Nordic equality and the bumblebee

Always been interested in the Nordic economies especially when you look at their standing in HDI and other indicators like happiness, trust and ease of doing business etc. There is a series of three books that looks at the fundamental features of these societies whether it be Equality, Economic Performance and Happiness – see image.

The Nordic countries rank amongst the best for equality in society. How is it possible that these economies are some of the richest and the most equal? Many people compare the Nordic model of equality to a bumblebee. The bumblebee tends to go against the laws of aerodynamics – a very big body with tiny wings. The Nordic countries model of inequality is very expensive but there is still economic growth in the economy. Carsten Jensen talks of 3 aspects of Nordic society that makes this possible.

  1. The flexicurity system – flexibility and security. This is where employment regulation is fairly lenient (ability to make employees redundant) combined with a generous welfare programme The welfare support has two main aims: to protect against loss of income that come with losing your job and ensuring that you have the right skills to better fit the labour market. Should be noted that the government play an important role in the provision of free education at the tertiary level in Nordic countries. This leads to the golden triangle of flexicurity – flexible labour markets, training and retraining, and unemployment protection – see fig below.
  2. The business friendly environment. The World Bank’s Ease of Doing Business Index ranks countries according to how conducive their regulatory environment is to establishing and running a company. In the 2020 Index Denmark were 4th, Norway 9th and Sweden 10th. However this does not imply that equality is somehow intrinsically good for a country’s commercial environment.
  3. Social trust – this is important for growth as it make cooperation between individual citizens and companies easier. The lower transaction costs from social trust mean the environment is more conducive to investment from entrepreneurs and banks. Those countries that have less social trust spend more time and money on monitoring employees, other companies and consumers.

Source: Equality in the Nordic world – Carsten Jensen – 2021

The topic Inequality on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.

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Norway and income distribution

In Norway, people right across the income distribution have high living standards. In the UK, US and Germany, the rich fare well but the poorest rank low vs other countries. From the graph below Norway does very well in equal distribution of income. The top 10% rank second for living standards as do the median (50%). The poorest 5% in Norway are the most affluent compared to other countries. Therefore in looking at all the percentiles Norway is a good place to live no matter what your income is.

Source: FT Britain and the US are poor societies with some very rich people – 16-9-22

Gini Coefficient
The Gini coefficient is the best known measure to convey an impression of the overall level of inequality in a country. It ranges from 0 where everyone is equal to 1 where one person owns the whole income of a country. However there are two shortcomings:

There is no intuitive understanding of what a Gini coefficient implies. Although it might say that one country is has more equal distribution how big are the differences really?
It gives a single figure for an entire country but it tells us nothing about which parts of society are causing the inequality. Is it the higher incomes being much greater than the rest of the population or is it the middle income group pulling away from the lower income group.

Comparing the very rich to the very poor does not tell us all that much about the everyday experience of ordinary people and societies they live in. Therefore by calculating ratios based on the income of the 10th, 50th and 90th percentiles we get a clearer picture of inequality. These two rations of 90:50 and 50:10 enable us to see the distance between the lowest-ranked wage earners and middle-class, and between the middle class and upper middle class.

Nordic countries – most equal in disposable income
The graph below shows the two ratios for disposable income in Denmark, Norway, USA and Italy for 2018. Nordic countries Gini coefficient are characterised by the short distance from the middle class to the upper class, and from middle class to bottom. Although they still have inequality it is evident that affluence is largely shared compared to other countries.

Source: Equality in the Nordic World -2021

Noridic countries – disposable income
90th percentile make 1.5 times more than 50th percentile
50th percentile make 1.8 times more than 10th percentile

USA
90th percentile make 2.3 times more than 50th percentile
50th percentile make 2.7 times more than 10th percentile

Universal Welfare State.
There are three elements to this definition:
1. Rights and unconditional benefits: if you are unemployed, sick or old you receive benefits to compensate for income loss. You also have access to free education, medical treatment and care homes for the elderly.
2. Benefits are paid for via general taxes therefore individuals don’t have job-based insurance or health programmes. All citizens are members of the same health coverage programme which is run by the government.
3. Universalism – no matter what your income because you belong to the same job-based insurance programme all citizens will be treated the same from a manual worker to a business manager/doctor. This means the number of deeply impoverished people is very small in the Nordic countries.

