The Economist on Nordic Countries as models: a bit too easy!

Bonjour,

Interesting to see that the Economist is out with a 14-page report on Nordic countries here : http://www.economist.com/news/special-report/21570840-nordic-countries-are-reinventing-their-model-capitalism-says-adrian

In this report, the paper tries to understand what makes their model so successful and how to replicate it to our shores is implied.

Having worked with Nordic countries, I can see 3 weaknesses in this report: no mention of access to capital, no mention of the cultural idiosyncrasies of Nordic populations and finally no mention of the fact those countries are small geopolitically.

First access to capital. 

I find it surprising that little emphasis was laid on the fact that except Norway, Nordic countries are capital poor. Nordic capital markets have relatively poor liquidity, depth and are not well interconnected with the vastly bigger continental European markets or the British one. One reason is probably currency but the main one is most certainly the sizes of the local economies. As The Economist points out, only 24m people inhabit those countries.

Most Nordic companies have robust niches but it is interesting to note that sectors with heavy capital intensity are not well represented or have underperformed: automotive (except suppliers, car makers have failed or got taken over), steel, chemicals (only specialty chemicals companies have survived), energy and oil services. Only cash rich Norway has been able to create a world-class leading aluminum company (Hydro), a fertilizer company (Yara) or a robust energy sector. Successful Nordic companies have been built on low-capital intensity: H&M, Ikea, Atlas Copco, Novo Nordisk.

Low capital access has forced entrepreneurs into those niches. It is unlikely that French entrepreneurs need to found capital-poor businesses given the larger access to funds. Same thing in the German Mittelstand. The current crisis may however shifts this: as capital is getting scarcer in developed countries, it is getting more abundant in emerging economies. This explains probably why capital-intensive industries are slowly being dominated by EM rivals.

Second, I find it surprising that the very model of Nordic countries is being described without a mention of cultural idiosyncrasies. 

I like the work of Geert Hofstede in mapping what makes countries so peculiar.

Here you can access the results of his studies for Sweden: http://geert-hofstede.com/sweden.html

Nordic countries are broadly aligned with the following criteria:

-          Low power distance

-          High individualism

-          Feminine society

-          Low to moderate uncertainty avoidance

-          Low to moderate long term orientation

I will not copy and paste Geert’s work but it confirms that the 1970’s spending bulge was certainly an exception and that the reforms since the 1990’s were more in line with the cultural dimensions of the population: accountability, self-decision (eg the Danes school vouchers), proximity to governors but also a continuously high level of spending given the femininity of the societies (ie they value living standards, through education, healthcare, etc).

What does this say: the model is probably not replicable.

Plotting Sweden against France reveals  that the accountability of the Nordic model cannot be translated in France given the power distance experienced in France. In brief, you cannot expect the French MPs to reveal how they spend their allocated budgets – it is interesting to notice that some small noise to go in this direction was quickly extinguished last Autumn. 

Furthermore, the high uncertainty avoidance in France means that innovative thinking is unlikely to be accepted – therefore new bold reforms will be blocked.Societal reforms are also difficult to pass - see the current gay marriage issue.

In the article, a comparison is quickly established with Singapore. Once again, cultural traits explain the different governance between countries: Singaporeans seem more comfortable with a more directive approach (not justifying dictatorship here).

Finally, another point I like to make is that the small size of the Nordic countries also implies fewer expenditures on the diplomatic and military fronts. 

Although the Russian threat is still present, Nordic countries spend 1.5% of their GDPs for their military against at least 2.3-2.5% for France, the UK or the US. The 0.8% gap is enough to make the latter economies relatively more leveraged.

If you also add operational expenditures, the gap rises to 1pp difference per annum. Since the 1990’s, this can amount to half the difference in indebtedness between the Nordic countries and the larger countries.

To conclude, some elements need to be added back to the debate. Nordic countries have performed very well since their 1990’s crisis but their model is hardly replicable I believe.