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The Nordic
Economies 1945-1980*
Lars Mj�set**
ARENA
It is often claimed that in the postwar period, one
can discern a Nordic Model of socio-economic development.
The model was based on a capitalist economic system, but
incarnates political concerns for social equality. It is
a specific version of the mixed economy: an economy
managed by political forces with a strong commitment to
the welfare of the broad masses, favouring goals such as
full employment, an egalitarian income distribution, and
general social citizenship through universal pension
schemes and provision of social services. The model was
marked by strong domestic consensus, high levels of
organization (of both labour, capital and agriculture),
and low levels of social conflict: a Nordic version of
organized capitalism. Towards the end of the period,
there was also greater equality between the sexes, and
high employment rates for women.
The term �Norden� here refers to the five states
that established the Nordic council in the 1950s.
These are the older states, Sweden (population size by
1970: 8.1 million) and Denmark (4.9 million), the newer
states gaining sovereignty in the 19th and early 20th
century, Norway (3.9 million) and Finland (4.6 million),
and finally Iceland (205 000), interdependent from
Denmark by 1944. The stylized model just sketched can
hardly be seen as a common denominator for all of them.
The postwar era until 1980 was the age of the nation
state. Despite significant expansion of international
trade, economic modernization in that period
predominantly implied the conquest of mass markets
delineated by national borders. Besides higher living
standards, citizens also gained rights — to welfare
benefits, education, health care, codetermination in
worklife, etc. — that were essentially guaranteed by
each nation state. The debate on the impact of
globalization concerns the 1990s, not the decades
preceding 1980.
All serious comparative history shows that there are
important differences in the development of the five
Nordic states, in the postwar period as much as earlier.
In this chapter, we shall emphasize both similarities and
differences. The five Nordic countries have, however,
been connected due to geographical closeness and near
language community. The Danish, Swedish and Norwegian
languages are close, making mutual understanding easy.
Icelandic is in the same language family, but not
immediately understandable to the others. Finnish belongs
to a wholly different language family. According to its
constitution, Finland is a dual-language country. Less
than 10 percent of the population talk Swedish as their
first language, while many Finns talk Swedish as their
second or third language. Mechanisms at the inter-state
level have homogenized certain features of their
socio-economic development patterns. In some areas there
may have been direct mutual influences (e.g. via the
Nordic council), while in other areas there may have been
conscious emulation of local leader countries (mostly
Sweden) by others who were in varying degrees latecomers.
Historical background and general political context
The postwar period 1945-80 can be seen as the peak of
a longer process: the transformation of the Nordic
countries from a poor early 19th century European
periphery to privileged status as some of the richest
members of the Western world.
The Nordic economies had traditionally linked up with
the world market through exports of staples: fish from
Iceland and Norway, iron from Sweden, forest-products
from Norway, Sweden and Finland, and agricultural
products from Denmark. Denmark and Iceland relied on food
exports, lacking industrial raw materials. In the early
20th century, it became possible to generate
hydro-electric power from waterfalls, later also for
Iceland. This was particularly important in Norway, where
a sector of foundries (heavy melting/process-industries
transforming raw material inputs to e.g. aluminium)
emerged. In the 1960s, off shore oil exploration started
on the Norwegian continental shelf, adding yet another
energy source to Norway's economic assets. Norway here
differs from the other Nordic countries: its economic
development, even in the 20th century, is influenced by
the discovery of new natural resources.
Manufacturing industries developed through forward and
backward linkages to the natural resource based
activities, as emphasized in the staple goods theory of
economic development. By the turn of the century, the
Nordic countries had passed a threshold of
industrialization, and a domestic market was
consolidated. At that time, Sweden not only had its
mining, steel and forestry, but also a number of
export-oriented engineering firms. Social and
institutional factors contributed to this transformation:
The quite egalitarian distributions of income and
agrarian property fueled the emergence of small and
medium sized firms catering for the domestic market. The
crisis of the 1930s triggered off export substitution,
creating a new segment producing consumer durables.
Industrialization created working classes, which
mobilized, either independently of or in interaction with
agrarian interest groups. Universal male franchise and
parliamentary democracy was established at the turn of
the century. Social democratic parties and strong labour
union confederations emerged from the late 19th century
and onwards. Sectoral collective agreements on wage and
working conditions, laws regulating collective
agreements, and even collective �national agreements�
were established in the 1900-1945-period. In the 1930s,
each country saw red-green alliances in which reformist
social-democratic parties allied with agrarian parties,
launching policies that eased the pressure on the lower
classes somewhat.
Even in the postwar period, the Nordic party systems
all display a non-socialist side, split between agrarian,
liberal, conservative and Christian-protestant parties.
