J.P.Roos

Department of Social PolicyUniversity of Helsinki

www.valt.helsinki.fi/staff/jproos

AWelfare state systems: development and challenges@, New Delhi 9-11.4.2001

THE CONSEQUENCES OF THE CRISIS OF 1990'S TO THE NORDIC WELFARE STATE: FINLAND AND SWEDEN

Introduction

Why hasn't the Nordic welfare state succumbed under the strain of global crisis, rising costs, high taxation, aggressive market liberalism, mass unemployment? If the criticism against the welfare state coming from the Thatcherite conservatism, Gingrichian right radicalism or Blairian third way social democracy can be said tohave a real target, it is the Nordic welfare state.The American society cannot by a long stretch be called a welfare state except in the very restrictive meaning of a state which gives some aid ("welfare") to the very poor (see Wolfe 1989, who compares the US and the Nordic Welfare State). The British "welfare state" was already much eroded and outdated when Margaret Thatcher attacked it and (at least partially) succeeded in taking away most of the remaining aspects of a welfare state.The third way is simply a question of how to find one's way back to a leaner, meaner welfare state, from something which cannot be called by such a name.

But in the Nordic countries, there is by consensus, a welfare state at work, which has long origins, but was fully developed only by the 60's and 70's. It is precisely this welfare state which is the enemy, the empire of evil for both the American right and more moderate European conservatives or market-oriented social democrats. And it has been declared dead already in the 80's by the more hasty theorists according to whom it simply could not work.

But the real test came in the 90's, in the guise of a very severe economic crisis, extremely strict criteria for a new kind of monetary policy and a general global market orientation which has - according to its proponents - made the national state obsolete.

I shall ask in this paper if this is so, and raise the disturbing question: if the Nordic welfare state cannot work, so how come it has worked very well precisely in the 90's, when it was supposed to have gone bankrupt and has been threatened from all sides?

The Nordic welfare model has very complex origins. The Bismarckian insurance schemes,Beveridgean universal flat rate benefits, and finally universal income related tax-based benefit systems, have all influenced the outcome which in the final analysis was a result of political negotiations between more conservative, market-oriented and more socialist, welfare-oriented political parties on the other hand and more and less paternalistically oriented social actors on the other hand (so we can have combinations of radical, liberal, socialist orientation or conservative, paternalistic welfare orientation which both result in a common compromise) . Another important factor is the ongoing negotiation process between the major social partners: the employers, the employees and the farmers, whose bargaining position has been stronger than their actual numbers because of continuing political support to the agrarian parties in both countries (more so in Finland than in Sweden). In a regional perspective, this means that except for the southern part of the country and the large cities in the south, the rest is dominated by the agrarian party.

Also the politics of the gender equality has had an important influence on the social welfare services, so that one of the specificities of the Nordic model is a much higher labour force participation of women - and in the Finnish case, an extremely low share of part time work so that both men and women, if employed, work mainly full time and regular hours. For the new entrants in the labour market, it has become popular to talk of "pätkätyö", i.e. periodic employment andirregular employment conditions; this is still a marginal phenomenon on the labour markets.

It should be noted that, when comparing Finland and Sweden, there is the important fact that Finland has started from a much lower level of economic development and has been, until quite recently, clearly the poor cousin of the Nordic welfare states. In the 1960's, when the building of the welfare state began in earnest in Sweden and Denmark, Finland lagged still considerably behind, its GNP per capita being about 60-70 % of the Swedish level. When this article is being written, the Finnish newspapers have reported triumphantly that Finland has passed Sweden in GNP per capita (this was already the case in 1990-91 when the Finnish markka was strongly overvalued and the Swedish economy was sluggish, but now we can almost speak of a real event - but not completely as the Swedish crown is floating and the Finnish markka has been arbitrarily fixed to the euro, on a level which probably is overvalued). This same difference has been true of the benefit levels, even with some exaggeration, because the Finnish share of social expenditure of the GNP has been clearly lower (seeKosonen 1998, Kautto 1999) throughout the postwar period.In fact, it has now (2001) descended clearly below the European Union average.

