Paths of Public Innovation in the Global Age: Lessons from Scandinavia

Paths of Public Innovation in the Global Age

Paths of Public Innovation in the Global Age Lessons from Scandinavia

Noralv Veggeland Professor of Social Science, Lillehammer University College, Centre for Public Policy Innovation (CPPI), Norway

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Noralv Veggeland 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Veggeland, Noralv, 1941– Paths of public innovation in the global age : lessons from Scandinavia / by Noralv Veggeland. p. cm. Includes bibliographical references and index. 1. Welfare state—Scandinavia. 2. Public adminstration—Scandinavia. I. Title HV318.V44 2007 330.12′6—dc22

2007010627

ISBN 978 1 84720 449 3 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents List of figures List of tables Preface Acknowledgements

vii viii ix xi

1

Path dependence and social models 1.1 Renewed focus on the Nordic countries: background 1.2 The search for a European social model 1.3 The regulatory state 1.4 Public administration and regulatory regimes 1.5 Europeanization through the EU and the EEA 1.6 Ways of Europeanization 1.7 Reregulation and Europeanization 1.8 European administrative traditions 1.9 Path dependence 1.10 Theoretical approach

1 1 3 8 9 11 16 18 20 22 26

2

The Scandinavian welfare state model 2.1 European social models 2.2 The roots of the Scandinavian social model 2.3 The rebirth of Schumpeterianism and the neo-liberal transition 2.4 Income protection 2.5 Neo-liberalism

31 31 36 40 45 48

Modernizing government 3.1 The death of managerialism 3.2 Market-type mechanisms 3.3 PLAs and PLBs 3.4 Public–private partnerships 3.5 Vouchers 3.6 Outsourcing 3.7 Microeconomic effects 3.8 Regulatory innovation and macroeconomic effects 3.9 Transaction costs over time

51 51 52 53 55 56 59 61 65 67

3

v

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Paths of public innovation in the global age

3.10 3.11

Some OECD perspectives Some conclusions

73 75

4

The service economy trilemma of the regulatory state 4.1 Welfare state politics 4.2 The fiscal restraint approach 4.3 The European service sector trilemma 4.4 European governance traditions and tradeoffs 4.5 The flexible labor market 4.6 The divisive Nordic flexicurity model in focus 4.7 Reforms 4.8 The advantage of flexicurity 4.9 Some conclusions

5

Scandinavian subsidiarity 5.1 The principle of subsidiarity 5.2 Government traditions 5.3 The Danish reform case 5.4 Five ‘faces’ of subsidiarity 5.5 How the Nordic countries practice subsidiarity 5.6 The intergovernmentalism perspective 5.7 The neo-functionalism perspective 5.8 The future for the Nordic countries and Europe as viewed from a Continental federal perspective 5.9 Three contrasting Nordic cases 5.10 New perspective and a concluding comment

97 97 98 100 102 106 106 107

Summing up the Scandinavian/Nordic model 6.1 The Europeanization framework 6.2 Europeanization and the Nordic role 6.3 Nordic flexicurity 6.4 Final conclusion

115 115 116 125 127

6

Appendix I References Index

Nordic country files

80 80 81 84 87 89 91 92 93 94

110 110 113

129 130 139

Figures 1.1 3.1 3.2

4.1 4.2

6.1

A threshold model of path-dependent development with structural transaction costs allocated in time The employment growth rate in Sweden Scharpf’s Law: decreasing microeconomic costs but exponentially rising transaction costs by increasing the use of outsourcing in the public sector The ideal European administrative model for welfare and workfare: the road map to the ‘promised land’ The three administrative traditions biasing choice options with none of them able to solve the so-called ‘trilemma’ in the regulatory welfare and service sector without generating ‘failures’ The Public Pension Fund: value and prediction for growth of the Norwegian petroleum fund

vii

25 64

71 83

87 125

Tables 2.1 2.2 2.3 2.4 2.5 3.1

3.2

3.3 3.4 3.5

3.6 5.1

5.2

European models and tradition indicators Public and private social expenditure, 2001 Standardized unemployment rates Income protection in eight European countries, 1973–95 Labor productivity in the business sector An overview of PPP activity in the Nordic countries compared to three major European states in two selected welfare sectors Public and private expenditure related to the implicit voucher form in two welfare service sectors and with focus on the administrative traditions of representative states Outsourcing of public services Business development in Norway Public savings of outsourcing transformed to increasing outlays because of growing transaction costs over time, with stable service standard Public and private institutions in long-term care for the elderly, late 1990s Citizens per elected councilor and population per representative assembly of governments on national, regional and local levels in some European Continental, Scandinavian and Anglo-Saxon countries The new administrative pattern of the Danish administrative reform concerning the number of municipalities, regions and elected authorities

viii

34 39 44 46 47

55

58 60 64

69 78

98

101

Preface Subsidiarity, the politics of multi-level innovative decision making has become a complex challenge affecting all levels and scales of private and public domains. At the regulatory EU1 level, the Lisbon and Gothenburg agendas have set the context for an EU-wide subsidiarity strategy to improve national and local innovation potentials, and therewith the Community’s identity and competitiveness in the global age. The policy goal is to achieve good governance by making the Community’s economic and social development more solid, secure and sustainable in the enlarged Europe. The new multi-actor and multi-level world of innovation has inspired academic environments to develop new frameworks and theories, and to compare economic and social models for understanding the new complexities of innovation and multi-level governance. Thanks to these efforts, innovation is no longer the ‘black box’ as it was considered for a long period of time. Schumpeter’s entrepreneur is now accompanied by an entire set of multi-level approaches to explain technological and institutional change and innovation. These approaches range from the system-level analysis and macro explanation of processes of socio-economic regulatory change, to the micro level, which explains innovation by organizational settings and strategies of individual public and private institutions and enterprises. At the national level, governments experiment with reforms in the public sector to initiate nationwide policy and encourage administrative innovation. The question then arises whether innovation in the public sector of collective actions refers to the implementation of mechanisms of something totally new, or whether social and administrative models and traditions of subsidiarity always will bias and put imprints on such mechanisms. Is innovation in the public sector bound to endure institutional path dependence? In the multi-level EU, the Scandinavian social and administrative model, converted contextually to the so-called Nordic model, is of much focus in this framework, and especially in the context of the Lisbon process. The following can thus be considered: Could this Scandinavian model of good governance also fit at the European level, and in the new setting generate promising path-dependent innovative developments? The well-known Finnish innovation platform, copied by the Netherlands, is an example of such a new Nordic approach. The national innovation platform model has been applied at lower levels to benefit revitalization of the local economy. ix

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Another example is the Nordic ‘flexicurity’ platform, a biased innovation platform that generates multi-level labor market flexibility through universal job and social security arrangements. Throughout the world, there is much talk about the Scandinavian countries as if they were almost identical societies. More accurately, during the previous century, the particular Scandinavian welfare state model developed based on a set of common norms, values and lifestyles which featured the contemporary model. In our global age, however, and because of embracing Europeanization processes, the original Scandinavian model has been transformed, reformed and adjusted. Though what remains, despite historical cleavages and different traditions, is paths of innovations and developments which feature a long range of good common governance realities. In the book Paths of Public Innovation in the Global Age: Lessons from Scandinavia, I discuss comparative social models and administrative path traditions in Europe, and I also define and provide examples of innovations which are appropriate for the societies of Scandinavia. My conclusion is that effective innovation no longer seems necessarily to be decided by R&D activities and marked acceptance, but actually by the ability to access the best multi-level paths, resources and knowledge in socio-economic regulatory environments. A ‘Nordic social model’ concept has become a common notion that sometimes replaces the ‘Scandinavian welfare state model’ or just the ‘Scandinavian social model’ as a basic concept notion in European politics (see EPC Working Paper 2005). When the former concept occurs it often indicates focus on the EU–Nordic member states relation more specifically. Hence, in this book the Nordic model is contextually, conceptualized as a path-dependent modification of the Scandinavian social model in the framework of the EU regulatory regime, otherwise used as just identical notions.

NOTE 1. Reliance on regulations – rather than interventionist governance through public ownership, planning or centralized administration – characterizes the methods of the regulatory state (Majone 1997).

Acknowledgements During the spring semester of 2006, I was offered a stay as visiting professor at the Center for Public Policy Administration (CPPA), University of Massachusetts, USA. A financial award from the American Scandinavia Foundation (ASF) made it economically possible for me to accept this opportunity. At the Center, I lectured and conducted a graduate class on European integration issues. Research and papers which I prepared for class lectures formed the starting point for the writing of this book. I would like to take this opportunity to thank ASF for their generosity and courteous treatment. Further, I would like to thank my colleagues at the CPPA for an interesting stay, and the students for interesting discussions and scholarly critique. Last but not least, special thanks and my gratitude go to my good friend for many years Eric S. Einhorn, professor and expert on the Scandinavian welfare state and a good colleague at the CPPA. Over the years, many people have contributed to my knowledge and thoughts about public sector transformation, the Scandinavian welfare state model,1 the regulatory regime of the EU, and issues of public innovation. I would like to particularly acknowledge the following colleagues at Lillehammer University College: Rolf Rønning, Håvard Teigen, Tor Selstad, Jon Helge Lesjø, Liv Solheim, Ulla Higdem, Tor Helge Pedersen, Jan Andersen and Olav R. Spilling. As a team, we have worked together for many years towards the establishment of the Center for Innovative Policy and for research performance in the field. It has been of utmost value for me to think in terms of innovation when writing this book. Lillehammer, December 2006 Noralv Veggeland To Unni

NOTE 1. In this context the EU Commission impact study ‘The Nordic countries: what impact on planning and development in the Union?’ (Veggeland 1995a), and the Scandinavian research teamwork behind it, inspired me greatly to further research in the field of European social models.

xi

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Path dependence and social models

1.1 RENEWED FOCUS1 ON THE NORDIC COUNTRIES:2 BACKGROUND After the collapse of the adoption of the EU Constitution Treaty in 2005, which was a result of negative referendums in the founding states of France and The Netherlands, the European Union intensified the on-going debates that had started with the Treaty of Nice in 2000 and the White Paper of 2001 on ‘Governance in the EU’. Now, they wished to investigate alternative European social and administrative models (refer to Europe’s World 2005; EPC 2005). On the one hand, this debate could be recognized as an anachronism since, in a national perspective, the administrative and social policy field constitutes a policy field in its own right at the domestic level. There are no European programs with an exclusive focus on national administrations and social performance. On the other hand, such a statement overlooks potential administrative and social effects of European policies in other sectors because in many instances decisions about policies imply decisions on corresponding administrative structures and social processes (Nuget and Paterson 2003). The theoretical framework of neofunctionalism provides evidence of this (Haas 1958; Pollack 2005). In regard to implementation effects in a national context, the corresponding decisions often result differently. This divergence phenomenon occurs because domestic social and administrative models tend to bias particular implementation paths, for example in the social and welfare sectors (Knill 2001). Throughout history and in different phases of European integration which will be discussed later, at least two such gross models have generated institutional path dependence: the Continental and Anglo-Saxon models with their different administrative traditions. The EU focus on the contemporary Nordic model is a more recent phenomenon (O’Sullivan 2005). From the beginning of the integration process with the adoption of the European Coal and Steel Community (ECSC) agreement and the Treaty of Rome in 1957 by the inner six Continental states – Germany, France, Italy and the three Benelux countries as founder states – the Continental model naturally was dominant. This model and administrative tradition created the path-dependent development of federal elements and then later 1

2

Paths of public innovation in the global age

disputed the politics of economic interventionism when regulatory measures became dominant (Urwin 1996, 2003).3 J. Pindar (1993: 46) defines federal elements as ‘a component of federal government should a federal constitution eventually be adopted. Such institutions (for example the High Authority of the ECSC, the European Supreme Court, and the European Parliament) will have some degree of independence from the governments of the member states’. The early economic interventionist policy showed up in the Treaty of Rome as the agreement to adopt a Common Agricultural Policy (CAP) and set up a European Social Fund (ESF), which at the time was relatively small. The ESF was established to meet anticipated negative labor market challenges in the wake of the new Common Market. The Continental model and administrative tradition dominance lasted until the arrival of the Single European Act in 1987 and the introduction of the Single European Market (SEM) one year later. The United Kingdom (UK) had joined the European Community (EC) in 1972 as a major member state. All of the member states experienced impacts of the global economy in the form of recessions, inflation and unemployment, and budget constraints resulted. These common factors pressed forward change and/or at least modifications to administrative and social models (Pierson 1996). The Anglo-Saxon administrative model and its repercussions became dominant. This administrative tradition changed the course of the path away from interventionism and public planning towards the direction of market-centered administrative reforms and competition policies. The reforms were launched in the last quarter of the century in many European countries with numerous common characteristics and presented, Sabino Cassese writes (2003: 130), ‘in emphatic terms to highlight their newness: “New Public Management” in the United Kingdom since 1979, “Neue Steuerungsmodell” in Germany since 1978, “Renouveau du service public” in France since 1989, and “modernizacion” in Spain since 1992’. The Scandinavian variant since the 1980s was ‘Modernization’ or ‘Renewal of the public sector’. The EU politics of governance was, first and foremost, transformed to the politics of regulation by implying a halt in the budgeted expansion and thereby resulting in fewer economic intervention policies (Majone 1997). Regulation and delegation of powers in the EU occurred as important issues. Delegation of rule-making powers became an ambiguous matter. Internal delegation came to denote the performance of transfer of executive powers from the Council of Ministers to the Commission or to the Parliament. External delegation expressed the transfer of rule-making powers to outside bodies which included the member states and arm’s length agencies, and other competitive bodies not named in the treaties

Path dependence and social models

3

(Majone 2003: 298; Veggeland 2004). Hence, rooted in the Anglo-Saxon/ American tradition and in the regulatory state affinity (Wallace 2005), at that stage the main EU administrative policy focus was strategies to increase the social and economic output through external delegation which thereby created legitimacy through the regulatory ‘governance for the people’. Such a strategy was preferred rather than creating popular support by inside delegation to the representative Parliament and budgeted expansion, which thereby created legitimacy through economic interventions and distributional policies, i.e. representative ‘governance by the people’ (Scharpf 1999: 6). During the 1990s, both the failure of the EU to compete in the global economy and the democratic and legitimacy deficit became issues of great focus due to the fact that these issues threatened the core identity of the Union. Upon the Soviet Union’s collapse, the political situation in Europe changed radically. The poor Eastern European states wanted membership status in the ‘rich men’s club’, and the Amsterdam Treaty of 1997 opened the negotiating door for them. Ten new accession states joined the Union in 2004. A heavy social and economic burden was an immediate impact challenging the EU (Sedelmeier 2005). During the spring of 2006 at two important events, the political and administrative leaders of the EU and its member state politicians discussed modes of good governance related to the enlargement challenge. The Scandinavian welfare state featured a social model of particular interest and focus. The issue raised was whether such a successful model could be transferred to other member states, ‘especially to those in distress’ (for the EU program 2006, go to www.euroactiv.com). With this in mind, it was a basis for motivation and good reason for European politicians and scholars alike to become reacquainted with the contemporary Nordic countries and the Scandinavian4 economic and social model by investigating the characteristics of the model’s paths in the 21st century as well as to investigate why the model is considered so successful ‘in the global age’ (Einhorn and Logue 2003).

1.2 THE SEARCH FOR A EUROPEAN SOCIAL MODEL The EU’s search for an innovative social model commenced when the European Council held a special meeting on 23–24 March 2000 in Lisbon where it was agreed to set out a new ten-year strategic goal for the European Union. The goal was to make the Union ‘the most competitive and dynamic knowledge-based economy in the world, capable of sustainable

4

Paths of public innovation in the global age

economic growth with more jobs and greater social cohesion’. This was to be achieved by introducing economic and social reforms in the Single Market, i.e. the European Economic Area5 (at that time composed of 15 countries), which aimed to strengthen employment by making the labor market more flexible and by expanding welfare services and social cohesion. During the Swedish presidency in 2001, the European Council added sustainable development to economic and social policy as an additional area for coordination through the Lisbon strategy. Under the strategy, a stronger economy would drive job creation together with social and environmental policies which ensured sustainable development, social inclusion and security. For further reading refer to the document ‘An agenda of economic and social renewal for Europe’ (www.europa.eu.int/comm/ lisbon.strategy/pdf/lisbon/). The European Council has also endorsed the use of the ‘open method of coordination’ (OMC) as a new governance technique for the EU. The OMC approach calls for setting targets and benchmarking progress, and prefers ‘soft regulation’, i.e. regulation by persuasion, rather than ‘hard regulation’ by coercion (Streeck 1995). Instead of deciding on binding laws and rules, common targets are set for the whole of the EU. Each country is free to decide how best to reach these goals. The countries are supposed to exchange experience, compare progress and work out suitable guidelines and procedures within modeled strategy targets. The launching of the Lisbon process took place in 2000 and has a special background. The EU’s push to increase its economic competitiveness by way of the Lisbon process was driven from the start by embarrassment. The difference between the Union’s shrinking growth rates and the persistent economic viability of the United States of America in the 1990s was a cause for EU leaders to react by launching a reform process which aimed to transform the EU into the most ‘competitive knowledge-based economy in the world by 2010’. The Lisbon process and its sustainable development agenda provides appropriate frameworks for pursuing the European social model, including welfare, employment and economic competitiveness. One of the most positive outcomes from these strategies is that both public and private actors welcomed them, agreed with their logic and understood the challenges of adapting these to national traditions and identifying the importance of these for domestic discourse and debate. EU leaders should reflect more closely on whether or not comparisons with the USA economy of the 1990s provides the best starting point for their work. It is ironic that EU decision makers felt compelled to look across the Atlantic for policy inspiration when in fact good examples of innovative, high-growth economies already existed within the EU. In 2006,

Path dependence and social models

5

Eurostat, an EU statistical agency, upgraded the Union’s economic average growth rate, which then showed it had passed the USA’s rate. Further, it is interesting to observe figures made available in the 2004 World Economic Forum report on the Lisbon Agenda. These figures show that, if the USA for comparative purposes was an EU member state, it would rank fourth behind three existing member states on an overall assessment of economic competitiveness. Remarkably, the three top countries were Denmark, Sweden and Finland, which are all Nordic member states of the EU. The consistency of the contemporary Nordic region’s superior economic performance is striking across a range of indicators: ● ● ● ● ● ● ● ●

economic growth; labor productivity; labor market flexibility combined with social security; research and development investment; liberalized product markets; performance in the hi-tech and telecommunications sectors; rates of employment (including amongst women and elderly workers); physical and social infrastructure.

The Nordic economic and social model seems to offer the qualities which the EU decision makers are looking for: highly competitive economies without harsh social inequalities evidenced in the classic market-centered capitalistic model of the USA (Held and Koenig-Archibugi 2003). The ambitious goals of the Lisbon process have been shown to be difficult to fulfill. The root of the problem for achieving the goals of the Lisbon process was initially focusing too heavily on the USA. Efforts should have been focused on searching for innovative models and paths which showed through experience and documentation to have been successful in job creation and sustainable equality and welfare. Preceding the 2004 World Economic Forum report, the Spring Council discussed, on 22–23 March 2005, the Commission’s mid-term review of the Lisbon strategy for economic, social and environmental renewal. It was concluded that more focus would be placed on strategies for growth and employment creation, flexible market performance, social security and the simplification and national ownership of national action plans. These were the key elements to be launched again more effectively of the renewed Lisbon reform agenda. However, the EU Commission’s proposal to again launch the Lisbon agenda in a new setting has raised an important debate rooted in part to conflicting administrative traditions of the member states, which is causing

6

Paths of public innovation in the global age

inconsistent solutions when it comes to the implementation of common goals and the use of measures. The EU is facing the logic of appropriateness, i.e. to make choices despite the challenge of properly weighing the three special target pillars in the process, such as 1) economic growth, efficiency and competitiveness, 2) welfare and social cohesion and inclusion, and 3) halting the growth of public expenses (Ferrera and Rhodes 2000). As pointed out by several scholars (Weiler 1995, 1999; Wallace 2005), the EU governance is characterized by a fundamental asymmetry. The asymmetry is described as a dualism between, on the one hand, supranational European laws (acquis communautaire) whose legitimacy depends on effective output from legal acts and, on the other hand, EU governance depending on intergovernmental policy making with legitimacy from the member states’ governments and administrative traditions. The sovereignty of the member states is normally anchored in a written constitution, while the regulatory authority of the EU is mainly based on pooled sovereignty anchored in treaties and agreements (Veggeland 2003). This dualism of European integration generates a basic democratic governance dilemma, which has to be overcome (Beetham and Lord 1998). What has to be solved and overcome in the Lisbon process is as follows: ●

●

●

Performance: the disagreement among member countries about the character and scope of the tasks the EU should undertake, and the inability of its institutional apparatus to deliver effective policy in the areas it undertakes. Of special importance is to agree on policy performance targeting employment and macroeconomic competitiveness under the pressure of fiscal restraint. Democracy: the failure to increase and consolidate popular consent in the member states. The challenge is to overcome the democratic deficit and to generate welfare and social equality and inclusiveness. The process of authorization that suffers from non-transparency, and the failure of accountability and broad representations generate legitimacy deficits which should be overcome. Identity: the failure of a common European identity. The challenge is to create and strengthen the mechanisms for cultural and ethnic inclusiveness in the process of Europeanization.