In Denmark, Norway and Sweden the reformist left is quite
homogenous, dominated by social democratic parties. With
a fragmented non-socialist wing, and a system of
proportional representation in parliament, social
democrats have been influential even when they were not
in government. In Finland and Iceland, there was a
fifty/fifty split on the left between communists and
social democrats, as well as a split on the right. There
are even splits in the Icelandic trade union movements,
while in Finland, trade unions were reconciled in the
late 1960s.
World War II implied the final breakdown of the
European state system. Since the decline of Sweden and
Denmark as European great powers in the absolutist age,
the emerging Nordic nation states had tried to keep
outside the turbulent and war-prone European state
system. They all managed to stay neutral in World War I,
but only Sweden remained neutral also in World War II.
The bipolar Cold War system, in which the Western bloc of
U.S. allies opposed the Eastern bloc of Soviet allies,
created a new set of relations between the Nordic
countries.
Sweden remained committed to a neutral foreign policy
line through the whole postwar period. But this
neutrality had a Western bias, implying e.g. covert
cooperation with Nato on surveillance of the Baltic area.
Norway and Denmark had been occupied by the German Nazi
regime during World War II. Iceland, in contrast, had
been held by Britain until a mutual defence pact with the
U.S. was signed in 1948. The Danish, Norwegian and
Icelandic governments turned down a Swedish proposal of a
Nordic defence union, opting for NATO-membership also in
1948. Facing the Atlantic, they chose to become U.S.
allies, thus receiving support for military
infrastructure (notably the Keflavik airport in Iceland
and Thule in Greenland/Denmark) and other economic
advantages of military burden sharing with the U.S.
Finland, finally, had a traumatic wartime experience.
The Finns fought a winter war, following an attack by the
USSR, between November 1939 and March 1940. Then the
country sought German assistance, fighting on the German
side 1941-44, but insisting on neutrality when Germany
invaded the USSR. Maintaining democratic government and
resisting occupation, Finland's balancing was highly
complicated, involving 100 000 deaths, loss of territory,
and a promise of war reparations (USD 445 million) to the
USSR after the war. With the coming of the Cold War,
Finland realised that she had to continue to balance
between east and west. In 1948, a �Treaty of Friendship,
Cooperation and Mutual Assistance� with the USSR was
signed. The treaty allowed the USSR to contribute to the
defence of the country if Finland could not resist a
military attack on its own. In contrast to Sweden's
west-oriented neutrality, Finland's neutrality was
east-oriented.
Different security preferences would systematically
hamper Nordic integration through the Cold War period.
But in economic terms, all of the countries, including
Finland, experienced a �Western� development.
Into the postwar period
Economic reconstruction was the top priority of the
late 1940s. Readjustment from abnormal supply conditions
and heavy state-intervention during the war was a major
challenge to economic policies.
All the Nordic countries except Finland received
Marshall aid from 1948. The Marshall aid reflected the
new U.S. strategy of civilian containment. Western Europe
had become a buffer in the Cold War, and if not
U.S.-friendly political forces quickly gained the trust
of a majority of the voters, strategically important
countries might be lost. Welfare, stability, and reduced
risks were seen as crucial, since the broad masses
remembered both the inter-war crisis and wartime
hardship. U.S. strategists suggested extensive
integration of the Western European economies as a main
remedy, and through the Marshall aid institutions
(especially OEEC) the receiving countries were urged by
the U.S. to engage in regional integration efforts. Some
countries, however, especially Britain, clearly opposed
such efforts. In Sweden, Iceland and Denmark scepticism
towards broad Western European integration led to schemes
proposing Nordic integration as a substitute. This was
facilitated by many ties between the social democrats,
which were in government in all three countries.
The problem, however, was differences in the level of
economic development. The agrarian/industrial shares of
the labour force in 1950 were 20/31 in Sweden, 26/27 in
Denmark, 26/26 in Norway, but 46/21 in Finland. Sweden
was the regional industrial leader. Having produced at
full capacity through the war, Swedish firms could
quickly deliver much of the goods needed for postwar
reconstruction. This scared many small and
labour-intensive firms in Norway and Denmark. In Norway,
the social democrats were quite in favour of some
transformation pressure on industry via increased
competition, but the non-socialist parties and business
decision makers tilted the decision against the proposed
Nordic customs union.
Until the late 1950s, the pace of structural change
was modest in all the Nordic countries, except for
Finland. The small open Nordic economies were heavily
reliant on their limited number of dominant export
sectors: wood, pulp, paper, fish, timber, iron- and
metal-products. In Norway, incomes from shipping
services, and energy-intensive raw materials also played
an important role. A rather narrow range of export
products had to finance increasingly varied imports, not
just due to increasingly sophisticated tastes among
consumers, but also due to the need for upgrading and
specialization of manufacturing technology. As earlier,
the manufacturing branches developed in interaction with
the transformation of the dominant export sectors.
