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  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Achieving high productivity in the small Nordic welfare states

    Vesa Vihriälä 11 June 2014

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    The Nordics have succeeded well • High GDP/capita combined with low income disparities;

    the Nordics top many rankings of perceived quality of life (including OECD’s better life index)

    • Particularly employment rates but also productivity levels have been high

    • The key - mutually reinforcing - elements of the “Nordic model”: – Substantial public spending on human capital, innovation

    support, safety nets; financed by high taxes – Trust, capacity to take risks, acceptance of structural change – High productivity, high employment => large tax base limiting the

    pressure on tax rates – Fiscal prudence => space for fiscal stabilisation

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Attractive combinations of average welfare and equality

    20 000

    30 000

    40 000

    50 000

    60 000

    70 000

    0.24 0.26 0.28 0.30 0.32 0.34 0.36 0.38 0.40

    FIN

    GDP per head, USD (CP & PPP) 2012

    Gini-coefficient at disposable income (total population) 2010

    CAN

    ITA FRA

    BEL

    CZE

    AUT

    EST

    NOR

    NLD DNK

    POL

    USA

    KOR

    DEU

    SVK

    GBR ESP

    SWE

    MEX

    ISR

    AUS

    SVN GRE POR

    ISL

    LUX Arithmetic average

    Arithmetic average

    Source: OECD

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Open economies, but not exceptionally so

    0

    50

    100

    150

    200

    250

    300

    350 %

    Foreign trade, % of GDP 2012 2000

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    R&D expenditures high

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    Expenditure on R&D, % of GDP, 2011

    Source: OECD Main Science and Technology Indicators. *EU-14 arithmetical average, missing Greece. ** 2009

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Competence levels good

    220

    230

    240

    250

    260

    270

    280

    290

    300

    Adult proficiency in literacy and numeracy *

    * The average of literacy and numeracy scores in the OECD Survey of Adult Skills (PIAAC)

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Strong competences associated with high intergenerational income mobility

    * Corak (2013). Inequality from generation to generation: The United States in comparison. ** The average of literacy and numeracy scores in the OECD survey of adult skills (PIAAC) 2012.

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    But vulnerabilities exist on several fronts • Macroeconomic instability remains an issue

    – All Nordics affected by the global and EA crises – Iceland, Denmark experienced a boom-bust episode

    very much as Finland and Sweden over 20 years ago – Finland: a combination of cyclical and structural shocks

    • Increasing factor mobility & high tax rates: pressures to reduce tax rates

    • Ageing & the extensive welfare promise: pressures to increase public expenditure

    • Global competition, technological change: – how to remain productive, capture value? – how to limit pressures on income disparities and trust?

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    100

    102

    104

    106

    108

    110

    112

    114

    116

    118

    120

    2005/1 2006/1 2007/1 2008/1 2009/1 2010/1 2011/1 2012/1 2013/1

    Vo lu

    m e

    in de

    x, 2

    00 5Q

    1= 10

    0

    Substantial variation in recent macro developments: seasonally adjusted GDP

    Sweden Iceland Norway Finland Euro Area Denmark

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Substantial variation in growth performance over the past decade

    100

    102

    104

    106

    108

    110

    112

    114

    116

    118

    120

    2005/1 2006/1 2007/1 2008/1 2009/1 2010/1 2011/1 2012/1 2013/1

    Vo lu

    m e

    in de

    x, 2

    00 5Q

    1= 10

    0

    Seasonally adjusted GDP Sweden Iceland Norway Finland Euro Area Denmark

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Some divergence of relative GDP levels over time

    80.0

    100.0

    120.0

    140.0

    160.0

    180.0

    200.0

    1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014*

    GDP (PPS, nominal prices) per cap., % average EU15 SE DK FI NO IS DE USA

    * Years 2013-15 EU Commission forecast (Autumn 2013)

    EU15=100

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Growth potential has weakened: potential GDP as assessed by EC in 2007 and 2014

    95

    105

    115

    125

    135

    2005 2007 2009 2011 2013 2015

    Potential Output Projections in 2007 (2005=100), EU Commission

    Denmark Finland Sweden

    95

    105

    115

    125

    135

    2005 2007 2009 2011 2013 2015

    Potential Output Projections in 2014 (2005=100), EU Commission

    Denmark Finland Sweden

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    The Nordic approach to productivity • Openness to trade: making the most of

    comparative advantage, embracing competition • Acceptance of “creative destruction”; little efforts to

    save existing companies, “national champions” • Extensive public investments in human capital and

    innovation • Red tape on businesses limited/moderate • Good infrastructure • Competitive corporate tax systems, dual income

    taxation to spur capital formation

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    The approach is very much in line with the OECD recommendations. But is it delivering? • Total economy productivity has been reasonably good but

    not at the top • Recent productivity growth has been more mediocre or

    even weak • Considerable variation among the Nordics • All the Nordics have started to lag further behind the USA

    in business sector productivity • The attractiveness of the Nordics as a destination of FDI

    not at the top and varies across the countries – Level: FI, NO below average – Recent growth: FI, DEN below average

    • Are the Nordics or some of them underperforming?

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Labour productivity and its recent growth

    -2

    -1.5

    -1

    -0.5

    0

    0.5

    1

    1.5

    2

    2.5

    3

    0 10 20 30 40 50 60 70 80 90 100

    La no

    ur p

    ro du

    ct iv

    ity g

    ro w

    th 2

    00 9-

    20 13

    , % p

    .a .

    GDP per hour, USD 2013

    Labour productivity per hour in the total economy in OECD countries

    Denmark

    Finland

    Iceland Norway

    Sweden

    Source: OECD

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Business sector productivity relative to the US

    50

    60

    70

    80

    90

    100

    110

    1985 1990 1995 2000 2005 2010

    Relative labour productivity levels, market sector, USA= 100 Finland Sweden Denmark Germany Netherlands USA

    Sources: Inklaar and Timmer (2008) and computations with EU KLEMS database. Note: For Denmark years 2008-2010 are proxied by private sector numbers from OECD's STAN-database

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Foreign direct investment, stock, % of GDP in 2012

    0

    50

    100

    150

    200

    250

    Inward Outward

  • ELINKEINOELÄMÄN TUTKIMUSLAITOS, ETLA THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY

    Potential problems 1. Are incentives for effort and risk-taking sufficient? 2. Can the Nordics keep and attract innovative talents? 3. Are the labour and product market institutions flexible

    enough to facilitate structural change? 4. Can popular support for creative destruction be

    maintained in the context of continued labour market polarisation and widening income/wealth disparities?

    5. Can the Nordics cope with the innovation needs on a b

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