Weekend reading: Denmark and globalization, the director’s cut

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When my article “Why Denmark Loves Globalization” was published in Time a couple of weeks ago, I said I might post the longer draft that I had tried vainly to get published in Time‘s Europe edition. Well, here it is. And it’s definitely longer:

Last year, Danish toymaker Lego announced plans to outsource most of its manufacturing to Eastern Europe and Mexico. Of 1,200 blue collar jobs at Lego’s headquarters in the town of Billund, only about 300 would remain.

You might think this would make union leaders at Lego hopping mad. You’d be wrong. “We thought it was the best way to keep as many workers’ places in Denmark as possible,” maintenance man and union shop steward Poul Erik Pedersen tells me. “We aren’t against the management. We want to make sure that they make money and we make money.”

This less-than-confrontational approach might partly be explained by the fact that Lego hasn’t laid anybody off yet in Billund—executives clued workers in on the plans long before they were ready, and stronger-than-expected sales have delayed the day of reckoning to sometime next year. There’s also the ambitious retraining program that Lego and its unions are putting together, which will give workers the chance to upgrade skills and learn new ones. Plus, unemployment benefits in Denmark replace about 90% of wages, and with a jobless rate of just 2% in the West Jutland region where Lego is based, finding new work shouldn’t be all that hard anyway.

And so, instead of taking to the streets in protest, union man Pedersen has driven out of his way to meet me at the Billund Airport before my flight back to Copenhagen. After chatting a bit about Lego’s plans, he launches unprompted into a defense of a business practice that his counterparts in other countries almost universally decry. “There are some good things about outsourcing,” he says. “Where the jobs go, the standard of living is growing, and then they can afford to buy more Legos or other things from the West.”

* * *

In most of the developed world, globalization has become a deeply fraught topic. For all the benefits it brings—cheaper and better products, the rise of an affluent middle class in formerly poor countries, Thai restaurants on every corner—the costs are much more obvious and wrenching: factories closed, jobs lost, comfortable lives wrenched from their moorings.

As a result, economic angst has become a major political force in the U.S. and in Western Europe. In a Eurobarometer poll taken last year, 43% of European Union respondents characterized globalization as a “very negative” or “fairly negative” phenomenon; 41% saw it as a positive. In France it was 61% negative, 29% positive.

In Denmark, though, 76% of those polled called globalization a plus. And why shouldn’t they? Living standards in Denmark are among the highest in the world. Per capita income trails that of the U.S., but is distributed far more equally. Unemployment is just 3.1%. The country exports more goods and services than it imports. And while only two Danish corporations (shipper A.P. Møller-Maersk and the Danske Bank) make the Fortune Global 500 list of the world’s largest, Denmark has more than its share of smallish, nimble, outward-looking firms well positioned in growth areas ranging from alternative energy to healthcare to high-end furniture.

This success has not gone unnoticed in business circles: In October the World Economic Forum ranked Denmark as the world’s third most competitive economy; in May, the other most-watched tally of global competitiveness, put out by Swiss business school IMD, put Denmark fifth. In September, the World Bank said Denmark was the fifth easiest country to do business, while the Economist Intelligence Unit and Columbia University’s Program on International Investment deemed it to have the best business environment on earth.

The Danes have not achieved these high rankings with could be called a conventional business-friendly approach. The country’s tax burden is, at almost 50% of GDP, just behind Sweden’s as the highest in the capitalist world. Its welfare state is spectacularly generous. Its workforce is heavily unionized. Five paid weeks of time off every year are the minimum. And yet somehow these heavily taxed, well-fed, leisure-sated Danes have emerged among the biggest winners of the supposedly dog-eat-dog globalization era.

This juxtaposition has made Denmark the sort of economic success story that a European social democrat or an American liberal can get excited about, and the country has been overrun with journalists, academics and politicians from around the world, especially from elsewhere in Western Europe. The same is true of nearby Sweden and Finland, which have also found a way to combine big government spending with vibrant economies (Norway, with its vast oil riches, is another story). But lately Denmark has hogged the spotlight, thanks to those high competitiveness rankings, that super-low unemployment rate and a catchily named labor market approach that seems especially suited to these times of economic dislocation: “flexicurity.”

The term is English, and it may have been coined in the Netherlands. But the Danes have become the acknowledged masters at it, balancing flexibility for employers—who can fire workers at will—with security for employees in the form of generous unemployment benefits and retraining programs, plus health care and pensions that aren’t job dependent.

* * *

This fall I joined the parade of curious foreigners visiting Denmark. One of the first things I learned was that country’s size and homogeneity—it has 5.4 million people, of whom all but 478,000 are of Danish ancestry—are crucial to how it works.