Those not familiar with the political history of the Nordic countries should know that Norway and Finland have under some time of the history been under the rule of either Sweden (Finland, Norway) or Denmark (Norway). Finland was, in addition, part of Russia between 1809 to 1917, when it became independent, as the last Nordic country. Traditions of law and administration are therefore quite similar (Finland continued to apply Swedish period laws even under Russian rule) and cultural differences are relatively small. Swedes, Danes and Norwegians understand each other, more or less, whereas the Finnish language does not belong to the same language group, even though it has many words in common.

In the beginning of the 1990's Finland and Sweden experienced a severe depression, for both the most severe since the 1930's. In Finland the depression was much deeper and has had longer lasting consequences than in Sweden. In both countries the main consequence was the rise of the unemployment to a permanently much higher level than before the crisis. The so called non-inflationary rate of employment (NAIRU), or structural unemployment in Finland is considered by experts to be close to 10 %. Also the number of long-term unemployed rose to previously unprecendented levels. The highest estimates point to somewhere between 60-80 000 long term unemployed, but an exact figure is very difficult to give because of statistical juggling in the EU-Finland (see the section on unemployment)

The depression is now over and both the Finnish and Swedish economies are experiencing strong growth, having returned to the previous growth paths (slower in Sweden, faster in Finland). The question is, what has happened to social welfare policies in these countries, both from the point of view of public support and the practical resources.

My/our discussion will be mainly based on a recently published collection volume Nordic Social Policy. Changing Welfare States (edited by Mikko Kautto, Matti Heikkilä, Bjørn Hvinden, Staffan Marklund and Niels Ploug, 1999) which analyses the situation in Denmark, Finland, Norway and Sweden and a more recent report by Mikko Kautto (2000) which compares Finland and Sweden.

Actually we can speak of a "welfare backlash" in the sense that from a largely liberalistic, anti-welfare orientation in the 80's combined with the panic concerning state finances during the crisis we have moved to a situation where the support for the Nordic welfare state is as strong as ever (even stronger than before in Denmark and Finland) and the financial pressures towards cuts are much less strong. In a recent article, the head of Finnish research and development center for social welfare speaks of AThe welfare state strikes back@ (Uusitalo 2001).

It is customary to talk about "welfare contracts": corporatist, generation, gender and disadvantage contracts. The corporatist contract refers to the connection between incomes policy, social reforms and the "social partners": the state, the employers and the employees, and the farmers. In Finland and in Sweden, the organisation rate of the employees and employers is extremely high, and the collective agreements are valid even for non-members if the agreement covers more than half of the employees in a given field. The generation contract refers to the commitment of the society to ensure adequate and reasonable care for the elderly people - regardless of whether they are insured or not.But it also means that the care of children is seen as a public responsibility.This is also covered by the gender contract which entails equal opportunities for both genders to to pursue working careers outside home, efforts to reach equal pay between the sexes and the provision of day care services (see Heikkilä-Karjalainen, 1999, 5) In fact, the day care services have been expanded throughout the 90's, when all other services have been curtailed.

Finland has experienced a much more uneven development than Sweden in the 80's and 90's so that during the latter part of the eighties its economy grew consistently 3-5 % yearly whereas in Sweden the growth figures were much lower (between 0 to 2 %). When the crisis hit, the Finnish economy had to endure three years of negative growth, in the worst year -8 % of the GNP whereas in Sweden growth was only slightly negative, but for a little longer time. Recovery was faster in Finland, but with much more losses to recoup. According to some authors, the cuts in Sweden went deeper (Marklund 1995, 411), but this is doubtful, as Sweden has maintained clearly higher deficits during the 90's which means that its social expenditure has been less dependent of the economic resources. 

