Why Are The Nordics So Rich?
[INTRO] Today the Nordic countries rank amongst the best in the world in almost any statistic: human development index, democracy index, GDP and PPP per capita, happiness, education, and many more. This begs the question: Why are the Nordic countries so consistently among the best in the world? Well, in this video we will look at how they went from being average countries in Europe in the 19th century, to ranking at the top of the world by the 21st century. But what are the Nordic countries? Well, for the sake of this video when talking about the Nordic countries we are referring to Denmark, Finland, Iceland, Norway and Sweden. It is important to note, however, that these countries have not always been independent throughout the entire time we will be discussing in this video: Norway declared independence from Sweden in 1814, Finland declared independence from the Russian Empire in 1917, and Iceland declared independence from Denmark in 1944. But their histories have been closely linked for the past 2 centuries.
[BEFORE INDUSTRIALISATION] They began their industrialisation around the 1850s, starting with Denmark and followed shortly after by the rest. But HOW they industrialized was different from those of other countries in Europe at the time. You see, most countries had a small upper class made up of nobility and rich merchants. 99% of the people worked in the fields, producing the food necessary to stay alive. With industrialisation, new tools were invented that made farming easier. So easy that you no longer needed 99% of the population to work the land to feed everyone.
These people now needed to find new jobs.. And they found these jobs in factories. And they were almost always owned by nobles, rich merchants, or their children. And so over time the farmers became the employees and the nobles and merchants became the factory owners.
Over time many European countries demanded some form of democracy… with the leaders of political parties almost always being part of the already-existing noble and merchant classes. Meaning that democracy and the government as a whole was often just a tool used by the elite to keep the people from rebelling while still staying in power themselves. But in the Nordic countries they developed very differently.
If you were a lord in the Nordic countries you had the problem that it was very difficult to control your territory. In most parts of Europe if you wanted to control your land you just had to control the ports, city gates, and roads leading in and out of your territory and then demand taxes from anyone traveling through your region. But in the Nordic countries people could chop down some trees, build a boat, and travel anywhere in the Baltic and North Seas. If the nobility decided to tax its peasants, those peasants could simply leave. And if you lived further inland, it was often too difficult to send soldiers to some village to collect taxes. And as a result, the Nordic nobility could never achieve the same level of power as the elites in most other parts of the world.
So while in other countries farmers had to hand over everything they produced to their local lords, in the Nordic countries those farmers got to keep whatever they produced. This created a large middle class made up of mostly independent farmers who owned the land they lived on. And if a lord wanted to exert control over their territory, they couldn’t simply send in some soldiers to collect taxes.
Instead, they had to give something in return so those farmers wouldn’t simply pack all their stuff and go live somewhere else. As a result, the Nordic countries developed the first cornerstone of what makes them so wealthy: the government had to provide services to the people they governed in order to stay in power.With a large group of people who owned land, participated in the political system, and where wealth was shared more equally among the population. Meaning that democracy and the government as a whole was a tool used by the people to get things done. When the Nordic countries began to industrialize, it was these governments that provided the infrastructure to set up new industries while in many countries it was wealthy elites who paid for things like railroads. So if you wanted to set up a lumber mill in Norway, an iron mine in Sweden, or aluminum extraction in Iceland, it was the government who set up the infrastructure so businesses could transport the raw materials to where it needed to go.
And they would have to construct a lot of infrastructure because the Nordic countries are full of natural resources: large forests in Finland, Norway, and Sweden which were turned into timber, pulp, and paper. Large amounts of iron in Sweden. Fish in Norway and Iceland. And many sources of energy such as wind in Denmark, hydropower in Finland, Sweden, and Norway; and Geothermal energy in Iceland. But for all its resources there was one thing which the Nordic countries didn’t have enough of to fully industrialize: people. There were simply not enough customers within their borders to make factories profitable.
And so they developed the second cornerstone of why the Nordic countries are so rich: an open economy that makes it very easy to trade with other countries. Right outside of their borders were big countries with big populations with big desires for natural resources. In particular they sold these raw materials to Germany, Great Britain, and Russia, while buying manufactured goods from them. And as the rest of Europe industrialized, they needed more resources, meaning the Nordic countries could sell more raw materials to them.
