Chairman of Capital Economics, Roger Bootle considers Jeremy Corbyn’s economic policy and examines the Scandinavian model for possible elucidation – can socialism ever really work?
For the first time in a long while, the British people are being offered a socialist agenda. I refer, of course, to the programme pursued by Mrs May’s “Conservative” government. Remarkably, there is something even more to the left of this, namely Mr Corbyn’s more radical agenda. This has been widely decried as unrealistic and expensive and even potentially, economically disastrous. As with all things economic, however, before indulging such in a kneejerk reaction, we should at least give a passing nod to the facts. Is socialism really such an economic disaster?
If you mean the red in tooth and claw variety, then the answer has to be an unequivocal “yes”. There isn’t a single case of extreme socialism, aka communism, managing to sustain decent economic performance. The Soviet Union chronically underperformed virtually all countries in the west, and its satellites in Eastern Europe fared just as badly. Strikingly, it was only where some measure of market freedom was allowed that economic performance raised itself above the level of the truly appalling.
In similar vein, before the market reforms introduced by Deng Xiaoping in 1978, the Chinese economy was essentially a basket case. Of course, China has long since left such dismal economic performance behind but North Korea still manages to fly the flag for batty, anti-market economic policies. Granted, it can make (and fire) ballistic missiles but its economy continues to do appallingly badly. And Cuba, that one time repository of many leftists’ hopes and dreams, continues to languish well below its potential.
Yet you could argue that all this is just knockabout stuff. All the countries so far mentioned combined suppression of market forces with a totalitarian political structure. That is not what Mr Corbyn is apparently offering. Rather, he aims to combine genuine parliamentary democracy with a market economy of sorts, but modified by the realisation of traditional socialist objectives: large-scale nationalisation of industry, particularly the public utilities, substantial increases in public spending in order to fund the NHS and redistribute income towards the poorer parts of society, substantial intervention in business, and increases in taxes for both businesses and high-earning individuals.
I realise that many a reader of this magazine may find the prospect of such a programme appalling enough to induce indigestion, but we really should give the Corbyn programme a fair crack of the whip and ask if there are examples of countries around the world that have tried something like this programme and succeeded?
The obvious place to look is Scandinavia, the home of supposedly swish furniture, social harmony and the “Nordic” economic model. A superficial look at the key macroeconomic numbers suggests that they are doing much better than we are. We are struggling to keep the ratio of government debt to GDP below 90%. The equivalent figure for Sweden is 42%, with 33% for Norway and 40% for Denmark. For the two non-Scandinavian Nordic countries, Finland and Iceland, the figures are 64% and 53% respectively. We have struggled to bring our government budget deficit down to 2½% of GDP and we are still struggling and cutting. The figure for Finland is similar to ours, but Sweden has a deficit of only about 0.5% of GDP, and Denmark 1%. Norway’s government is actually in surplus to the tune 3% of GDP while Iceland runs a surplus of about 1% of GDP.
And then there is overseas trade. We have run a huge current account deficit (loosely speaking an excess of exports, or their equivalent, over imports). Over the last year the figure has been almost 4% of GDP. By contrast, Finland runs a small deficit of 1% of GDP, while Norway, Sweden, Denmark and Iceland all run surpluses of 5%, 5%, 8%, and 8%, respectively.
But these are statistics for boring old economists like me to fret over. It is the performance of GDP per head (which is the ultimate determinant of standards of living) that butters parsnips. On this measure, the UK comes in as about the same as Finland but way, way below the others. On some measures the UK’s GDP per head comes in at only about half that of Norway. Admittedly, that is an extreme comparison. But the UK’s GDP per capita is still about 15% below Sweden’s.
In other respects, though, the Nordic countries are very different from each other. Norway has a small population but huge oil resources. Iceland is an even smaller economy with extensive thermal energy supplies. Denmark is another small economy with greater similarities to the United Kingdom but its economic structure is radically different and its currency is closely tied to the Euro.
Finland is a different kettle of fish altogether, ethnically, linguistically and politically. Not many British people are aware of this, but during the Second World War, because of our alliance with the Soviet Union and the Soviet Union’s attack on Finland, Britain and Finland were on opposite sides – although we never fought each other. All friends today, of course. But Finland is a member of the euro and it has long maintained strong links with Germany.
So these countries are not ideal comparators for the UK. The country that we really ought to home in on is Sweden. This is a country of some ten million people with an enviably high standard of living. Like us, it is inside the EU but outside the euro.
Has Sweden got rich by operating policies anything like the Corbyn programme? On government spending and tax the answer is yes. Moreover, Sweden has a high level of public ownership of industry. But before you start to toast Jeremy Corbyn, I should add that Swedish publicly-owned enterprises are run on commercial lines and state involvement in privately-owned business through price controls and regulations is limited. Interestingly, while much of Europe has been increasing the ratio of government spending (and tax) to GDP, the Swedes have been reducing it. In the early 1980s to the mid-1990s the ratio was over 60% of GDP, compared with about 50% today.
Moreover, whatever works for Sweden is not bound to work for the UK. Its history, comparatively small population and, until recently, ethnic uniformity have made it a comparatively easy country to govern by consensus. It has long enjoyed very low levels of industrial unrest. (By contrast, imagine what Corbyn plus nationalisation and repeal of the Thatcher labour reforms would spell for industrial unrest here.)
When it comes to the state, it isn’t so much the size of it that matters as what you do with it. There is no magic relationship with the level of GDP per capita – or its growth rate. You have to judge Sweden’s performance in relation to its endowments of resources and its history. Within Europe, France operates with an even higher ratio of government spending to GDP (about 55%) and is much less successful. Meanwhile, Switzerland operates with a much lower ratio, namely just over 30%, and is more successful. And in Asia, Hong Kong and Singapore, having no natural resources whatsoever, operate with ratios of government spending (and tax receipts) to GDP of just under 20%. Both have been spectacularly successful.
We could try to settle the matter by experiment. Perhaps we could experience five years of Corbynomics and see how we get on? Well, you could experience it and see how you get on. Personally, I don’t need such an experiment to know the outcome. I would be off – and not to Scandinavia. Maybe Boisdale will open somewhere in Switzerland? Hint. Hint.