by Alec Ross
However, Nordic people are generally happy to pay these high rates. Their societies enjoy relatively high levels of social cohesion and trust in government institutions. While American society’s individualistic culture portrays taxes and government in a negative light, in Nordic countries there is a general sense that supporting the government promotes the common good. Scandinavians feel that the benefits they receive from state-funded programs outweigh the costs of high taxes, much as was the case in the United States in the years following World War II, when Americans paid much higher taxes during a time of massively increasing well-being across the country. The Nordic states also do a good job hiding their taxes from consumers, reducing the psychological costs people feel when parting with hard-earned money. Like other developed nations, the Nordics make it incredibly easy to file taxes. Tax forms arrive in the mail already filled out—all people need to do is review the documents and submit a digital signature. Instead of tax deductions, Nordic states tend to distribute welfare through direct cash payments. Ask any behavioral economist, and they will tell you that people generally feel better about receiving a payment than reducing a cost, even if the net result is the same.
The citizens of Nordic countries consistently rank among the happiest in the world despite living in a part of the world that can be dark and cold fifteen hours a day for months at a time. When asked, people often attribute their peace of mind to the welfare system. They know their basic necessities will be provided for and the safety net will catch them if they fall.
Your average Dane, Swede, Norwegian, Finn, and Icelander enjoy a higher standard of living than their counterparts in many other parts of the developed world. Poverty and unemployment rates are generally low. People are highly educated and have access to world-class health care. Gender inequality in the workplace is much lower than in other developed countries. Nordic countries are not plagued by the same broad economic inequality that we see in the United States and other parts of the world. The countries are not socialist utopias—today, there are more billionaires per capita in Iceland, Norway, and Sweden than in the United States—but they do ensure that even those on the bottom of the income ladder have their basic needs met. This is what a strong social contract looks like.
“What the northern Europeans have managed to do is to marry high taxes with a great deal of efficiency,” political scientist Fareed Zakaria told me. “It’s always more durable politically to have benefits that feel more universal.”
Zakaria attributes the success of the Nordic model to the region’s long history of egalitarianism: “These are societies that have always been less top-down, less hierarchical, and less authoritarian than others.” Democracy in other parts of the West has generally manifested as a power struggle between the haves and the have-nots. But among the Nordics, it is used as a tool for building solidarity across class lines and leveling the playing field for all. They have developed “a really thoughtful understanding of what the purpose of the state is in society,” said Zakaria.
Today, the state defends free trade and enacts policies to encourage entrepreneurship and private-sector growth. Policy makers shy away from antitrust enforcement and other government interference in the economy. Companies are permitted to hire and fire employees without getting bogged down in excessive regulation or legal battles (though Nordic workers still enjoy more protections than their American counterparts). As we previously discussed, the Nordic countries also have a strong, multitiered organized labor apparatus that negotiates fair pay and benefits for workers across the economy. Employees can also directly influence how businesses are run thanks to work councils and codetermination, in which managers and workers collaborate in decision-making.
To succeed in the technology-driven, knowledge-based economy of the 21st century, companies must be able to fail and scale quickly. They cannot waste too much time jumping through regulatory hoops. The comparatively light-touch labor laws in Nordic countries give companies certain advantages over their counterparts in other parts of Europe. They are the reason Helsinki, Stockholm, and Copenhagen boast some of the most vibrant start-up scenes in the world. In Mediterranean countries like Spain, France, and Italy, companies looking to hire and fire workers often find themselves bogged down in bureaucratic processes that make it difficult to impossible to do so. While these countries generally outperform Nordics in traditional industrial sectors, they are not effectively competing with them in high-tech industries and certainly not among start-ups. The kludgeocracy of Mediterranean governments makes it harder for start-ups to incorporate, acquire funding, and acquire and shed talent as needed.
The combination of labor flexibility and strong safety nets in the Nordics is known as flexicurity. People pay higher taxes in exchange for mobility and economic security.
The foundation of the Nordic social contract is collective action. Through high taxes, the Nordic people leverage their governments to build strong, comprehensive social safety nets for everyone. Through the democratic process, citizens foster an economic environment where human and financial capital can pool in the most innovative and efficient companies. Through organized labor, workers ensure they share in the gains created by the private sector. The Nordic social contract is agile, adaptable, and free, promoting individual autonomy and private competition while maintaining a high economic floor through which people rarely fall.
If there is a vulnerability, it is that the Nordic model depends on citizens’ intrinsic willingness to work. Given the country’s strong safety net, it would not be hard to survive as a free rider, reaping social benefits without holding down a job or otherwise contributing to the economy. If too many people picked the couch over the office, there would not be enough taxes to support the welfare state.
The model also relies on strong social cohesion. It is not hard to foster a general sense of cooperation and goodwill when almost everyone looks, speaks, worships, and lives the same way. But when you introduce new people into a homogenous population, even the most tight-knit societies can begin to fray.
