Wednesday, October 26, 2011

Economic Lessons from Scandinavia, written by Graeme Leach—the Chief Economist at the Institute of Directors in London—shows that over the 15 years prior to the crisis in 2008 public spending fell by more than 20 percentage points of GDP in Sweden. The smallest fall in the share of public spending in GDP was in Denmark, where it still managed to fall by 10 percentage points. The reductions in public spending suggest the private sector was being crowded-in, thereby raising productivity and output growth.

“The success of Scandinavia is a triumph of government downsizing, and smart deregulation. Nordic countries are therefore a showcase of ‘neoliberalism’, and not a counterexample,” Graeme Leach stressed.

The fiscal performance of the four leading Nordic economies, both prior to and during the 2008 recession, has been outstanding. The headline budget deficits for all four economies peaked below three percent of GDP—compared with 11% of GDP in the US and the UK. The underlying budget balance—adjusting for the economic cycle—remained in surplus in three of the Scandinavian economies and was only slightly negative in Norway. The comparable US and UK deficits were nearly 9% of GDP.

Besides a commitment to fiscal conservatism, Nordic economic performance is also a result of an array of free market reforms. The governments have privatised the railways, airports, air-traffic control, motorways, postal services, fire departments, water systems, and schools. In Sweden, Carl Bildt’s Cabinet made it possible to privatise health care at the county level.

Dalibor Rohac, acting Director of Economic Studies at the Legatum Institute commented: “There are lessons to be learned from the example of Nordic countries. But, if anything, the Scandinavian experience vindicates those who claim that sound economic policies lead to prosperity. Its success is a triumph of prudent fiscal policy, government downsizing, and smart approach towards market regulation.”

Download the full Economic Lessons from Scandinavia report.