One important difference to note is that Finland joined the EMU (European Monetary Union) in 1999 having been in the ERM (European exchange rate mechanism) before that, and following strictly the ERM-requirements concerning budget deficits, inflation and the debt ratio to GDP whereas Sweden made the decision to opt out of the EMU (and exceeded clearly the allowed debt ratio). Which means at present that ALL the Nordic countries have fundamentally different positions concerning the European Union: Norway is not a member (but hangs on, belonging to the EES and the Schengen agreement), Denmark has special privileges from Maastricht and is not in the EMU, Sweden has no Maastricht privileges but is not member of the EMU (formally because it did not fulfil the criteria) and Finland as the only Nordic country is an earnest member ("the best pupil in the class"). Paradoxically, it is Denmark and Norway which are NATO members and therefore much less independent in their foreign and defence policies, at the same time as independent room for action has been a major argument against membership in the EU, or the EMU.

In my view this will have a very important effect on the future development of the Nordic model - i.e. that the Nordic countries will become less and less "Nordic" and their identities become more "German" (Denmark), Anglo-American (Norway), "European" (Finland). Only Sweden tries to stay Swedish, which is seen as the main reason of its lagging behind the others ... 

In fact, the Nordic countries used to present a clear alternative to the development of the European Union: a fully free labour market, free movement between the countries, free trade - but NO regulations, no cumbersome bureaucracy, no fake parliaments, no federal structures. The Nordic model has NOT developed because of directives but because there has been a common wish to strive at largely similar arrangements. It is actually a strange paradox that the EU has developed only in the context of globalisation, liberalism and anti-regulation whereas a completely unregulated, "liberal" system of intergovermental cooperation without force was developed by the bureaucratic, socialist, illiberal nordic governments. Their error was precisely not to give a symbolic dimension to their achievement.

Social expenditure and its distribution in Finland and Sweden

before and after the crisis

Finland reached the "Nordic" level of social expenditure only from 1983 to 1994 (in 1990 Finland was still much closer to the OECD average than to the other Nordic countries) and incidentally here the unemployment expenditure has had a big effect. (see Table 2.1), but also old age and disability pensions as well as family benefits have increased rapidly (and more rapidly than the number of recipients, while the increase in unemployment benefits is solely based on the increase in the number of unemployed) (Figures 4.1.-4.6) 

Compared to Sweden, Finland has been on a consistently lower level so that the benefits in Sweden have been both relatively and absolutely clearly higher and the conditions more generous (see Andersen et althe distribution of income): the Finnish expenditure level is, measured in purchasing power parity, about 20-30% lower. Finland has also cut back the benefits more consistently whereas Sweden has had a politically less stable situation with the bourgeois government first introducing cuts, then going back on them, losing elections anyway and the social democratic government re-embarking on the austerity course, with a vengeange.

Unemployment

In unemployment, the Finnish situation has been also much more dramatic than in Sweden. From a consistently low unemployment rate in the 1980's (around 4 %) the Finnish unemployment rate exploded in a few years to almost 20 %(almost half a million unemployed) and has since declined slowly - and actually more with the help of statistical juggling than because of a real decrease (the new EU/ILO definition of unemployment defines as "unemployed" a person who has been actively seeking employment during the past few weeks which means that many long-term unemployed are excluded: the figure of unemployed has consistently been about 20-25 % lower than the number of people registered as unemployed, while even the latter figure is in reality an underestimate. I have not seen yet any reasonable arguments for this statistical misrepresenta­tion the socially and politically highly important concept). In Sweden the rate was originally about half the Finnish level andit never exploded in the same way as in Finland (remaining below 10 % throughout the depression) (Fig 2.10)

In Finland, unemployment (registered unemployed) rose from 3.4. % in 1990 to almost 20% in 1994. Thus both the number of recipients and expenditure was multiplied (roughly sevenfold). Several cuts in the number of days the unemployed can receive full benefits and in the requirements of eligibility were introduced but the expenditure has still risen somewhat more than the recipients (see Ploug 1999, p. 82). The number of the unemployed on social assistance level of benefits (the so called labour market support) or receiving the flat rate unemployment benefit is 200 000, (see Kautto-Heikkilä 1998, 312), i.e. about 60 % of the number of unemployed. (TARKISTA!) In fact, the number of long term unemployed has grownalmost tenfold from 22 000 (less than 10 % of the unemployed) in 1991 (see Blom et al, 1999, 61)

In Sweden , unemployment rose for 1.3 % in 1989 to 8.2 in 1993. Also in Sweden, expenditure has risen more rapidly than the number of recipients. There have not been any notable changes in the unemployment benefits.Thus, in both countries, the effect of the unemployment insurance has been to cushion dramatically the effects of the depression on the living standards, but on the other hand to make the situation more dramatic as to the government expenditure.

