High taxes, high productivity. Illustration by César Sesio

Northern stars

A multitude of cultural, institutional and economic conditions make the Nordic countries the envy of the world. But exporting this special mix may not be easy.

by Poul Funder Larsen, World Business magazine
Last Updated: 23 Jul 2013

Despite high costs, heavy taxation and a sizable government sector - all factors that, theoretically, should make it difficult to get off the ground - the Nordic economic model is flying high in international competition rankings. In the World Economic Forum's annual competitiveness rankings (see page 66), the five Nordic countries of Denmark, Finland, Iceland, Norway and Sweden come out near the top. In the WEF's most recent Global Competitiveness Report, Finland clinched the number one spot, with Sweden in third place, Denmark in fourth, and Iceland and Norway seventh and ninth, respectively.

These countries, which are outperforming the big eurozone economies in terms of growth and have far lower levels of unemployment, are now attracting the interest of economists and business leaders. Their success seems to disprove the popular theory that low-cost destinations with little government intervention are always the most competitive. "People are flocking to the region to try to understand the reasons behind this phenomenon," says Mikael Lindholm, a senior editor at House of Monday Morning, a Danish think-tank. "But identifying the reasons isn't that simple."

A multitude of political and economic factors underpin a nation's competitive position, but the field can be narrowed to a handful of categories that are particularly pertinent to boosting competitiveness. "The real engines of competitiveness are science, technology, entrepreneurship, finance, logistics and education," says Stephane Garelli, a professor at business school IMD's World Competitiveness Centre in Switzerland.

The Nordics top the class in most of these categories, but identifying the exact formula that has enabled them to outperform nearly all their European peers is difficult. But, since they all have small, open economies, one factor that can be discounted is size. Taken together, the five nations have just 25 million people and a combined GDP of about EUR850 billion at purchasing power parity - still less than Spain's.

While there are important differences in geography, political systems and international affiliations among the five nations, they are also bound together by cultural, linguistic and socio-economic ties. Most immediately apparent, from an economic point of view, is the common commitment to generous welfare spending, financed by high taxes. Government spending unfailingly hovers at 45% to 50% of GDP, and the state often seems omnipresent.

Ove Kaj Pedersen, director of the International Centre for Business and Politics at Copenhagen Business School, says that other cultures typically perceive freedom as opposition to the state, but the Nordics don't feel they truly have freedom without the state to safeguard it.

A recent report on competitive advantages written by House of Monday Morning for the Nordic Council, an intra-governmental organisation, identified the region's eight core values: equality, trust, proximity to power, inclusion, flexibility, respect for nature, the Protestant work ethic and aesthetics.

While these values are not exclusive to the Nordic nations, their particular combination can be seen as characteristic, argues Lindholm. "It's the interplay of these values that creates a cultural and economic system. And competition in the future will increasingly be about the ability to innovate and produce value-creating solutions that are difficult for others to copy," he says.

Many Nordic corporate success stories appear to have been inspired by this set of values. The strong tradition for top-notch industrial design that derives from aesthetics, for example, has been crucial in creating such brand leaders as phone-maker Nokia, toy company Lego and hi-fi manufacturer Bang & Olufsen. Similarly, egalitarianism can be perceived as an important impetus behind companies that stress affordable yet well-designed products for the masses, such as clothing company H&M or furniture retailer Ikea.

It can also be seen in the open-platform collaboration epitomised by Norway's Opera internet browser, or the Linux platform, which was drafted initially by Finnish programmer Linus Thorvalds.

A fundamental respect for nature has also ensured Nordic companies are now leaders in instituting energy efficiency, profiting from a growing premium on environmentally friendly products. Companies such as Vestas, the world's largest wind-turbine producer, and Tomra, a global leader in vending machines for bottle recycling, have successfully 'piggy-backed' their businesses on green consciousness.

Furthermore, the values of equality, inclusion and proximity to power have played an important role in shaping Nordic corporations, which tend to stress collaboration and openness in organisations where the distance from top to bottom typically is short. "There's a lot of emphasis on developing critical and independent employees," Lindholm points out.