Nordic countries – equality kicks in before welfare support.
The welfare state and government taxation are important mechanisms for redistributing money from the higher incomes to the lower incomes. Below are figures for the rations of gross income – people’s income before taxation and welfare payments. Therefore at a gross income level Nordic countries have a more equal pay before government intervention.

Source: Equality in the Nordic World -2021

Noridic countries – gross income
90th percentile make 1.5 times more than 50th percentile
50th percentile make 1.8 times more than 10th percentile

USA
90th percentile make 2.3 times more than 50th percentile
50th percentile make 2.7 times more than 10th percentile

This equality comes about mainly due to centralised wage negotiations. In Nordics countries collective bargaining normally takes place for entire sectors between unions representing employees and the employer associations representing businesses. The deals struck by the two parties then apply to all non union members. By 2015 the percentage of workers covered by collective bargaining were as follows:
Sweden – 90%
Denmark – 84%
Norway – 67%
US – 12%

Although this compress may compress wages people in the same occupation generally make the same although there has been an allowance for individual top-ups based on performance and qualifications.

Source: Equality in the Nordic World by Carsten Jensen – 2021

The topic inequality and gini coefficient on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.

The paradox of Norway – fossil fuel giant and leader in renewable energies

In 1969 the discovery of oil off the coast of Norway transformed its economy with it being one of the largest exporters of oil. A lot of countries in similar positions have succumbed to the ‘resource curse’ in which countries tend to focus on a natural resource like oil. The curse comes in two forms:

With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

Norway – has a different approach.

In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.

The Economist – Ecowarriors bankrolled by oil – 8-2-20

What are they doing?

  • 98% of electricity is from renewable energies and technologies
  • Heating with oil is to be banned this year
  • 50% of new cars are to be electric
  • Oslo has set a ceiling every year for its greenhouse gas emissions
  • Oslo removed nearly all parking spaces from the city centre – now bicycle docks / benches
  • Norway is hoped to be completely emission-free shipping fleet over the next couple of decades – this accounts for almost all of Norway’s oil consumption
  • Sovereign wealth fund will sell its shares in companies dedicated to oil and gas exploration

Norway and Liberia – Coarse Theorem

Coarse Theorem – Ronald Coarse argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution.

An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

Norway’s challenges

This being said there needs to be more emphasis on the service sector as an earner of GDP – this sector already accounts for 55% of GDP. According to The Economist Norway faces 4 challenges:

  • Reduce it focus on gas and oil
  • Increase its productivity through the use of technologies
  • Reduce carbon emissions to meet the Paris agreement goals on climate change
  • Create 25,000 jobs a year so that oil workers can find meaningful employment

Source: The Economist – Ecowarriors bankrolled by oil – 8-2-20

Scandinavian countries most expensive but happy

Another good video here with Tom Chitty from CNBC – outlines why the cost of living is so high in Scandinavia – Norway, Sweden and Denmark. These countries on average have some of the highest tax rates (see graph) in order to fund a large welfare state. Expenditure in social welfare is one of the highest as a % of GDP and eventhough it is very expensive to live in these countries they rank as some of the happiest.

Norway sovereign wealth fund takes an ethical stance

Norway’s soveriegn-weatlh fund surpassed US$11trn in assets on September 19th this year. With its significant revenue from North Sea oil and gas getting invested overseas it is likely to get even bigger to the extent that Norway can start to shape ideas abroad. It is increasingly speaking out on ethical behaviour of companies and is an increasingly activist shareholder. The ethics watchdog for the fund recommends that it excludes several firms in oil, cement and steel industries for emitting too much greenhouse gas. This may seem hypocritical in that Norway produces significant amounts of oil but it operates under its own ethical guideline set by parliament.

