Susanna Fellman: The Nordic Model of Capitalism in Historical Perspective: Past Successes and Future Challenges

As a part of the Future of Capitalism Project at the Council on Foreign Relations (CFR), Roger W. Ferguson Jr. is inviting a diverse range of participants from academia, private sector, and government to contribute to a series of blog posts to provide perspectives on the different types of capitalism in practice around the world, the challenges these systems face, and their future in the twenty-first century. This post comes from Susanna Fellman, Torsten Söderberg and Ragnar Söderberg Chair in Business History at University of Gothenburg. Professor Fellman is a coauthor of the book Creating Nordic Capitalism: The Development of a Competitive Periphery.

There has been significant international interest in the Nordic countries of Denmark, Norway, Sweden, Finland, and Iceland and the “Nordic model of capitalism.” This was especially the case at the turn of the millennium when the economic growth figures of Nordic countries were exceptionally favorable and some famous Nordic firms, like Ericsson and Nokia, experienced notable success. The interest in these countries has endured to this day. Observers have often wondered why and how these small countries in the northern periphery can top the list of the most innovative countries year after year, especially as they do not in all respects fit the textbook model of efficient economies. For example, these countries are marked by large public sectors, extensive welfare states and high taxes. As they are small, open economies, they are heavily dependent on their export sectors and therefore also prone to crises because of outside shocks.

Nonetheless, all five Nordic countries have experienced swift economic growth since the late nineteenth century and today are among the richest countries in the world measured by GDP per capita. The Nordic countries have some clear strengths. They have been successful in combining a dynamic market economy with an extensive welfare state. The welfare state has often strengthened the economic development, by providing a highly educated workforce and promoting a high labor participation rate. Moreover, these countries are known to be stable democracies, with low levels of corruption and a large amount of social capital. The institutional basis has been favorable from an economic perspective.

The five countries are by no means identical and some even question the existence of a singular “Nordic” model of capitalism. However, they clearly have some common features. Firstly, all the Nordic countries are small open economies. They were late, but swift industrialisers that have over the centuries usefully exploited foreign markets and the global economy. They also have some common structural characteristics, for example the early industrial development was in all the Nordic countries based on some abundant key resource endowments. The institutional setting and economic policies have been quite similar as well. On the other hand, it is important to note that from time to time both the macroeconomic development and the economic-political models of these countries have diverged; there were periods when the models of capitalism have been more similar, followed by periods with greater differences.

Another important notion is that the Nordic model(s) of capitalism have not been the same over time. The economic, political, and institutional environment today is very different from the post-WWII decades. In fact, one of the strengths of these countries is the adaptability to transformations occurring in the external environment. This adaptability has originated from the social capital and internal cohesion, which made economic-political shifts by means of political compromises possible. The adaptability also originated in the countries’ openness, which have made large firms in export industries agile enough to change and at the same time  has encouraged innovative start-ups in new industries.

These inherent strengths still exist, but during the most recent decades some challenges for the future have become visible. Since the financial crises in 2008, the countries have also developed somewhat differently. For example, Finland is a very rapidly aging population problem, combined with a severely indebted public sector. Finland is one of the most crisis prone economies of the five Nordic countries. The Danish and Swedish economies are still very dynamic, but both these countries face severe problems with declining social cohesion and a quite unsuccessful integration of immigrants into the labor force. These factors can in the long run also have economic consequences.  Norway is the richest of these five countries, but it is heavily dependent on the oil industry. Also Norway too has an aging population. And last but not least, if the on-going geopolitical tensions would turn the global economic development towards a more permanent deglobalization trend, these small open economies would also face severe challenges.

Nonetheless, these countries continue to top in innovation rankings, are at the forefront of digitalization and adoption of new (today, especially green) technology, the political systems are intact, and the countries continue to be agile in dealing with changes in global markets. Many of the current problems that the Nordic countries face, are similar ones that other mature, industrialized countries confront, and not necessarily signs of specific weaknesses in the Nordic model of capitalism.