The region's success in leveraging its corporate values has profound implications for its economic well-being and competitiveness. "Whether Nokia is able to maintain its technological edge over its Asian rivals is a far more important determinant of the future evolution of per capita income in Finland than whether there is a slight rise in inflation," Augusto Lopez-Claros, chief economist of the World Economic Forum, noted last year.

However, there is little empirical evidence to explain why Nordic companies are better at generating economic returns, although some research seems to suggest that companies with a flat organisational structure outperform those with a more traditional hierarchy. Does this approach make for better leadership? Perhaps. As Jack Welch once famously remarked: "Pound for pound, Sweden probably has more good managers than any other country."

Today, it's easy to forget that Nordic engines were idling at one stage.

In the late 1980s and early 1990s, both Finland and Sweden experienced severe financial crises, while across the region unemployment was high and public finances were in disarray. But in the past 10 to 15 years, these countries have seized the opportunity to change their ways, while retaining certain traditional values. "There has been a remarkable comeback for the Nordics in terms of competitiveness," observes IMD's Garelli. "They have reformed their economies at a time when large European countries such as Germany, France and Italy haven't succeeded in doing so."

In the process, sweeping changes have been made, involving an overhaul of public finances, labour markets and pension systems. The cutting of red tape to improve conditions for entrepreneurs is one such area - with direct ramifications for competitiveness. "There has been a revolution in terms of simplifying procedures. The ease of doing business is much better than 10 years ago," says Garelli. For countries in the high-cost bracket, improving investor access is particularly important: "It's OK to be expensive, but it's not OK to be complex, particularly if you're small," he says.

The region has also pursued a successful two-pronged approach of targeted investment into research and development (R&D) - typically driven as much by industry as by governments - and rapid liberalisation, for example, of telecommunications. Sweden and Finland are the only EU countries to have achieved the Lisbon agenda target of spending 3% of GDP on R&D. And the region has generally been well ahead of the field in terms of deregulating and unbundling natural monopolies in the communications and energy sectors.

Another area where much progress has been made is the reform of labour-market conditions. While labour-market organisation differs markedly among the Nordic countries, they have mostly been successful in generating high levels of employment. Currently, Denmark and Sweden are two out of only four EU countries that meet the Lisbon target of a 70% employment ratio by 2010.

One reason for the high employment rates is the region's success in boosting women's participation in the workforce. In Denmark and Sweden more than 70% of women are in employment, compared with less than 60% in large EU countries such as France and Germany. The high proportion of women in the workforce may be explained partly by social values that stress gender equality, but it is also down to the provision of childcare and other social services, which are financed by taxes.

However, high taxes and operating costs are a serious concern to those doing business in the region. In January, the Norwegian capital Oslo overtook Tokyo as the most expensive major city in the Economist Intelligence Unit's Worldwide Cost of Living survey, and other cities in the region are not far behind. Business costs are high, even compared with most Western European destinations. For example, Denmark has an hourly labour cost of EUR29.45, more than double that of Spain.

On top of this comes a tax burden that makes other developed economies pale by comparison. In Sweden, tax revenue is close to 51% of GDP, while in Denmark it clocks in at just under 50%. Finland and Norway both collect around 45% in taxes, and Iceland 41% - all well above the OECD average of 36%.

But the structure of their tax systems means that the burden on business is less onerous than one might think. "They tax personal income and consumption heavily, but spare corporate profits," says Garelli. Denmark's marginal tax rate for personal income is a whopping 59% - and it kicks in at just EUR45,000 - while value-added tax is 25%, with very few exemptions, but corporate tax is 30%, not high by European standards.

And it could be argued that the Nordic states have been more successful than most in generating value for taxpayers' money. All five countries boast low corruption levels - ranking in the top 10 on Transparency International's Corruption Perceptions Index (see box) - and their government institutions are comparatively efficient. "The north-west European model involves a public-private interplay, which means that the public sector isn't necessarily a burden," according to Lindholm.

