

SA: Thank you!

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