Sickness

In Finland the level of benefits was cut from 80 to 66 % and the waiting period extended. The compensation for medicines has been throughout very low and fully compensated medicines have become fewer (There is a misleading practice of claiming that medicine compensation level is50 %, or the doctor's fee compensation 60 %, when there is a ceiling on the price (and a self risk part) which has nothing to do with the actual price so that the actual compensation level ismuch lower, from 20-30 %) The price ceilings have been unchanged since the 1980's.

In Sweden, the system has been much more generous, and there has for instance been no waiting period at all. It was reintroduced in 1993, while in Finland it was extended from five to seven working days, whicheliminates ordinary flus etc completely from the insurance coverage)

Retirement

Retirement pensions are in both countries based on a double tier, universal system, so that there is a flat rate pension meant for those citizens who do not have other sources of income, and income-related pensions for those who have had regular income (and the flat rate pension disappears completely, not only through progressive taxation). The latter has been relatively generous and the universal retirement age is 65. The third possibility has been individual pension insurance which has given tax advantages for the insured. In this case, the payments have been tax deductible up to a limit, but the pensions have not been allowed to exceed the limits of ordinary pensions. Thus, somebody who has not been employed for a sufficiently long period, may save for an individual pension to cover the difference. It must be remembered that all this equality business does not apply to higher echelons of management, where private pension schemes, early retirement agreements, golden handshakes etc. have recently caused much discussion and bitterness (in Finland, the former head of the Bank of Finland, not yet sixty years old, when appointed as a director of the European Central Bank, used her "right" to start receiving her not inconsiderable pension from the Bank of Finland, and a former head of a state owned firm who was not appointed CEO of the newly organized firm, had a clause in his contract which allowed him to retire with immediate effect at 55).

In Sweden, most of the same people who in Finland retire early on a disability pension, stay in the labour force with the help of active labour market measures (see Kautto 2000).

Major changes in the programs

Services

The important point to make in the question of health and social care services is that they are the responsibilities of the local government so that the state gives some (in some cases full) support and regulates the services. The important change here is that the state has simultaneously decreased its share and its control over the provision of the services, leaving the communities the freedom to make cuts. But there are still laws regulating relatively strictly the supply side whereas the financing is in crisis. For instance, the law requiring communities to provide day care to every child between 3 and 6 years (either in communal day care or through a generous contribution for private day care (or home care, so that the mother is actually paid for taking care of the child), was introduced only in the 90's (and the regulations concerning the number of children in a group are being followed to the letter). In the city of Helsinki this means that the day care personnel has grown much faster than other categories, especially those engaged in the care of the old or teachers.

The most important consequences have been the cuts in the eligibility for the services (sickness insurance, home care) and the cuts in personnel, where the long term consequences are yet to be seen.

Pensions

There is much talk of the pension "bomb" in both countries. The actual retirement age is as noted above, low (much lower in Finland than in Sweden), the baby boomers are nearing this retirement age (it is estimated that the number of pensioners will grow until 2030 when it starts to go down), the pension systems is based on a combination of pay as you go and pension funds which are underdimensioned for the full payment from funds, and simultaneously the number of those paying for pensions is diminishing rapidly (still, the calculated funds are almost 300 billion FIM).On the other hand, the pension system has undergone important cuts which affect future pensions drastically. Thus, the time which is needed to receive full pension was extended fromyears to 40 years: as the age when people actually begin working has risen due to longer studies, and there have been more breaks in the job career, the number of those actually receiving full pension will be much lower. Many people will therefore have the incentive to save for their own pensions and or plan some other retirement arrangements, typically combining retirement with income generating activities. But presently the cuts in the pension system are not yet very much visible: they form the other pillar of the Nordic welfare state together with the unemployment benefits.

