For decades, free-market economists have been driven to drink and desperation by the Scandinavian Paradox. How do they do it? Economic growth and high taxes. Are the laws of economic physics repealed by cold weather? Could it have something to do with Viking DNA? What explains, as two researchers phrased it in 2004, "the mysterious survival of the Scandinavian welfare state"?
Try this answer on for size, suggests Swedish economist Andreas Bergh: Globalization and economic freedom. (Thanks to Tyler Cowen at Marginal Revolution for the tip.)
Waitaminute. How does that work? Globalization, with all its race-to-the-bottom pressures, is supposed to make it harder for countries with extensive safety nets and labor and environmental regulations, isn't it? And haven't I heard somewhere that Big Government is the antithesis to economic freedom?
Not exactly, says Bergh. First, he substracts the government size component from the measures of economic freedom incorporated in the Economic Freedom Index. If you look at the other core components, such as property rights and legal structure, the Scandinavian countries score very highly. Indeed, argues Bergh, overall, the Scandinavian countries have been achieving gains in "economic freedom" faster than most other developed countries over the last three decades. They've been compensating for their big government by progress in other areas.
As for globalization, Bergh's argument is that "economic openness and free trade create more opportunities for a division of labor to arise." In other words, the Scandinavian countries, by virtue of their integration into the global economy, can devote more resources to high value-added services. They are also better situated to take advantage of new technologies and access to knowledge.
It's a bit of a paradox. Critics of free trade often argue that competition with cheap labor in the devoloping world will inevitably undermine the standard of living of workers in the developed world. But Bergh is saying that countries "with higher social protections and labor-market regulations compensate with a higher openness to trade." That, in effect, the better you treat your workers, the more effective you are in the global economy.
One might well wonder if this hypothesis will continue to hold true as the pressures of globalization increase. One could also wonder whether the recent turn to the right in Sweden portends any significant long-term change in the nature of the Scandinavian welfare state. But in the meantime, Bergh's conclusion is provocative and encouraging.
"In the Scandinavian countries, there are few signs that the dystopia described by Hayek in 'The Road to Serfdom' is about to come true. On the contrary, big government seems to thrive in peaceful co-existence with high and increasing degrees of economic freedom. For over 30 years, the Scandinavian welfare states have increased economic freedom and openness in a remarkable way. This development does not support the ideas that the welfare state is threatened by the market economy, economic freedom and globalization."
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