The impact of such dominant export sectors may be
stylized as follows: Their economic conditions are
externally given. Raw materials and semi-finished goods
follow quite regular business cycles in the world
economy. The products are mostly simple and homogenous,
being traded in traditionally competitive markets. Prices
are highest at the business cycle peaks. These sectors
then work at full capacity, and they are led to plan for
extension of capacity. Seduced by current surpluses, they
ignore historical experience. As the peak turns to
downturn, they are caught — thanks to their recent
investment decisions — in profit squeezes and
liquidity problems. They seek the help of the state,
requesting moderate incomes policies, possibly combined
with devaluations. In Norway, they also push for
advantages in terms of low energy prices. Each country
differs, however, in the extent to which these impulses
are spread to the rest of the economy, as we shall see
later.
In Finland, industrial modernization gained pace even
in the 1950s. Finland was Norden's industrial latecomer:
as late as in 1960, the share of the working population
in agriculture had barely reached the level attained by
the other countries in 1930. Finland's postwar
transformation was much more dramatic than elsewhere in
Norden. By 1980, namely, the agrarian share was down to
the Nordic average of 10 percent. This transformation
took place in spite of Finland's exclusion from Marshall
aid. But the very reason for that exclusion — the
intermediary position between the east and the west
— became a main advantage to Finland's industry. War
reparations to the USSR (mentioned above) were to be paid
in kind, in the form of manufactured goods. This
triggered off the development of a highly competent
manufacturing industry (shipbuilders, iron-/metal- and
machine-industries). Despite industrial expansion,
unemployment could only be held down thanks to extensive
labour migration to Sweden through the 1950s.
None of the Nordic countries developed the full set of
�Fordist� mass production/mass consumption industries,
but American methods of work organisation (taylorism,
time-motion studies, etc.) spread through their
manufacturing industries, and the Fordist assembly line
was introduced in sectors were it was relevant (mainly
Swedish auto-industry, Danish slaughterhouses). As the
most diversified of the Nordic economies, Sweden served
as kind of a �Nordic U.S.� with the largest, most
advanced industries (including a growing defence industry
to support its armed neutrality), being the most
important market, a magnet for Finnish surplus labour,
and a laboratory for social innovations (such as the
universalistic welfare state). We shall discuss
industrial diversification in more detail later.
While Fordist production norms were only partially
absorbed, the Nordic economies fully emulated the Fordist
norms of mass consumption. The ideal of �the American
Way of Life� played an important role, both for the
demand side of the economy, and as a point of ideological
identification.
Industrial relations
In the postwar period, the rudimentary �class
compromises� of the 1930s (collective agreements,
centralized as national agreements) matured. Union
membership (as a percentage of the non-agricultural
labour force) in the postwar period was around 70 in
Sweden, 50 in Denmark and 45 in Norway. In Finland, it
increased from 30 in the 1950s to about 45 in the 1960s,
reflecting that country's early postwar surge of
industrialization. Industrial unionism dominated in
Sweden, Norway and Finland, and there was considerable
concentration, especially in Sweden since 1960. There has
been few competing unions, and there is some degree of
cooperation between blue collar and white collar
confederations (notably LO and TCO in Sweden). Denmark
has few industrial unions, the LO (trade union congress)
is dominated by occupational unions and a large general
union, organizing unskilled workers.
The close ties between union confederations and Labour
parties secure stable labour market relations that
support a reformist framework and integration in public
decision making processes. Some of the common traits are
due to long term Nordic collaboration, both at the state
level and between labour market organizations in the
different countries. Since the mid-1950s, there has been
a common Nordic labor market (Iceland excluded) for all
unlicensed occupations (and some licensed ones). Even
more important is the long tradition of Nordic
cooperation in law making, based on a specific Nordic
legal tradition. Cooperation on laws imply negotiation of
uniform solutions, while the member countries
independently formulate the concrete laws.
Quantitative studies of industrial conflict (strikes,
lockouts) shows that in comparison with the unruly
inter-war period, the level declined significantly in
Sweden and Norway, somewhat less in Denmark, while it
increased strongly in Finland and Iceland. We shall later
relate this difference to patterns of economic policy
making.
Studies of macroeconomic adjustment have emphasized
the advantages of high centralization in the labor
market. In Denmark, Norway and Sweden, and since the late
1960s also in Finland, a broad class compromise has
prevailed, preferring negotiated solutions rather than
conflictual strikes and lockouts. Wage moderation is
possible and the state gains latitude to pursue a policy
of full employment. In European comparison, the Nordic
countries stand out in terms of their compressed wage
structure. Such a relation between the state and labor
market parties is often dubbed a �corporatist� pattern
of cooperation. Rankings based on various indicators of
corporatism show that the four large Nordic countries
generally are in the upper half among the OECD countries.