“We’ve been one small nation for 1,000 years,” says Hans Skov Christensen, who as director general of the Danish Confederation of Industry negotiates the nationwide agreements that revise the bargain between management and labor every few years. “We’re basically a clan.” Add to that the searing experience of being demoted in the 19th century from significant power to international nobody—starting with the bombardment of Copenhagen and destruction of the Danish Navy by then Vice Admiral Nelson in 1801—and you get an interesting combination: An extended family, with all the arguing and jostling for position at the dinner table that this entails, that knows it has to stick together to survive.

Informality, disputation and disrespect for authority are core Danish traits. But there are limits, and Danes seem to know in their bones just how far they can push them. Sometimes when the system comes under stress it takes a formal agreement, like the “September compromise” of 1899 that ended several years of labor strife and created the model for nationwide collective bargaining that exists to this day. More often than not, though, it’s tacit-like the understanding on the part of labor unions that, because so many Danish employers are small companies exposed to foreign competition, they won’t fight against layoffs.

The result, then, is an economy that looks like something out of a modern management how-to book. There are a few clear goals, and lots of leeway to achieve them. In one fascinating study, two American sociologists found [pdf!] that Danish non-management workers in the 1980s had nearly as much job autonomy as a supervisors did in the U.S., while supervisors in Denmark had about as much autonomy as “upper managers” in the U.S.

These autonomous Danish workers can be valuable. John Strand runs a wireless consultancy firm that gets 95% of its revenue from outside Denmark and could be based pretty much anywhere on earth with a good airport. He says he keeps Strand Consult in Copenhagen in large part because his Danish employees are so willing to argue with him and confront conventional wisdom. “Danes can think out of the box,” he claims.

Still, Denmark was small and homogeneous and presumably full of people thinking out of boxes 15 years ago, yet the unemployment rate topped 12% and the country’s economic prospects impressed no one. “Dynamism in the Danish economy is lagging behind that of many of the other nations,” wrote Harvard Business School’s Michael Porter in his book The Competitive Advantage of Nations in 1990. “Faltering motivation, too little competition, and a looming state influence are some of the most pressing problems.”

Porter’s famous analysis of competitiveness was a multifaceted one—and one that lives on in the World Economic Forum rankings, which Porter helped design. But in the English-speaking world a much simpler explanation for the problems of Denmark (and of Sweden and Finland, which were also struggling) got all the attention in the early 1990s: It was the welfare state’s fault.

The argument that big government is a drag on growth and prosperity has been around for a while (Austrian Friedrich Hayek and Chicagoan Milton Friedman were two important exponents). But a landmark 1991 study by Harvard economist Robert Barro gave it what seemed to be irrefutable empirical backing: In a statistical analysis of 138 countries, Barro found higher economic growth to be correlated strongly with smaller government.

The Danes weren’t deaf to this. The country’s politics operate on a somewhat unique spectrum: The biggest party on the political right calls itself Left (Venstre), and the main centrist party has been The Radical Left (Det Radikale Venstre). But there is a Conservative Party, and from 1982 to 1993 it led a series of governments, with Venstre as its main coalition partner, that did what they could to cut taxes and government spending. One bold young Venstre politician even published a manifesto titled From Social State to Minimal State.

The minimal state was never really what most Danes wanted, though, so what they got instead was a typically Danish compromise. It began with labor leaders embracing some of the Conservatives’ ideas, starting with the balanced-budget, low-inflation approach to economic policy that in the U.S. came to be known as Rubinomics. The collective bargaining process was cleverly rejiggered so that the country’s export-oriented manufacturers—those most exposed to global competition—negotiated first and set the trend for the rest of the workforce. And in 1993, Social Democrat Poul Nyrup Rasmussen–the long-time chief economist of the Danish Confederation of Trade Unions—took over as prime minister and completed the transformation.

Rasmussen’s government cut unemployment benefits from nine years to four, and beefed up job retraining programs in a big way. Getting people off the dole became a national priority. But beyond that the welfare state remained intact.

It seemed to work. Unemployment fell; the economy grew. There’s still a lot of debate over how effective Denmark’s job-retraining programs actually are, but it’s undeniable that they help create the kind of political environment in which union men like Poul Erik Pedersen at Lego advocate outsourcing and globalization even as their company cuts jobs.

And so in 2001, when a Venstre-Conservative government led by the author of From Social State to Minimal StateAnders Fogh Rasmussen–took power, it barely changed a thing. [A few weeks after my visit, Fogh Rasmussen’s coalition won reelection, albeit by a smaller margin than in 2001.]