As part of the Europeanization process concerning performance, democracy and identity, the EU has started looking for a basic common European governance and administrative model. The social model should have the potential to accomplish the three pillar targets of competitiveness and employment, welfare and equality, and balancing budgets more effectively, and the ability to generate an administrative path for target consistency.

Path dependence and social models

7

The ‘open method of coordination’ of the Lisbon process is supposed to be the governance instrument. The process should, thereby, to some extent be ‘Europeanized’, but also be a part of the development strategy which is based on national plans and actions arising from domestic administrative traditions (Rasmussen 2005). From a basic point of view, scholars have pointed out three alternative social models and administrative traditions accessible for enforcing and creating different national path-dependent developments (Knill 2001). These are: ● ● ●

the market-centered and regulatory Anglo-Saxon model and administrative path tradition; the corporatist and interventionist Continental model and administrative path tradition; the state-centered and interventionist Scandinavian model and administrative path tradition.

Observers often assume, particularly Anglo-Saxon public opinion, that the Scandinavian model is based on heavy state regulations which are not relevant to the complexities of other economies. Yet, an analysis of the labor markets in the Scandinavian countries reveals a surprisingly different picture. Far from strangling the labor market with onerous regulations, a deliberate strategy is pursued to keep labor market regulations to a minimum. As a result of active employment support (training, job search facilities, kindergartens, etc.), the Scandinavian countries encourage and compel the unemployed to seek new jobs as quickly as possible. Unemployment is therefore amongst the lowest of all developed economies. This, in turn, reduces feelings of job insecurity. My thesis is that people remain confident that they will be actively supported in finding new jobs in the event that they are unemployed. In addition, the Scandinavian universal welfare and social security arrangements enable people to feel confident that a deliberate change in job will in no way imply the risk of losing one’s rights. All in all, the model inherits promising flexible market incentives. This thesis is elaborated further in Chapter 3. The mixture of light regulation which allows low entry into and exit from the labor market, combined with generous benefits and highly active employment policies, helps to create flexibility for employers and security for employees. This approach rejects the traditional belief often found in the Continental tradition that worker security in the labor market can only be safeguarded through rules which restrict the ability of employers to downsize and where labor market authorities abstain from the open method of coordination, the OMC, recommended for the Lisbon process. Empirical evidence shows that those governments which persist in tightly

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Paths of public innovation in the global age

regulating labor markets tend to create more, not less, unemployment and instability (see Pollitt and Bouckaert 2004, Appendix B: Country files). The ideal combination of labor market flexibility and job security seems possible, as long as governments are prepared to put significant resources into generous benefits and employment policies. Many observers assume that such levels of public expenditure are simply beyond the realms of possibility in other countries. This does, however, overlook the fact that several EU countries such as the Continental states of France, Germany and Italy have comparatively high levels of public expenditure which they are spending in ineffective ways. The Scandinavian effect will not occur without consistency across the labor market in terms of benefits and employment policies. The three European administrative models mentioned will not be elaborated on further from this point. They will be noted as a basic framework for debates and controversies in regard to an economic and social model in the Europeanization process. This model-based framework and the different path-dependent administrative traditions, including their controversial incitements and effects, shall be elaborated, analysed and reiterated contextually throughout the following chapters. I have chosen this method because this particular framework contains important concepts which play an important role for comparative analyses of administrative innovations linked to Europeanization processes. This also includes the Scandinavian model scheme, which shows successful and innovative adjustment to the EU regulatory regime: the Nordic model in European politics.

1.3

THE REGULATORY STATE

Giandomenico Majone (1994, 1996, 1997, 2003) has been a central figure in the development of the ‘regulatory state’ framework. He defines the concept as follows: ‘reliance on regulation – rather than public ownership, planning or centralized administration – characterizes the methods of the regulatory state’ (1994: 77). In Majone’s terms, the EU has many of the key features of a regulatory state, with which the paradigm example of comparison is the United States. Regulatory states are based on different distant governance mechanisms in contrast to those of interventionist states. The interventionist state government involves government interventions to redistribute resources and has active state institutions as providers of public services. The regulatory state framework makes governments proactive only in the field of creating markets and correcting market failures (Scharpf 1999). The interventionist state operates through the mechanism of the traditional welfare state, while the governance of the regulatory state

Path dependence and social models

9

is very much bound to the mechanism of law and regulations, followed by legal surveillance and control of market actors. Much of the EU’s authority is bound to the regulations and legal surveillance of the Single Market. To a large degree, it lacks the welfare functions associated with the Nordic states and the post-war Western European states. The EU’s modest resources and budget figures are best targeted at regulatory forms of policy making. Majone’s point is that regulation is a form of governance that is becoming more widespread across the Western world. This development is not unique to the EU and is a result of market globalization and competition. Member states’ administrations have become influenced by regulatory state mechanisms which are enforced by and through Europeanization processes through the penetration of EU-level institutions into national systems of governance. There are important differences with respect to the national impact of diverse regulatory policies. These differences are closely related to two types of regulatory policy, which are: ●

●

the old regulatory policy, which is concerned with the regulation of market processes by defining conditions for market access and deregulation; and the new regulatory policy, which is directed at handling negative externalities emerging from market activities. The latter implies regulation where the classical policy fields are environmental protection, health and labor policy, consumer protection and some areas of social policy.

These regulatory policies are also of concern for the Scandinavian welfare states. Since the 1980s, their traditional post-war interventionist model has been heavily influenced by adopted regulatory state mechanisms which have been transformed and adjusted to the Nordic countries’ administrative tradition (OECD 2002; Veggeland 2004). We may talk about a mixture of interventionist and regulatory principles, but presented as a contemporary Scandinavian welfare state scheme. It is this scheme which is subject to further elaboration in this book and will be examined in the framework defined below about paths of innovation in the public sector.

1.4 PUBLIC ADMINISTRATION AND REGULATORY REGIMES International regulatory governance has been defined as ‘principles, norms, rules, and decision-making procedures around which actors’ expectations

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Paths of public innovation in the global age

converge in a given issue-arena’ (Krasner 1983: 1). The European Union is such a regime with an institutional development described as a regulatory form of government and not an interventionist form of government6 (Majone 2003; van Warden 1995). This means that the EU’s authority is, first and foremost, anchored in the authorization that the member countries have given this regime to develop regulations in the form of principles, norms, rules and procedures and to conduct legality controls. The regulations are to be implemented nationally and monitored judicially and this means, as cited above, that the member countries’ public and private administration at all levels is expected to converge on their areas of responsibility. A harmonization of the administration and service production is pressed forward. Europeanization is another term for the changes that occur when EU institutions penetrate national and local administrations (Olsen 2004). The convergence theory is nevertheless disputed by argument and with empirical evidence that divergence between national administrations is just as common a phenomenon (Pierre 2000; Knill 2001; Page and Wouters 1995). This means that there exists a national scope of action from the implementation of the EU’s many regulations and demands for procedures. Within these scopes of action, new and different organizational solutions and administrative styles develop, so that harmonization does not occur, despite the institutional pressure Europeanization implies. My thesis is that institutional divergence in the wake of Europeanization processes indicates that a scope of innovative administrative action exists at the national level. The innovation concept is elaborated in depth in the prominent Oxford Handbook of Innovation (Fagerberg et al. 2005). Historically, the concept variant of innovative public administration has been rejected to some extent as a concept of interest belonging to the public domain. However, at present, there seems to be an upcoming intensified focus on the concept amongst scholars. The reason seems to be the strong political and economic belief and trust in the competitiveness of the knowledge society, and both the regulatory and fiscal challenges of an expanding public service sector in most European states (EPC 2005; Pierre 2000). Innovative administration manifests itself generally as processes which generate institutional divergence in spite of conformity pressure emerging from different Europeanization7 processes. These processes are enforced and fueled by the EU’s supranational regulatory regime, and positive feedbacks create self-reinforcement of processes, namely path-dependent administrative developments (Pierson 2004). I write ‘developments’ in the plural because path-dependent processes of institutional development are crucial to the evolution of national diversity of modes of implementation, i.e. the divergence phenomenon. National administrative models and

Path dependence and social models

11

traditions tend to bias administrative solution diversity which could be innovative. Path dependence is understood as more than having a historical or ideological background which creates a form for ‘blind’ institutional conditions. Path dependence administration develops as a result of positive feedbacks. A ‘path’ is created which becomes more and more difficult to break out of over time as a result of institutional slowness and because reform is costly when systems have settled (refer to the game illustration of this in Chapter 2 below, and Pierson 2004: 151). This book analyses and discusses innovative public administration within the EU’s regulatory regime, and asks the question: What characterizes such an administration? The Scandinavian countries belong to this regime through membership in the European Union (EU) or the European Economic Area Agreement (EEA). These countries represent the subjects for my study. I have as a starting point in the study that the regulatory regime of the EU practices institutional force and creates path dependence which to some degree results in administrative convergence among the member states. Further, in relation to the EU directive concerning public procurement, which leads to national purchasing of services and outsourcing, I will attempt to supply empirical and analytical evidence to show that a national scope of different choices and actions exists within the regulatory universe which the EU represents. This choice and action potential manifests itself as national divergence in the modes of implementation of the EU’s regulations. National deviations from the EU’s regulatory standards in the Europeanization process implicate path dependence of different administrative traditions and/or innovative policies.

1.5 EUROPEANIZATION THROUGH THE EU AND THE EEA The EU as an international regime and supranational authority influences and reforms member states and EEA countries at all levels, from national to regional and municipal levels. We say that Europeanization is taking place. Through time and in various settings, the term ‘Europeanization’ has been defined in a number of ways (Olsen 2003: 334). Today, theory and knowledge development relating to Europeanization is linked to how political, economic, social and cultural processes at an EU level influence general national and society development in states joined to the EU. This also concerns EEA countries and Switzerland, which only have trade agreements with the Union. This shows in the development that legislation for competition is becoming more and more harmonized with the EU’s.

12

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The widespread use of the term ‘Europeanization’ is a relatively recent phenomenon. It is used in different contextual ways to describe a variety of social phenomena and processes of change. Johan P. Olsen suggests five possible uses: ● ● ● ● ●

Europeanization as changes in external territorial boundaries (such as in the case of enlargement). Europeanization as the development of institutions of governance at the European level (European-level institutionalization). Europeanization as the export of European forms of political organization and governance beyond Europe. Europeanization as a political project in support of the construction of a unified and politically strong Europe. Europeanization as the penetration of European-level institutions into national and sub-national systems of governance. (Olsen 2004: 334)

Acquis communautaire is the body of European treaties, laws and norms that essentially conducts and impacts the Europeanization process. It is composed of 31 chapters which all countries must adopt or negotiate transition periods for prior to enlargement. The chapters are as follows (Glenn 2004): Chapter 1: Free movement of goods Chapter 2: Free movement of people Chapter 3: Freedom to provide services Chapter 4: Free movement of capital Chapter 5: Company law Chapter 6: Competition policy Chapter 7: Agriculture Chapter 8: Fisheries Chapter 9: Transport policy Chapter 10: Taxation Chapter 11: Economic–Monetary Union Chapter 12: Statistics Chapter 13: Social policy and employment Chapter 14: Energy Chapter 15: Industrial policy Chapter 16: Small and medium-sized firms Chapter 17: Science and research

Chapter 18: Telecommunications and information technologies Chapter 19: Education and training Chapter 20: Culture and audiovisual policy Chapter 21: Regional policy and co-ordination of structural instruments Chapter 22: Environment Chapter 23: Consumer and health protection Chapter 24: Cooperation in the field of justice and home affairs Chapter 25: Customs union Chapter 26: External relations Chapter 27: Common foreign and security policy Chapter 28: Financial control Chapter 29: Financial–budgetary provisions Chapter 30: Institutions Chapter 31: Other

The acquis communautaire and Europeanization processes do not only affect the Nordic member states of the EU, but also the EEA member states

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13

of Norway and Iceland. Based on our earlier definition of international regulatory regimes (Krasner 1983), freely translated, the EU becomes consequently through the EEA Agreement: ‘An international EEA regime, which based on . . . “principles, norms, rules and decision-making procedures impose[s] conditions on Norway and Iceland as EEA actors and create[s] expectations about convergence in relation to EU member countries in the agreement areas”.’ Through its legislation, the EEA regime transforms its expectations about convergence of public administration and its institutional structure and manner of operation in the entire EEA area.8 However, a distinction should be made. For the EU member states of Sweden, Denmark and Finland, both the primary legislation of the treaties and the secondary legislation decided by the European Council and the Parliament generate ‘expectations about convergence’. However, for the Nordic EEA countries, it is only the EU’s secondary legislation and not the treaties which are binding and which can be said to represent the regime (Veggeland 2005). The secondary legislation is made up of four main types and is described as decrees, directives, resolutions and non-binding recommendations: ●

●

●

Decrees: These are in their entirety directly binding for the member countries – and for Norway, Iceland and Liechtenstein in actual competence areas as EEA countries. They have an unambiguous judicial character, and are enacted immediately they are decided. Directives: These join the member countries and also the countries in the areas which the EEA defines to the objectives with the resolutions which are decided on and which acquire status as directives. Each state determines itself which form the directive shall have in the national legislation and which instrument shall be used for implementation. This last point provides a scope of action which some member countries’ central and local authorities take advantage of better than others, with the significance that they realize the objective but interpret the directive differently. They reregulate within the directive’s institutional framework (van Gerven 2005). In this way, they take advantage of a national scope of action which makes it possible to pay attention to differences concerning administrative paths and administrative traditions (Knill 2001). Resolutions: These have a limited area of effect, for example for individuals, a business, an institution or one of several member states, and therefore make up a large quantity of statutes. They are only binding for those they pertain to, but have a universal effect for similar cases within the community.

14

Paths of public innovation in the global age ●

Recommendations: These are not binding for member countries, but can still have significance towards the development of institutional convergence and harmonization. Larger member countries may implement recommendations in their administrations and thereby create a path which places pressure on smaller countries.

In 2006, the total number of judicial acts registered in, for example, Norwegian law is close to 5000 and for EU member countries this total is even larger. According to the European Commission and the legislation database CELEX, the number of active laws was divided as follows in 2004: ● ● ●

Decrees 6191 (34.9 percent) Directives 1844 (10.4 percent) Resolutions 9690 (54.7 percent)

We can assume that public administration’s legitimacy can become pressed and sometimes threatened by the demand of legality, in other words, to fulfill expected implementation and monitoring. In Scandinavia, this is in accordance with the EU for the member states or EEA for Norway and Iceland (Veggeland 2005; Lavenex and Wallace 2005). Above, I mentioned ‘politics for blame avoidance’ as an aspect of this. The EFTA’s monitoring agency ESA represents the EEA states in this manner. It is a matter of building an innovative administration with institutional ability and capacity to create ‘satisfactory’9 implementation of the EU’s set of rules, but within a legal framework. Besides the administration should be anchored in national democratic decision-making processes, and thereby reproduce the ability to politically sustain ‘good governance’ (Rothstein and Teorell 2005). We suggest that identification of the scope of actions which achieve important regulatory modes of innovation will always be influenced and biased by domestic administrative and social path traditions. Administrative burdens, compliance costs and financial viability are just some of the problems associated with the European regulatory climate and, in the view of some, generate too heavy transaction costs. On the other hand, the increasing emphasis on European-wide regulation instead of on sets of national regulations is leading to simplification of the rules. The EU has advanced substantially towards creating a new regulatory culture where political initiatives replace market mechanisms. The ‘reregulation’ thinking is an example of this and stands contrary to deregulation and market liberalism. It is designed to reconcile the protection of public welfare services, sustainability10 and the environment with the agenda for growth, competitiveness and job creation. The European Commission has committed itself to this thinking by

Path dependence and social models

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developing a wide-ranging set of measures designed to improve the quality of regulation which is in line with citizens’ demands and the renewed European social model. All of the Scandinavian states are consequently bound by the EU regime’s deregulations and reregulations. This regime binds and has impact on so many areas of society that it is difficult to fully describe it. It is, however, the domestic public administration that holds legal responsibility for implementing the regulations. After-effects, which manifest in Scandinavian public administration in the wake of the EU’s general supranational regulatory regime, will be of focus. The EEA expands the geography so that the EU regime’s impact area also includes three non-member countries.11 This means that the national states’ societies within the entire EEA area ‘Europeanize’ in various ways and in varying degrees (Olsen 2004). We can say that the Europeanization establishes external framework conditions which go against the institutional path dependence of national framework conditions for renewal and innovation. This means that public administration experiences transitory pressure from the EU regime’s secondary legislation in the form of direct and indirect impacts. In reality, this legislation creates many administrative paths which cross each other and which are not always consistent. The paths have a crossroads where opportunities of choice arise and scope of action is manifested (van Gerven 2005). The challenge lies in finding this scope of action. Innovative administration with its proactive orientation towards satisfactory solutions becomes transformed into a reactive adaptation or a not legal dismissal (Graver 2005; Veggeland 2005). The most common reading of the term relates to Europeanization as a consequence of European integration, rather than the integration itself – ‘the development of institutions of governance at the European level; Europeanlevel institutionalization’. In this context, it implies Europeanization of the nation-state, i.e. top-down performance targeting harmonization of domestic administration by ‘the penetration of European level institutions into national and sub-national systems of governance’ in the member states (Olsen 2004: 334). In this regard, the EU choice of a basic administrative model for future performance of welfare, workfare and competitiveness is of greatest interest to the public, knowing that the chosen institutional model will create long-term path dependence for future developments (Pierson 1996). The latter dependence binds not only for the Union but also domestically in the member states (van Warden 1995). Politically the choice of the administrative model should be perceived as of great importance when considering that the EU is defined as a fast growing ‘regulatory’ supranational authority with competence embracing

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a constantly growing number of societal sectors (Majone 1997; Knill 2001). Hence, Europeanization of the welfare state concerns EU affiliated member states. I chose to analytically study Europeanization processes in the framework of neo-institutional theory and path-dependent developments (Mayhew 2005).

1.6

WAYS OF EUROPEANIZATION

In addressing the basic question about how Europeanization occurs is divided between three mechanisms based on general perspectives of what controls behavior (Olsen 2004; Claes and Førland 2004: 153). Europeanization occurs by: ●

● ●

The EU’s legislation and set of rules, create path dependence. This occurs through the penetration of EU institutions into national and local administration. Appropriate and satisfactory choice is made from the desire to optimize one’s own national interests within the EU/EEA framework. Learning and the exchange of ideas, models and knowledge and contact and teamwork within the EU system are modes that form the administration’s preferences and identity.

The Legislation Power, authority and legitimacy are needed in order to practice, influence and realize Europeanization. This means that practice occurs on the basis of a role as ‘principal’, in contrast to the role as ‘agent’, or rather the one who is influenced. As a supranational authority, the EU has a role as legal principal while the member countries are agents in the role as proactive or reactive implementers. The member countries have voluntarily established the EU, and have therewith undertaken a general obligation to follow the EU’s legislation and the European Court of Justice decisions.12 National administration is exposed to significant pressure to act as an adapting agent to achieve legality, and not as an innovative agent that creates divergence between the EU/EEA countries by satisfactory choice. Satisfactory Choice Influence and Europeanization through interests must be regarded as being more indirect from the EU’s side. National administration evaluates its scope of action, opportunities and limitations within the EU’s

Path dependence and social models

17

legislation and set of rules and in relation to the EU’s different financial instruments. In the areas where scope of action exists, the administration can choose to follow the EU’s strategies and procedures to avoid processes becoming ambiguous and increasingly more complex. This means that it chooses a role as a reactive agent with adaptation as a value and a norm. For example, this may occur when public administration is reorganized and exposed unnecessarily to the EU’s legislation for competition and with the use of bidding schemes. A satisfactory choice about innovative adaptation could have prevented this. In order to avoid political debate and other solutions brought forth by political opponents, the EU’s set of rules is given without reason as a reference for a case or action. This last ‘trick’ is mentioned as ‘the politics of blame avoidance’ (Weaver 1986; Claes and Førland 2004: 154). Learning and Transference of Ideas Influence and Europeanization through the transference of ideas and models occur when national authorities and administrations acquire direct and indirect contact with the EU system. A number of studies, anchored in constructivism as a theory (Rosamond 2000), point out that Europeanization of the national state does not just occur on the basis of institutional regulatory pressure (Sandholtz 1996). It is debated that: ‘EU institutions do not only shape behavior, but they also influence preferences and identities of individuals and member governments’ (Pollack 2005: 23). In relation to theories and models, the points demonstrated must not be misunderstood. Ideas and conceptions which pre-exist in the EU system do not need to have their origin in the Union and wait for Europeanization. The models for modernization of the public sector, where the focus is on the use of market mechanisms and competition (OECD 2005), can be mentioned here as an example. Conceptions of this type can be traced back to ‘New Public Management’ principles and theories with Anglo-American origin and administrative traditions (Veggeland 2004). The exchange of knowledge and experience can occur when national administrative actors overlook the principle that ‘power is knowledge’ – and power defines the basic value. This means that a powerful principal is often willingly imitated by the agents because the agents lack alternative knowledge (Flyvbjerg 1991), owing to the fact that ‘knowledge is (still) power’. This occurs if and when ‘knowledge as counter-power’ does not exist and the non-reflected agent puts standard models for institutional organization and development into use. It is a challenge for municipal and regional levels to acquire knowledge and institutional capacity as counter-power to develop

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innovative administration because at these levels one is exposed to a double standardization pressure from both the EU and national levels (Pierre 2001).