Source: The Economist – 23-9-17

Missing out on billions of dollars

Norway’s sovereign wealth fund has share in 9,000 companies, 1.3% of the entire world’s listed equity. It has lost out on billions of dollars of revenue by its government prohibiting any investment in tobacco companies and manufactures of certain weapons. The fund is forbidden by law from investing in firms that produce nuclear weapons or landmines, or are involved in serious and systematic human rights violations, among other criteria. These include Boeing, Airbus, Imperial Tobacco, Philip Morris. Last year the council looked into the construction industry in Qatar – host of the 2022 soccer World Cup – and neighboring countries, after reports of abuse by human rights groups. Since then new regulations have been implemented which protect the rights and living and working conditions of labour in the construction industry. This includes the right of immigrant workers to hold onto their passport. There is a broad consensus in Norway that the fund should not make money from companies that take people’s lives.

Norway and coase theorem

Another way Norway is trying to influence global warming is by using its sovereign wealth fund to change behaviors of other countries. Ronald Coase argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution. An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests.

Stick and Carrot

The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

5 or 6 more China’s

The reality is that the planet can’t stand another 5 or 6 China’s but developing countries still need to grow and, like their developed country counterparts, it will involve greenhouse gas emissions. If we are to curb global emissions developing countries will have to leapfrog to new technologies as the burning of traditional fossil fuels will just exacerbate the problem. However developing countries have neither the resources nor the incentive to reduce dependence on fossil fuels on their own as their main focus is economic growth. Whilst developed countries have a lot to lose from developing-world emissions it is in their interest to pay the latter to curb emissions e.g. Norway paying Liberia not to chop down its trees. Although this looks a simple enough policy politicians will not be so enthused by it as money that is paid overseas to cut climate change is not very popular with the electorate and therefore the government.

Contributions to world GDP 2013-16

The Economist produced a graph showing world GDP data and made the following points:

  • India and China account for 65% of world growth
  • Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
  • Norway contributed less to global GDP with lower oil prices being prevalent.
  • USA with increased government spending and greater export volumes improved its position
  • Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.

Maybe a good starter for your classes asking the question who contributes most to world GDP?

World GDP 2013-16.png

 

Pining for the Fjords or higher oil prices?

Although Norway is a capitalist country, it is state-owned enterprises that seem to be most prevalent in business circles. Oil revenues have been at the forefront of Norway’s development and it is, behind Luxembourg, the richest country in Europe. Ultimately the economic welfare of the country is heavily influenced by the price of oil and the peak of $150 a barrel in 2008 had huge benefits for the government purse. Oil and gas now account for about 25% of Norway’s GDP and almost 50% of its exports. However with the recent fall in oil prices to below $50 a barrel, oil companies have had to lay off workers – estimated to be 30%. According to The Economist the falling oil price has exposed two weaknesses in the Norwegian economy.

  1. Bureaucracy is a problem in Norway with the government owning about 40% of the stockmarket. Furthermore, as the vast majority of the country’s top executives attend the Norwegian School of Economics there is an unhealthy cultural uniformity which is not a catalyst to change.
  2. The welfare state has been too generous. The public sector employs 33% of the workforce (compared to 19% for the OECD countries) and as people enjoy a 37 hour week and sometimes a 3 day weekend there is a concern that the state is undermining the work ethic. In 2011 Norway spent 3.9% of GDP on incapacity benefits and early retirement, compared with an OECD average of 2.2%.

However, the government has been very prudent with its saving in that it now has the biggest sovereign-wealth fund in the world at $873 billion. The country also has a fish industry which is worth $10 billion a year.

Norway fjord

Where to from here?

Are we seeing a classic resource curse where an economy has become reliant on a particular resource? Does Norway have a real alternative to oil to generate revenue for its economy?

Norway needs to allow the entrepreneurial spirit more room to grow and also apply some free market reforms to the welfare state. Shrinking the role of the state will help as the private sector cold  start to be more involved in the running of schools, hospitals, and surgeries. So far the country’s reaction to the oil price drop is to be become even more left wing especially in the cities of Bergen and Oslo.

Source: The Economist – Norwegian Blues – October 10th 2015