As agricultural technology advanced, more and more people moved away from the farms to work in the mines, lumber mills, and food processing plants. Denmark, for example, sold vast amounts of food products to Germany. But by the late 19th century the technological advances in farming began to slow down. As a result, fewer people moved away from the fields to find work elsewhere and it became more and more difficult to find new workers to extract more resources.This meant growth
in natural resource industries slowed down. So if the Nordic countries wanted to keep getting richer, they would have to find new products to sell to other countries. So they looked at what was available to them and decided that, instead of letting other countries turn their resources into manufactured goods, they would simply do it themselves. So for example, Denmark produced a lot of food and they created processed food industries, Sweden had a lot of iron so they focussed on steel manufacturing, etc. The open economies of the Nordic countries meant that it was easy to export these goods to other regions of the world where producing such materials was far more expensive… And if they wanted to keep up the level of economic growth they experienced while exporting raw materials, they would need to open their economies further to allow the export of manufactured goods. But unlike most large countries that tried to produce everything it needed, the nordic countries focussed on expensive products such as, for example, electric generators.
Or my personal favourite, that sweet sweet delicious chocolate. The first Nordic chocolates were created by the end of the 19th century, such as Freia in Norway, because that was the moment that this region of the world became rich enough to set up their own manufacturing industries. And when you look at Nordic companies, you will see that many of them were created by the end of the 19th century when the Nordic region transitioned away from exporting raw materials and moved towards exporting manufactured goods and luxury products. But the Nordic countries still had the problem that its own population wasn’t large enough to make large-scale manufacturing profitable. So while new businesses were set up, the government decided to open the Nordic economies even further. In particular with other Nordic regions.
It now became easy to not only trade, but also travel between these countries. And many people decided to move abroad. This was good for the economy because it meant companies needed to compete with each other to get employees or else those workers would simply leave. Swedes in particular migrated to both Norway and Denmark. And this in turn made trade even easier. For example, if you are a Swedish company producing Swedish goods.
Well, when Swedes move to Norway, for example, then you have customers in that country who are interested in buying products from their own home country. And you can use Swedish immigrants to sell your products to the native population. We can see something similar today in a lot of countries.
After WW2, many Turkish people moved to Western nations in search of better work and salaries. Those people wanted to eat food from their own country such as Kebabs. Today, most major cities in Western Europe sell kebabs. Many of us westerners discovered they also loved Kebabs and those Turkish people in turn sold it to us. As a result, Turkey was able to sell its own products through Turkish people to us westerners.
And something similar was happening in the late 19th century in the Nordic countries. Except that the Nordic countries already had a shared cultural and linguistic heritage, thus making it much easier for them to do business with other scandinavians. As a result, the markets of the nordic countries became more interconnected. And as one country became richer, they would purchase more products from other nordic countries, thus making everybody else richer as well. In essence, more prosperity for one country meant more prosperity for the others. This can be seen in the imports of these countries, as imports became a larger share of the economy while exports remained mostly the same percentage wise.
Even Finland became more integrated with the Nordic countries, even though it was part of the Russian Empire. Thus beginning it’s own slow process of becoming economically more dependent on the nordic countries than the Russian Empire. And this is the 3rd cornerstone of why the Nordic countries are so prosperous: Their strategy of opening up their economy further when faced with economic difficulties: During the Great Depression in the 1930s, many countries limited trade with other nations to prevent foreign competition. The Nordic countries, however, decided to keep their trade free with the 1930 Oslo Agreement, where the Nordic countries, along with Belgium, The Netherlands, and Luxembourg, decided to limit the trade barriers between their countries. In the 1970s the Danish government didn’t have enough money. Then an oil crisis caused the price of crude oil to rise dramatically, creating major economic issues as it became too expensive to create certain products.
And the solution? Open their markets to foreign trade, by joining the European Economic Community, the precursor to the EU. In 1989 the Soviet Union collapsed. Finland and Sweden did a lot of business with the USSR and suddenly lost a lot of trade.So what was their solution? Open their markets to foreign trade by joining the EU in 1995. In 2008 Iceland faced a severe financial crisis and decided on closer ties with the EU.
This was so successful that the European Union adopted this strategy in the 2010s, with dozens of free trade agreements. [EARLY UNIONS] And as the Nordic countries used their open economy to get rich, more people became employees rather than landowning farmers. And these employees could see the clear difference between those farmers who owned their own business making their own profits versus the employees who received a salary working for somebody else. And as farmers had worked together against their local lords in the past, employees worked together against their employers in order to get better salaries and working conditions. These unions would then work together to form union federations, with multiple unions working towards a common goal. Such unions would be able to negotiate with all the employers in a particular industry to get what they want and is often far more effective than smaller unions negotiating with a single company.