1.7

REREGULATION AND EUROPEANIZATION

The national administrative effects of EU legislation vary from one political area to another. Let us take a look at the area where Europeanization is most evident and articulated. The EU’s politics is generally most prominent as regulatory politics,13 and not as distribution politics. The scarcely comprehensive and direct distribution and redistribution politics in the EU is linked to a relatively limited budget14 (Woolcock 1996; Veggeland 1999, 2003). In many ways, the EU’s regulatory politics is different from what we know as traditional national regulatory politics in a mixed economy or what is referred to as the ‘old regulatory politics’. To a large degree, this traditional regulatory politics is occupied with market regulations by defining the conditions for companies to achieve access to the market and to operate in the market under specified competitive conditions. It is especially important to prevent the creation of monopolies and oligopolies in the market (Austvik 2002). The new regulatory politics is a renewal politics with ‘reregulation’ as an institutional instrument, which occurs in the coolant of deregulation (Majone 1997). Reregulation is organized to prevent negative externalities which arise as a result of competition to market activities, in other words unintended negative conditions on society and nature. However, reregulation also attempts to achieve political goals by new regulation, for example in welfare policy, environmental policy, regional policy, labor market policy, food protection policy, etc. New administration and rules are politically established and result in new institutional path dependence which gives desired positive feedbacks. We may say that deregulation creates market-driven innovation and renewal targeting economic competitiveness, while reregulation corrects the market and represents policy-driven innovation in the public administration of the regulatory state. Reregulation means that earlier regulations are replaced or that a new administrative area is placed under an alternative regulatory scheme (Scharpf 1999). The regulatory state searches through reregulation to create satisfactory solutions and positive feedbacks. Some examples of these administrative areas for extensive new reregulation in the EU are within environmental protection, the working environment, health and social services, consumer protection, food safety, anti-discrimination, veterinary

Path dependence and social models

19

practices and conditions,15 sustainable regional politics, and so on. (See for example Morgan (2004) on the Welsh reregulation linked to the directive of public procurement. Only local bidding rounds and contractors were performed Political argument for sustainable local and regional development was used, and the latter as a premise to promote and increase competitiveness in the EU area in general (Veggeland 2005: 125).) The direct effect of the EU’s deregulation politics on national administration is that agreements and sets of rules which prevent free movement in the EU’s single market are not legal. For example, a European regulation which liberalizes the working market through the principle of free movement of labor has been imposed on the EU member countries and the EEA countries. The service market is liberalized with a ban against discrimination of foreign job applicants and business participants of the bidding rounds when performing outsourcing of public service provisions.16 Road transport is liberalized and there is a ban against refusing foreign transport carriers to perform their services in a home market. At the same time, there is no demand for a national administrative reform in these areas to correct negative effects that may be the result of the market liberalization. In this respect, foreign labor forces, service producers and transport carriers have to submit to national laws and national administration for the respective areas of society (Woolcock 1996). This often creates deep-seated crossborder extended conflicts, with the EU’s Constitution Treaty and the Bolkesstein ‘service directive’ as well-known examples.17 Reregulation presumes political objectives and therewith an innovative administration which can develop ‘satisfactory’ solutions. In the EU’s legislation, there are concrete decisions and demands for reforming and restructuring sets of rules and administration based on the objectives which the directives indicate. Member countries need to bring their administrations within these areas into ‘satisfactory’ and legal accordance with the ‘European model’ which is implicitly evident in the legislation. Varying national and local regulatory traditions and basic values can freely be respected if they satisfy the objectives. Therefore, the term ‘reregulation’ is used for this type of regulation. The type which the ‘European model’ has becomes a question of national interpretation (Veggeland 2006). There is also pressure from the EU to fulfill certain supranational objectives in other areas than the legislation for competition indicates. This can be, for example, to fulfill minimum values, procedures and threshold values (such as relating to environmental politics, food safety and so forth). This may go against national administrative traditions and their administrative paths. The national states are being challenged (Olsen 1995; Ferrera 2000).

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1.8

EUROPEAN ADMINISTRATIVE TRADITIONS

Divergence theories relating to Europeanization are concerned with infringements between national administrative traditions and path dependence which the EU generates. They point out that administrative development and organization vary largely between EU member countries, in spite of supranational legislation and a legality pressure for harmonizing and adapting public administration to a vaguely defined European model. They are searching for an explanation about how divergence develops within regulatory regimes such as the EU (Knill 2001; van Gerven 2005). There are very different objectives behind the decision to intervene economically in the society by regulations or by financial means. It responds to a wide variety of priorities: ● ● ● ● ● ●

providing public goods (security, administration, legislation, etc.); finding the proper balance for services provided by the state (education, health, etc.); providing goods and services as in-house provisions through the public sector or by outsourcing; promoting markets that will lead to competitiveness and economic growth; levels of income distribution and social transfers; environmental issues, etc.

There are different administrative traditions in Europe when governments are dealing with and giving priorities to the objectives. A rough division goes between a Continental state-centered public administration and rule-controlled bureaucracy which characterize central member countries such as Germany and France, and Anglo-Saxon marketcentered, regulatory state and result-managed administrations represented by the United Kingdom as the forefront country in Europe (Knill 2001: 59–117). Different understandings and administrative traditions by the states result in various adaptations to the European model, with significant effects on how the public sector is organized (Veggeland 2004). In the European integration process, these traditions create conflicts. This occurs because it is difficult to reach consensus in important questions between member countries,18 and because innovative administration by national interpretation and implementation of regulations creates divergence. Divergence goes hand in hand with convergence in the public sector as defined by Krasner (1983). This is observed empirically by the different formulations of the national organizational solutions and institutional arrangements.

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At all levels, alternative choices occur under the umbrella of different administrative traditions based on different paths of ethical principles, understanding and conditions, and are dependent upon the political scope of action. Let us examine these traditions more closely. It is common to make a division, between ‘negative’ and ‘positive’ integration, in economic theory. The terms are in no way meant to represent anything normative, nor do they refer to economic processes as such. They refer to public policy which aims to develop the economic market area in order to expand existing national borders or, in other words, to create markets with deregulation and political aims in order to later correct markets with reregulation (Tinbergen 1965; Scharpf 1999: 45). The development of the EU’s inner market is characterized by both negative and positive integration, as is the expansion of this market to the EEA area. The differentiation between negative and positive integration is not completely synonymous with ‘creating a market with deregulation’ and ‘correcting the market with reregulation’. It can be assumed that negative integration actions based on deregulation can be organized to create a market and to arrange a foundation for innovation and renewal through ‘creative destruction’ in Schumpeterian significance (Veggeland 1998). However, positive integration actions based on reregulation can be organized either to create market arrangement or to correct a market by public innovation and renewal. A market is created when, for example, actions are established to harmonize technical products standards or specifications of demands for hygiene in production processes to eliminate non-economic barriers to trade. Reregulation through innovative administration corrects the market by dealing with process-orientated regulation and administration organized to improve for example hygienic conditions, working environments and social safety, sustainability and/or pollution control. Political Europe and the EU mark the distinction between creating and correcting the market in European integration. There is an ideological front line for conflict between those who are not supporters of public interventions (supporters of the market’s ‘invisible hand’ and new liberalism) and those who are supporters of state intervention (the supporters of the economist J.M. Keynes’s theories about an active state, socialists and social democrats) (Friedman 1987). This front line becomes effective in the EU’s integration approach as an internal conflict anchored in different national administrative traditions regarding views on the state’s function (Knill 2001: 61–84). An Anglo-Saxon public administration tradition exists with an understanding of the state’s power as primarily an equal part in relation to other societal actors and a protector of and organizer for market actors. Public

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administration should not involve itself actively in actors’ dispositions, regardless of whether these actors are from the private or the public sector (Knill 1999; Veggeland 2005). Expressed in a metaphor, public administration shall ‘steer without rowing’. (In Great Britain, the term ‘the state’ is not used. One does not say ‘the British state’, but rather ‘the British government’.) A Continental public administration tradition also exists, with strong focus on the state power as the superior authority and protector of other societal actors. In this tradition, the state intervenes institutionally and financially and involves itself directly and actively in steering society, based on a conventional foundation, by showing a special responsibility to ensure citizens’ rights and services which have a general significance. A basis for this is the judicial state’s principles (German Rechtstaat) (Schmitter 2000). For many market liberalists, negative integration is the most significant form of European integration in the same manner as deregulation. Positive integration is only acceptable to the degree that it serves the purpose of creating a market or formulating and implementing statutory provisions which prevent competitive twists in the market. On the contrary, from an interventionist perspective, negative integration becomes evaluated problematically if not succeeded by the establishment of public administrative mechanisms of control and appropriate reregulation policies. The purpose is to correct the market with reregulation as a steering instrument and to develop positive integration with administration and an administrative form (Scharpf 1999). Up to now, the interventionists and the Continental administrative tradition have been strong, owing to the strong position the Continental states such as Germany and France had previously. In the 1990s, the balance in the EU, as in the OECD area in general, became displaced by the Anglo-Saxon tradition, with increased emphasis on neo-liberalism, New Public Management (NPM), and the use of market mechanisms in the service sectors within the public sector. This creates path dependence which breaks down other administrative traditions and where innovative administration needs to find its scope of action (OECD 2002). How can this take place? We will look more closely in a comparative perspective at a case of the market-type mechanism of outsourcing related to the EU directive on public procurement in Chapter 3.

1.9

PATH DEPENDENCE

‘Path dependence’ has become a popular term, but often lacks a clear meaning when it comes to institutional developments. I support Paul Pierson (2004: 10) that the most simple definition of the term is that path

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dependence is ‘the dynamics of self-reinforcing or positive feedback processes in a political system’. The definition refers to social processes that exhibit positive feedback and thus generate branching institutional patterns of historical development. Below is a classical game illustration of path dependence, which relates to mathematical probability calculations19 and highlights also my approach to innovative administration and the regulatory government’s introduction to path dependence. In the game, we have a container which holds one ball and one red ball. In the game, you choose one of these balls and place it together with a ball of the same colour. Let us say that the first one you select is blue. The next time you take one there are now two blue and one red, and the odds of what you select the third time are two to one. Again a blue one is selected and the odds of selecting a blue one next time are three to one, and the odds continue in this path. Is the tendency that the blue balls are selected in increasing majority? Path dependence increases the likeliness that the blue ball is selected the next time. Path dependence develops over time as a selfstrengthening process. We also observe by the illustration that for development of the selfstrengthened blue – or red – ball path dependence the early random characteristics are very important. When the blue balls were selected, path dependence was established. In other words, it was established in relation to an alternative path dependence linked to the red balls. Later in the game, similar characteristics will not have the same effect on the further development of the path dependence of the blue or red direction. Late in the game, let us say after carrying out 100 selections, the simple selection will only have a marginal effect for the outcome of the winning path dependence in the game. Gradually increasing possibilities for victory display themselves as feedback. What Are the Consequences? Scholars agree that in every political system institutions do matter, but they often disagree on how institutions matter and path dependence works. In other words, they disagree on which types of path-dependent social consequences may come out of different processes and institutional choices (March and Olsen 1989). Here is an example. It is a well-known belief that the intention of the Western European governments and architects of the European Communities (EC) in the 1950s may have been to rescue the nation-state (Millward 2000). During this postwar era followed by the era of the ‘cold war’, it was an important rational choice of the actual governments to secure and consolidate the young

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national democratic states of Continental Europe. It was made through intergovernmental cooperation and regulations in order to protect and stabilize the nation/state against internal and external threats. In general, this rational choice belief belongs to the theory of intergovernmentalism which acknowledges the member states as the key actors in the process of European integration from the establishment of the European Coal and Steel Community (ECSC) at the start, to the decision on the Single European Act (SEA) in 1987 and European Monetary Union (EMU), and the introduction of the euro in 2002 (Moravcsik 1993; Veggeland 2003; Urwin 2004). Discussions on the framework of path dependence have brought up the problem of unintended consequences in the European integration process. Scholars argue that the immediate concern of the EC architects led them into acts of path-dependent institutional design that ultimately eroded the capacity of national governments to control the governance of their economies (Rosamond 2003). The implications for research of unintended consequence examples, and the theory of neo-functionalism introducing the prominence of non-state actors and ‘spill-over’ principles are quite interesting (Haas 1958). Students of the EU are given the opportunity to think about how to identify policy pathways and how particular EU-level institutions emerge over time as unexpected results of particular decision making. Rational acts of the past influence rational actions of the future. Multiple Outcomes, but with Removed Options Self-reinforcing processes and positive feedbacks generate multiple possible outcomes depending on the particular sequence and time in which events unfold. However, when self-reinforcing processes occur at a particular time, certain institutional options are essentially removed from the list of political possibilities. Furthermore, especially late in the process, the occurrence of alternative institutional options becomes more and more unlikely as our red and blue ball game illustrates. When given an institutional building process, each step in a particular self-reinforcing direction makes it more difficult to reverse course for several reasons (Pierson 2004). Reversal Costs The reversal of a path-dependent institutional direction will normally disturb established internal norms and values of the actors and generate resistance to a change in the path. When the change demands renewal of the actors’ special competence, resistance to the reform will increase and affect efficiency, and the costs to re-educate and/or eventually replace

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Path dependence and social models

employees may become increasingly higher. Institutions in social systems are interconnected and dependent upon each other. The pathway change of an institution path is often biased by external pressure from related institutions and from negative feedbacks and inefficiency as a systematic outcome. However, the pathway change of the actual institution will also affect other institutions of the social system and therewith result in higher accumulated macroeconomic transformation costs. In other words, the transaction costs accumulated by switching institutions to some plausible alternative path course arise especially at the point of implementation reforms, and initially become a barrier to reforms (Scharpf 1997; Veggeland 2004). Threshold, Time and Transaction Costs Path dependence develops over time and in the network activities of social systems. According to Paul Pierson (2004: 83–7), there is empirical evidence showing that systematic transaction costs do not increase or decrease as a linear function, but rather as threshold effects in time. He states that, in many cases, ‘Incremental or cumulative forces may not generate incremental changes in outcomes of interest. Instead, these processes have a modest or negligible impact until they reach some critical level which triggers major changes’ (2004: 83). The statement may be illustrated as shown in Figure 1.1. In Figure 1.1, a new institution is established at time T, and fast growing transaction costs mark the launching period. Structural causes, let’s say the creation of new cooperative and networking institutions, are then introduced in the periods T1, T2 and T3. According to Pierson, this moves the Transaction costs

Critical level Thresholds

T

T1

T2

T3

T4

Time

Figure 1.1 A threshold model of path-dependent development with structural transaction costs allocated in time

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Paths of public innovation in the global age

pressure off the status quo to new and higher transaction cost levels – very close to the threshold level for major institutional change. In the period of T4, the level is exceeded and the self-reinforcement of the institution ceases, negative feedbacks take over and the major institutional change occurs. More concrete related examples of this threshold phenomenon are to be found in Beetham et al. 2002. A summarization of the principles related to path dependence in social systems is: Principle 1: Institutions, once created, eliminate options of actions and generate path-dependent and self-reinforcing dynamics with multiple social effects. Principle 2: Institutions are based on internal norms, values and procedures which generate path dependence in the framework of neo-institutional theory. Path dependence also arises from institutional cooperation and networking activities in social systems as external pressure. Exchange of specialized competence and skills creates such a pressure. Increasing transaction costs are a barrier to institutional reform because they limit available resources. Principle 3: Designers of institutions act not only instrumentally, but ideologically as well. In regulatory states or under regulatory regimes like the EU, designers will act in accordance with adopted regulations and models or by learning and copying acts. When reregulations replace regulations in such states in the framework of major path-dependent institutional changes, this is said to be an example of path-dependent innovations. Principle 4: Institutional designers are shown to have short-term perspectives when forgetting long-term effects of self-reinforcing mechanisms such as structural threshold pressure and arising transaction costs. Principle 5: Institutional effects may be unanticipated. Unanticipated consequences are likely to be widespread, even if the designers of the institutions do have singular objectives, do act instrumentally and do focus on the long-term situation (Pierson 2004: 115). Principle 6: Path-dependent development and institutional self-reinforcing dynamics develop over time by thresholds due to structural causes such as new institutions and/or regulations. The course pushes the transaction costs upwards in the governance system, resulting in a critical cost level. A major institutional change is expected beyond this level.

1.10

THEORETICAL APPROACH

Since I shall analyse innovative administration within the framework of an expanding and narrowly transparent regulatory regime, which is the case

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for the EU, my foundation is that rational choice theories are scarcely applicable in this context. I reject that innovative administration can be perceived as ‘policy analysis’ such as Friedman (1987) defines in his book Planning in the Public Domain. Rational choice and policy analysis approaches require actors with a full overview of the reasons and effects of plan initiatives and administrative reform, consequently a conception about ‘the economic man’ (Amdam and Veggeland 1998). This approach became first and foremost developed and linked to the analysis of the Weber bureaucracy which is the plan government’s administration and the interventionist governmental reform. This approach had its limitations in such analysis and to a larger degree in the analysis of the regulatory government. I am not able to find a reason to choose a theoretical approach which builds on a condition about innovative administration as a modern administration whose main or only goal is to optimize effectiveness and benefit by using competition and market type mechanisms in the public sector. New Public Management theories have this approach when they analyse innovation in the public sector (Veggeland 2004). The approach has also been in wide use in the OECD’s recommendations to their member countries since the 1980s which were about ‘modernizing government and the way forward’ (OECD 2005). In this book, I will apply a new institutional theory and enable elements from it to represent my analytical instruments. ●

●

●

●

I see innovative administration as ‘satisfactory institutional transformation’ of adopted EU regulations in the wake of Europeanization processes, but within the scope of administrative paths that exist at national and local levels. I define ‘satisfactory transformation’ as institutional change in the form of reinterpretation or modification of the EU’s regulatory acts imposed on current administrative areas. The institutional and regulatory change occurs within the framework of path dependence which the EU regime generates, based on and represented by a supranational judicial authority. Path dependence is maintained and strengthened by positive feedbacks, as defined and described in this chapter. The administrative related satisfactory transformation does not occur randomly, but rather within the national administrative traditions which generate counteracting path dependence (Knill 2001).

I refer to J. March and J.P. Olsen’s (1989) ‘logic of appropriateness’ in my understanding of the form the innovative administration acquires when it

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Paths of public innovation in the global age

is submissive to an international regulatory regime. This ‘logic’ is rather simply described as follows: ‘In this view [logic of appropriateness], actors confronting a given situation do not consult a fixed set of preferences and calculate their actions in order to maximize their utility, but look to socially constructed roles and institutional rules and ask what sort of behavior is appropriate for the situation’ (Pollack 2005: 23). Public administration as an actor becomes confronted with the EU’s regulatory authority and judicial control towards current societal areas, by supranational surveillance when regulations are implemented. This means that national administration sometimes must implement EU regulations which are in accordance with their politics. For others, this creates conflict and goes against current tradition and administrative procedure (Wallace 2005). One thinks that this creates a national policy and administration, which is mentioned as ‘politics for blame avoidance’ (Weaver 1986); one accepts fully the EU regulations which arise. With criticism, the EU is referred to as the cause and responsible source, and is surprised when its politics is criticized. In this way, maximum political benefits can be a result of using the EU as a scapegoat. This is an element in the convergence theories about Europeanization processes and implies the expectations regarding full adaptation of public administration to the EU’s regulatory regime. Instead of developing a new and innovative administration which is anchored in a deliberative national value debate, the administration and implementation become a closed technocratic question of legality to avoid criticism and political responsibility. Since the 1980s, modernization and renewal of public administration have been synonymous with the implementation of the NPM principle and follow-up of the OECD recommendations (refer for example to Cassese 2003; Olsen 2004). In my understanding and contextual definition of innovative administration, the breaking process needs to be brought in. Breaking processes occur between historical and social administrative traditions and the institutional path dependence these have developed, and from the path dependence EU institutions and Europeanization processes create (Rosamond 2000). There is no clear institutional form for administration and implementation which results from this. Rather, an administration results which carries a ‘satisfactory’ institutional adaptation to EU regimes of institutional path dependence and which continues as long as it is strengthened with positive feedback. In my approach to innovative administration, I perceive the choice of EU membership or EEA membership as the first decisive selection in the game of path dependence. In this connection, I refer to P. Pierson’s (2004) analysis of institutional path dependence in public administration. Pierson

Path dependence and social models

29

shows how positive feedbacks are a condition for the path dependence selfreinforcing extension, and shows that the time dimension plays a role and makes it more difficult to choose an alternative path. He states that: ‘Each step along a particular path produces consequences that increase the relative attractiveness of the path (positive feedbacks) for the next round. As such effects begin to accumulate; they generate a powerful cycle of selfreinforcing activity’ (2004: 18). Further, he states ‘Once a particular path is established that self-reinforcing processes are prone to consolidation or institutionalization. Critical junctures generate persistent paths of political development’ (2004: 51). My understanding is that innovative administration in the regulatory government does not occur spontaneously or by coincidence. Rather, it occurs in relation to the path dependence which the EU regime establishes, and in relation to the path which the positive feedbacks show. The EU generates institutional path dependence through the large number of judicial acts the Union introduces, in Norway through the European Economic Area Agreement (EEA). These also create a new scope of action in relation to a national administration, because critical junctures arise. It is this scope of action through regulation and change which enables innovative administration to benefit from satisfactory adaptation. The harmonization pressure is maintained, which the EU’s/ESA’s surveillance authority oversees. The national innovative administration is maintained by the legitimacy from positive feedbacks (Pierson 2004). In a comparative analysis of administrative outsourcing, the selected theoretical approaches and assumptions will be applied and empirically examined.