Employment minister Claus Hjort Fredriksen, a Venstre member, was among those who were convinced in the early 1990s that Denmark needed a much smaller government. He’s changed his mind. “I have to admit now, 15 to 20 years later, that the model we have found here—free education, free health care, a good financial situation if you lose your job, together with a flexible labor market and the size of Danish companies—somehow has struck something that is the answer to the challenges of globalization,” he says.

* * *

Economists have also been recalibrating their views on taxes and growth in light of the recent success of Denmark and its Nordic neighbors. Not all of them, mind you—Barro visited Copenhagen last year at the behest of a local think tank to tell Danes their taxes were too high. But several years ago, Peter Lindert of the University of California, Davis took another look at the connection between growth and government size, this time eliminating authoritarian regimes where the government ran everything, and found no correlation between the two at all.

Lindert’s explanation is not that taxes don’t matter, but that high-tax democracies are far more careful about what they tax. Sure enough, apart from the high overall tax burden, the Danish tax system is a conservative economist’s dream: the corporate tax rate is lower than in the U.S., capital gains are taxed at a much lower rate than ordinary income, and major efforts have been made to move the tax burden from income to consumption.

Add to this certain elements of the welfare state, and you get a system that is in some ways better geared to the interests of business than the low-tax, low-service American model. In the U.S., “you have to pay for health care and social benefits for employees,” explains Thomas Nagy, the North Carolina-based president of North American operations for Novozymes, a Danish maker of industrial enzymes. In Denmark, that’s all taken care of. “I think I get a lot for my money,” says Per Tejs Knudsen, founder and CEO of the Copenhagen software firm cBrain. “My children go to great schools. I can go to the doctor for free. In general that is a good feeling.”

Could U.S. politicians learn from this? When I pose the question to Fogh Rasmussen, the prime minister, he pauses for a moment. “Well, I don’t know, because the two societies are different in many ways,” he says. “But I do believe we have created welfare schemes which combine social security with market principles.”

I’ve corraled Fogh Rasmussen after a speech—Denmark being the kind of country where a journalist can just walk right up to the top elected official and start asking him questions—at the annual political summit of the Confederation of Danish Industries, or Dansk Industri. When Dansk Industri holds a summit, everybody comes. Half the cabinet is there, as are opposition politicians, union leaders, ambassadors and the CEOs of most of the country’s major companies. And as special guest speaker there’s Philippe Legrain, a young English economist of French-Estonian-American descent who has written an acclaimed book called Immigrants: Your Country Needs Them.

Featuring Legrain is a deliberately provocative gesture on Dansk Industri’s part, given that immigration happens to be the touchiest subject in Danish politics. The country has never allowed all that many foreigners in, and even its limited admission of refugees and asylum-seekers in the 1980s and 1990s inspired a major political backlash. The anti-immigration Danish People’s Party got 12% of the vote in the 2001 election [14% in November], and the current minority governing coalition relies on its support to get bills passed.

In his speech, Legrain argues that the successful economies of the future will look like his favorite soccer club, London’s Arsenal, which has achieved great success with a roster made up almost entirely of foreigners—among them a 19-year-old Dane. But the audience he’s speaking to in a convention center on the outskirts of Copenhagen doesn’t look like Arsenal at all. “Denmark is one of the few countries in Europe suffering from a brain drain,” Legrain tells me afterwards. “It’s closed off to attracting talented people from abroad.”

Denmark is in fact experiencing a net emigration about 40,000 people a year immigration of about 10,000 people a year. And But Danish companies are beginning to complain of shortages of skilled workers. But Still, is Arsenal really the right economic model for Denmark? “It’s a good story, and it’s necessary for us always to listen to these people,” says one of the leaders of the People’s Party, Kristian Thulesen Dahl—himself a Liverpool fan. “But we don’t believe in a multi-ethnic society. We think Denmark has positive sides because we aren’t a multi-ethnic society.”

None of the other Danes I met during my stay would say such a thing out loud, and most cluck disapprovingly at any mention of the People’s Party. But homogeneity has certainly been a factor in making the flexible adaptable Danish system work. And it definitely helps explain why Danes are willing to put up with such high taxes—because they know that recipients of social services are mostly people just like them.

The people running Dansk Industri, though, now argue that high personal income taxes—the top marginal rate is 62%—are driving some talented Danes out and discouraging foreigners from coming in. In his speech to the group, Fogh Rasmussen talks up some small tax cuts enacted since he took office. He acknowledges that the business community would like to see much more, but adds, “I think it’s quite good to have tax relief in a country where public opinion polls say people don’t want that.”

That gets him a big laugh. It’s not a joke you’re ever likely to hear an American politician make.