But if union federations wanted to negotiate with all employers at the same time, those employers would also need to join together. And they did in so-called employer organizations. And when both employers and employees have nation-wide organizations with which people can bargain for better conditions for themselves, it allows the government to more easily communicate with these groups of people than if they were separated into smaller organizations. And here we come to the 4th cornerstone of the Nordic model: Governments, workers, and employers, have to work together to get things done in the economy… whereas in most countries the relationships between these 3 groups are adversarial, in the Nordic countries they tend to work together for a greater common good in which everybody benefits. For example, the government often listens to the employers, who are generally far more knowledgeable about the economy because they work in it.
As a result, the government is able to make much more informed decisions about what laws to implement in the country. While at the same time listening to the needs of the employees by ensuring certain safety regulations and human rights. And by working together, everyone becomes better off. For example, high taxes means that there is more money to spend on the salaries of teachers.
This means that when someone wants to become a teacher, they don’t need to worry about whether they will be able to live a decent life, just because their passion is teaching. In countries where teacher salaries are lower, people tend to find other jobs with higher salaries even if they aren’t as passionate about those other jobs. Thus reducing the quality of education or creating teacher shortages. But in the Nordic countries teachers are paid well, increasing the quality of education, meaning that those children turn into far more knowledgeable employees, and so businesses can hire more high-skilled workers. As a result, the company gets better employees, the employee gets a higher salary, and the government gets more taxes from the increased productivity. Meaning there is more money to spend on high quality schools, better roads, more social welfare, etc.
By working together everybody became better off than they would have been if their relationship was adversarial. And this cooperation eventually gave rise to a new economic model in the beginning of the 20th century. This model, in simple terms, is the idea that as technology advances, people get better tools to produce more products and services.
As people produce more, their salaries increase. As more people get more money, they will want to buy more products. As a result, there will be new technological advances to produce more stuff for people to buy and thus creating a circular process whereby people become wealthier by producing more products to then buy more products. Various government policies were implemented to help the economy grow: agencies which monitor the country for potential problems and find solutions before those problems became too big, laws that assured that the worker would have good working conditions, and financial policies that kept Nordic products cheap for the outside world so they could sell more stuff. This process started in Sweden and quickly spread to the other Nordic countries after WW1 and remained in place until the 1970s. [AFTER WW2] After the Second World War the 5th cornerstone of the Nordic model was created: a large social welfare system.
Up until this point services such as pensions, unemployment benefits, etc. were private, meaning that if you wanted a pension you had to go to a company to give them a portion of your salary, which they would pay back once you reached a certain age. If you didn’t have enough money, then you wouldn’t have a pension and you would have to work until your death. But thanks to the systems of union federations set up in the late 19th and early 20th centuries, people were far more politically organized and were able to bargain with their governments to change this system into a new system. One where everybody, regardless of your wealth, would receive a pension from the government. The first was Iceland in 1946 and over the next decade spread to the other Nordic countries.
These welfare systems were slowly expanded upon all the way through the 1960s with new welfare programs: free healthcare, free education, free housing for the poor, unemployment benefits, money for people who are too sick to work, disability benefits etc. All done in an effort to reduce the inequality between the rich and the poor. And this greatly benefited the Nordic societies by removing the cost of poverty… This isn’t often talked about but poverty is expensive. Very very expensive. For example, a person who gets a disease like polio will never be able to work as effectively as a person who does not suffer from Polio.
Preventing polio is rather easy with a vaccine. A poor person is unable to afford such a vaccine for their children. As a result, their children, who will suffer from polio their whole lives, will remain poor as well. Being poor, they have 2 options available to them: 1.
Starve to death or 2. Steal food. To quote my favorite YouTuber: “If you or your family start going hungry, see how long you remain a law-abiding citizen”. Almost everybody choses to steal rather than die. As a result, the baker who gets their bread stolen will need to make more bread without earning more money, because they need to make up for the stolen food. The government, not wanting to let crime go unpunished, will need to raise more taxes for a police force to apprehend the thief and build a prison.
These are police officers who could instead be building things to make society better and that’s money which could be spent on improving people’s lives. This whole process is very very expensive. It’s far cheaper for a government to simply make polio vaccines free. Basically, if small problems are left unattended they turn into big problems. Therefore, it’s cheaper to solve a problem while they are still small, rather than wait until they become big.