NOTES 1.

2.

In the early 1990s I conducted one of the European Impact Studies commissioned by the European Commission: ‘The Nordic countries – what impact on planning and development in the Union?’ (Veggeland 1995a). In a way this book represents a follow-up study in a renewed and actualized perspective. The Nordic countries encompass the five nation states of Finland, Sweden, Norway, Denmark and Iceland and the four nations with the form of home rule which are Greenland, the Aaland Islands, the Faeroe Islands and the Lapp territory. For historical reasons, the eastern Nordic countries of Sweden and Finland differ in many respects to the western Nordic countries of Denmark, Norway and Iceland. Sweden and Denmark have, through history, been the ‘superpowers’ of the Nordic region, with the other countries as only adhered periphery nations of the former. Actually, Finland was, until 1809, a fully integrated part of the Swedish empire and then became a great dukedom under Russia, and at last an independent nation state in 1919. Norway was part of the Danish monarchy from 1380 until 1814, then became part of a personal union with Sweden until 1905, and thereafter achieved full national sovereignty. Iceland was also part of the Danish monarchy until 1944 (but only in personal union with Denmark from 1918), and

30

3. 4. 5. 6. 7. 8. 9. 10.

11. 12. 13. 14. 15. 16.

17. 18. 19.

Paths of public innovation in the global age achieved its national independence and sovereignty thereafter. Sometimes Sweden, Norway and Denmark have been identified as the proper Scandinavia because of their related languages. But often ‘Scandinavian’ and ‘Nordic’ are used as synonymous notions. This is my interpretation of Derek W. Urwin’s contribution to history. In this book, I often use ‘Scandinavian’ and ‘Nordic’ as synonymous terms. I do, however, use the term ‘Scandinavian welfare state model’ consistently. Norway as an EEA country participating in the Single Market is therefore fully affected by the Lisbon strategy. The EU’s budget for intervention use is scarcely more than 1 percent (1.27 percent) of the member countries’ joint GNP. See section 1.5 below for a more explicit definition of the term ‘Europeanization’. Currently, a total of 28 states, which in 2007 will be increased to 30 states. The administration’s implementation of the EU’s directives does not need to follow a ‘rational choice’ or a ‘coercion’ logic, but rather a logic and understanding linked to the attainment of ‘appropriateness’ (March and Olsen 1989). Sustainability is often linked to the sustainability of the physical environment and this in itself is an important policy issue, but this concept has expanded its original meaning and now implies policy coherence as well. It means to bring together the goals of economic growth, social cohesion and protection of the environment and merge them into one approach. Norway, Iceland and Liechtenstein. This also concerns Norway as a member of the EEA. The EU is called a ‘regulatory authority’ (Majone 1997). A fraction larger than the Norwegian state budget in 2005, or a fraction more than 1 percent (1.27 percent) of the EU countries’ joint BNP. The veterinary agreement as part of the EEA agreement is known to Norwegian administration as a different type of reregulation in these areas. The so-called ‘Bolkestein’ (service) directive has created debate, and a compromise in 2006 was agreed in the EU Parliament regarding free movement of all commercial services. But protection of labor with a demand for the same rights for social safety and wage rates independently of country of origin was also agreed. The directives are still causing debate but became resolved in fall 2006. The service directive creates free movement of services in the inner market. Conflicts have arisen due to different national administration of services, interpretation of public services, social welfare services and social security schemes. For example, disagreement in 2004/2005 about protective or competitive exposure to ‘services of general significance’ and about the service directive regarding the laborers’ welfare rights in ‘foreign’ employer countries. P. Pierson (2004) also uses this game illustration in his contextual connection.

2. The Scandinavian welfare state model 2.1

EUROPEAN SOCIAL MODELS

‘Are higher taxes and strong social “safety nets” antagonistic to prosperous market economy?’, Jeffrey D. Sachs asks in the November 2006 edition of Scientific American. He refers to the Austrian-born free-market economist Friedrich August von Hayek, who in the 1940s suggested that high taxation would be a ‘road to serfdom’, a threat to freedom itself, and comes to the conclusion: ‘Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness’ (Sachs 2006). The reference for his conclusion is the Scandinavian welfare states. In general, the different administrative models and traditions of the European countries are, by and large, characterized by their social economies. This is demonstrated by their strong emphasis on balancing pure economic achievements with other goals, such as welfare, employment, social cohesion, leisure and environmental sustainability. This implies that Europe is characterized as having a larger public sector than other parts of the world (OECD statistics 2005). It is equally true that there are many European social sub-models. How many depends on the level of analysis, from local to national and international levels. In other words, a coherent picture can only be drawn if the analysis takes place at a reasonably high level of territorial aggregation (Knill 2001). The purpose of this study is to group countries into appropriate sub-models in such a way as to derive useful explanations of how paths and administrative traditions perform innovations in regulatory regimes. As introduced in Chapter 1, going beyond the macro level of the European economic and social model, we can distinguish the three submodels as Nordic, Anglo-Saxon and Continental types (EPC 2005). A Mediterranean and a new Eastern European model can also be considered. Of course, a group of countries which have recently emerged from more than 50 years of Communist governance will also have common characteristics. However, it is very likely that these countries will soon adopt some of the other European models. This process is probably already under way. 31

32

Paths of public innovation in the global age

The Southern model may be identifiable, but is not so useful for this analysis. Most of its characteristics can be found in (and probably come from) the Continental model. Even the traditional historical West Nordic model (the core state Denmark, and Norway and Iceland) contains characteristics that differ from those of the historical East Nordic traditions (the core state Sweden, and Finland), in spite of their belonging to the common Scandinavian welfare state model. They are organized along different lines. The West Nordic administrative tradition implies significant ministerial administration (the so-called ‘ministerial model’) Each minister is responsible for all policies and decisions made by administrations under him, including directorates. This ministerial model tends to create inertia of the system concerning administrative reform because of ‘personal’ constitutional responsibility. Janerik Gidlund writes that the reason why the Danish ministerial system has taken this form is to be found far back in history, namely in the days of Fredrik III and the establishment of absolutism in 1660–61. At the same time as the king seized power, a centralization of all administration and a major expansion of the central administration took place (Gidlund 2000: 258). The tradition creates path dependence biasing delay when it comes to innovative public policy action compared to the East Nordic administrative tradition. The East Nordic tradition is characterized by division between relatively small-scale ministries, and autonomous civil service departments and independent ‘boards/agencies’. The authorities are collectively subordinated to the government and not to any one politically responsible cabinet member. The Swedish administrative form has its roots in the administrative regulations of Axel Oxenstierna concerning the so-called ‘status of the colleges’ in the governmental form of 1634. The intention was to create an effective administration which could manage the affairs of the empire of Greater Sweden (Gidlund 2000: 259). It has been suggested that the independent governmental working bodies of the East Nordic tradition on the one hand inspired the basic New Public Management (NPM) reforms1 found in the Anglo-American tradition, increasingly expanding since the 1970s (Pedersen 2006). More likely the East Nordic model adopted NPM reforms after inspiration from the Anglo-Saxon liberalism of the 1980s (OECD 2002). It is worth noting that a comprehensive amount of convergence between administrative and social models in Scandinavia has occurred. Public administration has gradually been transformed and given increased autonomy of the Anglo-Saxon type in Western Scandinavia, and decreased autonomy by regulatory measures in Scandinavia (Gidlund 2000: 259). There are some important differences and similarities between the gross Anglo-Saxon, Nordic and Continental models.

The Scandinavian welfare state model

33

Firstly, the Anglo-Saxon and the Nordic models have become quite similar in terms of the nature of relations between governments and markets: for example in the use of market-type mechanisms to provide government services (OECD 2005: 133). However, they are very different when it comes to the size of government and state-centered planning and distributive policies. Secondly, the Nordic and the Continental models are more alike in terms of the size of the public sector, job security policies and trade union relations, but they are very different in terms of government, such as labor market relations and employment regulations (EPC 2005). The Nordic model therefore emerges as a blend of the two larger European models, with the Anglo-Saxon model’s emphasis on economic liberalism and the Continental model’s emphasis on a large public sector and close relations to the labor market organizations (Jorgensen Overgaard and Vagnby 2005). These positions can be demonstrated in a number of ways. One is to look at the size of the public sector measured as general government total outlays as a percentage of the nominal GDP and as total taxes as a percentage of the GDP (Table 2.1). This indicates the degree to which governments and countries’ populations are willing to spend money on collective rather than individual issues in society. Welfare and social security issues are part of the collective approach. Table 2.1 shows that this willingness is lowest in the Anglo-Saxon tradition, and highest in the Nordic tradition but with the Continental tradition near by. This is not so strange when it is considered that the historical roots and framework of the Scandinavian welfare state model have their origin in the Prussian collective thinking of the late 19th century and the performance of the Weberian neutral bureaucracy. Attitudes to markets can also be measured in different ways. The OECD carried out a study in early 2005 which analysed a number of relevant issues, including an index for product market regulation. Measured by this index, the three main models and traditions have the results shown in Table 2.1, where the Nordic tradition appears as a blended model of the two other models. The product market regulation indexes in Table 2.1 indicate that the Anglo-Saxon administrative tradition and policy targets domestic deregulation of the product market and simplification of rules in the framework of the EU regulatory regime, while domestic reregulation for the purpose of correcting markets is more common and increases the index in the Continental tradition. The Nordic model results as a blend of the two other models and their traditions. Since the 1980s, this model has been transformed in the direction of more market liberalism in certain sectors. The state-centered path of the model still tends to perform reregulations in order to correct the market and for collective and redistributive purposes. As for the two other models and their traditions, the regulatory

34

Table 2.1

Paths of public innovation in the global age

European models and tradition indicators

Government outlays as percentage of nominal GDP Taxes as percentage of GDP (2003) Product market regulation (2003) Unemployment rates (2004)

Anglo-Saxon*

Nordic

Continental**

43–45

48–58

47–54

31–37 0.8–0.85 4.4–4.7

45–51 1.0–1.4 5.4–8.8

42–46 1.5–1.6 9.5–9.7

Notes: * Represented by Ireland and the UK. ** Represented by France and Germany. Source: OECD statistics (2005).

performance has to be achieved innovatively in the framework of the EU/EEA regime. In regard to the comparison of the unemployment rate figures in Table 2.1, it is important to underline that labor market flexibility is defined and achieved in very different ways in the models. The Nordic and Continental definitions should be distinguished from the Anglo-Saxon definition. A flexible labor market could mean that employers and workers agree together to vary working conditions and working hours in order to meet the needs of the business, as well as to meet the social and personal needs of the workers. However, in the Anglo-Saxon tradition it usually means flexibility for employers, job insecurity, individualized wage payment, lowpaid wages and other poor working conditions for large groups of employees. Workers can easily be laid off from their jobs. In this tradition, the definition of flexibility stresses elements such as the possibility of wage differentiation based on performance-related pay and task measurement, part-time workplaces, contract-based appointments and job insecurity, non-tariffs and low-paid social groups, health insurance linked to the employers and a passive labor market policy. As a result, there has been increasing employment since the 1980s and low official unemployment rates as indicated in Table 2.1. At the same time, there has also been an increase in inequality (Pierson 2001a). Employed workers tend to cling to their workplace despite bad working conditions because their security is linked to their employer (Iversen 2005). Labor market flexibility is in the Anglo-Saxon framework linked to job insecurity, poor working conditions, high employment and low mobility. The Continental and Nordic definition of labor market flexibility weighs varying elements. Of course, these traditions deviate in certain ways. For example, the trade unions have a stronger position in the traditional

The Scandinavian welfare state model

35

Continental model than in the Nordic model, and more formal and rigid rules generally influence the procedures of appointments and working conditions in the former model. Universal welfare and social security arrangements are a special characteristic of the Nordic model (Arter 1999; Einhorn and Logue 2003). In both of these models and traditions and in their definition of labor market flexibility we find, as in the Anglo-Saxon model and since the 1980s, the elements of wage differentiation by linking wages to the result of work task measurements and low-paid part-time work less essential. In contrast, tariffs and equal access to health and social insurance, job security and other work conditions are stressed in their definition. This makes the models comparable. According to Table 2.1, the Nordic model is doing better than the Continental model concerning employment. What is said to be so important and provide the Nordic model as an alternative ‘in the middle’ governance according to Table 2.1 on employment policy?2 In order to keep employment in high-wage areas like Western Europe, it is necessary to require flexibility in the workforce in terms of skills previously acquired, a willingness to continuously upgrade these skills and a readiness to leave jobs while upgrading skills (Iversen 2005). This could be seen as personal risk taking, but is really a strategy for job security. Interestingly enough, the Continental model, with its strong intervention by law and procedures on behalf of employee unions, does not seem to provide security of this kind. It does provide compensations to the unemployed, but it does not provide sufficient jobs. This model demonstrates serious imbalances and runs a very strong risk of financing problems in the long term with a persistent unemployment rate in excess of 10 percent in Continental European countries. Legitimacy is then lost in the EU struggle to develop a promising social model for Europe and an enlarged EU. One important feature of the ‘middle balanced’ Nordic labor market situation, as indicated in Table 2.1, is the flexibility of the active labor market policy and of employee unions combined with social security policy for the unemployed, i.e. what is known as ‘flexicurity’3 policy (EPC 2005). This policy helps explain why the Scandinavian welfare state model may be sustainable notwithstanding the high costs paid by taxpayers. The key to its success is that the employment service has been transformed from providing passive compensation for unemployment to providing services which help the unemployed develop their skills and actively search for jobs. This is probably a much better use of public money than paying 10 percent or more of the population for not working. The latter solution is a poor solution with regards to benefiting economic and welfare state sustainability (OECD 2005).

36

Paths of public innovation in the global age

The contemporary Nordic countries are clearly doing best in employing their workforce in a flexible way, and this is most likely due to three elements: 1. 2. 3.

the universal health and social insurance arrangements; the active labor market policy; and the transformation of earlier rigorous regulation of their labor markets to softer regulations with an innovative and satisfactory character.

In contrast, it is very difficult to change the workforce by for example altering the make-up of skills and thereby offering on the one hand flexibility for the employer and on the other personal security by upgrading in Continental Europe. This is, however, quite easy to obtain with the Nordic model. In the latter model, adaptation to a fast changing labor market through lifelong learning is generally accepted. Another social driving force of the Nordic model is that either changing a job or employer or being out of work because of upgrading personal skills does not mean one will lose health and social security rights. These rights are universal and are not dependent upon employment or which employer the workers are bound to (Iversen 2005). The modernized contemporary Nordic model represents an administrative innovation in a European setting. The innovation is linked to the creation of necessary flexibility in a fast changing and globalizing labor market within a framework of universal social security. We shall see that the innovation of flexicurity policy as an appropriate solution based on positive feedbacks has not arisen by accident, but rather as part of a pathdependent development linked to the Scandinavian welfare state model (Arter 1999).

2.2 THE ROOTS OF THE SCANDINAVIAN SOCIAL MODEL As a start, let us look briefly into the Scandinavian welfare state as a background for the above-mentioned flexicurity model. Despite varying degrees of differences, the Nordic countries do have a state-centered administrative model tradition in common, but decentralized by delegation for welfare and workfare in terms of health and social security, public services and an active labor market policy (Arter 1999; Veggeland 1998). In the Scandinavian countries church and state bureaucracies were fused under the mantle of the state government due to the Lutheran Reformation during the first half of the 16th century (Kuhnle 2000). The responsibility of the state came to embrace not only financial issues, but also human

The Scandinavian welfare state model

37

values, charity and morality as an inherent part of governance. Obviously, the solution was good from a public perspective. For the ‘market’ capacity of these rather poor remote states in the outermost and sparsely populated European periphery was not much of an alternative for offering social insurance and aid to the sick, the weak and the poor nor to building the economy at the time. The state–church–civil society partnership remained vital until almost the end of the 19th century, when the Continental Prussian welfare policy ideas quickly spread northwards and transformed the societies by developing a welfare state. Also, at this point in time, Nordic ‘civil society’ and voluntary non-governmental organizations had limited capability to manage social security development and welfare services. There is also another perspective and path that may be considered. Historically, the Nordic combination of relatively egalitarian pre-industrial structures and homogeneous and small populations in terms of language, region and culture had in some way its inherent advantages that led to beneficial welfare and workfare performance. A mass democracy was established resulting from structural advantages, with the central state and not the market in the distributive and steering position, which became politically conducive in a socially productive manner when social movements and development of the welfare state started about one hundred years ago (Einhorn and Logue 2003). The institutional outcome was the gradual founding of a comprehensive, tax-financed public sector (see Table 2.1) with universal welfare and social security policies as basic pillars. The policies were both interventionist and socially and regionally redistributive in their character, based on macroeconomic planning developed after the Second World War, and fully administered by governmental institutions (Amdam and Veggeland 1998). The legitimacy of the interventionist Scandinavian welfare state at the time was created partly by social democratic parties in governmental majority positions and partly by its foundation in macroeconomic theory which John Maynard Keynes developed in the work The General Theory of Employment, Interest and Money from 1935. The Scandinavian social democratic parties all had a collective and interventionist political platform with social equality, welfare and employment for all as the core goals. Keynes created the understanding of the necessity of an interventionist state. Despite being a liberal economist, he indirectly concluded an antilaissez-faire perspective in his theory (Arter 1999; Veggeland 1998). This perspective was derived from the demonstration of the use of government interventions in the market to avoid macroeconomic fluctuations and crises. By financial and institutional interventions of the state, aggregated demand in the society could be regulated. According to the theory,

38

Paths of public innovation in the global age

for example, it could be increased or diminished depending upon macroeconomic needs related to a balance and/or imbalance. From a theoretical point of view of ‘digging a hole’, Keynes famously said that this would have the same demand effect as anything else and therefore would be useful. Demand creation is neutral in the framework. In addition, macroeconomic planning is the tool used to put the demand and income side of the economy under control and thereby make it feasible to regulate forward balances between full employment and inflation through political initiatives and planning acts. The concept has sometimes been called the Keynesian revolution, i.e. a revolution because it was at the time a theoretical approach of innovation causing immense change in public sector politics and governance reform in the Western world states. Certainly, in the Scandinavian countries the Keynesian central interventionist principle was very much in line with the already established statecentered administrative path and welfare state model, which could be said to be a revitalization of an already established path. The revolutionary part of the concept was the strength of the new institutional tools that were introduced to build the new post-war welfare state. These ‘Keynesian’ tools, which are well known from most macroeconomic textbooks, were: ●

●

● ●

●

Political legitimacy: Economic grounds given for the importance of state interventions, high public expenses and social democratic antilaissez-faire policies. High public sector spending: Public spending as well as private spending for employment and economic growth – the mixed economy concept. Public planning at all administrative levels: Macroeconomic planning and sector planning. Sector neutrality: Theoretically, sector neutrality of government spending in the framework of the demand-side economy ruled. Public spending in the welfare sector expected similar demand effects as in the industrial sector. Infrastructure monopolies: Public monopoly in financing and administrative infrastructure sectors, from soft infrastructure such as welfare and social security services, education and labor market services to hard infrastructure such as telecommunications, road construction and postal services.

In the Scandinavian countries, the empirical fact is that the role of a strong and influencing state authority was seen to be most legitimate, perhaps more so than anywhere else in Europe (Kuhnle 2000; EPC 2005). It could be stated that the Scandinavian societies and their citizens have a

39

The Scandinavian welfare state model

very ‘state-friendly’ attitude. Actually, ‘state’ and ‘society’ are often used to express the same thing. The evolution of the Scandinavian welfare states has always been anchored (and still is) in such a holistic administrative tradition4 and collective identity approach and with relatively high public social expenditure in percentage of their GDP (Table 2.2). The figures in Table 2.2 related to social expenditure in Sweden and Denmark should especially be recognized with regard to their indicated size. Even 20 or more years ago, 20 to 30 percent of the labor force in the Scandinavian countries was employed in the public welfare service sector such as within social insurance, health, elderly care and education. These countries were clearly placed at the top of the Western world in terms of public welfare state employment (Kuhnle 2000). From a theoretical point of view, the introduction of the Keynesian welfare state concept in the Scandinavian countries in the immediate postwar period may very well be understood in the framework of rational choice theory, and the social democratic governments at the time may be understood as the rational political decision makers. In the framework of the interventionist state, appropriate and satisfactory policy choices were made (Østerud 1972). We may very well refer to public institutional innovations in the public sector (cf. Fagerberg et al. 2005) with the ideal of lowering social inequalities, insecurities and unemployment as the main political goal. The social consequences that resulted were increased public expense and greater power to employee unions. The concept of innovation in the public sector implies the successful introduction of ‘something new’, a novelty, which usually means a new institution or process, but may encompass just about any policy-made phenomenon, idea, concept or procedure (ibid. 2005). This policy-made innovation occurred differently as a concept and procedure in the Anglo-Saxon, Table 2.2

Public and private social expenditure, 2001 STATES Social expenditure as percentage of GDP

Gross public social expenditure Gross private social expenditure Net total social expenditure Source: Selected OECD data.

