How can the Nordic nations become more competitive?

Over the past half century, the Nordic countries of Denmark, Finland, Norway, and Sweden have transformed into successful economies that have managed not only to generate strong economic growth but also to endow citizens with generous social benefits. Yet over the past decade, Nordic competitiveness has been in decline, and as a result, the economies, especially in Denmark and Finland, have become stagnant.

An analysis of these Nordic countries and their chief rivals in the largest export markets from 2006 through 2016 shows that Denmark, Finland, and Sweden have lost their positions among the top five most competitive countries; Norway has advanced from tenth place to ninth. When evaluated in terms of the efficiency of the labor and goods markets and other business areas—essentially the factors that incentivize people to work harder and innovate—we found that these Nordic countries rank at the very bottom globally. And yet, efficient markets are crucial in order for dynamic competitive societies to create sustainable long-term economic growth. A dramatic improvement in the efficiency of the Nordic markets is needed for these nations to recover and secure positions at the top of the wealth and GDP rankings.

In 2014, we created the Nordic Agenda, a set of ten recommendations to help Denmark, Finland, Norway, and Sweden transform in the areas of competitiveness and growth. (See Nordic Agenda: Transforming for the Next Wave of Success, BCG report, November 2014.) These Nordic nations have slowly started to embark on the agenda, but we feel the speed of change is insufficient and there is a lot more to be done. Continued prosperity and well-being of the countries will require restoring growth of at least 2% per annum until 2030.

In order to speed up the process, these Nordic countries should look at best practices from one another and from abroad. Applying solutions that have been used successfully in other countries is an efficient way to take action. This article discusses five best practices.

Opening Labor Markets to Immigrants

Several countries have kept their labor markets open, successfully attracting large numbers of immigrants and integrating them into the workforce by keeping regulation and restrictions to a minimum. The UK is one such country. When ten new countries joined the European Union (EU) in 2004, the UK didn’t impose new restrictions that would hinder the new EU citizens from immigrating and working.

Although the annual inflow of immigrants to the UK has increased from less than 300,000 in 2000 to more than 400,000 after 2004, this policy has been successful on two fronts: the employment rate of the native population has stayed level at 72% (contrary to the expectations of critics) and the employment rate of immigrants has increased from 63% to 69%.

In addition, as members of the workforce, immigrants’ contribution to the health of public finances has been positive. The ratio of overall revenues to spending has been higher for immigrants than for the British-born population from 2001 through 2011. In essence, as a result of successful workforce integration, immigrants have subsidized social benefits for British-born citizens.

It is evident that an agile labor market with few restrictions is important in integrating new immigrants into the workforce, especially those who have fewer skills and lower productivity and those who struggle to find suitable jobs. Two examples of rigid labor-market regulations that discourage employers from hiring are high minimum-wage rates and high social-security contributions. Lavish social-security benefits are an example of regulations that deter immigrants from working. Governments need to put in place a combination of regulations that provides incentives for employers to hire and immigrants to work.

Improving the Innovation Climate

To boost British innovation, in 2010 Prime Minister David Cameron introduced a long-term initiative to improve the country’s business conditions for start-ups. The program addressed improvements in five main areas: infrastructure, more prevalent technology clusters, access to capital and funding, developing talent and skills, and supportive regulations and taxation. After the introduction of the program, the UK’s ranking soared from 14 to 2 in the Global Innovation Index.

Similar efforts were undertaken in Denmark, Finland, Norway, and Sweden as well, but during the same period, the rankings of three of the four dropped. Initiating stronger programs in these Nordic countries could put them back at the international frontier of innovation, which is central to fostering new companies, attracting foreign direct investment and international talent, and spurring economic growth.

Implementing Value-Based Health Care

The Swedish health-care system is often considered a best practice. Though spending less per capita on health care than some other Western countries—for example, spending half of what the U.S. spends—the Swedish system is ranked among the best in the world and has strong statistics in life expectancy (number 12 globally) and infant mortality (number 6 globally). But Sweden’s health-care system faces the same challenges as the systems in most Western countries: rising demand coupled with increasing costs and pressed public finances. To address these issues, hospital administrators have traditionally focused on process efficiency rather than on patient outcomes, but this has only exacerbated the problems.

Several Swedish hospitals have now started to implement a strategy for value-based health care (VBHC), which has also become a high priority for several county councils. VBHC focuses on delivering the best possible health outcomes for the patients at equal or lower cost. By defining what outcomes truly matter for patients, measuring them, analyzing the data, and creating transparency by equipping both medical professionals and patients with the information, VBHC can have a huge impact on treatment quality. Operating hospitals and health care systems on the basis of outcomes, rather than only on process metrics, further encourages collaboration across units within hospitals and across various health-care-system stakeholders.

A central part of VBHC is to standardize outcomes measurement, making it possible to compare the results of care providers within and across health care systems to identify the best practices. Sweden is a pioneer in outcomes measurement, having created a large number of high-quality disease registries and established the International Consortium for Health Outcomes Measurement, the cooperative effort of Karolinska Institutet in Stockholm, Michael Porter at Harvard Business School, and The Boston Consulting Group. (See The Value-Based Hospital: A Transformation Agenda for Health Care Providers, BCG report, October 2014.) VBHC is still in its youth, but it holds great potential to curb increasing health-care costs and, more important, to deliver better outcomes that matter to patients.

Creating Clear National Strategies and Follow-Up

Singapore’s government stands out for its effectiveness over several generations in responding to the country’s short-term crises and long-term structural challenges by setting clear targets and strategies. To sustain the nation’s economic growth, for example, in 2010, Singapore formed an Economic Strategies Committee that set the future direction, recommending a focus on highly skilled people, an innovative economy, and being a distinctive global city.

Singapore is also known for actively tracking the outcomes that its public sector achieves. It has institutionalized regular monitoring of the ministries’ achievements and publishes a biennial Singapore Public Sector Outcomes Review that focuses on quantifiable outcomes and progress in crucial areas of national interest. Such measures enable the government to take action on the basis of results. Nordic governments should evaluate the need for similar practices.

Reforming Labor Regulation

The World Economic Forum’s recent competitiveness assessment identified labor regulation as the most or the second most problematic factor for doing business in Finland, Norway, and Sweden. In Denmark, however, it was only fifth, clearly indicating a less regulated labor market.

Since the 1990s, Denmark has used the “flexicurity” model, which provides flexibility for employers to scale their workforce up or down—and thus their costs—and security to employees through a state guarantee of up to 90% of their salary should they become unemployed. The government further supports this model with active labor-market policies that help the unemployed find jobs or that provide them with education and training. The model is also supported by the major unions and the employer association.

The flexicurity model increases employers’ willingness to hire staff. From the 1990s until the financial crisis in 2008, Denmark’s unemployment rate improved to become one of the lowest among member countries of the Organisation for Economic Co-operation and Development (OECD). After the financial crisis, the unemployment rate increased by more than 3 percentage points, but it was still lower than the OECD average and lower than the rates in Finland and Sweden. Economist and professor Lars Calmfors estimates that structural unemployment in Sweden could be reduced by 1.5 to 2 percentage points by introducing reforms similar to those in Denmark.

Establishing a model similar to Denmark’s would be a step that Finland, Norway, and Sweden could take to reform their labor markets and help domestic companies become more competitive globally. However, this step would need to be followed by measures to decrease the other obstacles companies face.

Børge Kristoffersen, Fredrik Lind, Mai-Britt Poulsen, Teemu Ruska, Tuukka Seppä, Juuso Soininen, Øyvind Torpp, Johan Öberg.