This constellation has mostly required labour party
dominance or participation in parliamentary alliances
which use legislation to establish institutions
(including those of the welfare state) that
counterbalance private capital's power over investments
and work organization. Sweden is the most famous example
of such an accumulation of power resources that
strengthens labour's bargaining power.
Even in Iceland, we can discern a class compromise,
but a highly sectoral one between fishermen and fishery
capitalists. The terms of this compromise has not been
overall equality, but rather income-sharing between two
privileged elites. Fish is the crucial export item, and
the net value of a vessel's catch is to be shared between
the owner and the crew members. This is a sharecropping
system, but adapted to modern technological conditions,
very different from traditional tenant farming where the
system is well known. What makes Iceland unique is the
dominance of the fisheries and hence of sharecropping in
the national economy. Unlike a traditional tenant farmer,
crew members form a collective of workers running an
expensive piece of production equipment, the trawler.
They negotiate wage and terms agreements like
wage-earners. Given the seasonal nature of fishing,
ship-owners are vulnerable if crew members use strikes in
connection with disagreements on the terms of the
sharecropping deal. The crews of fishermen have become
Iceland's labour aristocracy.
As such, they have a strong influence in Iceland's
Trade union congress (ASI), which is thus ridden by
strong tensions relating to the huge gap in incomes
between fishermen and wage earners working e.g. in fish
processing plants or in the public sector. This may be
the main reason why Iceland never had the Nordic type
broad labour/capital-compromise with a strong social
democratic party.
Even Finland lacked a full compromise in the early
postwar era. But there, a process of political
centralization took place. This must also be seen in the
light of the very rapid structural changes already noted.
In 1967 the union-movement reunited into one central
confederation. Since that, unionization skyrocketed. At
the same time, a broad centre/left-government took
office, including even the communist fraction of the
labour movement.
In Sweden, tensions developed already in the late
1960s. The compromise presupposed that the labour
movement would accept that investment and work
organization decisions were the privileges of business
management only. Rising demands for worker influence on
work environment and investments challenged this
assumption. Wild cat strikes destabilized labour market
peace. As their legitimacy was threatened, social
democrats responded by emphasizing work environment and
codetermination reforms, launched as a �third step� on
the peaceful �third way� to socialism. In the 1970s, LO
and Labour proposed a system of wage earner funds which
would go some way towards a full socialization of
investment decisions. They were not, however, able to
sustain this offensive in the 1980s.
Economic policy regimes
The dynamics of the dominant export-sector and the
nature of the class compromises were crucial determinants
of the postwar economic policy regimes. In addition, the
nature of the institutions of monetary control and credit
creation, that is the central bank and the financial
system, must be taken into account.
All the countries — with the partial exception of
Denmark — developed various versions of a
state-interventionist, credit-based financial system,
relatively closed to international influences. Foreign
exchange controls prevented residents from acquiring
foreign assets and nonresidents from dealing in domestic
assets. The interest rate was set administratively at a
low level, and (consequently) credit was rationed. The
influence of banks and the stock exchange was marginal.
In Norway, credits were to a large extent allocated
through a system of state banks.
Denmark deviated, with somewhat more open credit
markets (especially towards Germany). Already in the
1950s, Denmark had large markets for Treasury Bills, long
term private bonds, private savings and institutions for
private pension schemes. Denmark had a sizeable
government debt, and the Central Bank maintained a high
interest rate to force firms to borrow in international
financial markets, thereby financing the permanent
payments deficit.
Given these structural and institutional conditions,
we can compare the different economic policy regimes. The
most clearcut patterns are found in Iceland and Finland,
the two cases with weak class compromise and increasing
postwar levels of industrial conflict. Here, the state
had to confront the wage earners in order to protect the
profitability of the dominant export sectors, creating
devaluation cycles. The cyclical pattern of
over-investments and profit squeeze was outlined above,
and devaluation was the preferred way in which the
dominant export sectors were bailed out: their incomes
increased, while imported inflation eroded the purchasing
power of the wage. As economic conditions improved,
strikes followed as wage earners tried to compensate
their losses.
The Norwegian, Swedish and Danish regimes were
different, marked by incomes policy compromises which
secured both the profitability of dominant export sectors
and wage-earners' income levels. Crucial in postwar
Nordic economic planning were macroeconomic �inflation
models� in which the main exporting firms were assumed
to be price takers in international markets. Wages in
that sector were determined by international inflation
and the pace of productivity. These wages were
generalized for all sectors. In the sheltered sector, it
was assumed that employers determine a mark up price
which leaves the wage/profit-distribution constant.