Denmark

Finland

Iceland

Norway Sweden

34.2

28.0

23.4

27.0

35.1

1.5

1.3

1.7

2.4

4.0

26.4

22.6

21.7

23.6

30.6

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Paths of public innovation in the global age

Continental and Nordic administrative traditions. In the Anglo-Saxon states with the path dependence of their market-centered model, the main focus was on the growing public expense issue. Accordingly, the responsibility of health and social insurance became an individual and employer responsibility in order to diminish public expense (Iversen 2005; Pierson 2001a). In the typical Western Continental states with path dependence linked to strong corporative traditions, with comprehensive formal relations between governments and their social partners such as employee unions, the rigidity of labor market procedures was left to continue as an integrated part of the new welfare state concept (EPC 2005). In contrast to the other Western European industrialized countries, which participated in the Keynesian revolution, the Scandinavian concept of welfare and social security arrangements became a deviation from the previously mentioned traditions through the performance of the universalism and the active labor market policy. Low inequality, low social security and full employment were the main political goals (Iversen 2005). From the Keynesian ‘General Theory’, the governments learned that the expensive welfare state concept could gradually be paid for even with budgeted deficits. It was most important to generate full employment, and thereby purchasing power, aggregated demand and the formation of increasing national economic values. The social democratic governments of Scandinavia made rational choices, but the welfare state innovation was also guided by the path dependence emanating from the traditional state-centered social system. This was namely that the responsibility of the state embraces not only economic issues, but also human values such as social security, equality and morality as an inherent part of public governance (Kuhnle 2000). In addition, the supremacy and legitimacy of the state are obviously anchored in a very deep-rooted popular attitude of a ‘state-friendly’ approach.

2.3 THE REBIRTH OF SCHUMPETERIANISM AND THE NEO-LIBERAL TRANSITION In the 1980s, there was an ideological occurrence: the saying ‘to be taken care of from the cradle to the grave’ as a welfare guarantee suddenly became for many politicians a negative slogan. In reality, this change in attitude reflected a brief fiscal problem. An international crisis caused a public expense issue (Cumes 1984). Let us again examine some historical events. One of the most significant achievements of the post-war era has been the compromise between the parallel developments of fast economic growth and varying degrees of social justice and equality within Western

The Scandinavian welfare state model

41

European welfare states. Yet the capacity for achieving this compromise has always been an issue of question and debate. Pressures for retrenchment, including claims for lower tax burdens, the consequences of low economic growth and global competition, have collided with counter-pressure for larger social outlays. An international economic recession made this compromise the hottest political issue in the whole OECD area (McCracken et al. 1977). In the 1970s, the international economy entered a crisis, known as the ‘stagflation’ crisis, which should be regarded as a fundamental causal factor in subsequent changes to the Scandinavian welfare state model (Veggeland 1998: 60–62). Consequently, the unemployment rate in the Western industrial nations rose to 10–15 percent and inflation reached dangerous levels. This represented a fundamental interruption in the stable economic development formed on the basis of the Keynesian principles of state intervention, which were (1) financial interventions, (2) direct control through laws and regulations, (3) institutional interventions, (4) sector interventions and (5) state-run enterprises (Østerud 1972: 30–31). It also led to a crisis in the principles of the planned welfare state conception based on full employment developed in the interventionist state form. Actually, the crisis was the appearance of the arising globalization and its challenges. It affected the institutions of the interventionist state and caused failure to govern because of overloaded government budgets and the parallel increase of unemployment and inflation rates (actually a theoretically defined impossible phenomenon in an interventionist demand-side economy). Confusion ruled in the Scandinavian welfare states as in the OECD area. It was difficult at the time to imagine that the balance in economic circulation would once again reach critical dimensions comparable to those of the inter-war Great Depression era. The English economist Andrew Shonfield, in a large work from 1969 called Modern Capitalism, argued from a Keynesian perspective and wrote the following: ‘The central thesis of this book is that there is no reason to suppose that the patterns of the past, which have been ingeniously unravelled by historians of trade cycles, will reassert themselves in the future’ (Shonfield 1969: 62). The crisis arrived, expressing itself as a stagflation crisis. Former methods of dealing with the situation were no longer effective or, to be more correct, they did not work as expected. Theories and models of public governance built from the Keynesian perspective failed. Measures introduced by governments to reduce rising unemployment only resulted in the level of inflation spiraling upwards. If demand was reduced, production fell, with increasing unemployment as a result. The confusion of national politicians and economists was understandable, as was expressed in OECD reports written under the pretense of providing reasonable advice to the governments. They were

42

Paths of public innovation in the global age

unable to decide which remedies would be most appropriate (McCracken et al. 1977). The OECD confusion the beginning of the stagflation crisis often reflected the position of standing between the main European administrative traditions. The Anglo-Saxon market-centered tradition represented a path in the direction of a goal of fighting inflation through the measure of reduced public consumerism and the creation of jobs in the private sector. The corporatist Continental and Nordic traditions and paths were in the direction of giving priority to a goal of fighting unemployment by allocating public money to saving business and other sectors in trouble. A new direction in the fight against stagflation was found in a revision of the theories of J.A. Schumpeter, the German-American economist. A wave of neo-Schumpeterianism was experienced. Schumpeter offered a microeconomic perspective on the driving forces in a market economy (Schumpeter 1939). His focus had been upon enterprises which created new combinations and entrepreneurs who created something new as a source of innovation. This went against Keynesian theory. Stable production and aggregate demand were central for Keynes, and the state was responsible for this stability. The critique against the Keynesian theory, based upon state intervention and a top-down welfare state conception, was from the standpoint of Schumpeterianism that in the long term the economy would lose growth potential resulting from a lack of renewal and necessary innovations. According to Schumpeter, the constant innovative activity of the market transforms a state of stagflation into one of growth. The stagflation occurs when new forms of market-effective technology, production and organization are created alongside the existing structures. In a growth phase, there is a type of harmony. After a period of time, intensified competition between old and new arises. Competition leads to instability in national economies resulting in the closing of old industries and increased unemployment. However, the new enterprises and economic sectors gradually assume a position of superiority as a result of being more competitive and by having the market mechanism on their side. Schumpeter used the term ‘creative destruction’ to describe how old structures were weakened and disappeared and how new ones broke through to reform the sphere of production and to once again allow growth to occupy a determinant position (Schumpeter 1974). Examples of this are the introduction of electricity and the petrol combustion motor at the turn of the century and their inclusion in the productive processes of the 1930s in the Western world after the Second World War. The crisis in the international economy occurred because of this change in the mode of production. Information technology and biotechnology were technologies introduced after the war, but it was not until the 1970s and 1980s that they made their breakthrough and were included among the means of

The Scandinavian welfare state model

43

production. The result of their adoption led to competitive advantages and also led to a new transition crisis in the international economy. The Schumpeterian perspective supported the development of deregulation, decentralization, the breakdown of public monopolies, privatization and an increased orientation towards the market. The OECD therefore made recommendations and the national governments replied with widereaching deregulation and the introduction of a set of market-type mechanisms in the public sector (OECD 2005). Institutional reforms were designed in the framework of the New Public Management (NPM) principles to make policy goal attainment more effective and the outputs exposed to measurements of scientific evaluation. Governance by regulations and management by objectives replaced bureaucratic control (Veggeland 1998). Great Britain, the United States and other Anglo-Saxon states gave priority to the goal of fighting inflation and keeping it at a low level in order to fight the stagflation crisis and to clear the ground for new economic growth. It was argued that growth was a necessity to revitalize the modern welfare state. In contrast to the Keynesian demand-side policy, the supplyside economic policy was established and was regulated monetarily to fight inflation. The Nordic governments followed the reshaped Anglo-Saxon model through institutional reforms of the 1980s and 1990s. First to do this were the countries of the East Nordic administrative tradition, Sweden in particular, and later on the West Nordic countries, Denmark, Norway and Iceland. The typical Continental states followed only incrementally and under the regulatory umbrella of the EU (OECD 2005). Three typical characteristics of the new way to modernize government were as follows: ●

●

●

Supply-side policy: Deregulation of markets and lowering the general level of taxes in order to liberalize the economy and increase investments in the private sector. Monetary policy: The main monetary means were the authorization of the national central bank to decide and control, independently of the government, the general steering level of the interest rate. Government service monopoly policy: The main means were organizational fragmentation of public service monopolies and the exposure of these to market competition and to make outsourcing a complementary mechanism to in-house provision of services.

In the wake of these policies, the total government outlays decreased and so did inflation. However, high unemployment rates continued to exist as a phenomenon in the Nordic countries as well as in most of the OECD countries, partly because the Schumpeterian ‘creative destruction’ policy

44

Paths of public innovation in the global age

made the closing down of old industries extensive. During the 1980s, the new economic policy generated recovery in most states. Table 2.3 indicates that, since 1986, the Anglo-Saxon states of the UK and Ireland have improved concerning employment. In economic terms, they have done better than most of their major Continental counterparts, and this has resulted in robust and stable job creation during the 1990s and consequently a low unemployment rate in 2004. However, as pointed out by scholars, in the Anglo-Saxon tradition, since the 1980s, the labor market flexibility based on the path of neo-liberalism has generated employment but many of the jobs created are low-paid jobs (Einhorn 2006). Some of the jobs are so low-paid that workers are unable to cover their living expenses and therefore need public security income support. They are still counted as employed in the official labor market statistics, but the income statistics reveal a systematic increase of social inequality. As Table 2.3 also shows, over the same period from 1986 to 2004 the Nordic countries also experienced stable job creation and low unemployment with Finland still suffering from the loss of huge markets when the Soviet Union collapsed. This will be elaborated on later. The development Table 2.3

Standardized unemployment rates1 Percentage of labor force

Anglo-Saxon states United Kingdom Ireland Continental states France Germany2 Nordic states Denmark Finland3 Norway Sweden Iceland

1986

1994

2004

11.2 16.8

9.2 14.3

4.6 4.5

9.8 6.5

11.7 8.3

9.7 9.6

5.0 6.7 2.0 2.7 –

7.7 16.8 6.0 9.4 5.3

5.4 8.9 4.4 6.4 3.1

Notes: 1 Data have been adjusted to ensure comparability over time and to conform with the guidelines of the International Labor Office. 2 Data prior to 1993 refer to West Germany. 3 1994 data influenced by the collapse of the Soviet Union in 1991. Source: OECD statistics (2005).

The Scandinavian welfare state model

45

of high employment is based on flexibility in the labor market. This flexibility has been created for different reasons in the social tradition as compared to the Anglo-Saxon. This flexibility has resulted from the universal welfare state path with its social security arrangements which make the changing of work and workplace low-risk for employees. The flexicurity concept does not generate systematic inequality (EPC 2005). Balancing policy choices with political realities is not easy. The AngloSaxon model especially remains an awkward topic for debate in the Continental context for several reasons, but mostly because of the latter’s dependence on the corporatist path, which makes the labor market too inflexible. For example, formal reasons often make it systematically difficult for employers to lay off employees or to replace and exchange employees in order to acquire needed new skills and qualifications. In contrast, the regulations for firing or replacing employees are formally almost non-existent for employers in the Anglo-Saxon countries. The situation for employers in the Nordic countries is somewhere in between. However, since the 1980s, the Nordic workfare policy has to some extent followed the path of neoliberalism. On the other hand, the social traditions of the Nordic and corporatist Continental models are not really positive to generating labor market flexibility by the creation of low-paid jobs. Although the Nordic and Continental countries are similar in being founded on a social state-centered model and having strong employee unions, the Anglo-Saxon neo-liberalism has penetrated the Nordic countries to a larger degree than Continental countries like France and Germany. First and foremost, this penetration is found as policies for the breakdown of public service monopolies, the exposure of public sector activities to market competition, and lastly the liberalization of the labor market (Veggeland 2004; EPC 2005). The universal welfare state and social security scheme continues. This welfare and social security scheme will be a topic considered in Chapter 4 in order to explain why the Scandinavian model has become an employment success in the wake of Nordic flexicurity.

2.4

INCOME PROTECTION

Social security is a wide concept which embraces access to social services, employment and unemployment protection as well as income protection. Income protection is secured both through the collective wage bargaining system on standard tariffs involving employer and employee unions and through the public tax and transfer system. This sort of protection helps to reduce the variability of wage rates after tax and transfer income, and therefore helps to manage the risk associated with changing jobs for

46

Paths of public innovation in the global age

the employees and to invest in skills that cannot easily be transferred (Iversen 2005: 52). Torben Iversen (2005: 53) has worked out some very interesting indexes for the extent of income protection existence in 17 Western countries in the 1973–95 period, based on OECD data. He seeks to capture the income protection with three different measures. A simplified version of these measures is: 1. 2. 3.

an index of total taxes and transfers; earnings ratios; and after-tax and transfer coefficients.

From his indexes, it easy to understand the importance of what social model and tradition is in use in the different countries: the Anglo-Saxon, the Continental and the Nordic. In Table 2.4, taken from the work of Iversen, a selection of only eight states is noted in order to make visible the impact of our three social models Table 2.4

Income protection in eight European countries, 1973–95

Nordic Sweden Denmark Norway Finland Continental Germany France Anglo-Saxon Ireland UK

Taxes and transfers*

Earnings ratios**

After tax and transfers***

Index of income protection****

0.77 0.61 0.50 0.41

2.07 2.18 2.00 2.08

19.40 21.50 21.50 20.00

0.94 0.81 0.80 0.79

0.42 0.67

2.80 3.25

26.16 29.40

0.52 0.46

0.33 0.22

4.06 4.06

– 32.00

0.21 0.10

Notes: * Transfers as a percentage of GDP. ** Earnings ratios are the gross earnings (including all employer contributions for pensions, social security, etc.) of a worker at the top of the earnings distribution relative to a worker at the bottom. *** Calculated on the basis of data on post-tax and -transfer income for households with working-age adults. **** Average of the three columns after each indicator has been standardized to vary between 0 and 1. Source: OECD data/Iversen (2005).

47

The Scandinavian welfare state model

and traditions on income protection policy. In Table 2.4, the final column of income protection is an index based on all three indicators after standardization and, as Iversen elaborates, the income protection increases from 0 to 1. As can be seen, the income protection is lowest in the AngloSaxon tradition with the United Kingdom at the bottom, the Continental countries in the middle, and all of the Nordic countries at the highest level of protection in the comparison. Let us now test and compare the same countries and social models for the influence this income protection and ranking have had on labor productivity. Does this income protection related to welfare and social security have a negative effect on the productivity of employees in the listed states? The OECD provides data for the business sector with figures showing the percentage change from one period to the next. We chose an average productivity change for 1978–87 and 1988–97. As can be seen from Table 2.5, on average the figures indicate the highest labor productivity in the business sector in the Nordic countries despite the high level of income protection. Finland should be noted especially in this context, with knowledge of its economic problems after the collapse of the Soviet Union in 1991. High labor productivity has resulted in a quick recovery for Finland. The Continental states are shown clearly below the Nordic states in the period 1988–97, but with a level similar to the United Kingdom. In the Table 2.5

Labor productivity in the business sector Labor productivity in the business sector* Percentage change from previous period

Nordic Sweden Denmark Norway Finland Continental Germany France Anglo-Saxon Ireland UK

1978–87

1988–97

2.3 1.1 1.5 3.4

3.0 2.1 2.4 3.4

1.1 2.5

2.1 1.8

3.2 2.6

4.4 1.7

Note: * Total economy/employees less the public sector/employees. Source: OECD statistics (2005).

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Paths of public innovation in the global age

Anglo-Saxon model, Ireland is an exception. Since the 1980s, Ireland has developed an effective economy with heavy foreign investments and rising productivity. Ireland has also just recently become eligible for the EU’s Structural Funds development policy. Labor productivity is high and the labor market is functioning well despite the Nordic states’ large budget burden and the model’s high social and workfare security, and the outspoken contextual skepticism of the followers of neo-liberalism.

2.5

NEO-LIBERALISM

In the wake of the stagflation crisis of the 1970s, as previously indicated, there was pressure to modernize government and to reduce government outlays through new structuring (Ferrera 2002). However, there is a counter-pressure which consists of demographic changes such as the growing rate of elderly people, leading to fiscal changes such as the rising cost of health and elderly care, liberalization of national and international markets and the changing nature of the labor market and so on (Pierson 2001a). The question then is how do we acquire fiscal ability vis-à-vis such welfare and workfare challenges without overloading public budgets and creating destructive inflation? Scandinavian political attitudes and economic approaches changed when the fiscal ability became threatened in the late 1970s to the 1980s and the severe worldwide economic recession occurred. Suddenly, increasing unemployment rates, overloaded public budgets and globalization of markets became the focused issues which also challenged the Scandinavian welfare state model (Veggeland 1998). The situation in Norway was exceptional because this country had a source of growing income from oil and gas, and this provided a cushion against the development of high unemployment. Nevertheless, the stagflation crisis of the 1970s was noticeable here also, and the crisis represented a fertile ground for new thinking and transformation in the organizations of economic production and the institutional functions of the state. Market solutions and proposals for less state involvement arose and were legitimized by the neo-liberal ideology of the Anglo-Saxon tradition and New Public Management (NPM) goals (Lane 2000). Politicians, the media and economists started giving attention to the actual and potentially increasing welfare role of the market driven by both public and private actors and agencies. This new attention was often linked to sharp criticism of the allegedly inefficient public bureaucracy and monopoly. The criticism of the costly

The Scandinavian welfare state model

49

welfare state emanated not from the heavily burdened OECD welfare states of the Continental and Nordic traditions (Veggeland 2005), but rather from the ‘less advanced’ or ‘less expensive’ Western liberal welfare states such as the UK and the USA. The OECD legitimized the criticism and skepticism through the wide-ranging report on The Welfare State in Crises. The book promoted strongly the strategy of deregulation, outsourcing instead of in-house provision of welfare services, market-driven solutions in the public sector, and contracting as a new management tool (Veggeland 2004). Modernizing government in this way and performing the reform along the Anglo-Saxon path and NPM principles were the ultimate recommendation of the OECD. Further, the related neo-liberal ideology stressed the responsibility of individuals for themselves, the freedom to choose services, security through personal and/or employer health and social insurance, etc.5 From the 1980s on, the international winds of ideological criticism and warnings against universal public welfare and social security measures reached Scandinavia. The OECD neo-liberalism-biased strategy and recommendations still linger on in the documents coming from the organization (OECD 2005). The views of neo-liberalism, which were picked up and have been partly followed with very little deviation by the leading Scandinavian right-wing political parties since the 1980s, influenced the social democratic parties. A key word here is the belief in commercialization in order to increase efficiency in the public sector and in the welfare service sector (Dilger et al. 1997). Constituting an ideological front here is the presentation of individual differentiated needs and rights with the liberating message of freedom to go ‘shopping’ for services of your own, and a message of inclusion by giving everyone the opportunity to be included in this system of freedom. Neoliberalism generated its own language, which biased good governance views and values to the market and bad governance views to the state. This list of ideologically blended words, which is inspired by many scholarly sources and dominant in OECD reports of recommendations on modernization issues, tries to clarify the contrasting views in a context of supremacy and inferior absolutism: Neo-liberal views Market qualities Freedom Individualism Diversification Open economy Modernism Deregulation

State qualities Enforcement Collectivism Uniformity Closed economy Entrapment in the past Interventionist reregulation

50

Cost efficiency Elasticity Mobility Progress Innovation

Paths of public innovation in the global age

Cost inefficiency Rigidity Immobility Lack of progress Standstill

The neo-liberal views are partly right and partly wrong but are somewhat realized in the Nordic countries in a transformed mode (OECD 2002). Throughout the last two decades, a new Nordic welfare and social order has risen to some degree. However, innovations in the field are blended with administrative traditions and should be understood and interpreted as path-dependent innovations arising from the historical Scandinavian welfare state model. Let us look further to compare the actual and basic transformations and dilemmas that challenge the universal welfare state of the contemporary Nordic countries.

NOTES 1. For example, the ‘Next Step Agencies’ and ‘non-departmental bodies’ of the United Kingdom (see OECD 2002: 11). 2. Answers are also elaborated in the EPC working report (2005). 3. Labor market flexibility combined with social security. 4. This is in contrast to Anglo-Saxon administrative tradition. Great Britain has frequently been described as a ‘stateless society’. The lacking development of the state as a responsible authority superior to society becomes apparent in the fact that the term ‘state’ still is only used in terms of international relations or in the term ‘welfare state’. 5. In an OECD report from 2002, another critical perspective in this regard is titled Distributed Public Governance: Agencies, Authorities and Other Government Bodies, Paris: OECD.

3.