The Nordic model works on this principle: it essentially takes care of its own citizens to keep them in one of the best shapes possible. For example, parents are given long paternity leave in Norway. As a result children are taken better care of by BOTH parents and those children are far more likely to become economically successful later in life. So by investing in children early, for just a few months, those children are FAR less likely to get into poverty and cause problems for their society as a whole in the future… Letting them become productive citizens which in turn pay more taxes than a person in poverty, which allows its society to pay for everything else.
At the same time, by having fathers be more active in raising the children, the chances of a child developing so-called ‘daddy issues’ is much smaller and thus the children will suffer less stress as an adult which in turn increases productivity. While the mother is more likely to have free time left over for her own life and career. So a simple measure like giving men more parental leave after becoming a father, results in happier and more successful children and mothers. The same is true for non-heterosexual relationships, where the person or persons not giving birth are better parents due to longer parental leave.
And this extends to many other aspects of life, such as pensions, where nobody ever needs to worry they won’t be able to survive in their old age due to poverty, meaning their family members won’t have to stress out and spend time taking care of the elderly and instead leave that job to more qualified people, thus increasing the efficiency of the whole system. The welfare state is therefore not meant as a means to give money so people don’t have to work, but rather an investment in their own people in which, on average, the people become more productive because they can focus on improving the lives of themselves and those around them. They will have better skills and education with which they get a better paying job.
With that extra money they pay more taxes to spend on the nation, spend more money on products that other people work to create, and invent new technologies that will create new industries for everyone in the country to profit from. But there are many other countries with a large welfare system also: Germany, for example, spends a quarter of its entire economy on welfare… So what makes the Nordic system so different? Well, in many countries when you want to receive welfare you only get it when you’re poor or if you’ve worked enough. So in a country like the USA if you earn more than a certain amount of money, the government gives you less welfare.
This means that if a poor person manages to get a better job, they won’t earn more money because the government gives them less money, meaning there is little incentive to get ahead in life as your overall income won’t increase. If you live in a European country, the amount of welfare you get is often determined by how much you’ve worked in the past. So if you’ve focussed on your education and need a few months to enter the job market, you won’t receive anything from the government because you don’t have previous work experience. In essence, the moment when you’re most likely to increase your income you get the least amount of help, meaning people are often forced to take a job that pays a lot less than what they are capable of doing. Under the Nordic system, however, everybody receives assistance regardless of how much someone works, meaning costs related to poverty are almost entirely gone; Everybody receives free healthcare and education, meaning your health and level of schooling are not determined by the wealth of your family; everybody receives a pensions, everyone receives unemployment benefits, meaning that if you focussed on studying or starting your own business you don’t need to risk your livelihoods.
It doesn’t matter how much you’ve worked or how much money you have: everyone gets help.This is more effective at increasing the productivity of people than many other systems, where people risk everything in order to improve their lives. And the Nordic countries managed to do all this without large bureaucratic systems, being more efficient or as efficient as other systems. But by the 1970s and 80s the Nordic model had a problem: it could no longer increase salaries any more.
And for this we need to look at the wider world. In every developed country at the time, salaries increased when productivity increased… But by the 70s and 80s this stopped and salaries became stagnant in every developed country. The gains from then on went to the richest people.
And those rich people had the option to either invest in a country like Finland, where it would have to pay a high amount of taxes and wages, or it could invest in any other developed country instead. As a result, investments in the Nordic countries decreased. At the same time, if the Nordic countries kept increasing their wages, their products would become so expensive that other countries couldn’t afford Nordic products anymore and would instead buy them from cheaper developed countries such as Taiwan or South Korea. So unless they somehow managed to increase the wages of all countries everywhere at the same time, it was simply impossible to keep increasing wages. And so, in order to adapt to this new reality, the Nordic countries decided to focus on high-tech high quality products. Businesses from Europe, East Asia, and North America set up shop in Northern Europe, while Nordic businesses expanded around the world.
The Nordic countries, while small, managed to create gigantic multinational companies such as Nokia, Ericsson, Ikea, and Hennes & Mauritz. These companies helped to create new businesses alongside them, such as expanding shipping sectors to bring more goods to and from the Nordic countries. Or new energie sectors such as oil, gas, and hydroelectric energy to power their new industries. But if you want to produce the highest tech products, you need to put a lot of effort into developing them. And this brings us to the 6th pillar of the Nordic model: Research.
Research is risky. When delving into the unknown, you don’t know what you’re going to find. And so you don’t know whether your research will result in a profit or not. On average, research produces a profit. So if you reduce the risk associated with doing research, then the profitable research will almost always be more than the cost of unprofitable research. The Nordic governments recognize this statistical fact and because they spent nearly 70 years setting up a generous welfare system, they were able to take away this risk and become the most innovative region in the world per capita.