Family

Another exception is that the only increase in social policies in Finland relates to day care: it was made mandatory to the local communities so that every child has a subjective right to day care. This has caused important changes in the labour force divisions in the communities, so that the share of nurses has gone clearly down whereas day care workers are already more than half of the community workers. This year, the government has decided to begin free preschool starting from 6th year (in Finland, the mandatory school age starts from age 7), which in practice means that parents save one year of day care payments. However, the most recent studies in the use of day care show that over half of the children under school age are taken care at home.

In Sweden the daycare is also a priority service and here the differences are rather small.

Politics and social welfare

The support for social welfare has been problematic in the Nordic countries and especially in Sweden and Finland. In Finland there has been a consistently high level of support for the welfare state whereas in Sweden the opposite has been the case. In Finland there was a dramatic dip in 1992 when the support (agreement with the claim "the present level is appropriate") went down from around 55 to over 40 (and the critical position: the present level is too high, went up from under 30 to over 30),see Andersen et al 1999 p 243

Note then, that the famous thesis about the relationship of social democracy and the welfare state (Castles 1978, see Kosonen 1998) works very much inversely, too. Without social democrats, it would be much more difficult to dismantle the welfare state, introduce the global economy, liberalize the capital flows, give up major means of economic policy etc. 

One extremely interesting but questionable result from Kautto et al 1999 (Nordic Social Policy) is that whereas in Sweden the results of the cuts can be seen in increasing inequalities, worsening poverty and in deeper divisions in the society (strengthened by the cleavage between the left and the right) in Finland, even though it experienced the deepest depression, in the living conditions nothing of this was visible: economic inequality did not increase (because (almost) everybody became poorer), the number of relatively poor did not increase (for the same reason; even though the number of people receiving social assistance rose dramatically). Thus, the Finnish welfare state functioned precisely as it was supposed to, whereas the Swedish welfare state although being heavier and more generous, produced contrary results.There is however, much conflicting evidence about this: the bread queues (i.e. free distribution of bread for the poor), the number of visible poor on the streets, the increase in homeless people, the growing segregation of the suburbs, the changes in disposable incomes etc (see especially Kosonen 1998, 371, also a discussion by Halleröd and Heikkilä 1999, 213). In my view, this result (no change in poverty) is a statistical construct which is not borne out by the reality. And in this case, it should once more be remembered that both the extremely rich and the extremely poor escape social surveys, on which social scientist base their conclusions.

Poverty and power are phenomena not reachable by statistically representative surveys.

Future problems

Pensions

The evidence is inconclusive. The trend towards being independent and staying at home longer, means also that the houses and apartments of the older generation are not being liberated: only in rare cases do the younger generation wish to move in while a parent is still alive. The patrimony does not change handsand children will rarely inherit their parents until they themselves are retired. In the worst scenario, lonely aged persons are living in large houses and apartments in pleasant neighbourhoods almost indefinitely, whereas couples with small children are paying dearly for small apartments in inhospitable and unruly suburbs. The timing is worse than bad, because this will affect the children also.

In all these questions, it seems that the Finnish society is in deeper waters than the Swedish (?) where people work somewhat longer and whose "baby boomers" are not so large a group - and who have a large number of immigrants in the best working age. Thus the so-called economic dependency ratio, the relationship of those at work and those not in wage work (children, students, retirees etc) is clearly lowest in Finland and highest in Sweden (Kautto-Uusitalo 1998, 304)

Long term consequences of unemployment

One of the most problematic questions is the long term effect of the mass unemployment which hit the population in the Nordic countriesin the beginning of the nineties. Unemployment affected both working classes and middle classes and it can be estimated to have affected indirectly a very large number of children. In the short term, as has been noted, the direct economic effects were relatively minor. But in the long runs, both the economic and social effects of high unemployment begin to make themselves felt. And especially the social effects: the employability of the unemployed, the effects on their children etc will be considerable. It there are now around 200 000 long-term unemployed in the country, there are about same number of chldren affected.

How will these children grow up? Will there be an evil circle, inheritance of the characteristics that lead to unemployability etc.And if the pessimistic claims about the inability of the modern society to create new jobs to replace those eaten up by rationalizationand automation, are true, the problems will start to accumulate. A discussion about a citizen's wage or negative income tax has been going on both in Finland and Sweden, but is not being taken really seriously. 