Modernizing government

3.1

THE DEATH OF MANAGERIALISM

David Harvey (1989, 1994) has described the period since the 1980s as a phase of transition from the ‘managerialist’ models of the welfare state conducted by governments to ‘entrepreneurial’ models conducted by regulatory governance arrangements. Managerialism, characteristic of the interventionist governance in the 1960s, was replaced by market-centered entrepreneurialism as the main motif of public action in the regulatory state and in the framework of Schumpeterianism (Harvey1989: 365; see also Pollitt and Bouckaert 2004). It has been asserted that, in the regulatory state, governance is no longer confined to focusing upon formal political institutions such as elected bodies and the administrative hierarchy (Koukiades 2006). The political system develops a network of independent institutions which are part of the planning and decision-making process at different levels, but operating at arm’s length from the governmental hierarchy. Even so, these agencies must be recognized now as an integrated part of a political system in the process of change (Majone 1997). The regulatory state’s independent agencies and government bodies are important because of their inherent specialized knowledge and the possibility of making credible policy commitments. They are output effective because of their market-type mechanism foundation. However, Majone (1990) underlines that the real comparative advantage of those agencies and bodies is the combination of expertise and commitment. Long-term policy commitment is notoriously difficult to achieve in a democracy which is a pro tempore form of government. The time limit imposed by the requirements of elections at regular intervals is a powerful constraint on the arbitrary use by the winners of the electoral contest of the powers entrusted to them by the voters. The segmentation of the democratic process into relatively short time periods has serious consequences whenever the problems faced by society require long-term solutions (Loughlin and Mazey 1995; Amin 1994). However, political principals can transfer power to their agents within limits set by law, but they cannot transfer legitimacy in the same way. The new institutions must be able to achieve their own legitimacy. 51

52

Paths of public innovation in the global age

In the Nordic context, the legitimacy of the institutions rooted in the social democratic interventionist state for providing welfare services is especially threatened by the neo-liberal views on the supremacy of the market, as listed at the end of Chapter 2. How should we act in the face of decline in the labor market protection system being considered as ‘good’ policy; or the weakening of the right to pension or reduced compensation to the unemployed in order to benefit workfare; or the encouragement of inequality by the decrease in tax charges for those earning high incomes and profits, or by the decrease in health expense refunds and social security being put under strain, or by the multiple increases in the salaries of high-ranking leaders of public agencies and other government bodies? Let us look more closely into these serious issues.

3.2

MARKET-TYPE MECHANISMS

The central state of the European countries including the Nordic (and other OECD) countries has lost its claimed monopoly in sectors of public policy (although that monopoly was never complete). Besides being part of the European integration targeting pooling of sovereignty to bring about a common supranational regulatory EU authority, local and regional subnational governments are also more involved in policy making. Another type of independent policy makers and government bodies of great number are created and biased by neo-liberal ideology and New Public Management principles. It has enforced policies for comprehensive outsourcing of public responsibilities and services. External and internal pressures and policy contradictions limit the national state capacity to perform consistent policies (OECD 2002; Beetham et al. 2002; Veggeland 2004). All together outsourcing and the many actors involved contribute to the fragmentation of the public sector and public policy making in Europe and the European nation-states, resulting in increasing transaction costs.1 This also occurs in the Scandinavian countries. If outsourcing is set up as an indicator of the fragmentation of the public sector it is of interest to find out where such fragmentation is happening in the wake of modernizing government reforms. According to OECD figures (OECD 2005), outsourcing as a market-type mechanism to provide public services is applied to a greater extent in the English-speaking countries and the Nordic countries and much less in the Continental European states (see indicated impact Figure 3.2). ‘Market-type mechanisms’ in the public sector which imply exposure of welfare and infrastructure services to competition are a broad concept. According to the OECD (2005), they encompass all the arrangements

Modernizing government

53

where at least one significant characteristic of markets is present. Some main examples of specific kinds of market-type mechanisms (MTMs) are defined below: ●

●

● ●

3.3

Public law administrations (PLAs) and private law bodies (PLBs) – independently organized public agencies competing as market actors. The former may have a governing board, an advisory board or oneperson rule. Control is transferred to the governing body and the minister has indirect control. PLBs usually have a governing board and the minister has indirect control. The state may own totally or partially the private law body as shareholder. Outsourcing – contracting out the provision of public services to private providers or to PLAs and PLBs after bidding rounds, instead of in-house provision. Public–private partnerships (PPPs) – agreement-based cooperation between public and private actors for the purpose of joint venture. Vouchers – separation of the provision of public services from their financing source. (OECD 2005)

PLAs AND PLBs

Throughout history PLAs and PLBs have been created as public providers of welfare and infrastructure services with the expectation that market competition should generate efficiency and lower public expenses. They should do this by differentiating rules of control for some functions and/or for creating a special governance structure for other. In the 1980s, the trend was accelerated through guidance by New Public Management principles in some European countries and in the Nordic countries with Sweden as the leading state (Gidlund 2000; OECD 2005). Some PLAs are organized as multi-firm enterprises. Others are organized as regionalized administrations and named regional (service) enterprises. The Scandinavian type of ‘regional health enterprises’ exemplifies this, i.e. hospitals organized as regionalized multi-firm (clusters of specialized hospitals) PLAs (Veggeland 2004). Some of the PLBs have been given real enterprise status, i.e. they have been transformed into fully or partially state-owned multi-firm companies. The political focus on the weakened position of the elected national parliaments in the European multi-level and domestic multi-agency governance and partnerships of cooperation has increased among EU and EFTA member state governments (Veggeland 2004; Scharpf 1999).

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Paths of public innovation in the global age

According to an OECD report (OECD 2002), it is in the wake of comprehensive ‘distributed public governance’ arrangements that certain negative impacts occur. The national outsourcing of democratic competence, also noted as distribution of public governance, is on the OECD agenda. Devolution of competence through outsourcing goes upward to the institutions of the EU or WTO (Rometsch and Wessels 1996) and other international cooperation bodies like cross-border regional partnerships (Commission of the European Communities 1997). Distribution of governance and competence also goes outwards to arm’s length independent state agencies and other government bodies. By this means, the institutions are performing increasingly as public service producers and regional development actors, and as authoritative bodies they constitute a basic element of the modernizing government scheme which generates fragmentation of public governance. As welfare policy executives, they have become principals with strategic power superior to that of both central and local representative government authorities. They are competitive entities and are systematically suffering from the failure of democracy control and transparency. As pointed out in an official evaluation report on Democracy under Blair: But the sheer institutional diversity of public governance makes the doctrine [of democratic control] obsolete and its complexity obscures who is accountable to whom for what? A whole host of official bodies and officials exercise a great variety of powers over the spectrum of government – executive agencies, quangos, public corporations, regulators, czars, ad hoc plenipotentiaries, and inspectors. (Beetham et al. 2002: 133)

In the Nordic context, the complexity and spectrum of the PLAs and PLBs are referred to in the diversity of names such as ‘special law enterprises’, ‘public enterprises’, ‘public agencies’, ‘state bodies’ and ‘boards’. They are found in almost all of the service sectors. From a holistic polity point of view and in terms of the fragmentation trend of public activities and governance, there is a democratic deficit problem and an efficiency occurring in the wake of distributed public governance policies due to the control failure and growing transaction costs. Actually, the latter troubles the core activities of the agencies, which are to promote development and not costly paperwork. The problem is to keep the core activities at an optimal level when the aimed budget measures of each are fixed annually, which is common in the public sector (Scharpf 1997). Since the early 2000s in the Nordic countries, the pace of creating new PLAs and PLBs has slowed in certain sectors as in some other European countries (OECD 2002; Hayward and Menon 2003). The political discussion remains about whether they should be drawn under the more direct authority

55

Modernizing government

of elected representatives at national and sub-national levels, or whether the companies should remain independent but fully or partially public.

3.4

PUBLIC–PRIVATE PARTNERSHIPS

According to the OECD definition (2005), the PPPs represent institutional arrangements whereby the private sector on an agreement-based foundation finances, designs, builds, maintains and operates infrastructure assets traditionally provided by the public sector. The public–private partnership concept originated in the United Kingdom in 1992 and was implemented as a distinct institutional arrangement (Jessop 1994). Today, the UK is by far the largest user of PPPs in the EU. PPP use has expanded to virtually all other EU states (OECD 2005). Our focus is on the PPP in the welfare service sector. The United Kingdom has a substantial number of market-type mechanism PPPs in operation according to Table 3.1. The two Continental states of the corporatist administrative and social traditions have on-going political discussions about this issue and/or the mechanism has a modest use in connection with projects related to EU-regulated public procurements. For the state-centered Nordic states, some information is missing but the table Table 3.1 An overview of PPP activity in the Nordic countries compared to three major European states in two selected welfare sectors EU/EEA member states

UK France Germany Denmark Sweden Finland Norway Iceland

Sectors of PPP activity Schools

Health and hospitals

S D M P – P P –

S P D – D D P –

Notes: S
Substantial number in operation. P
Projects in procurement. D
Discussions on-going. M
Many procured projects, some closed. Source: European Investment Bank statistics (2004).

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Paths of public innovation in the global age

tends to show clear similarities between the Nordic and the Continental institutional approach in this regard. We know that in both the latter administrative traditions of public–public partnerships a diversity of operations is favored in the public sector in contrast to the public–private concept (Balme and Bonnet 1995; Veggeland 2003, 2005). The objective of the PPPs is to achieve efficiency through competition by private sector providers, transferring risks from the public authorities and by taking advantage of private sector expertise and innovative capacity. However, PPPs seem to be most appealing for large-scale programs and projects that involve extensive maintenance and operating requirements. For this reason and due to the preferred public–public partnership concept, it is only to a small degree appealing to the Nordic and the Continental traditions for providing welfare and education (EPC 2005). Appropriate allocation of risks and resources between public authorities and private partners is supposed to be fundamental to the success of the PPPs. It might be hypothesized that the trends that Table 3.1 reveal represent repercussions of administrative traditions. The state-centered Nordic and the corporatist Continental traditions seem to stick to collective and universal welfare solutions. Policy makers and executives resist the markettype mechanism of PPPs because they fear it might form an institutional solution that could generate an undesirable path dependence for the future of non-transparent responsibility and control measures (Veggeland 2004).

3.5

VOUCHERS

Vouchers, as a market-type mechanism to provide public welfare services, are defined by the OECD as the separation of the provision of public services from its financing. ‘The funding remains with the state authorities in the form of a voucher that is issued to individuals and which entitles them to exchange the vouchers for services at a range of suppliers’ (OECD 2005: 131). The neo-liberalism view on the voucher concept is obvious: the individual voucher holder is free to choose on the market among different suppliers and pay with the vouchers. Accordingly, vouchers are very much in use in the Western liberal welfare states anchored in the Anglo-Saxon administrative tradition, with the distribution of food stamps to poor people as the most well-known example. In the USA, voucher arrangements of this kind are not run by public social service authorities, but by the Department of Agriculture (Pierson 2001b). The voucher mechanism is defined by many characteristics and forms; for example:

Modernizing government ● ● ● ●

●

●

●

57

Vouchers are for the use of specific services only. They are not in the form of cash. Vouchers can equal the total or part of the cost of the service. Vouchers are not a universal welfare arrangement but limited to certain social groups or means-tested. The suppliers may be a mixture of competing public and private bodies, or private bodies only. Regardless, the public monopoly on service provision is broken and the consumers have the right to choose among market actors. An explicit voucher may be a physical coupon or smart card. When used, the supplier of the services in turn exchanges this for cash from a public funding body. The voucher is of an implicit type which takes the form of a qualifying recipient choosing from a number of designated market suppliers. Upon registration with one of them, the public funding goes directly to the provider of the service. The public funding goes directly to the user as reimbursement for expenditure on qualifying services from approved suppliers.

The extent of use of the different voucher arrangements is significant in some service sectors in most of the European countries and concerns areas such as housing, childcare, education (primary and secondary schools) and care for elderly people. Table 3.2 focuses on education and long-term care for elderly people, and the implicit form is the use of the market-type mechanism of vouchers, which means that the support is not in the form of cash. The latter means that the qualifying recipients of education services at the primary and secondary level and long-term care may choose from a number of designated market suppliers, i.e. replacing public schools with private schools and public nursing homes with private nursing homes. Upon registration with one of the private institutions, the public funding goes directly to this provider of the education or care service. If registration is with one of the public institutions, it implies in-house provision of the services, or the market-type of mechanism of outsourcing might be in use (see section 3.7 below). In Table 3.2, all of the Nordic states are represented in addition to the UK, France and Germany in order to test path dependence from the different welfare state models and traditions. Table 3.2 reveals path dependence. The UK, a market-centered liberal welfare state, chooses the market-type mechanism of vouchers, which in this case is the implicit one. Public expenditure on private schools is relatively high-ranked while private expenditure on private schools is accordingly low because of the voucher mechanism. Public expenditure on elderly care as a

58

Paths of public innovation in the global age

Table 3.2 Public and private expenditure related to the implicit voucher form in two welfare service sectors and with focus on the administrative traditions of representative states EU/EEA member states

UK France Germany Denmark Sweden Finland Norway Iceland

Public expenditure On private On elderly schools % care % of total of GNP 22 13 10 7 3 5 5 1

0.89 x 0.93 x 2.89 x 2.10 x

Private expenditure On private On elderly schools % care % of total of GNP 78 87 90 93 97 95 95 99

0.23 x 0.22 x 0.14 x 0.11 x

Total expenditure On elderly care % of GNP

1.12 x 1.15 x 3.03 x 2.21 x

Note: x
not estimated. Source: OECD (2005).

percentage of GNP is comparatively low, and private expenditure is not accordingly high because private social security insurance concepts are involved. For this reason, the total amount of public and private expenditure is comparatively low in Table 3.2, 1.12 percent of the UK’s GNP. In the elderly care sector in Germany, no universal social security insurance arrangements make the total amount of public and private expenditure about the same as the UK level. Both Germany and France are at about half the UK figures in respect of public spending on private schools. This shows us that the market-type mechanism of implicit voucher in the education sector is modestly in use. In this regard, the five Nordic countries make the real comparative difference. The use of the implicit voucher mechanism in the education sector is almost out of the question. The explanation is that privately run educational options exist only in small numbers limited to schools for certain religious groups, schools founded on alternative pedagogical ideas and so on. This empirical fact implies that the market-type mechanism of vouchers is not a real option because most education is a public in-house provision. If we look at Table 3.2 we see that Sweden is at the top with 2.89 percent public expenditure and only 0.14 percent private expenditure (total 3.03 percent), and Norway follows with respectively 2.10 percent and 0.11 percent (total 2.21 percent). Comparatively the table gives evidence for a

Modernizing government

59

path-dependent transformation related to the Scandinavian universal welfare state model. However, these figures give no indication as to how the public provision of care services is organized, as an in-house provision or by use of the market-type mechanism of outsourcing.

3.6

OUTSOURCING

The term ‘outsourcing’ is defined as the provision of public services by contracting out services to market providers after bidding rounds instead of making the provision of services an in-house operation. It has also been denoted as ‘privatization from inside’ (Ramsdal and Skorstad 2004). The primary objective of outsourcing is to increase efficiency and quality by introducing competition between providers when providing services in the welfare sector. The objective may be specified as: ● ● ● ● ● ●

cost reduction; market creation for the provision of services, both domestic and international, such as in the EU; expertise access not available in-house to meet needs; expertise access on a long-term basis in order to be able to vary its quantity, quality and mix over time; replacement of unsatisfactory public provision; option for ‘good governance’ promoting transparency and a reduction of corruption within public procurement.

The range of services outsourced in the EU/EEA member states is very widely varied, from clearly commercial services to welfare services, the latter also called ‘services of general interest’. In the EU, there is an ongoing debate between welfare state traditions on the service provision issue, what should be defined as commercial services in the welfare sector, what should benefit from being exposed to outsourcing and competition, and what services of general interest should be protected and remain as inhouse provision (EU 2003). The leading examples of commercial services are information technology services, transportation, janitorial services, renovation, catering, etc. The Anglo-Saxon tradition normally does not bother with such a distinction, while the Continental tradition does (Veggeland 2004). Table 3.3 shows the OECD ranking of some selected countries concerning their impetus for outsourcing. Table 3.3 features interesting aspects of the modernization of the public service sector in our context, and envisages according to the OECD (2005) data that the market-type mechanism of outsourcing is largely in use in

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Table 3.3

Paths of public innovation in the global age

Outsourcing of public services Public purchase of goods and services vs in-house provision Selected countries

UK ..…………………………………….. (1) Anglo-Saxon tradition US …………………….……..……. (2) Norway …………………………..…... (3) Switzerland …………………………..….. (4) > 50 % Sweden ………………………….…. (5) New Zealand ………………………….…. (6) Australia ………………………... (7) Finland ………………………. (8) Continental tradition Netherlands ……………….….…… (9) Iceland …………….………… (10) Germany ……………………. (11) Canada ……………….…… (12) Denmark …………………… (13)  50 % Austria …………..….. (14) Luxembourg ……………. (15) Belgium ……………. (16) Ireland ……………. (17) Spain …………..... (18) France ………….. (19) Italy …………. (20) Portugal ………... (21) ____________.___.___.____.____.___.___ .____.___.____ 0 10 20 30 40 50 60 70 80 90 % Source: OECD (2005): Government Finance Statistics (GSF), Share of central government’s purchase of all goods and services from outside vendors as a proportion of total expenditures, excluding transfers and interest payments.

Europe. This occurred to a significantly greater extent in the Englishspeaking countries and the Nordic countries than in the Continental European states. Why did this occur? As expected, the percentages put the two main states of the marketoriented Anglo-Saxon administrative tradition (Knill 2001) at the top of the ranking as concerning outsourcing. In the EU member state of the UK, only 22 percent of government services are in-house provisions, while 78 percent are outsourced. In the USA, the respective figures are about 35 percent and 65 percent, in New Zealand 45 percent to 55 percent, and in Australia 50 percent to 50 percent. Switzerland, which is outside the AngloSaxon tradition, results in less than 50 percent in-house provision, and this may have to do with the fact that it has a relatively small public sector.

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The positions of the Nordic states in the graph are unexpected in terms of belonging to the state-centered Scandinavian administrative tradition. Norway is ranked as the third from the top as a heavy user of the markettype mechanism for outsourcing public services; 40 percent is in-house provision of public services and 60 percent is outsourced. Sweden ranks fifth and follows just behind with a respective 45 percent and 55 percent usage level. Finland ranks eighth, Iceland ranks tenth and Denmark ranks fourteenth. All have a comprehensive use of outsourcing of 40–60 percent as a mechanism to provide public services. Compared to the two main EU member states belonging to the Continental administrative tradition, the Nordic figures (Table 3.3) must be said to be strongly aberrant. As could be expected, the Continental tradition of the market-type mechanism for outsourcing in the public sector has been used only modestly according to the graph. The biased path-dependent policy of Germany generated 60 percent in-house provision and 40 percent from outsourcing, and in France the figures are respectively 75 percent and 25 percent. The latter figures reveal a very traditional and strong state-centered provision of services often requested if dynamic and flexible enough.

3.7

MICROECONOMIC EFFECTS

The related aberrant Nordic figures concerning the rate of outsourcing as against in-house provision of public services should not be explained as an empirical result biased by path dependence in the administrative tradition. Instead, the high rate of outsourcing seems to be related to another path dependence. This shows the path dependence of a tradition of institutional values, namely the value of ‘Small is beautiful’. Let us test this hypothesis. Three alternatives exist: 1.

2.

3.

An adaptation to the EU directive occurred, with a surprisingly extensive use of the market and competition in relation to what the administrative tradition requires. An adaptation occurred, influenced by the new liberalistic AngloSaxon ideology and by the New Public Management (NPM) principle, as Table 3.3 can easily be interpreted. The public administration in the two Scandinavian countries was reregulated to achieve political objectives and therefore performed innovatively because it broke away from its traditional path dependence.

Let us examine this more closely. An EU-adopted regulation from the early 1990s on public procurement demands that ‘All public purchases that

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are not in-house provisions of goods and services over the marginal cost level of Euro 200 000 are obliged to be exposed to market competition through tendering and outsourcing.’ This occurs in terms of open or partly open tendering and bidding rounds and the contracting out of the provision to the private providers who become winners in each of the many bidding rounds. This is a brief background. We are focusing on the EEA negotiations at the beginning of the 1990s between EFTA countries and the EU in regard to an agreement for access to the EU’s inner market. The EEA agreement was entered into, but Sweden, then an EFTA country, instead became an EU member in 1994 while Norway continued as an EEA country. The EEA agreement included the EU’s supranational set of rules and directives regarding public purchasing of products and services. Procedures and an upper limit of Euro 200 000 (NOK 1 600 000) were established for such purchases. Purchases for lower values did not require competition and bidding administration. Purchases over this value were included in the directive and placed under surveillance by the EFTA agency ESA for Norway’s part. As in many other EU member states, there were strong obstacles and skepticism to the introduction of outsourcing in the Scandinavian societies. This was due to path-dependent popular and social-democratic concerns about private sector involvement in traditional public activities. The other concern was related to the fact that, despite great variety technically, very few services could be outsourced. The lack of clearness on the issue of which ‘services of general interest’2 ought to remain in-house provisions or be exposed to commercial competition was seen as an attack on the universal welfare state. The challenge to existing public service provisions also triggered resistance from affected public employees, unions and their political allies. Lastly, the outsourcing game was perceived as a game where large private businesses would come out as winners and thereby threaten the Scandinavian ‘Small is beautiful’ concept. In the wake of the general skepticism to the market-type mechanism of outsourcing, the Scandinavian states introduced a reregulation which was influenced by the EEA agreement and probably by the ‘Small is beautiful’ tradition. Norway and Sweden set the upper limit for bidding much lower than what the EU regime required: respectively NOK 200 0003 and SEK 200 000. The decision resulted in a much more extensive use of bidding administration and outsourcing than if the EU’s marginal value for public purchasing had been applied. This partly explains their high ranking in Table 3.3. The decision was legal because the EU directive had no stipulations against lower national limits for biddings and competition and therefore the directive could be interpreted freely (Veggeland 2005).

