ARENA Working Papers
WP 00/4



The Nordic Economies 1945-1980*

Lars Mj�set**

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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[*] 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:
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]