Looking for Prosperity? Go North!

Dalibor Rohac

When Americans think of Scandinavia, what comes to mind is probably Ikea, breathtaking landscapes and maybe Ingmar Bergman's movies.

But what they should do is ask how we can learn from Norway, Denmark, Sweden and Finland when it comes to prosperity.

After all, these are among the most prosperous nations on the planet, according to Legatum Institute's Prosperity Index, which takes into account not only the drivers of economic growth but also factors that contribute to human well-being.

The Prosperity Index is the world's only assessment of factors that lead to higher levels of material wealth and subjective well-being, looking at 110 countries accounting for more than 90 percent of the world's population. The factors identified as the "pillars of prosperity" range from purely economic indicators to the "softer" measures of social capital, personal freedom, and safety and security.

In the 2010 edition of the index, Norway ranks first, followed by Denmark, Finland, Australia, New Zealand and Sweden. United States comes in 10th, not only because of weaker economic fundamentals, but also safety and security concerns.

One might be tempted to attribute the Nordic countries' prosperity to their generous welfare states. But in reality, these four nations have shot to the top of the prosperity league because they encourage and protect innovation and entrepreneurship better than any other countries.

As American policymakers contemplate which aspects of the Nordic model to adopt, they'd be wise to take note of the true reasons for Scandinavia's success.

To be sure, a large welfare state is an important aspect of life in each Nordic country. But these nations also exhibit many characteristics that are antithetical to the standard understanding of big government.

Denmark, for instance, ranks as one of the world's freest economies, according to the Heritage Foundation's Index of Economic Freedom. The country features a uniquely liberal labor market, with the lowest firing costs in the world, according to the World Bank's Doing Business report.

Sure, taxes are high and social benefits generous, but the Nordic states also maintain incentives that encourage entrepreneurship and innovation. Also, the region went through a series of radical "neo-liberal" reforms in early 1990s. For instance, not only did the absolute size of Swedish government spending decrease markedly after 1993, but also the government put in place a massive program of deregulation in sectors such as banking, retailing and telecommunications. As a result, productivity accelerated from a 1980s average of 1.2 percent to 2.2 percent from 1991 to 1998, and 2.5 percent from 1999 to 2005, according to McKinsey Global Institute.

Furthermore, entrepreneurship is highly regarded in the Nordic states. According to the Eurobarometer survey, 83 percent of Danes and 78 percent of Finns have a favorable opinion of entrepreneurs -- the highest proportion in Europe.

Another key ingredient for prosperity in the Nordic countries has been their high level of social capital. In the broad sense, this signifies trust and moral like-mindedness within the population. Citizens adhere to social norms that facilitate cooperation. On numerous surveys, citizens of Nordic countries report the highest levels of trust and civic cooperation -- including volunteering, participation in referenda, and density of various civic networks and associations.

Such capital directly contributes to economic development by reducing the costs of doing business. Scandinavians trust their countrymen -- so they aren't concerned about being the victims of fraud or opportunistic behavior. In the long run, that helps the economy grow, and it also helps to sustain the generous systems of welfare entitlements.

Nordic countries' welfare states depend on a general acceptance of these norms of cooperation, wherein it may be considered morally wrong to abuse the welfare state. In part, these high levels of social capital are product of the Nordic countries' small size and homogeneity. As a result, larger and more culturally diverse countries ought to be cautious in trying to blindly imitate the generous welfare policies of Scandinavia.

Those who argue that the United States should adopt the redistributionist policies existing in Nordic countries should realize that the U.S. will probably never possess the same degree of cultural homogeneity that helps to sustain these policies in countries like Norway or Denmark.

Yet the U.S. can still learn a lot from the Nordic countries. When it comes to prosperity, a flexible and very lightly regulated economy and high levels of trust and cooperation can go a very long way.

Dalibor Rohac is a research fellow at the London-based Legatum Institute, an independent, nonpartisan organization that researches and advocates for an expansive understanding of global prosperity.