So if, for example, you start a new business with a new type of product and you fail, then you don’t need to worry that you might lose your house or your savings, because the government will give you enough money if you’re unemployed. But if that person becomes successful, they earn more money on average than they would working for a boss. The risk of starting a new innovative business is very low in the Nordic countries. As a result, they are among the most innovative regions in the world simply by taking away the risk.
The Nordic model, with heavier public investments in education, technology, and infrastructure, and with their welfare system, increases the willingness and ability for innovative risk taking. The Nordic model of social welfare is, essentially, an investment in its own people which is able to pay for itself by levying higher taxes on the people who benefit the most from this system, in order to lift up everybody else. By the 1980s this has become one of the Nordic countries’ greatest advantages that lasts to this day: It was one of the first to adopt IT systems, some of the strongest mobile phones of the early 21st century, and a personal favorite; spearheaded the crafting-survival genre in video games with Minecraft. But if you want to do the best research, you need to have the smartest people. And now we come to the last cornerstone of the Nordic model: excellent education.
Because a well educated society is a wealthier society. As rule of acquisition number 74 points out: knowledge equals power. A person with an engineering degree able to calculate precisely how industrial operations should be managed can create far more economic value than a person with a high school degree who can do basic mathematics. Therefore investment in education has been a key component of the nordic model since the 18th century and today the Nordic countries spend comparatively much on education, and people stay in school longer: the median age of persons in college education is 24-25 years old in Nordic countries, compared to Ireland or the USA at 20-21 years old. And with the more generous welfare for students, it means that people in low-paying jobs are more likely to go to school to get a better education or start their own business and earn more money on average.
So in essence, by providing people with money when they don’t have an income, they are investing into a more productive population. And when people become more productive, they pay more taxes, and after a few years those increased taxes will have paid for the education that person received. This education has created tremendous wealth for their nations. For example, Finland was one of the first countries to take electrical engineering seriously, creating generators and electric motors.
By the 1990s the Nordic countries had become the leaders in cellular technology, maintaining that position until the introduction of smartphones in the late 2000s. Today it has expanded into industrial automation, medical technology, and meteorological technology. And so today the Nordic countries have become among the most developed countries in the world, always being one of the best in nearly every statistic on human development, happiness, healthcare, level of education, and much more.
[OUTRO - THREATS TO NORDIC MODEL] But, there also significant threats to the current Nordic system. You see, taxes are very high but so are salaries… And at some point it’s cheaper to avoid taxes than it is to pay taxes. But only rich people have enough money to afford tax evasion, which the Nordic countries have a lot of. In fact, Sweden has the most billionaires per capita. With the Nordic countries being very open economies, it’s easy for someone to transfer their money to another country with lower taxes. As a result, more money has to be spent fighting tax evasion while at the same time having to deal with other countries where taxes are low and where it’s completely legal to pay almost no taxes.
This isn’t a unique problem to the Nordic countries, however, the Nordic countries have more wealthy people than most other countries. Meaning that the government loses out on a lot of tax revenue as a result of their system creating so much wealth. And as their population ages, it means fewer people are able to work and thus pay taxes. This means that the Nordic countries will have to overcome the problem of having a large social welfare system with a smaller amount of people working. These are important hurdles that the Nordic system will need to overcome in the coming decades in order to survive.
[OUTRO] And so, through the last 200 years or so, the Nordic model we know today was developed: starting with a government that had to provide services to the people in order to survive; a small open economy to trade with the rest of the world which kept trade as free and easy as possible no matter what crisis it faced; a society where the governments, employees, and employers peacefully work together to create a better society; with a large social welfare system designed to lift people up in order to increase productivity and life satisfaction; with a focus on creating one of the best educated societies in the world; which eventually created the most high tech and most valuable products which resulted in more profit for everyone involved. The Nordic countries are very pragmatic about how to set up their social structures so it benefits nearly all parts of society. Whether you’re a child that doesn’t need to worry about poverty, a student with some of the best education in the world, an employer with some of the best trained workforces in the world, a parent who gets to stay at home with their children for a long period of time, a person who just lost their job and doesn’t need to accept a low-paying job in order to survive, or an elderly person who doesn’t need to worry whether they will be able to afford the care they need in the last stage of their life. The Nordic model has helped to lift almost everyone up to a higher standard of living and this is why the Nordic countries are so rich. If you liked this video then please leave a like, subscribe, and hit the notification bell. The next video will be about…