Economic Freedom in Denmark and Sweden

How can two of Scandinavia’s welfare states rank among the economically freest countries in the world?

Every year The Wall Street Journal and the conservative Heritage Foundation publish the Index of Economic Freedom which ranks countries according to ten indicators that affect market freedoms throughout the world.

For several years now, Australia, Hong Kong, New Zealand, Singapore and Switzerland have made up the top five of economically freest countries in the world. Government spending as a share of national income is relatively low in these states; property rights are well protected while investment and trade can take place with few restrictions. Much of the developing world ranks poor by comparison. North Korea is at the very bottom of the list.

What is notable is that otherwise extensive welfare regimes as Denmark and Sweden rank relatively well — eighth and twenty-second in the world respectively.

A closer look at these countries’ rankings reveals that while government spending is extremely high, more than 50 percent of GDP in both Denmark and Sweden, in most other areas, they perform exceptionally well. Taxes are high, especially in Sweden which has a “burdensome income tax rate” according to the Index, but otherwise both Scandinavian nations are very free economically.

With its economy open to global trade and investment, Denmark is among the world leaders in business freedom, investment freedom, financial freedom, property rights and freedom from corruption. The overall regulatory and legal environment, transparent and efficient, encourages entrepreneurial activity.

The same is true for Sweden, albeit to a slightly lesser degree. Whereas Denmark has flexible labor laws, regulations in Sweden remain rigid. “The non-salary cost of employing a worker is high and dismissing an employee is costly and burdensome.”

Both countries maintain open borders to trade and investment from abroad at the same time. Corruption is perceived as almost nonexistent while property protection is solid. Neither government interferes much in small- and medium-sized businesses. Starting a company is simple and straightforward. The business framework in both Denmark and Sweden is highly conducive to innovation and productivity growth.

It’s just too bad they tax their people so heavily.