Iceland's particularly one-sided international
specialization, as well as the role of sharecroppers,
made its devaluation cycle highly inflationary. In good
times, wage-earners secured wage indexation, so that
living costs would not be eroded by inflation. But a bad
year for the fisheries (low prices and/or catches) put a
squeeze on both ship-owners and processing plants, and
the current account deficit soared. Economic policies
were tightened, the currency was devalued and other
fiscal and monetary policies favoured the fisheries. The
government passed legislation that modified or completely
repealed wage-indexation. As conditions improved, the
system did not work in a symmetrical fashion. Excess
profits in the fisheries and export trades were not
redistributed (e.g. by revaluation of the currency). Wage
earners were eager to recapture their earlier real wage
losses, and the system was vulnerable to work stoppages.
Given the imperative importance for Iceland's export
incomes, fishing could not be blocked during the three to
seven months' season of active fishing. By means of
strikes, wage-earners forced indexation back. But through
both good and bad times, credit policies were
accomodating: in good times, investments in new fishing
equipment was supported and during bad times, firms were
bailed out. Together with the periodic devaluations, this
pushed towards hyperinflation.
The sharecropping system complicated matters further.
The domestic price of fish determined the (net) catch
value to be shared by ship-owners and crew. If this price
was high, it fed domestic inflation both by pushing up
costs in fish processing and by pushing wage drift as
wage earners strove to approach the high gains enjoyed by
the fishing crews. The state used to be able to influence
this fish price, but was generally unable to restrain the
inflationary dynamics that emerged in the conflictual
relations between the state, fishermen, ship-owners, fish
processing firms and common wage earners.
Like Iceland's, the Finnish regime was pro-cyclical,
with non-consensual incomes policies (devaluation —
deindexation — strikes — reindexation) as a
main feature. But the Finnish regime did not generate
hyperinflation. Credit policies were less accomodating.
Furthermore, the cyclical swings were less erratic than
in Iceland's case, since Finland's main export staples
followed more regular cycles than fish, and also because
Finland soon developed more diversified exports. The fact
that Finland exported both eastwards and westwards turned
out to be a stabilizing, �counter-cyclical� feature of
Finland's economy in the 1970s.
The Norwegian model was based on an export enclave
producing semi-finished goods by energy intensive
methods. This structural feature involved more
�automatic stabilizers� than in the Finnish case. The
impact via wages on the domestic economy was also small,
since the export enclave was highly capital intensive.
Both the foundries and shipping sectors had very few
feedback effects on the domestic Norwegian economy:
inputs and machinery was imported, the main Norwegian
input being cheap hydroelectric power. Processing of
semi-finished goods as aluminium was mostly done abroad.
Shifts in external demand and supply conditions affected
Norwegian exports and imports, but not domestic economic
relations. It was thus easy to conduct economic policies
in Norway. The Icelandic and Finnish routines were
pro-cyclical, they reinforced the business cycle,
spreading its effects into the domestic economy. Norway's
economic policies may seem counter-cyclical, but the main
point is rather that structurally determined automatic
stabilizers insulated the domestic economy from external
cycles. Only in the 1970s, with new and stronger external
and internal pressures, counter-cyclical fiscal policies
were implemented.
Sweden, finally, have a more diversified export basket
than the others, and thus sectoral business cycles cancel
each other out to a larger extent. Still, Sweden
encountered problems in the 1950s: despite collective
bargaining, excess demand spurred inflation, and high
profits amplified this by generating wage-drift and
competing wage claims. Inflation, together with current
account problems, forced authorities to turn to
contractive policies which threatened full employment.
Union interests feared the fragmenting effects of
increasing income inequalities, and argued in favour of a
regime which could secure full employment without
increasing income differentials. This regime, called the
Rhen/Meidner-model, characterized Swedish economic
policies in the period 1958-76.
The model proposed restrictive fiscal policy to handle
excess demand and reduce wage inflation. Furthermore, it
was based on the assumption that wage restraint was only
possible if there was also a squeeze on profits. Capital
accumulation would not suffer from this squeeze, since
parts of the high public savings (based on a high rate of
taxation) would be recycled to firms at a low interest
rate. Selective labour market policies (training
programmes, stimulation of occupational and geographical
mobility, regional policy, labour market information)
secured full employment without labour shortages.
Finally, the unions pursued a solidaristic wage policy:
equal pay for equal work, and reduction of sectoral wage
differentials. This also speeded up structural change by
eliminating unprofitable firms or forcing them to
rationalize. In addition, the model required fiscal
policies to be contractive. This was periodically the
case, but as a result of bad timing than of conscious
policies.
In the case of Denmark it is also hard to distinguish
a cyclical pattern of economic policies. As late as in
1955, agriculture accounted for 2/3 of export incomes.
Most foreign agricultural markets were regulated. Any
domestic upswing would quickly drain the currency
reserves, and it was difficult to borrow abroad. As
noted, Denmark has to import all industrial raw materials
and energy sources, and the prices of these inputs
increased during international upturns, unlike the prices
of Denmark's agricultural exports. Thus, a Danish regime
of stop-go policies hampered industrial investments. The
chronic current account problems restrained growth,
barring the Danish economy from full participation in
international upturns. In the 1960s, however, the
situation changed, and there was a massive growth surge
which we shall investigate later.
