Norway Breaks With Social Democracy

Like many other European systems, Norway has much to gain in bringing in more emphasis on individual responsibility and free markets in the traditional Social Democratic system

by Nima Sanandaji

Largely uncommented on in the US press, Europe’s long-standing social democratic tilt has changed. During recent years, almost all Western European nations have seen a dramatic fall in support for the traditional Social Democratic parties, which for so long have dominated the political landscapes. In response, the centre-left parties have morphed, moving towards greater emphasis on the benefits of free markets and individual responsibility. In several countries the former communist parties now claim that they fill the role of traditional Social Democrats. A new breed of modernized centre-left parties is likely to replace several centre‑right governments during coming years. The third consecutive loss for the German Social Democrats illustrates the continuing difficulties for Europe’s labor movements to gather the strong support that they previously almost took for granted.

Until recently oil-rich Norway has remained unique, as the only nation where Social Democrats have resisted change to highly generous welfare benefits. In 1999 the former Swedish social democratic minister of business, Björn Rosengren, famously called Norway “the last Soviet state” due to the lack of willingness to adopt market policies. But now even Norway is shifting with the recent election of a centre‑right government formed by Erna Solberg. Making the transition from a full-scale welfare state to a system which consistently rewards work more than public handouts will be a difficult one for Norway. Hopefully, the newly elected government will draw inspiration from the neighbor to the east. 

Politicians in Norway for long admired the Swedish social system, seeing their larger neighbor as a pioneer of Social Democratic policies.

Recently however, particularly the left has begun to emphasize the uniqueness of the Norwegian Welfare Model rather than the Scandinavian Welfare Model. Swedish policies have even been used in the recent election as deterrence by the left. It is easy to see why. The current centre-right government in Sweden, elected in 2006 and re‑elected in 2010, has focused on a broad reform agenda. The workfare policies introduced include: somewhat less generous benefits, tax reductions aimed particularly at those with lower incomes, liberalizations of the temporary employment contracts and a gate-keeping mechanism for receiving sick and disability benefits.

The policies have successfully addressed the problem of overutilization of welfare benefits. The number of those on sick leave in Sweden has fallen from around 212,000 individuals in 2005 to 136,000 in 2012. At the same time, the number of individuals on early retirement has fallen from 557,000 to 378,000. If we look at the total share supported by various government benefits, we can see that this figure has been reduced from 25 to 16 percent of the working age population between 2005 and 2012 (adjusted to full‑time equivalents). Not a bad feat given that the period has been shaped by the global economic downturn.

Until recently, Norway has continued on the path of very generous public handouts. Contrary to Sweden, overutilization of welfare systems has thus continued in Norway. Erna Solberg utilized this fact to criticize the Social Democratic policies during the recent election campaign. Solberg noted that the working age population which depends on welfare benefits has increased slightly from 31.2 percent in the beginning of 2006 to 31.7 percent in the beginning of 2013. After adjusting the figures to full‑time equivalents, and thus making them more comparable to the Swedish data given above, the Norwegian magazine Aftenposten calculates that the share has been stable around 20 percent of the population since 2005.

By relying on workfare policies, Sweden has thus gone from having considerably more to quite less dependency on public handouts.  It should be noted that both countries are very healthy. The high share on sick benefits, disability benefits and early retirement is not a sign of bad health. Rather, it is a combination of overutilization of welfare systems by segments of the population at one hand, and of the willingness of politicians to hide the true unemployment by classifying individuals as outside the labor force on the other hand.

The difference between the more work-fare oriented Sweden and the more welfare oriented Norway are also seen in the number of hours worked. Swedes on average spend 14 percent more hours working than their neighbors to the west. (In fact, as my brother has shown, in terms of hours worked per working age adult, Sweden has recently even outpaced the US). Particularly young Norwegians are considered to have a notoriously weak working ethic, while Swedish workers are highly praised in Norway. Interestingly, since Norway has such significant oil resources, the countries welfare state is supported by lower taxes than Sweden. Clearly, overly generous welfare systems will create welfare dependency even when combined with more moderate tax levels.

Norway remains, in many regards, one of the most affluent nations in the world thanks to its oil‑wealth. But whilst Sweden and Denmark have introduced significant market reforms during recent decades (Denmark recently even ranked slightly above the US in the Heritage/WSJ index of economic freedom), Norway has resisted change. It is of course an exaggeration to call Norway “the last Soviet state”, although this notion remains popular in Sweden.

A more nuanced perspective is that although Norway has yet to introduce market liberalizations which promote competition, reduce state involvement in the economy and promote workfare policies, it seems headed in this direction. Norwegians can continue to afford an overly generous welfare system. But they have good reasons to be concerned over the social and economic consequences that follow long‑term welfare dependency and deterioration of the work ethic. Like many other European systems, Norway has much to gain in bringing in more emphasis on individual responsibility and free markets in the traditional Social Democratic system.