Over the last two decades, the Nordic countries have seen a significant influx of immigrants, many of whom are fleeing violence in Africa and the Middle East. As their societies grow more ethnically and religiously diverse, the Nordic countries have seen a resurgence of nativism. Over the last decade, Far Right parties have increased their seats in the governments of Sweden, Norway, Finland, and Denmark. Across the region, you also see more people questioning the extent to which newcomers should benefit from their generous social welfare programs. Many migrants have comparatively little formal education and do not speak the native language, which makes it more difficult to hold down a job. Across the region, many people are beginning to balk at the idea of paying taxes to support those who are out of work, especially if those people look different from them.
“The kinds of benefits Nordic countries provide seem to have social support, political support, and durability when people think of them as being provided to a community that they identify with,” said Fareed Zakaria. “When the community is one that they don’t identify and attach with, they become much more American in their attitudes. You’re beginning to see this dilemma where basically you can have a homogenous society with strong social markets, or you can have a highly heterogeneous society with somewhat shallower benefits.”
The key challenge for the Nordic social contract over the coming decade will be to determine if it can continue to provide a high-quality safety net as its population grows more diverse. Immigration and growing inequality rooted in a tax system that treats the very wealthy and workers the same will test the mettle of the Nordic social contract.
But ultimately, the Nordic model stands as an example for the rest of the world, and especially for democracies that are struggling to balance openness with stability. The Nordic countries have built an effectively egalitarian society for the 21st century. By combining free-market economics with an expansive safety net, their social contract guarantees a
high quality of life for every citizen and fosters an environment where business can thrive. The private sector avoids the perils of shareholder capitalism because it has been compelled to pursue stakeholder capitalism—not so much by government mandate as by the collective influence of its workers, empowered by organized labor, work councils, and board-level representation. That makes for an effective balance of power: citizens, business, and government are each able to serve, and provide checks on, the next. As the world grows more connected and climate change spurs mass migration in the years ahead, the Nordic model will be put to the test. But when you spin the globe and look at all the social contracts in place, the Nordics have enacted the best set of solutions to address the forces that have shredded social contracts elsewhere.
* * *
MORE DEMOCRACIES, ESPECIALLY the United States, would benefit by drawing lessons from the Nordic model. But critics in the US often say that the Nordic approach would not be able to apply there, especially given the size and diversity of the United States. However, it is worth emphasizing just how much of an outlier the US social contract is among developed democratic states. It is even starkly different from countries with similar histories and makeups. In the bulk of these other Western countries, citizens rely on the government to construct strong, inclusive safety net programs largely independent of the private sector. Consider, for instance, Australia.
Australia and the United States have a lot in common. Both countries began as British colonies and both speak English; if you saw an American and an Australian at a dinner party, they would be indistinguishable but for their accents. However, if you examine their views on the responsibilities of government, they are very, very different.
Julia Gillard is a dynamo who served as Australia’s first female prime minister while I was working at the US State Department, and we are now colleagues in a venture capital firm where we both serve as board partners. When I asked her how and why the United States and Australia take such a different approach to the role of government, she noted that Australia’s tendency toward collectivism is rooted deep in its culture. She referenced historian Gavan Daws’s account of Japanese prisoner of war camps during World War II. Even in “the depths of degradation,” prisoners stayed true to their culture, she said. “The British still had their aristocratic structures, the Americans were the humorist individualists of the prison camps, and the Australians formed male-bonded welfare states to support each other.
“The Australian attitude is that the government should do things. To the extent they aren’t doing things, that’s because we’ve got a dumb mob of politicians, and you can always get another mob of politicians,” Gillard told me. “If you’re going to boil down the American attitude, it is that the government probably shouldn’t be doing things, and to the extent it does things, you ought to be deeply suspicious of them.”
In contrast to the United States, the Australian government provides all citizens with high-quality, universal health care, including free or heavily subsidized medical services. The state operates a universal pension system that is funded entirely by employers (workers also have the option to contribute). It supports a high-quality public education system, while also subsidizing private schools. In 1907, Australia became the second country, behind New Zealand, to create a national minimum wage, and today it boasts one of the highest wage floors in the world. As of August 2020, the lowest-paid Australian workers made $14.23 per hour, nearly double the earnings of their American counterparts.
Australians’ proclivity for collective action extends to the workplace. While less than 15 percent of Australian workers belong to a labor union, about 60 percent of the workforce is covered by collective bargaining agreements. The country’s labor markets are heavily regulated by the government, which reduces mobility but ensures a high standard of living for most Australians.
While safety net programs are a point of political contention in the United States, they receive near-universal support among Australian lawmakers, Gillard said. “Political parties contend on who is going to do better for Medicare and free public hospitals. No one contends on ‘let’s take that system away.’”