Nordic integration and industrial transformation
Periodically, ambitious proposals of Nordic
integration appeared. Even though these visions were
always frustrated, some regional institutions were set up
in Norden: The Nordic Council (1952; Finland joining
1955) followed the failure to establish a defence union.
The Helsinki Convention of 1962, codifying the results of
Nordic cooperation, was signed after the failure of the
Nordic customs union in 1959, and the Nordic Council of
Ministers (1971) followed the breakdown of the plan for a
Nordic common market (Nordek).
The Nordic integration proposals always avoided
supranationality. The Nordic Council started as a
yearly gathering of delegations of mps and government
ministers, with subcommittees meeting more often. It
gives advise, but not on foreign policies. The Council of
Ministers has a permanent staff.
A Nordic customs union was proposed several times
since 1948. By the mid-1950s, also Finland (due to Cold
War detente following Stalin's death in 1956) and Iceland
joined these talks. But then the Nordic countries became
founding members of EFTA in 1959 (with Britain, Portugal,
Austria, Switzerland), joining the British effort to
counter the EU with a free trade agreement among the
�outer seven�. Since the Nordic countries did not
expect Britain to accept a customs union within EFTA, the
plan was dropped. Finland became an associated member of
EFTA in 1961.
Britain soon revised its stance, applying for EU
membership in 1961. An EU including Britain would be
Norden's dominant trading partner, so Denmark and Norway
applied for membership, while Sweden discussed a looser
kind of association. Applications were repeated in 1967.
But de Gaulle opposed British membership until his
resignation in 1969. Thus, EFTA was the main institution
for Norden's economic integration in the 1960s. Sweden's
large manufacturing firms were the main Nordic force in
EFTA, but all the Nordic countries benefited. Economic
catch up continued, there was convergence, not
polarization. Any fear of Swedish competitive pressure
quickly withered away.
There were distinct regional patterns in trade
integration. In the early 1960s, Nordic exports to
non-Nordic OECD countries consisted overwhelmingly of raw
materials and semi-finished goods. But in the 1961-73
period, intra-Nordic trade expanded rapidly, and the
composition of this trade differed from that of Nordic
trade with the OECD at large: the share of raw
materials/semi-finished goods was much lower. The Nordic
market became a testing ground for new export products,
an extended domestic market. In the OECD, Norden lost
market shares in markets for natural-resource-based
products, but won market shares for certain manufactured
products. Even without a formal Nordic customs union, a
specifically intra-Nordic dynamic was unleashed.
Even Denmark was part of this dynamic. Denmark's
problems in the late 1950s have been noted. The late
1950s trade-liberalization agreements (GATT, EFTA, EU)
did not encompass agricultural exports, agriculture
remained sheltered everywhere. Responding to a situation
of strikes and unrest in 1956-7, a new Danish government
implemented a series of economic policy reforms favouring
a set of new expanding export-industries. Trade in
manufacturing goods was liberalized and convertibility
made it possible to convert agricultural sterling-incomes
into dollars, that would buy up to date machinery.
Manufacturing employment exploded, not just in
traditional sectors such as textiles, but also in new
activities producing for niches in the world market. For
the first time in Danish history, manufacturing exceeded
agricultural exports. All economic indicators, even the
current account, showed favourable trends, producing
growth above the EFTA-average. The current account
problem, however, returned in the late 1960s.
Although Denmark is the spectacular 1960s case, there
was industrial diversification and modernization also in
the other countries. Sweden developed the most
flourishing consumer durables industry (Volvo,
Electrolux). They were intermediate between domestic and
export industry, but increasingly export-oriented. The
value added of Finland's exports increased considerably,
from timber via paper/pulp to turn-key plants for paper
processing. Initially linked to reparations (as noted),
Finland's manufacturing industry now was a crucial export
sector. Dependence on the forest industries was
moderated. The new engineering firms were mostly
state-owned, continuing to export eastwards, often
exchanging bilaterally with Soviet oil. Gradually, they
also began to sell in western export markets. West- and
east-oriented industrial elites were integrated.
In Norway, and particularly in Iceland, structural
change was less marked. About 80 percent of Iceland's
exports are fish. Engineering activity focused on various
types of equipment for fishing vessels. Iceland's most
important diversifying effort was the erection of
energy-intensive foundries, imitating the Norwegian
structure. Norway's dynamic manufacturing industries were
linked to dominant export sectors: shipyards were linked
to shipping, and engineering firms, producing turbines,
etc. were linked to the development of water power
resources. The role of the export enclave was reinforced
by the oil economy of the 1970s. While the links between
shipping and shipyards was weakened, the shipyards
survived by turning to construction of off-shore oil rigs
and related equipment.
