Growth and Employment in Nordic Welfare States in the 1990s: a Tale of Crisis and Revival

This paper reviews the macroeconomic performance of the so called Nordic welfare states, especially in terms of growth and employment. In the post-war years the Nordic economies enjoyed rapid growth and full employment. At the same time, under the rule of Social Democratic governments they also built their extensive welfare states. However, starting from the 1980s, the Nordics – together with other European countries – have suffered from various economic imbalances and crises, which have led many observers to doubt the economic viability and fiscal sustainability of the welfare states. In Sweden and Finland the economic problems and structural changes culminated in the beginning of the1990s in a severe macroeconomic and financial crisis, which can be viewed partly as an adjustment to integration and globalisation, especially to financial deregulation, and partly as a result of macroeconomic policy failures. In this paper we review the experiences of Denmark, Finland and Sweden in the 1990s in adjusting their public sectors and welfare states to the fiscal consolidation. It can be concluded that even after the hardships of the 1980s and 1990s the Nordic model of social policy remains clearly distinctive and in many respects successful. The Nordic countries have been able to maintain their position among the richest economies in the world and also to avoid the under-employment typical to larger European economies. However, there lie further challenges in the future. The most important of them are possible tax competition which may threaten the financial basis of the current welfare systems, especially in Denmark and Sweden, and expected demographic change, which will add excess burden to the public finances within the next 20–30 years.