Australia is not unique in this regard. The citizens of New Zealand and Canada, both former British colonies, have also leveraged their democratic governments to build strong safety net programs. Even in the United Kingdom, which tends to behave more like the United States politically and economically, most politicians have thrown their support behind the government-funded health care system.
Because the state’s safety net programs are so robust, the Australian business community is not expected to provide for their workforce in the same way as American companies are. They collaborate with the government on worker training programs and step in to support public welfare when compelled to do so by lawmakers. But for the most part, the companies “haven’t historically conceived it to be their role to be big shapers of the social safety net,” Gillard said.
The private sector’s voice in Australian politics is also limited. While individual companies and industry groups may hire lobbyists, they aren’t “dictating the play” in Canberra, Gillard noted. Election campaigns are financed by the government, and Australian candidates do not raise much from private donors. “Money speaks in our politics, but it doesn’t speak as loudly as it does in the US,” said Gillard.
At the core of the Australian model is the sense of collectivism. Using the levers of democracy, Australians and their counterparts in the other advanced Commonwealth countries have engineered a social contract in which the state provides basic necessities and keeps corporations from being the administrators of welfare programs. This has prepared them well for the 2020s, and as the United States eyes the future, it would do well to look not just to the Nordics but also to its peers in Australia, Canada, and New Zealand. Each offers a piece of the puzzle for balancing an open economy with the support citizens need to be able to take risks and thrive in an interconnected world.
THE CHOICES IN THE DEVELOPING WORLD
So far, we have looked at countries that have firmly chosen their approach to the 2020s. These nations have established 21st-century social contracts that will serve as models for the rest of the world. But scores of countries still stand at the crossroads, yet to determine their course through the decades ahead. They seek growth, stability, and a seat at the global table. But will they favor the controlled model presented by China, or the open model offered by the Nordics and Commonwealths, or something else entirely? This is still an open question for much of the world, and it is especially pressing for developing world countries throughout much of Latin America, Africa, and Asia, including India and its 1.3 billion people.
Over the last thirty years, the nations of Latin America have opened up their economies to the world and embraced more democratic forms of government. In 2001, the thirty-five countries of the Western Hemisphere came together to adopt the Inter-American Democratic Charter, which declared democracy to be the only legitimate form of government in the Western Hemisphere. On the whole, these reforms have been remarkably effective in fueling growth and self-government on the continent. As Tom Shannon, a former State Department leader on Latin America, put it, “We have in the Western Hemisphere a bunch of countries we can point to and say ‘Hey, you can do this in forty years. You don’t have to do it in three hundred years like us.’”
But the younger Latin American democracies tend to have a different flavor of democracy than the United States and Europeans. They are more rooted in results, according to Shannon. “For Latins, the measure of legitimacy of a democracy is going to be ‘can it deliver the goods?’ It isn’t just about fair and free elections.” The populace expects its government to provide the security, health care, and educational opportunities needed for citizens to achieve their rights. As the young Latin democracies run up against the shifting winds of the world economy, they will want to draw from Nordic models. Yet the United States is also a leader in the Western Hem
isphere, and it is going to be crucial that the world’s most powerful democracy reforms its own social contract as well if it wants to continue to be a beacon for democracy to the rest of the Americas. When democracies falter in Latin America, we’ve seen the authoritarian alternatives rush in. For the Latin American social contract to keep functioning, we need to see continued proof that democracies are able to “deliver the goods” in the 2020s and beyond.
Turning to Asia, we find one of the most striking examples of how a more open model can deliver—South Korea. In 1968, South Korea had a lower GDP per capita than Ghana, but fifty years later it ranks among the most modern, technologically developed countries in the world. Following the Korean War, which cemented the border between North and South Korea, the two new countries took widely divergent paths. North Korea implemented a medieval social contract in which the state controls almost every aspect of political, economic, and social life. South Korea opened its economy and fought to become a player on the world stage. For South Korea, its involvement in the world economy helped fuel its turn to democracy and more political openness. The military seized control of the country in 1961 and held on to power until civilian government was gradually restored in the 1980s. After watching Japan’s rapid growth, South Korea’s military government began directing loans and lucrative contracts to a handful of select companies that worked closely with the government. These conglomerates, called chaebol, helped jump-start South Korea’s spectacular economic expansion, and they still control a large portion of the national economy—Samsung, the largest of these conglomerates, accounts for one-fifth of the country’s gross domestic product.
But the country also now features a vibrant start-up scene that has pushed its economy to new heights year after year, and it has become a global cultural leader. In 2018, the K-pop group BTS became the first Korean act to reach the Number 1 spot on the Billboard Artist 100 chart. Korean director Bong Joon-ho’s thriller Parasite became the first foreign film to win an Oscar for best picture in 2020. To other young democracies in Asia and around the world, South Korea serves as an example of the growth that’s possible in an open model, while North Korea stands as a cautionary tale for a controlled model taken to extremes.