Ireland should be cautious about adopting the Nordic social model, writes Danny McCoy.
Faraway hills are green, even from the Emerald Isle. While the Irish economy continues to flourish and impress international policy makers, domestic fascination (at least by some) appears to be moving northwards to the Nordic nations and their fabled social model. Indeed there is not one Nordic model - there are significant differences among the individual country approaches.
Since the Nordic countries tend to rank highly as the world's most competitive nations, there is much to justify the fascination. Ireland, having lost competitiveness over the last five years, has lessons to learn.
The Irish model, with its distinctive emphasis on attracting foreign direct investment, has been classed as Anglo-Saxon along with the UK, in a categorisation used by Belgian economist André Sapir in the debate on the European social model. The characteristics of his Anglo-Saxon model include the provision of quite generous social assistance of last resort, with cash transfers going mainly to people of working age. Trade unions are considered relatively weak in the private sector and the labour market relatively unregulated.
Sapir's categorisation includes three other major social models at work in the EU. These included the Nordic model which included Denmark, Finland, Sweden and the Netherlands (with honorary membership).
This model is characterised by the highest public spending on social protection and universal welfare provision. Labour markets are relatively unregulated, but there are active labour market policies, while strong unions deliver a high degree of wage equality.
The Continental model, inclusive of Austria, Belgium, France, Germany and Luxembourg, relies on social insurance for those out of work, as well as for provision of pensions. Employment protection is stronger than the Nordic countries. Unions are also powerful or enjoy legal support for extension of the results of collective bargaining.
The Mediterranean model of Greece, Italy, Portugal and Spain concentrates public spending on old age pensions. Heavy regulation protects, but ultimately lowers employment, while generous support for early retirement seeks to reduce the number of job seekers.
Sapir's approach evaluated the four basic models in terms of efficiency and equity. The higher the employment rate as a percentage of the labour force was used as a measure of efficiency, while a low risk of poverty was used as a measure of equity. His conclusion brought to the EU heads of government last year was that of the four main models operating, the Nordic and the Anglo-Saxon models are both efficient, but only the former manages to combine both equity and efficiency. Critically, the Continental and Mediterranean models, which together account for two-thirds of the GDP of the entire EU-25 and 90 per cent of the GDP of the 12-member euro zone, are considered both inefficient and unsustainable.
Strong praise for the Nordic model then! As ever the devil is in the detail. Why is it that the Nordic model countries do well on equity as measured by risk of poverty? The extent of redistribution via taxes and transfers is important, but it is not the major explanatory factor. A better explanation is the difference in the proportion of the population aged 25-64 with at least upper secondary education. It is highest in Nordic (75 per cent) and Continental (67 per cent) countries and lowest in Anglo-Saxon (60 per cent) and Mediterranean (39 per cent) - a ranking that perfectly matches the position of country groups in terms of poverty risk.
In Ireland 78 per cent of the 25-34 age group has at least higher second-level education, compared to an 89 per cent average of the EU Nordics of Denmark, Sweden and Finland. In terms of third-level completion, Ireland has 37 per cent of the same age group, compared to 38 per cent for the Nordics.
Ireland's overall unemployment rate for 2005 of 4.3 per cent is substantially below their 6.6 per cent average and is even more impressive for those aged under 25, at 8.5 per cent compared to the Nordic's 14.4 per cent. The average annual GDP growth over 2001-2005 in Ireland was 5.1 per cent, in contrast to just 1.9 per cent in the Nordics. A single person without dependants on an average industrial wage pays income tax at a rate of 23.8 per cent on average in Ireland, in contrast to 45.4 per cent in the Nordics. Corporation tax is 12.5 per cent in Ireland while the Nordic average is 45.4 per cent.
The Nordic model is now most closely associated with the concept of "flexicurity" - protecting the worker, not the job. Denmark is the exemplar. The Danish system combines three pillars. There is a flexible regulation regime primarily based on agreements between the social partners on issues such as working time, hiring and dismissals. In addition there is a well-developed social security system for the unemployed. And finally, an active employment policy aimed at providing the unemployed with training and qualifications.
While the Danish model appears very effective, its replication in Ireland, even if desirable, must acknowledge some fundamental differences. Denmark has not followed to the same extent Ireland's model of attracting foreign direct investment nor is it a member of the Economic and Monetary Union. However, at its root, the desirability of any social model is a philosophical question. The Nordics espouse egalitarian principles of equality of outcome and not just opportunity. The Anglo-Saxon model strives for equality of opportunity but depends on meritocracy to drive outcomes.
Only if Ireland's population were to pursue egalitarian principles would a Nordic model be desirable. As an Anglo-Saxon bard through the persona of a Danish prince remarked "there is nothing good or bad but thinking makes it so". Given the successful Irish model, change should not be considered lightly. Increased employment protection leglislation is exactly what the Danish model would caution against. That is the most pertinent lesson of all.
Danny McCoy is director of economic policy at Ibec