Thursday, 24 March 2016

The misguided pursuit to be like North Europe

By Nitin Pangarkar, Published The Straits Times, 23 Mar 2016

The groundswell of support for Senator Bernie Sanders' presidential campaign in the United States, particularly among college-age students, has opened up some interesting possibilities and debates.

Mr Sanders' campaign is centred on his ambitious agenda to make the American economic system more like that of Northern European countries like Denmark, Sweden, Norway and Finland. It is a cause that has struck a chord on US campuses and rattled the campaign of Mrs Hillary Clinton, the widely expected shoe-in for the Democratic nomination.

Apparently, the millennials in the US are fed up with the income inequality resulting from the capitalist system and hence are drawn to Mr Sanders' ideas. Throughout its history, the US has been loath to even use the word welfare, let alone become a welfare state, hence it chooses the term entitlements (over welfare payments) instead.

Over the last few years, the Northern European system has received much admiration, including in Singapore. In fact, several Singaporeans have asked me, why can't Singapore be like Sweden? Unfortunately this pursuit of the Northern European economic model is based on a number of misconceptions and incomplete information.

So is the Northern European economic model one worth emulating? In terms of income equality, all the countries seem to do well, having a Gini coefficient ranging from 0.25-0.27, compared to more than 0.4 for both the US and Singapore (lower values of the coefficient mean greater equality).

They also do well on labour force participation rate - in other words, the proportion of the population who are economically active - scoring in the high 70 per cent for the 15-64 age range.

Educationally some of these countries, especially Finland, have traditionally performed well on the dimension of having good schooling systems, but they have been losing ground lately. Singapore's education system now ranks well above Finland's, according to Pearson's 2014 global report on the sector.

But the performance of an economic system can be judged on many fronts and income equality and labour force participation are only some of the indicators. Let us consider GDP growth rate between 2011 and 2014. By this measure Denmark exhibited growth of 0.275 per cent per annum, Norway 1.65 per cent and Sweden 1.475 per cent. Norway's growth rate has already been affected by the lower oil prices and is forecast to be 0.6 per cent for 2015.

Compare this to the US growth rate of 2.125 per cent per annum (2011-14) and Singapore's growth rate of 4.225 per cent per annum (also for 2011-14). One simple reason for lower growth is that high taxes blunt the incentives for innovation and creativity which are manifested in the form of entrepreneurship and creation of dynamic enterprises - for example Tesla and Uber, to name just two.

Employment rates, another index of performance, also see the Northern European economies perform poorly. Averaged over 2011-14 the unemployment rate for Denmark stood at 7.225 per cent and for Sweden, 8 per cent. Norway performed better with an average rate of 3.35 per cent (4.1 per cent by March last year and probably even higher today). But compare these rates to Singapore's rate of 2.875 per cent.

Another misconception is that Northern European countries achieved high levels of affluence while maintaining equality. In fact, these countries largely achieved their affluence before the socialist policies were put in place. As Johan Norberg, an award-winning Swedish author, noted: In 1950, when Sweden was known worldwide as the great success story, taxes in Sweden were lower and the public sector smaller than in the rest of Europe and the United States. Sweden's biggest social and economic successes took place when it had a laissez-faire economy, and widely distributed wealth preceded the welfare state.

Many of the Northern European countries also have large land masses, small populations and significant natural resources (for example, Denmark and Norway have oil; Sweden and Finland have a variety of metal ore deposits and timber), which have bumped up their GDP per capita - luxuries countries like Singapore do not have.

In a recent article in The New York Times, columnist David Brooks pointed out that high indirect taxes, in the form of a value added tax or sales tax, are a key feature of the welfare state that is prevalent in Northern European countries. Singaporeans would do well to reflect on whether they would like to pay a 20 per cent (or higher) GST. These taxes are also regressive - lower-income earners pay disproportionately more than high-income earners.

So what could Singaporeans get by becoming more like Sweden or Norway? The rich would certainly pay the price in the form of higher taxes which would lead to lower disparity in incomes. But along with that would come other changes that Singaporeans would likely find harder to swallow - lower growth rates, higher unemployment, higher GST, lower spending on infrastructure such as MRT and possibly fewer choices in terms of healthcare, education and other services since most would have to settle for what the Government provides.

If socking it to the rich was an aim, it would be a Pyrrhic victory indeed - making the rich worse off, but also making everybody else worse off.

Singapore has recently succeeded in nurturing entrepreneurship, with some enterprises making splashes in the infocomm and e-commerce sectors (for example, Anchanto, Grab, Lazada, Carousell). There are budding enterprises in other fields such as biotechnology. These enterprises need the freedom to pursue commercial success and be held accountable for results, which is what a free market system does.

Putting the shackles of high taxes and government intervention on budding entrepreneurs might mean they would either wither and die, or take their business elsewhere.

Voltaire famously said: Each player must accept the cards life deals him or her; but once they are in hand, he or she alone must decide how to play the cards in order to win the game.

Singapore has been dealt a different set of cards from the Northern European countries and there is little point in trying to imitate another country with a very different resource base. Humans are economic animals and without the appropriate incentives (invoking the animal spirit), we will simply not get the kind of behaviour (economic dynamism) that leads to economic development.

My advice to Singapore - and, for that matter, the supporters of Mr Sanders in the US - is to devise your own game and improvise constantly. Don't make the mistake of playing another country's game - it will do more harm than good.

The writer is an Associate Professor of Strategy and Policy at the National University of Singapore (NUS) Business School.

Pitfalls of excessive welfare in Nordic model

As a citizen of Finland, I read with great interest the commentary by Associate Professor Nitin Pangarkar ("The misguided pursuit to be like North Europe"; Wednesday).

I had mixed feelings about his conclusion.

While I would like to be proud of my country and the Nordic model, the Nordic countries will face serious challenges with the dynamics of growth and the funding of excessive welfare systems.

Finland got rich on paper and mobile phones. Nokia was a mighty success, but it made people think that the state of Finland was also a winning model. The economy delivered large tax revenues that made politicians promise new welfare benefits.

That was a mistake.

Nokia collapsed and the nation lost its competitiveness, but the need for benefits funding remained. Finnish public deficit soared and debt increases by billions of euros a year. The gross domestic product has hardly grown since 2012.

It is sad that there is no big idea to get Finland back on track and there is an increasing risk that it will become a failed state.

The main reasons are fat public benefits discouraging work, heavy regulation which makes new business difficult, high taxes, inflexibility of the labour market and dysfunctional democracy.

Employers struggle to hire workers, while blue-collar workers in Helsinki openly say there is no reason to work because they get almost the same standard of living by doing nothing.

The politicians try to adjust the benefits, but there will always be noisy and aggressive interest groups, backed by trade unions, which the politicians do not dare to challenge.

Of course, not everything is wrong in the Nordic countries.

The Swedes perform better than the Finns because they adjusted their generous welfare state and made structural reforms towards a more competitive economy. Unemployment benefits were cut and the tax burden was reduced.

The Nordic countries are a late-20th century success story. But the crash looms when the finances drain away.

The case of Finland shows that when the state gives too much protection and benefits to the people, these principally good things can turn bad for them.

There is not much to recommend from the Nordic lessons to Singapore.

Instead, the only way I can see to stop Finland from going belly-up is for it to study and take steps towards the Singapore model, which is winning.

Olli Muurainen
ST Forum, 26 Mar 2016

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