But Nordic observers warn that those looking to the region for inspiration to solve their domestic ills may be disappointed. While many of the Nordic model's components might be imitated successfully elsewhere, replicating the whole may prove impossible. The model is deeply rooted in the local culture, for one thing. Strong social cohesion and the consensus between populations and elites may go a long way towards explaining how the Nordic governments could muster a mandate for changing and modernising their systems at a time when larger European countries failed.

Knowing all this, however, does not mean it can be exported or that it will work in other countries. "Much of this is based on shared culture and values, and you don't just change a nation's culture overnight. It takes generations," warns Lindholm.

IKEA: SWEDEN

The company that would become Ikea started selling furniture in 1955; its simple, affordable products soon caught on. By 2005, it had more than 200 stores and founder, Ingvar Kamprad is one of the world's richest men, overtaking Bill Gates in 2004. Apparently, one in 10 Europeans is conceived in an Ikea bed.

NOKIA: FINLAND

Until two decades ago, the world's largest mobile phone company used to sell toilet paper. But it switched and Nokia has been pre-eminent ever since. Like most telcos, it caught a cold in the tech bust, but has since rallied. It is now Finland's biggest company and it accounts for more than half the Finnish stock exchange.

BANG & OLUFSEN: DENMARK

The high-end audio manufacturer struggled with a severe financial crisis in 1990s, but has since refocused; last year it posted a profit of Dkr380 million on a turnover of Dkr3.7 billion. Celebrated for futuristic, stylish design, its products have even made it into New York's Museum of Modern Art.

BAUGUR: ICELAND

Iceland's biggest retailer (formed by the merger of two supermarkets) has extended its reach across Europe over the past few years with acquisitions such as Hamleys (London) and Magasin du Nord (Denmark). The company went private in 2003 and is controlled by its CEO Jon Asgeir Johannesson.

STATOIL: NORWAY

Founded in 1972, and named after a North Sea oil field, it is Norway's largest company. It produces 0.8 million barrels of oil a day and has interests in pipelines, petrol stations and other fuels, while its geographical businesses stretch to Africa and the Caspian. Its share price has quadrupled over the past five years.

AP MOLLER-MAERSK: DENMARK

Maersk is one of the largest shipping companies in the world, employs 60,000 people and has more than 250 vessels; it operates in 125 countries, although its origins date back to 1904, when a man bought a boat. Denmark's largest industrial group, it also has interests in IT, oil and groceries.

TRANSPARENCY INTERNATIONAL'S CORRUPTION PERCEPTIONS INDEX Rank Country 2005 CPI score 1 Iceland 9.7 2 Finland/New Zealand 9.6 4 Denmark 9.5 5 Singapore 9.4 6 Sweden 9.2 7 Switzerland 9.1 8 Norway 8.9 9 Australia 8.8 10 Austria 8.7 Source: Transparency International WORLD ECONOMIC FORUM GLOBAL COMPETITIVENESS INDEX, 2005-2006 1 Finland 2 US 3 Sweden 4 Denmark 5 Taiwan 6 Singapore 7 Iceland 8 Switzerland 9 Norway 10 Australia GDP GROWTH: AVERAGE ANNUAL VOLUME CHANGE 1994-2004 (%) Finland 3.6 Iceland 3.5 Norway 2.9 Sweden 2.8 Denmark 2.1 US 3.3 UK 2.8 G7 2.5 Euro area 2.3 EU-15 2.2 OECD total 2.6 Source: OECD EMPLOYMENT: FEMALE PARTICIPATION RATE 2004 (%) Iceland 79.9 Denmark 76.4 Norway 75.6 Sweden 75.0 Finland 72.3 US 69.8 UK 68.5 G7 66.6 EU-15 63.0 OECD total 61.1 Source: OECD TOTAL TAX REVENUE AS % OF GDP, 2004 Sweden 50.7 Denmark 49.6 Norway 44.9 Finland 44.3 Iceland 41.9 EU-15 40.5 Source: OECD REAL GDP GROWTH, 2005 (PRELIMINARY FIGURES) Iceland 5.9% Norway 3.8% Sweden 2.4% Denmark 2.2% Finland 1.7% EU 1.7% Source: National Statistics, World Business estimates

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