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Scandinavia's Success Story or Myth

Citizens of the northern European countries -- Sweden, Denmark, Finland, Iceland and Norway -- enjoy high living standards, and free health care and education. But they also pay high income taxes. While many economists say Europe's socialist democracies are economically unsustainable, Nordic economies are experiencing healthy growth.

When full-time workers in Sweden lose a job, they remain on full pay for a year. During that time, they are eligible for retraining at government's expense. And if they remain unemployed after a year, they may qualify for unemployment compensation, equivalent to an average income, indefinitely.

Education, including university study, is available to everyone at no cost as are health care and numerous social services. Swedish citizens pay for these benefits through taxes, which by American standards are very high. For example, personal income tax in Sweden can be as high as 55 percent and in Denmark can exceed 60 percent, compared to a maximum rate of about 35 percent in the United States.

High Taxes and High Growth

Jacob Kirkegaard, a research associate at the Institute for International Economics in Washington notes that despite high taxes and expensive welfare programs, Scandinavian economic growth ranged from more than two percent in Finland to almost six percent in Iceland in 2005.

"They have not grown as fast as the United States in term of the size of the economy, but these are also the countries that have not had the population growth of the United States. And relative to other European countries, they certainly have grown far faster than the rest of the eurozone, particularly, of course, the big eurozone countries -- France, Italy and Germany," says Kirkegaard.

The outlook for the future is also good, says Jacob Kirkegaard. This year, most Scandinavian economies are expected to grow by about three percent -- Sweden by nearly four percent -- compared to a little more than two percent forecast for other western European economies.

Kirkegaard says one reason for the growth of Scandinavian economies is that they encourage investment. "Obviously they are small, which means that they tend to trade a lot with other countries, much more so than a big country such as the United States or, for instance, Germany. But also, in terms of investments. For instance, Sweden sold their car companies to U.S. firms G.M. and Ford. Or, for instance in Denmark, just last year, a couple of private equity funds from the U.S. and Britain actually bought the former telecommunications incumbent in what was the biggest private equity deal in Europe in 2005. So these are really countries that are extremely open and hospitable to both trade and investments," says Kirkegaard.

Economist Jacob Kirkegaard says low corporate taxes -- ranging from 18 to 28 percent, compared to about 40 percent in the United States -- as well as low corruption and violence make Scandinavian countries attractive to foreign and domestic investors. Although Scandinavian labor is highly organized, unions are focused on creating jobs, rather than protecting them. They foster a system popularly called flexicurity, which includes generous unemployment benefits, but also an obligation on the part of workers to accept government sponsored training for new jobs.

Expensive Welfare State

But many economists point to flaws in the Scandinavian economic model. Marian Tupy, a policy analyst at the Cato Institute in Washington, says expensive social welfare systems sooner or later run out of money. He notes that in the past 15 years, northern European countries have had an average economic growth rate of just 1.5 percent per year, compared to three percent in the United States.

"Sweden and Norway and Finland and Denmark are still very rich countries. That's not at issue here. The issue is what will happen to these countries and to the welfare state they have 10, 20, 30, 40 years down the line. And if you look at their economic performances [in the past 15 years], then you have to conclude that it should be very difficult for them to maintain the current rates of taxation and redistribution and financing of the welfare state while at the same time remain rich. And," according to Tupy, "we can already see that. For example, the Timbro Institute in Sweden came up with a ranking of all countries of the E.U. vis-à-vis the 50 states of the American union [i.e., the United States]. And it is very interesting that all the Scandinavian countries come at the bottom of the league. In fact, Denmark is poorer than Kentucky."

During the 1980s, Swedish income taxes ran as high as 90 percent. As a result, Swedish households accumulated almost no savings. This made them even more dependent on social programs when the economy soured in the early 1990s. Swedes revolted at the ballot box, electing a neo-liberal coalition led by Carl Bildt, who lowered taxes. And without those changes, many economists point out, Sweden's economic rebirth in the late 1990s would have been impossible.

Scandinavian Lessons

Still, the combination of social welfare and the ability of Scandinavian countries to integrate into the global economy has attracted the attention of a number of countries seeking to improve their socio-economic model. South Korea is one of them.

Branko Milanovic, an analyst at the Carnegie Endowment for International Peace here in Washington, notes that South Korea shares some common traits with northern Europe.

"It has a tradition of consensus building. It has very ethnically homogeneous population. It has a fairly high level of education of its population. It has several of these features that are also similar to the Scandinavian countries. So I don't think it is impossible that some form or variant of the Scandinavian model could be applied. I am a little more skeptical of the applicability of the Scandinavian model to other countries," says Milanovic.

Most economists agree that the Scandinavian economic model is very hard to emulate, especially in poor nations that cannot afford to impose the high taxes needed to support an expensive welfare state. This model may work in small, rich countries with homogeneous and well-educated populations and a long history of income sharing. But some analysts argue not forever.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.