Increased inequality and segregation?

We have on the one hand a strong consensus that the major problem of the Nordic welfare state in the 90's is increasing inequality and segregation. And on the other hand, the statistics do not show this. In my view the answer is clear. The statistics show that a large majority of the population lives under relatively unchanging circumstances and relationships whereas a very small and statistically insignificant group lives in extreme wealth and in extreme poverty. Both groups, by the way, are able to avoid "detection" by the normal research instruments but the economic effects of the small group of rich people are real enough: both as the anonymous "market forces" and effects on trendy consumption (I have always been impressed by Werner Sombart's little known book "Liebe, Luxus und Kapitalismus" where he attempts to show - polemically against Max Weber - that it was the luxury consumption, especially the upkeep of mistresses that set the modern capitalism on its course, both as a system of wasteful consumption and consumption oriented production).

The results of the actual depression and cuts are inconclusive: statistics do at least show that comparatively speaking, Finland has been more egalitarian in the effects of depression than Sweden, but on the other hand, in Finland there has been the phenomenon of highly visible poverty: food banks and people complaining of going hungry while nothing such has been experienced in Sweden (see Heikkilä-Karjalainen 1999). Finland has also, as the only "new" member of the EU, been obliged to take EU food aid to help its poor. There have been regular food queues in the bigger cities (unheard of since the great depression) and research has indicated that around 100 000 persons reported going hungry at leqast occasionally between the spring of 1992 and the spring of 1993 (Heikkilä- Karjalainen23) The so-called Hunger Group, consisting of the heads of the labour unions, the employers union, the speaker of the parliament and other notables, published recently a report in which the reality of the hunger and marginalisation was stigmatized and an action program to alleviate problems of poverty proposed (Nälkäryhmän raportti 1999). The program was not very concrete, but the names behind it were heavy-weight labour and employer leaders, archbishops, parliament speakers etc. and represented various shades of opinion. Therefore, it is perhaps right to say that at least the extreme effects of the depression and the ensuing cuts were more dramatic in Finland than in Sweden. 

Global effects

The welfare state cannot be expected to spread globally very far. It has certain qualities which do not help its spreading. It requires a modicum of law abiding and willingness to work by the population, it requires some solidarity between different groups, mutual respect, recognition of the human worth of every citizen (which usually also means that minorities are protected and respected, not treated as unwanted aliens). And in fact, in the Nordic welfare states the citizenship is not a criterion, but simply being a legal inhabitant in the country. These conditions are not fulfilled in many parts of the world. The welfare state model is thus not easily exportable (one place where a sort of Nordic model does seem to exist are the wealthy and well-regulated small city states of Asia which adhere to the so-called Asian values, see Anne Haila 1999,p 3).In India, where this seminar is held, I would guess that in certain states, there are attempts to approach the welfare state and its basic requirements: literacy, education, equality, protection of the poor. I would say that it would be better to find applications which are relevant for Indian society.

On the other hand the global economy is, by definition, exportable. The question is, will it succeed in killing the goose with golden eggs? Until now, there has been an uneasy coexistence and interdependence (As Ulrich Beck has pointed out, the heads of the global firms are the last to accept the social effects of globalisation and therefore actually depend quite a lot on the welfare state, see Beck 1998 ) so that the welfare states are very much dependent on foreign trade, capital flows and the international markets but also the global firms increasingly need countries with well-educated, healthy employees in safe and ecologically positive environment. At least for the more highly qualified jobs and for their chiefs who prefer the idea to lead ordinary lives without heavily armed body guards, around the clock surveillance and other inconveniences of the global jungle (when the CEO (and chairman of the board) of Nokia, Jorma Ollila is being presented abroad, the journalists often marvel his simple summer cottage and the self-made outhouse, with no keep out- or armed response signs around ...).And to end this papers, it should be remembered that the Finnish IT-company Nokia imports high numbers of Indian programmers and other IT-personnel to Finland, instead of outsourcing the development work in India.

Helsinki, March 28

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