Economics | World

A Dynamic Welfare State?

Is there a contradiction between a socialist welfare state and a dynamic, high-growth economy? Look at India and China and it would seem so. But is it possible to combine the benefits of a welfare state with those of competitive enterprise?

The current issue of the Harvard International Review looks closely at Sweden to offer some hints on how this may be possible. Sweden, along with Switzerland, Norway, and Finland, is amongst the most globally competitive, yet has an extensive welfware system for its citizens. To explain how this works the article compares Sweden with another welfare state - France:

The key difference between the leaking private sectors plaguing other European nations with the welfare model in Sweden is the way in which the government injects value into the economy. Because of the structure of Swedish welfare, the private sector doesn’t suffer. Swedish socialism is designed to protect the people, not just jobs themselves.

The reason for this apparent contradiction lies in the agent of action in Sweden’s social calculus. While French corporations are required by law to provide benefits, the Swedish government shoulders these costs. In addition, unions in Sweden have a different perspective than do their French counterparts. Much like the system as a whole, the goal of unions is not just to protect jobs, but to protect people by winning benefits for those who go off the employment rolls. In France, a worker represents costs to the company during and even after their employment, but in Sweden, the government takes over for the welfare of laid-off workers.

Clearly, by placing the burden of welfare and job protection on the government, the system retains companies’ focus on efficiency, hiring, and firing.

There is an additional consideration that allows this system to work - and explains why Swedes tolerate such high taxes. The country’s homogeniety makes such collective transfer payments acceptable - something that may not work in a more diverse country where group membership is restrictive (India), or where there is a traditional mistrust of the government (USA).

A final contrast between the Nordic country and its southern counterparts is national unity. With a largely homogenous population, Sweden’s view of community is unique. Unlike France, which is a nation historically marked by prejudice and racial conflict, Swedes are more willing to submit to the large tax rates that support the large government payroll and expenditures.

Of course, government is no paragon of efficiency, and Sweden is no exception. Indeed, the government’s overwhelming presence in society, together with the twisted incentives and changing social mores, are identified as threats to the system:

Because employee benefits are so generous, many abuse the system by faking illnesses and escaping work. Absenteeism is the largest unaccounted-for contributor to the discrepancy between government data and actual statistics.

A new issue altogether is increased apathy toward the Swedish government. Decreasing voter turnout reflects a populace that cares less for its government. There are two possible explanations for this drop. First, the Swedish people could be disillusioned with the government and its policies, possibly heralding a fledgling discontentment that has in the past resulted in troubles for other welfare states. Once a country’s citizens are unhappy with governmental policy, they are much less likely to be pleased with paying for it. This could prove to be a disrupting factor in the seemingly well-run model.

An alternative explanation lies in the changes and modernization taking place throughout the country. The Sweden of today features an increasingly diverse population. This results in less emotional and cultural investment in the nation as a whole, as well as less willingness to shoulder the burden of welfare for one’s fellow Swede. The homogeneity that differentiates this Nordic nation from other European welfare states is starting to dissipate, and with it possibly the security of the model’s success.

This is an article worth reading in its entirety for it offers two important lessons.

First, a welfare state is not necessarily contradictory to a free-market one. If the latter is necessary to lift people out of poverty, the former is necessary to keep them out of it. The hope offered by Sweden is that it may be possible, in certain conditions, to marry the two.

Second, just as a free-market system needs government regulation, a welfare state also needs regulation to minimize beauracracy. But who will regulate government? Some self-regulation occurs in times of economic distress, as demonstrated by economic restructuring during the Asian and Latin American financial crises and India’s own balance of payments crisis. But when no external triggers exist the only true regulator is a well-informed citizenry, vigilant and wary of excessive government.

Ironically, then, the countries best placed to establish sustainable but extensive welfare systems might be the countries most skeptical of them.

© 2008 The Discomfort Zone.