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What resulted from this independent and innovative transition regarding outsourcing and the Scandinavian regulatory solution in the wake of this specific Europeanization mode of institutional penetration? On the positive side was the incitement for small and middle-sized private providers to adjust to the markets created by the outsourcing form of public administration. Small providers/businesses with low investment ability had the opportunity to participate and adjust their activity to the public procurement and tender games due to the low regulatory cost level. Numerous and flexible SMEs came out as winners in the large number of bidding rounds by taking advantage of their small size. When becoming contractors they contributed to the creation of important employment and the highly prized labor market mobility. This promoted employment and flexibility due to the decision and the innovative interpretation of the EU regulatory directive concerning public procurement modernizing the SMEs and the labor market. The modernization efforts in the framework of the market-type mechanism of outsourcing dynamics also achieved employment and flexibility in the public sector (OECD 2005). However, concerning the latter statement, a critical elaboration of the different modes of outsourcing and their mechanisms in a holistic perspective is necessary. Was this an adaptation or an innovation within the supranational regulatory regime, and what about the regulators’ legitimacy in relation to administrative traditions? One could be skeptical and presume that it was more than an innovation and was the result of a political error in both countries; ‘the value difference’ was overlooked because the focus was on the quantity 200 000. It seems unreasonable. Instead, one must assume that we see an example of both adaptation and innovative administration in the implementation phase of a supranational regulation. Furthermore, there is reason to believe that the decision in the two countries was based on the assumption of a satisfactory choice based on their respective social situations. In principle, reregulation has endured and is understood as having created a path dependence driven by positive feedbacks and political legitimacy. This was an innovative administration in relation to the EU’s regulatory regime because a market-correcting and politically prioritized reregulation and not a market-creating reregulation was introduced (Scharpf 1999). The EU regulation on public purchasing had an objective to create a market, while the national reregulations with the lower threshold values for bidding rounds and outsourcing were a competitive regulation with another objective. Internationally, this is called ‘regulatory competition’ (Woolcock 1996; Scharpf 1999: 84–121) and has the political objective to correct the market. Small and medium-sized businesses with lesser capacity and investment

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capability were given an opportunity to participate as bidders, win bids and become contractors. An innovation arose in the form of reregulation when Scandinavian administrative tradition changed its path-dependent institutional value belief. The administration took advantage of the scope of action within the EU’s supranational regulatory regime and created a satisfactory solution. Throughout the 1990s in Norway and Sweden, innovative administration created positive feedbacks in the form of statistics which showed low unemployment but growth in SMEs. Other factors in addition to regulation are of significance here. There is reason to believe that national reregulation had a positive effect. An indicator of this is shown in the increase in the number of businesses and number of employed in Norway from the years 1993 to 1998 (Table 3.4). The increase occurred to a notable degree in the SMEs. Over the same period and until 1999, Sweden also experienced relatively good employment growth. However, after 1999 this fell to 0 in 2004 according to OECD figures. Figure 3.1 indicates positive and negative feedbacks Table 3.4

Business development in Norway

Year

Number of businesses

Employed

1993 1998

10 994 12 095

266 819 299 823

Source: Historical statistics of the Norwegian Statistical Bureau (SSB).

Employment growth rate 4 3 2 1 0 –1

Positive feedbacks

Negative feedbacks

1993 94 95 96 97 98 99 00 01 02 03 04 Source: OECD Statistical Database.

Figure 3.1

The employment growth rate in Sweden

Year

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over time in terms of increasing employment during the 1990s and indicates negative feedbacks during the 2000s. On the policy level, the decrease in the employment growth rate is a combination of many factors which primarily relate to the economy and international conjunctures. I will assert an additional plausible explanation in the next section on the framework of the regulatory state and transaction costs in the wake of neo-liberalism, administrative fragmentation and outsourcing.

3.8 REGULATORY INNOVATION AND MACROECONOMIC EFFECTS The notion of outsourcing means ‘contracting out’ the provision of public services instead of sustaining them as in-house provisions. In the Europeanization process of the Scandinavian public sector, two mechanisms are in function which induce reinforcing processes: 1.

First and foremost, the EU regulation of outsourcing is part of the general market-making policy efforts in the Union (Scharpf 1999). The directive on public procurement and tender procedures is a prolonging of this effort. For the EU and EEA member states, it implies that they are obliged to arrange tender and bidding rounds and contract out provisions in the framework of what the directive targets, i.e. market making of public procurements. However, governments may deliberately decide lower maximal cost limits for the purchase of provisions from private providers. When governments are making such a regulation, it implies fragmentation of services and forces administrations to arrange tender and bidding rounds in large numbers. 2. Lower maximal cost limits on public procurements than enforced by the EU directive before tender and bidding rounds deliberately and legally pursued by national authorities is demonstrated in the Scandinavian countries. The decisions made at the beginning of the 1990s were based on the belief and conviction found in the AngloSaxon market-centered tradition that the market-type mechanism of outsourcing increases the efficiency of the provision of public services. Additionally, in the Scandinavian countries, the decisions were biased by another tradition and path dependence. Here, we can find a very strong traditional political and administrative focus on small and medium-sized enterprises (SMEs). Apparently, the national decisions on regulating public procurements and outsourcing were also considered as a stimulating public action from which small private

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providers might benefit and an action which would sustain local labor markets. There is evidence in public reports about such a Scandinavian doublebind approach to outsourcing, a rational choice approach concerning belief in more efficiency in the public sector and a path-dependent approach concerning SMEs and local labor markets. There is evidence in public statistics that microeconomic success resulted from this ‘regulatory innovation’. In the case of the Scandinavian statistics, these indicate expanding local providers and sustaining local employment, which benefit from public– private related flexible labor markets. The Scandinavian decisions and interpretations of the EU directive on public procurements and outsourcing are described as a regulatory path innovation due to both microeconomic and macroeconomic positive feedbacks being indicated (Pierson 2004). The decisions arose partly out of the path dependence found in the traditional Scandinavian institutional approach of ‘Small is beautiful’. This is the reason for the low purchase cost level in the framework of microeconomic incitements. The decisions also result from the more general rational choice approach related to the belief that competition generates efficiency. This is the reason for maximal use of the market-type mechanisms in the public sector in the framework of macroeconomic incitements. The Scandinavian case highlights how path dependence, inherent in different administrative traditions, may be transformed to innovations which in turn generate a new path dependence of some kind. In general, Europeanization of the nation-states by the penetration of regulatory actions may bias administrative innovation. The creation of path dependence in public administration and collective action may turn out to be tricky because of the inconsistency of the feedbacks. A crucial feature of most collective action in the public sector is the absence of a linear relationship between effort and effects. Instead, collective action frequently involves many of the qualities conducive to both positive and negative feedbacks (Maxwell and Olivier 1993). Path dependence needs positive feedbacks to sustain and maintain influence (Pierson 2004). In rational choice theory, up-coming negative feedbacks to a certain pathdependent policy should immediately bias correction measures and reform efforts. In the case of outsourcing, it is often ignored that efforts often generate high fixed costs, learning effects, coordination effects and adaptive expectations. We also learn that institutions induce self-reinforcement processes that make reversals increasingly difficult and often unattractive over time. The adopted Scandinavian regulatory innovation, in the framework of Europeanization, induced self-reinforcement processes despite the negative

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feedbacks that arose over time, such as the fragmentation of services and increasing transaction costs. The low limit of purchasing provision costs in the framework of the public procurement regulation caused these negative feedbacks; the collective ‘dark’ side of the coin was less transparent. Economists typically refer to self-reinforcing processes as involving a process of ‘increasing returns’; additional expenditure of resources generates a higher return than the one previously. In the Scandinavian case, additional expenditure of public resources on the single tender, bidding round and contract generates a higher savings return than the one previously. However, this efficiency focus on the benefits per unit of expenditure makes sense for self-reinforcing processes that most interest microeconomically oriented economists, but is not appropriate for many of those who monitor collective expenses. The fragmentation of public services may have a negative effect on holistic human needs, for example when health and elderly care are ignored. This issue is not a topic here. The issue of focus is that increasing fragmentation over time implies involving an increasing number of actors in the outsourcing process, for example: ●

●

●

in the public sector, because people are needed in the many tendering, bidding and contracting rounds and in initiating and controlling functions; in the private sector, because the many providers that participate in each tendering and bidding round as competitors get multiplied as the fragmentation process continues over time; in addition, the many single public law administrations/agencies, the PLAs, and the private law bodies, the PLBs, because they are part of the outsourcing process and arm’s length actors themselves.

A result of this over time was the fast increasing number of actors involved and the excessive, growing transaction costs in both the public and the private sector and the outcome of the path dependence that the Scandinavian innovative regulatory action concerning outsourcing had created. In the 1990s, this institutional apparatus induced self-reinforcing processes from a base of positive feedbacks towards employment, flexible labor markets and sustained development of SMEs.

3.9

TRANSACTION COSTS OVER TIME

The rising transaction costs because of the growing number of actors in the outsourcing games represent the negative feedbacks which are the other

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side of the self-reinforcement of Scandinavian regulatory innovation. The self-reinforcement of the administrative procedure of single tenders and bidding rounds as competition-promoting means continued. The achievement of public efficiency as the fulfillment of the policy end was only tested in a microeconomic framework. Achieved benefits per unit expenditure terminology ruled the economic arena and the political legitimacy approach. The Scandinavian regulatory innovation and its self-reinforcement were tested comparatively in terms neither of feedbacks from longer sustained European experiences nor of knowledge from holistic and European scholar impact studies (OECD 2002; Beetham et al. 2002; Veggeland 2004). The evidence that outsourcing increases efficiency is substantial from a microeconomic perspective based on the conclusions of extensive studies. The problem is that the studies are all based on single outsourcing initiatives and are missing a holistic perspective. For example, a study of over 2000 initiatives in the USA found an average cost savings of 33 percent (see Dilger et al. 1997). A Danish study found 5–30 percent savings along a range of different outsourcing initiatives (OECD 2005). However, the effects over time are neglected. Positive feedbacks induce and bias expanding self-reinforcements and processes which increase the transaction costs. In addition, the principles of Garret Hardin’s ‘The tragedy of the commons’ (1968) are also neglected. Single interests and transparent benefiting acts appear per se rational, while a multitude of less transparent repetitions undermine the advantage of the ‘commons’ by devastating the basic conditions and quality of the collective good. In the outsourcing case, the less transparent and increasing transaction costs which undermine the advantage of the savings and the funding ability of the public sector ‘commons’ are neglected in studies of this type. The transaction costs either reduce the standards of public services or increase the public outlays if the standard is sustained. Table 3.5 reveals some interesting aspects of what we are elaborating here and especially if we relate the figures to Table 3.3. In the Anglo-Saxon states, the public outlays decrease in the period 1990–2000, while outsourcing of public services continued to expand. In the neo-liberal view, this indicates an increase in efficiency. The same course of public outlay developments can be observed for Denmark, Norway and Sweden, and hence an increase in efficiency is similarly viewed. From Table 3.3, we know that all of these countries in 2005 topped the list of outsourcing states. To the contrary, Table 3.5 now shows an increase in public outlays in the period 2000–05. Has the market-type mechanism of outsourcing changed its benefiting character? If we look at the Continental states in Table 3.5, there were only modest developments of public outlays during the period 1990–2000 and 2000–05.

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Table 3.5 Public savings of outsourcing transformed to increasing outlays because of growing transaction costs over time, with stable service standard Selected states

Total general public outlays Percent of nominal GDP Costs down up 1990



2000



2005

UK Ireland

42.2 43.3

5.2 11.2

37.0 32.1

6.3 3.8

43.3 35.9

France Germany

50.7 44.5

(1.8) (1.2)

52.5 45.7

0.9 1.4

53.4 47.1

Denmark Finland Iceland Norway Sweden

57.0 48.6 42.4 52.8 60.7

5.1 (0.5) (0.8) 8.0 3.4

54.9 49.1 43.2 44.8 57.3

Euro area Total OECD

48.7 40.1

1.6 1.1

47.1 39.0

(0.2) 1.1 2.1 2.8 0.6 0.8 1.1

54.7 50.2 45.3 47.6 57.9 47.9 40.1

Source: OECD Economic Source Outlook, vol. 2004, no. 75.

On the other hand, Table 3.5 reveals a relatively low degree of public service provision by using the mechanism of outsourcing in 2005. In the neo-liberal view of the state listed in Chapter 2, the conclusion should show states entrapped in the past, and a lack of innovation, rigidity and immobility. What is overlooked is the agglomerative transaction cost effects of the bidding system, for both the public and the private sector and the actors. On the one hand, the actual public authority responsible for the provision of the service may benefit from savings related to each purchase. On the other hand, the invested efforts of the many individual providers putting time and labor into working out the tender do have a prize. Except for the actor who wins the bid, all of the others become losers with regard to the related contract option. The outsourcing mechanism imposes costs on the losers of the bidding competition who do not win the contract. The larger the number of losing competitors the greater the unproductive and agglomerative costs will be.

70

Paths of public innovation in the global age An example: The public purchase of a service is valued at Euro 200 000. Twenty potential contractors/providers are bidding for the announced public procurement. Each of the providers has invested Euro 5000 in working out the bid. Only one of the potential 20 providers becomes the contractor and gets the revenue accordingly to the announced value of the purchase. The bid was the lowest, with savings of perhaps Euro 10 000. In a national and holistic economic perspective a total of Euro 300 000 has been invested in a project estimated to be worth Euro 200 000. However, in the single purchase context the project comes out with a public cost of Euro 190 000 and is registered as an outsourcing case with savings of Euro 10 000.

The mechanism of outsourcing follows what has been called Scharpf’s Law (Hooghe and Marks 2001: 5): ‘As the number of affected parties increases . . . solutions incur exponentially rising and eventually prohibitive transaction costs’ (see Figure 3.2 and Scharpf 1997: 70). In conclusion of this case examination, it appears that, for each passing year and as evidenced in other OECD countries (OECD 2002), negative feedbacks became manifested to an even larger degree. Increased transaction costs appeared over time in the wake of the reregulation because of extensive use of bidding administration. Over time, path dependence brought about new areas of use and increased the volume of outsourcing. This agrees with what P. Pierson (2004) shows in his analysis referred to above. Negative feedbacks occurred as the years progressed, mostly in the form of strongly growing transaction costs (exponential).4 Both private businesses and public administrations experienced this as a result of business fragmentation and from the number of actors involved. ●

●

Transaction costs and private businesses: The many companies that participate as bidders invest in the preparation work of the bid, but only one company becomes the contractor in practice. For the many other bidders, the investment in principle is lost. Employment is created, but not earnings. Transaction costs and the public sector: The administration invests significant resources in the preparation work of the bid, to administrate the bidding rounds, evaluate the offers, prepare the contracts and finally conduct controls to ensure that the contracts are complied with (Beetham et al. 2002; Veggeland 2004, 2005). Employment is created in the public sector, but, since administration budgets in principle are restrained and of a certain size, the transaction costs will over time affect the central activity of the sector negatively, in other words the core service production.

The problem with increasing transaction costs and the increasing use of outsourcing in the public sector can be shown as in Figure 3.2.

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71

1)

: : : :

: :Exponentially increasing macroeconomic :costs as negative feedbacks :

T

:

: : 2)

: :Numerically decreasing microeconomic

:

:

costs as positive feedbacks Increasing use of bids over time

Figure 3.2 Scharpf’s Law: decreasing microeconomic costs but exponentially rising transaction costs by increasing the use of outsourcing in the public sector Curve 1) in Figure 3.2 shows the exponentially increasing transaction costs with the increased use of outsourcing in the public sector as described above. The development in a municipal economy in a holistic perspective is an example of the development perspective which is a general foundation. The purchase of municipal products and services results in the eventual splitting up of the operation when small bids increase in number over time. An increased use of resources also results in the preparation of bids and contracts, and in administration, reporting and control, and increasingly more actors become involved in this type of work. When the municipalities first started out with outsourcing, it is reasonable to assume that the transaction costs of this type were at a low level with insignificant effects on the budget or other operations. Dominance of positive feedbacks was the administration’s experience during the first years by saving with purchases and learning and competence development amongst the employees. The negative feedbacks through transaction costs became dominant and were experienced later, as Figure 3.2 shows, possibly after several years (OECD 2002). Curve 2) shows numerically declining transaction costs by increased use of bids over time. The basis for this is not the general perspective behind curve 1), but the individual bid which consequently increases numerically in quantity over time. It is assumed, and there is evidence, that the bid makes the individual public purchase cheaper, for example in municipal administration. There is also reason to assume that transaction costs with the individual bid are largest in the starting phase due to the lack of experience with this

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type of administrative form and perhaps with the need to hire external expertise (OECD 2005: 132–9). Over time, experience is acquired and competence is built up. The time it takes to prepare a bid decreases, and thereby reduces the transaction costs in a numerical sense over time. Positive feedbacks dominate and are experienced by the administration, as Figure 3.2 shows, until the general transaction costs begin to be tangible. They begin to affect tight budgets of the core operation. Figure 3.2 at one point shows that the two curves cross each other and a type of balance point is created with the use of outsourcing as administration. A T-point is established in Figure 3.2. In my definition of innovative administration, this T-point makes up the point which we can say makes up ‘satisfactory’ administration. In the regulatory state, the administration must conduct itself to this. The development up to the T-point and a period thereafter is driven by positive feedbacks. The administration makes satisfactory choices within the path that the EU regulatory regime establishes. When the negative feedbacks fully appear, the administration is no longer satisfactory and a new innovation pushes forward. In respect to this, and as assumed in the theoretical framework, it is just strong effective negative feedbacks which can change path dependence administration established over time on the basis of positive feedbacks (Pierson 2004). Empirical data confirming this are reported by the OECD (2002: 22). It is documented that outsourcing which involves extensive fragmentation and large transaction costs, besides control problems, has come to an end in the member countries which were analysed. These were from the European countries of Great Britain, Sweden, The Netherlands, Spain, Germany and France. Related to our case, Norway has had negative effects as a result of the pressure from negative feedbacks on regulatory change relating to outsourcing. In Norway, the national threshold value for bidding through public purchasing was reregulated in 2005 to NOK 500 000 by the Bondevik II government. This was done by a government that ideologically stood for market liberalism and competitive exposure in the public sector as ‘a goal in itself’ (Veggeland 2004). However, it did not stop there. At its start, the Stoltenberg II government announced a reregulation, and this government wanted a much higher threshold value before the use of outsourcing in the public sector. Full adaptation to the EU’s purchasing directive with this much higher threshold value was mentioned as a possibility. Ideologically, this was less surprising because the reasoning was less use of competition mechanisms in the public sector and a more complete administration to reduce transaction costs. The suggestion about this policy and reregulation was shortly thereafter withdrawn.

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A ‘satisfactory’ regulatory solution was preferred. The upper limit before bidding and bidding rounds for public purchases was kept at NOK 500 000. The reasoning was linked to SME participation and employment. Curve 1) in Figure 3.2 shows that increasing transaction costs will for a period result in a somewhat lower growth from fewer bids, and the T-point will be pushed forward so that the period for the positive feedbacks is extended. The EU’s regulatory regime and administrative path continue in line with the EEA agreement.

3.10

SOME OECD PERSPECTIVES

Here are some of the statements from which at least two OECD reports (2002, 2005) draw their conclusions. The statements on governance and administration revealed are listed below: ●

●

●

●

●

In most countries, and in terms of the new democracy principles, priorities have moved away from the inclination to create new independent and separate bodies, and outsourcing as a dominant markettype mechanism. Now, the challenge seems to be finding the right balance between accountability, autonomy and management of the existing independent agencies and bodies through more openness and transparency, as well as by strengthening the steering capacity of governments (2002: 21). The new independent technocratic entities allow governments to avoid making political decisions or to make decisions guided only by instrumental and professional expertise on issues that actually require a political choice and are at the core of political responsibility (2002: 22). The lack of clarity about the differences between the various types of agencies, authorities and enterprise-like institutions makes it unclear whether the best organizational forms have been chosen for the various purposes of government (2002: 24). Standardization measures are implemented. Governmental monitoring efforts and control of the independent public entities become more difficult. Despite reporting procedures, and even though using neutral agencies for legal surveillance, the different types of relationships and the different types of control and accountability mechanisms of the bodies make accurate control almost impossible (2002: 25). The lack of clarity of the institutional system potentially undermines citizens’ trust in the system’s functions (2002: 25).

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Paths of public innovation in the global age ●

●

●

A need for clearer criteria for establishing different types of boards – advisory, management or governing boards and their respective responsibilities – is acknowledged. There has been criticism of the lack of transparency surrounding the appointment of board members, their salaries and other benefits. There has also been criticism on the lack of representative members in terms of gender and ethnic and local background (2002: 25). The independent bodies are seen as functioning outside the political debate with little oversight from ministers and ministries and weak accountability arrangements. The parliaments are neglected and so are individuals and the institutions of the civil society. The conclusion is that weak accountability mechanisms undermine the legitimacy of governments and parliaments (2002: 26). Finally, weak coordination mechanisms and coherence failures threaten effective public service production in terms of ‘best value’ to individuals, social groups and corporate interests because of fragmented governance (2002: 26).