Welfare states
According to a standard typology, there is a peculiar
Nordic type of social democratic welfare state. It
entails a specific institutional model of social
policies, in which the provision of a secure standard of
living is guaranteed as far as possible independently of
market mechanisms. Supplementary pensions, however, are
indexed to wages. Health and educational services are
provided for all at a low cost. The basic pension system
was established in the late 1940s/1950s and extended in
the late 1960s, as benefits were generalized and indexed
to the rise in living standards. There was also a major
expansion of health and education systems. Welfare
mechanisms exist in terms of both legislation and
organizational structures.
Certain aspects of Nordic integration are connected to
these welfare states. There are uniform laws about
citizenship: a resident becomes a citizen after seven
years in another Nordic country, and can run for
municipal offices after only three years. In case of
inter-Nordic migration, pensions and social insurance is
transferred.
Basic pensions are independent of participation in the
labor market, e.g., they are granted also to housewives.
Such a model differs markedly from the marginal
welfare state that — as in the U.S. — provides
services only for those residual groups that are the
worst off. The model was originally similar to the
British Beveridge plan, but while the Nordic countries
consolidated and extended that model in the 1960s and
1970s, British social policies moved towards the U.S.
model. The Nordic welfare state also differs from the achievement-oriented
(or �conservative�) continental European welfare
states, where provision of many welfare services is
dependent on past participation in specific labor
markets.
But the five Nordic countries also differ with respect
to the degree of welfare state institutionalization. The
Danish welfare state went through a major expansion in
the 1968-73, but did not complete the system of
state-organized supplementary pensions. This was left to
private initiative. Finland employs a system of
compulsory supplementary age pensions through private
insurance companies.
The similarity in welfare state systems explain
certain common traits of economic adjustment through the
1970s, especially the fact that employment continued to
rise, despite shrinking industrial employment. First in
Sweden, then in the other countries, women increasingly
took up paid work, doing �female� tasks such as caring
for the young, the old and the sick, but now as employees
in a service producing welfare state. In contrast to the
transfer-biased Continental welfare arrangements, the
Nordic welfare states created extensive wage labour by
women in the public sector. The price for this was a high
degree of gender-segmentation, with women dominating in
the public sector.
1970s adjustments
In the late 1960s, it seemed that EU would not admit
new members. Inspired by the high growth, integration and
modernization experienced in the 1960s, a plan for a
Nordic common market (Nordek) was launched in April 1968.
But the fall of de Gaulle in 1969 opened the way for
British EU membership, and the process of EU enlargement
soon started. Nordek was postponed. Denmark and Norway
relaunched their earlier membership applications, while
Sweden again discussed a looser association. In early
1970, Finnish authorities found that Nordek would be too
close to the EU, which was regarded as much too dominated
by Nato-countries. The Nordek plan was shelved.
In the end, only Denmark joined the EU (with Britain)
in 1972. Since EFTA did not include provisions for freer
trade in agriculture, Danish agricultural interests had
become increasingly pro-EU. Danish agriculture prospered
in the EU. Sweden withdrew from negotiations, guarding
its neutrality. Norway negotiated a deal, but it was not
accepted in a national referendum, making Norway the
first and so far only applicant to reject EU-membership.
The remaining Nordic EFTA-members — Finland,
Iceland (joined in 1970), Norway, Sweden — later
concluded trade treaties with the EC. Since 1977, most
trading barriers applying to manufactured goods between
the EFTA and EU areas were dismantled. The EU was clearly
the dynamic force in Western European integration. But
macroeconomic adjustments in the 1970s demonstrated the
dominance of nationally based economic policy management.
In Denmark, public spending and tax rates had grown
faster than in any of the other Nordic countries in the
1960s. Sheltered sectors, such as housing, construction
and the public sector, as well as high interest rates
hampered the expansion of new manufacturing industries.
The current account deficit exploded again, and the
Danish 1960s regime was in ruins already before the
international crisis hit in 1974/5.
In Norway and Sweden, established routines proved
unable to contain new external and internal pressures.
Even before the downturn of 1974 (first oil shock), the
standard economic policy routines produced unexpected
results. Overshooting of several economic policy targets
produced very expansive booms. In Norway the
counter-cyclical phase coincided with the emergence of
significant off shore oil exploration, as well as with a
political legitimation crisis as the Labour party had
promoted EU membership, but lost the 1972 referendum.
Adjustment to the 1974/5 downturn caused overshooting in
incomes policies and a record high current account
deficit 1976/7, anticipating huge future oil revenues.
Oil revenues added to economic policy autonomy, but even
Sweden — without such incomes — pursued a
policy of bridge-building.
