During his upcoming visit to Stockholm, US President Barack Obama will likely reflect on a number of fields where Sweden and other Nordic societies have for long excelled; such as low poverty, social cohesion and technological development. But a more surprising fact worth pondering is that Nordic nations have begun to catch up in a field where the US has previously dominated: capitalism.
Each year the Wall Street Journal and the Heritage Foundation publish an index of economic freedom, based on a thorough analysis of economic institutions in nations around the world. When the index was published in 1995, the US could pride itself as being the fourth freest economy in the world. Sweden was on the other hand merely ranked on the 41st position globally. During recent years however, both Social Democratic and centre-right governments in Sweden have pursued a course of market reforms and fiscal conservatism. The US has followed a different course, as public expenditure and state involvement in the economy have increased.
Today Sweden has become the 18th freest economy in the world. The US has fallen to the position of the 10th freest economy. The main reason for why Sweden still lags behind somewhat is that it has higher taxes. Remarkably, in a range of other fields, such as business freedom, investment freedom, lack of corruption and protection of property rights, Sweden already has stronger market institutions than the US. In addition, even the famously high Swedish taxes have begun to normalize towards average OECD levels.
What, then, about the other Nordic states? Norway, which relies more on an oil-rich state than business friendly policies, today ranks as the 31st freest economy. Finland does much better, even placing two ranks above Sweden. The perhaps most surprising development has occurred in Denmark. Denmark has recently taken over Sweden’s position as the European nation with the highest tax rate.
At the same time, much like the other Nordic countries, Denmark has compensated for its size of government by introducing far-reaching liberalizations in many other fields. The country even has a relatively liberal labour market within the frame of its successful flexicurity system. Since 2010 Denmark has had the same overall economic freedom score as the US. According to the latest ranking Denmark is in fact narrowly ahead of the US, being ranked as the 9th freest economy in the world.
A high level of economic freedom is of course not necessarily a good thing. In many situations there may be good reason to restrict the free market with various regulations. Overall, however, a significant research literature shows that economic freedom, as measured by indexes such as the one produced by the Wall Street Journal and the Heritage Foundation, strengthens the potential for economic development, entrepreneurship and job growth. It is obvious that countries with a high ranking, such as Australia, Canada and Switzerland, thrive thanks to entrepreneurship. It is equally clear that countries with a low ranking, such as Greece, Belarus and Ukraine, do not reach their full potential.
Americans continue to see themselves as the bastion of free market economy. But the most comprehensive attempt to measure economic freedom shows that the Nordic nations have in many ways surpassed the US. Sure, taxes are higher in the Nordics. But protection of property rights is more solid, corruption is weaker and business freedom is stronger. At least in part, the Nordic nations have developed into free-market role models for the US. Perhaps Obama can, during his short visit, not only draw inspiration from the favourable social outcomes in the Nordics, but also some of the smart business friendly policies.
Nima Sanandaji, a Swedish writer of Kurdish origin with a PhD in polymer technology, has written numerous books and reports about subjects such as integration, entrepreneurship, and women’s career opportunities. His forthcoming book, published by Sweden’s Reforminstitutet think tank, is entitled Krympande eller växande städer (‘Shrinking or growing cities’). He is a regular contributor to The Local.