What is Nordic Model?

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The essence of the model lies in distributing the benefits of capitalist prosperity and expanding the public welfare systems. In other words, the model promotes successful private enterprise, but at the same time captures the benefits of free education, health, and welfare through a large public sector and redistributive policies.

Key Takeaways

  • The Nordic model is a hybrid economic model espoused by countries of Scandinavia – Norway, Iceland, Sweden, Finland, and Denmark. Hence, it is also called the Scandinavian model. The Nordic model economy is a balanced mix of capitalism and socialism working towards bettering citizens with state pensions, childcare, income, and other welfare plans. In the Nordic model, the people of the society have an undisputed belief in the government, with the ideology of working together and facing every global challenge together. Countries following the American economic model are primarily based on capitalism and often criticize the Nordic model.

Nordic Model Explained

The Nordic model combines socialism and capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also.read more to form an economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more where equality is celebrated with benefits and social services that provides comforts of state pension, income, and other citizen welfare programs.

Scandinavian countries like Denmark, Sweden, and Norway rank high among every human resource and development list for what they have achieved in their society. This model has come forward as a shining example of how a country must operate and how citizens of the countries should contribute to collective goals and objectives while showing trust in the authority and its government.

It embraces the political structure of equality and assurance that every citizen is prospering individually. Due to a high degree of trust in government, the citizens of these countries willingly contribute a large amount of their income in taxes and federal funds to bring more prosperity to society. The government, in exchange, uses these funds to allocate for free training, childcare, free education, pension plansPension PlansA pension plan is a retirement plan where the employer makes a guaranteed payment to the employee once they retire. Every month, the employee receives a specified income post-retirement derived from earnings on its employer’s investments.read more, and other government-induced social service schemes.

With so much public trust and support, these Nordic nations have easily recovered their economies post-COVID pandemic. As per an OECD report, Norway’s GDP is projected to rise by 3.4% in 2021. Sweden is also reviving well with its growth rateGrowth RateThe Growth rate formula is used to calculate the annual growth of the company for a particular period. It is computed by subtracting the prior value from the current value and dividing the result by the prior value.read more expected to touch 4% in 2021.

People living in these countries are considered to be the happiest people. However, the Nordic economies have been subject to extensive analysis to determine their effectiveness. Whether other countries can adopt this economic structure depends on factors specific to each nation.

Characteristics of Nordic Model

The Nordic model denotes a standard set of social, economic, and political characteristics common to all Nordic countries. The main features of the model are:

  • High taxesTax-financed social servicesFee education and healthcareEqualityHigh employment ratesMassive investment in human capitalActive labor marketLabor MarketThe labour market, also known as the job market, is a well-studied market that operates on the supply and demand dynamics of people looking for work (workers) and organizations/people providing work (employers).read more policiesRegulated work lifeStrong public sectorCooperation between employers, trade unions, and the state

Scandinavian countries have market-based economies with a robust public sector that secures welfare benefits to its citizens. However, it is different from most modern capitalist societies’ state welfare that provides for only the economically or socially backward citizens.

The Nordic societies are characterized by a relatively high degree of social equality. As a result, all citizens are entitled to social welfare irrespective of their ability to pay. The public sector renders social programs like old-age pensions, healthcare, childcare, education, child allowances, health insurance, unemployment pension, etc. The quality of the service provided is second to none leaving no room for private players to take over.

Another key attribute of this model is the high employment rate achieved through quality education and training that mobilize the workforce effectively. Also, gender equality promotes higher employment of women and ensues relatively small wage differentials.

Besides, the flexible work culture with easy working hours and long paid vacations encourages greater participation in the workforce. The high employment rate in the Nordic countries ensures a broad tax baseTax BaseTax base refers to the total value of the income or assets of an individual or firm which is taxable by the government or the relevant taxing authority. This taxable amount is used to evaluate the tax liability of the individual or company.read more among citizens that finance a comprehensive social security system.

The dynamics between trade unions and employers ensure moderate wages, keeping inflation low and contributing to a competitive private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more. Note that the risks posed by the capitalistic system are mitigated by welfare arrangements. Thus, this model is believed to bring together the best of both worlds.

Why Does Nordic Model Work?

A substantial credit to its success goes to its people and collective history. Citizens embrace globalization but at the same time collectively share risks arising from it. They voluntarily pay high taxes that fund an extensive system of social security. These programs are not targeted at the poor but instead cover the entire population, thus acting as a cushion against adversity for everyone. 

Besides, the citizens place a high level of trust in the government and the public sector to execute the welfare state tenets. If we talk about its work culture, they are way ahead of any other country regarding wage management, employment plans, and income. With high union membership, the unions successfully demand higher compensation and benefits by eradicating minimum wage.

Most of these countries are significant producers of natural gases due to a significant portion dedicated to nature and forests. In addition, the air is crisp in these nations, they have an efficient waste collection system, and most people are regarded as environmentally conscientious.

All five nations always put their citizens first and do not fall for background politics. As a result, their government and public sector institutions are relatively corruption-free. Also, the unions in these countries do not use their power to create tight labor market regulations. Instead, they promote competition and take up issues that make sense to everyone.

Pros and Cons

The Nordic model’s pros and cons help to discern the efficacy of the model. Its pros are comprehensive and cover every detail of how citizens of a country work and grow and prosper as a nation. But, at the same time, there are critics who content that it is a utopian concept and won’t survive the test of time.

To start with the pros of the model:

  • The Nordic welfare model ensures free education, free healthcare, job opportunities, and assured pension fundsPension FundsA pension fund refers to any plan or scheme set up by an employer which generates regular income for employees after their retirement. This pooled contribution from the pension plan is invested conservatively in government securities, blue-chip stocks, and investment-grade bonds to ensure that it generates sufficient returns.read more for the citizens.The citizens living under this economic model has strong faith in their government and have a history of displaying collective strength in facing world challenges and compromising together for the greater good of all.If we go by the past, it has been cited that an individual’s problem was the problem of many and a solution collectively addressed the problem of a large community. The citizens of Scandinavian countries believe in their authority and appreciate paying high-income taxes so that the government can take some measures to solve the issues and bring pleasure to individuals and the whole nation.

Now, if we talk about the cons of the model:

  • Over the years, the countries have witnessed a massive spike in immigrants and a large part of population is old and dying. As a result, the size of the tax-payingTax-payingA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more population is reduced, building pressure on the nation’s resources.Economists believe that the model supports monopoly, does not encourage free-market trades, and is not open to competition, making it very tight for businesses to flourish.All the social services regulated in this welfare model are tax-funded, which technically means that it depends on their citizens’ willingness to contribute to the greater good of all. Any reluctance among the citizens may lead to the failure of this model. However, the Scandinavian countries have everything and should be celebrated for their achievements, though one may observe hints of a Marxist society.

This has been a Guide to what is Nordic Model and its Definition. Here we discuss the meaning of the Nordic model, its features & why it works along with its pros & cons. You may learn more about financing from the following articles –

The Nordic countries offer generous benefits and welfare programs to their citizens. However, they face real challenges of a large aging population and increased immigrants who do not actively participate in the workforce. They take their share of social protection without contributing to it. It puts strain on the economy and hinders their advancement and prosperity.

The Nordic model is sustainable, but as almost all the countries following different capitalist forms of economy prosper, the Scandinavian model is left at the bottom with internal issues like the aging population and perpetual growth of immigrants.

The Nordic model economy is a mixed economy formed by the amalgamation of the socialist and capitalist economies. It includes elements of both. It enables the nations to advance through capitalistic pursuits and simultaneously protects its citizens through welfare schemes.

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