In the late 1970s, fiscal and incomes policies were
tightened in Norway and Sweden. Full employment was
defended by soft monetary policies: devaluations and
rigidly low interest rates. This implied a rejection of
the standard routine, which required tight monetary
policies in such a phase. But the old routine of low
interest rates was maintained (so also in Finland). Given
high inflation, this generated negative real interest
rates even before tax. Politicians and economists began
to worry about the control of inflation. Resulting
strains on the system of credit rationing led to the
emergence of a grey market.
Compared to Norway and Sweden, Denmark's delayed
counter-cyclical response implied a return to unpleasant
stop/go policies from 1975. Denmark was not troubled by
soft monetary policies, however, given its higher
interest rate and less interventionist credit system,
reinforced by the EU membership in 1973. Real interest
rates never turned negative. But the new current account
problems had forced decision makers to introduce direct
regulations (credit rationing), so a grey market
developed even there. Denmark was in deep trouble by the
late 1970s. Despite a short attempt to devalue like the
other Nordic countries, Denmark experienced the fastest
increase in unemployment ever seen since the war, from 5
percent in 1975 to 10 percent in the early 1980s.
In Norway and Sweden, a vicious circle of more
controls and increasingly sophisticated evasions started,
producing overshooting of credit volume targets. Labour
markets were very tight, and high wage drift undermined
relatively moderate wage settlements. The inflationary
effects of these policies undermined the regulatory
systems which had worked well until the early 1970s.
Attempts at direct regulations created political
backlash, and deregulation followed, most notably of the
housing market (Norway) and of the domestic financial
systems (1980s, both Norway, Sweden, Finland).
In Iceland and Finland the responses were
pro-cyclical. The mechanisms of the standard economic
policy regime were reinforced. The early 1970s pressure
for wage-increases created by the raw materials (and
food-price) boom was — in contrast to Norway and
Sweden — very quickly blocked. In Iceland, full
employment was defended, but accomodating monetary
policies and devaluation created hyperinflation (the
consumer price index growing at 50 percent in 1975 and in
1980). Finland experienced higher unemployment — 5.8
and 7.2 percent in 1977/8 — but developments
stabilized in the late 1970s.
The Finnish economic policy regime stabilized in a
�Nordified� version, while Denmark very early
encountered the limits to a devaluation strategy. Finland
had few regulatory problems, Iceland had a lot, and also
in Norway and Sweden, there were milder versions of
regulatory problems due to high inflation. It is tempting
to explain Finland's success with reference to the
emergence in the late 1960s of a more �Nordic� pattern
of industrial relations, but there is also a very
important structural reason: Finland's intermediary
trading position, its extensive bilateral trade with USSR
oil serving as a counter-cyclical force in the 1970s: the
higher the oil price, the more manufacturing goods
Finland sold to the east.
While Norway, Sweden and Denmark introduced a
devaluation routine similar to a routine that Iceland and
Finland had been using for a long time, Finland probably
became more moderate in its use of devaluations. In
Iceland, however, the use of devaluations went into the
extreme.
These inconsistencies can be seen as the first signs
of a sequence of revisions and deregulations of the
�Nordic models� that followed in the 1980s and 1990s.
It should, however, be noted that despite many
deregulatory measures, the Nordic type of welfare state,
as well as the peculiar pattern of industrial relations
are still crucial features of the Nordic situation.
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Footnotes
[*] Italian translation to be
published in Storia dell'economia mondiale
dall'antichita' ai giorno nostri. Ed. Valerio
Castronovo Vol. V. Modernization and the problem of
underdevelopment 1945-80, Rome: Gius. Laterza & Figli
2000.
Written for a Italian compendium on world economic
history, this paper contains only a few major refereces,
as requested by the publisher. However, the paper mainly
relies on earlier work, notably Lars Mj�set, ed., Norden
dagen derp�. De nordiske �konomisk-politiske modellene
og deres problemer p� 1970- og 1980-tallet [Nordic
hangover. The Nordic economic policy models and their
problems in the 1970s and 1980s], Oslo: Norwegian
University Press 1986; Lars Mj�set, �Nordic economic
policies in the 1970s and 1980s�, International
Organization, 41: 3, 1987, pp. 403-456 (reprinted in
the five volume collection: Bob Jessop, ed., Regulation
Theory and the Crisis of Capitalism, Cheltenham,
Edward Elgar 2000); and Lars Mj�set, �The Nordic
Economies and their External Challenges�, pp. 71-84 in
Frank Brouwer, Valerio Lintner & Michael Newman,
eds., Economic Policy Making and the European Union,
London: The Federal Trust 1994. Extensive references and
documentation may be found in these publications.
[**] Adress of the author: lars.mjoset@sosiologi.uio.no
I am grateful for comments on this paper from Jan Otto
Andersson and Birgir Bj�rn Sigurjonsson.
[Date of publication in the ARENA
Working Paper series: 15.01.1998]
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