In explaining the last paragraph on weak coordination mechanisms, we may refer to what has been called Scharpf’s Law (Hooghe and Marks 2001: 5): ‘as the number of affected parties increases . . . negotiated solutions incur exponentially rising and eventually prohibitive transaction costs’ (Scharpf 1997: 70). In the system of distributed public governance, the problem of technical, communicative or legal coordination of the many actors and bodies escalates immensely with larger numbers, and the transaction costs will be excessive, according to Scharpf’s Law. In this perspective, the weak coordination mechanisms of the reporting countries are not a failure through bad performance of public governance, but a consequence of the distributed public governance system itself (Veggeland 2003). Therefore, according to the OECD report (2002), there is a growing focus on good governance and more coherent public services, i.e. on policy and structural coherence solutions, including making the autonomous bodies work on joint projects and in public–public partnership. Furthermore, the focus of the involved states in the study is reported to have been changed from one-dimensional market-type mechanisms to directed endeavours such as: 1. 2. 3.

avoidance of the creation of new independent agencies, public service enterprises and autonomous bodies; more involvement of the civil society and the governments in governance; improvement of parliamentary control over activities for the reason of more holistic responsibility;

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a growing political will to make the overall system more comprehensible and accessible to people, and the accountability mechanisms, activities and performance more easily controllable by parliaments on all tiers and in accordance with the principle of subsidiarity.

3.11

SOME CONCLUSIONS

With empirical data and the case examination, I have tried to draft terms and assumptions which were introduced above regarding innovative administration. The terms and assumptions became fundamentally linked to the framework that an increasingly more developed regulatory state sets and which is generated within the EU regime. The case does not disprove my assumptions on innovative administration as an administration which makes ‘satisfactory’ choices, creates a self-strengthened ‘path dependence’, is generated by positive feedbacks, is not developed randomly, uses ‘scope of action’ and arises in the connection between the EU/EEA set of rules and the national set of rules. Innovative administration is both a legalitysearching and a legitimacy-searching administration and is an administration anchored in the country’s own national administrative traditions. With limited empiricism, I have tried to expose these aspects of innovative administration. The game with the blue and red balls in section 1.9 is an illustration of how path dependence is established and can be understood in a mathematical perspective. The colored balls early in the game are decisive for generating blue or red path dependence. Towards the end of the game, each draw becomes less significant, and decreasing risk gives positive feedbacks. We allowed the blue balls to create the path dependence. This naturally occurs in a much more complex manner in politics and administration than as indicated by the example in this game. Norway’s entry into the EEA agreement was the first founding characteristic, as explained in Chapter 1. Thereby, the EU directive for public purchases was at the same time adopted with its threshold value, bidding schemes and outsourcing. This was the decisive characteristic for the further generation of a path dependence which Norwegian administrations had to follow and find a scope of action within and to which they had to relate innovatively. Let us try to simplify this by using colored symbols. The EEA agreement created in the start what we will call a ‘blue’ path dependence in a political sense in Norway, by legally demanding outsourcing and competitiveness in the public sector. It was ‘blue’ because it created and strengthened a marketcentered path through public purchasing. But the red balls were also part of the game, represented by the plan market tradition in public administration. The ‘red’ path modified the ‘blue’ through a reregulation. In the

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start, the reregulation meant NOK 200 000 and afterwards rose to NOK 500 000 as a threshold value, increased use of the market and competition in relation to the EU’s regulations and path. Evidently, it was the ‘blue’ ball that was in play and which strengthened this path. The ball was nevertheless ‘red’ because it was a state-centered and planning-oriented administration which played to the lower threshold value. This did not occur with regard to European market integration. The EU’s high threshold value before bidding in Norwegian and Swedish standards would have given precedence to the large international and national companies. We must assume that the authorities followed their administrative traditions. They intervened in the form of reregulation which gave precedence to the many Norwegian small and medium-sized businesses and to the employment potential these represented in small and large municipalities. This represented an innovative administration within the regulatory state with a satisfactory decision based on the situation. As in the game, the blue balls dominate also in the political arena, and thereby continue to manifest the blue ‘path’. A ‘red’ draw later in the game changes little to the ‘blue’ path dependence which is created in the wake of NPM and in the use of the market-type mechanisms in the public sector (see the illustration in Chapter 1). Heavy path dependence in public administration can only be broken down when sufficient negative feedbacks arise. Negative feedbacks in the regulatory state in the form of exponentially growing transaction costs and growing unemployment together with steering and control problems are, as pointed out above, experienced and recognized within the OECD area and also within the EU. As mentioned previously, the EU is searching for a model for innovative administration and ‘good governance’. In this context, what will make the modern Scandinavian model attractive (Veggeland 2006)? About the Nordic administrative model, we may hypothesize the following: ●

●

In a holistic perspective, the market-type mechanism of outsourcing and independent agencies and other government bodies generates fragmented governance and thereby underreported control problems and transaction costs in the Nordic countries as regulatory states. Transaction costs will eventually be excessive according to Scharpf’s Law (Scharpf 1997; Veggeland 2004). Further, these exponentially rising transaction costs in the wake of comprehensive outsourcing reduce economic efficiency. What is important to notice is that outsourcing generates jobs and in Scandinavia employment and a flexible labor market. In this perspective, the mechanisms are not a coincidence of performance of

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public provision of services but a consequence of the outsourcing mechanism itself (Veggeland 2003). From Table 3.3, we see a ranking of states which indicates that such impacts should be observed and registered in the Nordic states because of their receptive use of outsourcing. Firstly, it may be hypothesized that related labor market tend to become more flexible independently of administrative tradition, and the AngloSaxon tradition should especially benefit from it. Secondly, in the transformed Scandinavian tradition, the adopted outsourcing mechanism has to some extent discouraged corresponding leverage in comparison to the Continental administrative tradition which weighs corporative solutions in the framework of strong trade unions and other employee organizations, because signed contracts on deliveries imply superiority to the employers. The employers become protected by laws and regulations which authorize them to ignore all other interests than the achievement of the contracted results (Veggeland 2004; Ramsdal and Skorstad 2004). In other chapters of this book, these hypotheses are tested. However, the use of the market mechanism of outsourcing to provide public services did not influence the solid historical position and responsibility of the Nordic states assigned to provide universal welfare services and social security. Table 3.6 shows that publicly funded long-term care expenditures for the elderly are significant in many European countries, but not in all. The exceptional but expected dominant public role in elderly care is found in the Nordic countries, according to the table, in Finland, Sweden and Norway, with only 10–15 percent of beds in private residential institutions compared to 90–85 percent in public institutions, followed by Denmark and the Continental states France and Italy with respectively 30–35 percent and 70–65 percent in private and public institutions. Significantly, the table confirms the administrative tradition of the statecentered provision of services within the Scandinavian welfare state model. The graph shows that the United Kingdom, belonging to the Anglo-Saxon tradition, has more than 80 percent of beds in privately run institutions and less than 20 percent in public institutions. In this case, it is Germany that deviates from what should be expected in terms of the state’s administrative tradition, having about 80 percent of the beds in privately run institutions. However, it should be taken into consideration that the German state offers mandatory insurance and guarantees for long-term care. A scheme introduced in 1995 allows users a generous choice from a menu of service provisions and cash benefits.

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Table 3.6

Paths of public innovation in the global age

Public and private institutions in long-term care for the elderly, late 1990s Share of beds in nursing homes and residential institutions

Finland Sweden Norway Denmark France Italy Ireland Belgium Netherlands Spain Switzerland Germany United Kingdom

...............................................................ppppp .............................................................pppppp ...........................................................ppppppp ...................................................ppppppppppp .................................................pppppppppppp .........................................pppppppppppppppp .......................................ppppppppppppppppp .....................................pppppppppppppppppp ...........................ppppppppppppppppppppppp ...........................ppppppppppppppppppppppp ...........................ppppppppppppppppppppppp ....…….pppppppppppppppppppppppppppppp ........pppppppppppppppppppppppppppppppp 0 20 40 60 80 100 %

Notes: …. Public institutions. pppp Private institutions. Source: OECD (2005).

Additional elements indicating that the Nordic states have kept the Scandinavian welfare state viable since the 1980s is for example in Norway the concept of a basic public retirement insurance (folketrygd). This is an economic security for everyone after retirement, which remained functioning and was actually developed. In Sweden, the social-democratic adopted term ‘people’s home’ (folkhemmet) envisions the idea of a state-run welfare society which marks and embodies universal social inclusiveness and continues to have political appeal. Even more importantly, we must assume that the Nordic state authorities followed their administrative traditions. They intervened in the form of reregulation which gave precedence to the many Norwegian and Swedish small and medium-sized businesses and to the employment potential these represented in small and large municipalities. This represented an innovative administration within the regulatory state with a satisfactory decision based on the situation. Although for ideological and economic reasons the Scandinavian welfare state model was challenged in the 1980s and 1990s, and maybe still is at the commencement of our millennium, its solidity related to institutional

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identity and path dependence resisted the impacts of both domestic and external pressure as described by historical neo-institutionalism approaches (Rosamond 2000; Pollack 2005). Further of great importance is that EU policy continuously generates impacts which bias new revitalization of the model.

NOTES 1. In the OECD report of 2002, Sweden is one of nine Western countries studied in this respect. The conclusion drawn from the study is that these negative impacts have forced governments not to create more fragmentation. It ‘seems to have come to a halt in many countries’ (p. 22). The halt notion does not refer to the use of market-type mechanisms of some kind when providing public services, but to more holistic institutional measures and procedures. This is most apparent in countries like Sweden and the other Nordic states, but less so in the UK and the US (Veggeland 2004). 2. The term ‘services of general interest’ is defined by the EU as public services which the government provides and should provide under universal obligation. The diversification of this type of services for in-house provision or outsourcing is still heavily disputed in the Union; see the dispute on the ‘service directive’. 3. In 2005, the amount was increased to NOK 500 000 by the government. 4. Exponentially increasing transaction costs with an increasing number of actors involved in the administrative process are examined by Fritz Scharpf (1997).

4. The service economy trilemma of the regulatory state 4.1

WELFARE STATE POLITICS

It is said that the welfare state is not based on ‘politics against the markets’, as commonly assumed, but rather on ‘politics with markets’ (Iversen 2005: 73). I further add ‘politics by the market’ to the latter postulation about the foundation and evolution of the welfare state. However, the postulations seem reasonable but should be qualified through answering the question, which type of welfare state? Although it is popular to point out that markets, including global markets, interfere with the welfare state and vice versa, it is obvious that this interference occurs along different paths depending on the actual welfare state model (Beetham et al. 2002). As mentioned in previous chapters, we have at least three gross welfare state models in Europe which are linked to the corresponding three administrative traditions and politics. Let us contextually elaborate these somewhat further. The Continental welfare state model, which is dominated by strong trade unions, is said to be of a corporatist type with a heavy regulated labor market. As elaborated earlier, high job security and protection through industrial relations play a key role (Koukiadis 2006). For this and other reasons, the corporatist welfare states are, in many ways, based on politics against markets more than other European states. The corporatist Continental welfare state model has not been shaped by accident, but due to historical reasons and institutional path-dependent developments. The Anglo-Saxon welfare state model, which is dominated by the record of actual market-centered policies, is said to be of a liberal type. The liberal welfare states are using market-type mechanisms and independent agencies for providing welfare services. The labor market is sparsely regulated and has low job security and protection (EPC 2005). This welfare state model more than others qualifies for the notion of politics by markets. This post-war liberal Anglo-Saxon welfare state model does not occur accidentally, but is biased by its historical roots and institutional path-dependent development. The Scandinavian universal welfare state model, which is dominated by the record of actual state-centered policies and high welfare expenses, is 80

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said to be of a universal type. The universal welfare states have universal job, social security and protection arrangements, and life-long learning and skills development are highly prioritized as a government responsibility. From another point of view and elaborated in other chapters, the post-war Nordic labor market has become rather liberalized, and the market-type mechanism of outsourcing is often put to use when providing welfare services. This makes the universal welfare state model qualified for the notion of politics with markets.1 Flexicurity is the other notion for the same politics (EPC 2005). As with the other models, the universal Scandinavian welfare state model and its politics have also become formed due to its historical roots and institutional path dependence. Why does the Scandinavian welfare state model seem to be receiving renewed EU attention under the umbrella of the Lisbon process in a time when states and regions are more then ever competing globally and are intensively acting politically and economically to maintain a high employment rate, trying to keep inflation in balance and maintaining low public expenditure (Iversen 2005; EPC 2005)? Public budget records confirm over the years that the Nordic welfare and social security costs consequently represent a high public budget burden. The answer may be very simple. The European renewed attention of politics is linked to the fact that, according to the contemporary Nordic model, welfare politics has been transformed to become productive politics with markets and not some sort of ‘parasitic’ activity as postulated by classical macroeconomic base theory (Cumes 1984; Austvik 2002). This means that universal job protection and social security shape the incentives workers have for investing in particular market-attractive types of skills and life-long learning and for changing work and workplaces without personal risk. Labor market flexibility is the innovative outcome of the Nordic active labor market policies with the market: education, lifelong learning, kindergartens that make work accessible to women, etc. For firms, it is such flexibility and skills access which are critical for competitive advantage in human-capital, knowledge-intensive economies. ‘Firms do not develop competitive advantages in spite of systems of social protection but because of it’ (Iversen 2005: 74).

4.2

THE FISCAL RESTRAINT APPROACH

There is a thesis that the attractiveness and strength of the Scandinavian model have their explanation in the model’s ability to adapt functionally in order to meet the challenges in the actual world of regulatory governance and global competition (EPC 2005). On the one hand, the model which is

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based on the Nordic administrative traditions prolongs and self-reinforces path dependence connected to the universalism of the traditional interventionist welfare state. On the other hand, as we have seen, innovative performance also occurs in the new regulatory state regimes which generate what we have called satisfactory institutional solutions. At least two such public innovations have been elaborated so far. We have identified the admired Nordic flexicurity approach and the particular Nordic innovative outsourcing scheme related to the EU public procurement directive. The latter scheme introduces and expands the market-type mechanism of bidding rounds and competing European providers and at the same time performs a reregulatory policy targeting indirect protection of national and local SMEs and, thereby, also employment. Despite the elaboration in earlier chapters of the Scandinavian social and administrative paths and related documentation of the public innovations and despite the Lisbon process’s up-coming focus on the Nordic model as ‘a recipe for European success’ (EPC 2005), let us continue the analysis and test the thesis model from another point of view. The challenge of the welfare state confronting the regulatory form of governance has been described as a question of policy choices represented as a ‘trilemma’ (Iversen and Wren 1998). In the regulatory state of welfare, wage equality and private service employment represent two of the policy goals, while budgetary or fiscal restraints represent a third goal. The public sector stagnates upon the will of the politicians who argue the necessity of fiscal restraint, referring to negative taxpayer responses. Growth of employment in the private service sector represents the potential which European politicians recognize, flavoured by neo-liberal views (Dilger et al. 1997), as the progressive strategy for the replacement of jobs in a stagnant public sector with fiscal restraints. Torben Iversen writes the following with regard to fiscal restraint, in the framework of the welfare state challenging approach (2005: 247): By fiscal restraint, I have in mind whether or not the government responds to non-market clearing wages by expanding public consumption and employment. The use of the macroeconomic concept of fiscal restraint is intentional because it is in fact closely related to the notion of non-accommodating fiscal policy. The relationship between government consumption and fiscal policy matters because fiscal policies are constrained by international and institutional constraints.

Let us make Figure 4.1 the point of departure to better understand the essentials of the welfare state challenges. 1.

As already pointed out, public expenses should be kept low because of macroeconomic fiscal restraints and also because fiscal policy is subject

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Low public expenses

The ideal welfare state model

Low unemployment

Low social inequality

Note: 1 The idea is inspired from a presentation by J.F. Sorensen at the University of Massachusetts during the fall of 2005 and quoted in a student work of S. Dreager (2006), ‘Secure retirement at stake: which welfare state regime performs better on the demographic challenge?’, UMass.

Figure 4.1 The ideal European administrative model for welfare and workfare: the road map to the ‘promised land’1

2.

to international and institutional constraints. The policy of low public expenses is often given legitimacy by the ideologically colored rhetoric of good governance. This is the political argumentation for the need and necessity of measures to diminish the ‘suppressing’ tax burden of the people and businesses. Lower personal taxes to individuals will presumably increase their economic freedom and their ability to act as free consumers. Lower taxes to private businesses shall expand their free capital and bias investments and thereby create jobs in the private sector. Social inequality should, correspondingly, be kept low and thereby fulfill the EU’s goals of economic and social cohesion and the ‘Equal’ program.2 Economic and social cleavages between EU member states and regions reduce the legitimacy of the Union, besides which poor regions will contribute less to the GNP than developed regions. Therefore, more than one-third of the EU’s budget is allocated to regional social and economic cohesion and development programs and

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projects. The ‘Equal’ program also concerns individuals. Too large economic and social inequalities between people threaten the ‘output’ legitimacy of the EU, i.e. the ‘governance for the people’ principle, and thereby the whole integration process. Therefore, in the political rhetoric fundamental goals are noted as the three SSSs: the achievement of economic and social solidarity, security and sustainability (Veggeland 2005; Eriksen et al. 2002). 3. Low unemployment should be achieved to fulfill the EU goal of global competitiveness. In an economic sense, a fundamental condition for increasing the macroeconomic competition of a state or region is fully exploiting the aggregated labor force. Job creation policies are essential in the EU, and the private service sector is pointed out as the arena for reducing the unemployment rate, which in some member states is quite high (more than 10 percent). Low unemployment is linked to the goal of low inequality and to the goal of sustained economic growth. Workfare and wider systems of social security, to which they often are linked, are not dysfunctional for such growth. It is not the case that labor market institutions are in the grip of such deep uncertainty that the importation of Anglo-Saxon neoliberal deregulation policies into the rest of Europe is on the agenda (Rhodes 2000: 173).

4.3

THE EUROPEAN SERVICE SECTOR TRILEMMA

For the EU and the Lisbon process, the crucial issue is to request not a theoretical ‘promised land’ model, but rather a practical approach. As illustrated in Figure 4.2 the economic goals of public expenses, equality and employment are linked to three distinct policy choices. The trilemma occurs because it is difficult to pursue successfully all three goals simultaneously as long as there are tradeoffs between them (Wren 2000). At this point, and before elaborating this statement further, there is a need to define the notions of trilemma and tradeoffs, between which we distinguish. I follow Pollitt and Bouckaert (2004: 162): ●

Tradeoffs: where having more of one desideratum, or lessening one problem, inevitably diminishes some other wished-for quality or increases a different problem. This is therefore a situation where decision makers are obliged to balance between different things that they want very much, but cannot possibly have more of all at the same time – indeed, where to have more of one entails having less of another. In the political world, choices of appropriateness are often

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85

made which mean making the best out of it in terms of good governance based on a pragmatic approach. Trilemma: situations in which the decision maker is faced with a choice of three (at least more than two) unsatisfactory alternatives, that is, in which the available decisions about a given problem cannot be made in such a way as to solve the problem, but only to substitute one set of undesirable features for another. A trilemma is thus the limiting case of a tradeoff, in that it is a tradeoff in which the situation remains negative whichever option is chosen. Accordingly, in the political world, choices of appropriateness are made which mean making the best out of it in terms of good governance but now based on norms, values and traditions which make one set of options preferable to the other.

In the framework of the real world of administrative traditions and governance systems, the question is raised as to where to find a model which at least empirically features a path of appropriateness in relation to the goals of the Lisbon process. Trilemma governments tend to compromise the goal that is least ideologically important to them in order to maximize the others. Torben Iversen (2005: 146–7) highlights this ideological aspect of the trilemma choices emanating from the global age challenges of keeping unemployment, inequality and public expenses at a low level. One strategy was to deregulate labor markets to reduce the power of employee unions and increase wage flexibility. This was exemplified by the neo-liberal policies of governments in the United States, Great Britain, New Zealand and Australia during the 1980s. Another strategy was to accept the employment consequences of a compressed wage structure and to seek to limit the disruptive effects by discouraging the labor market entry of women and by facilitating labor market exit, primarily with older people through early retirement. This is the choice pattern we find in some Continental European countries. The final option was to accept slow growth of employment in private service sectors and to simultaneously pursue an expansive employment strategy through expansion of public sector services and to regulate forward a low unemployment rate by keeping younger people in education. These were the options often chosen by social-democratic governments in the Nordic countries, where the ideological path was to finance the higher public expenses by increasing taxes. As we observe in this process of compromising goals and policies, social models and administrative traditions and path dependence played an essential role for what determined appropriate choices and strategic thinking.

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The trilemma as tradeoffs between the above three noted economic goals of the new welfare state are illustrated in Figure 4.2. In addition, there are choices illustrated which are biased by path-dependent processes stemming from the three dominant European social and economic models. All of these generated ‘failures’ because of the tradeoffs between the goals of equality, employment and fiscal restraint. The content of the ‘trilemma’ indicated by Figure 4.2 is as follows: We have all been faced with a dilemma at some point and have experienced the problem when we must confront the dilemma and then need to make a choice to resolve this. In the European Union, there is a debate on how to solve a ‘trilemma’ such as the ‘welfare and service sector trilemma’ (Rhodes 2000: 169). Arrangements are issued to overcome the trilemma which occur politically when choices are to be made for developing European welfare and competitiveness on three basic goals which seem to reflect the inconsistency of the goals of the ‘promised land’: 1. 2. 3.

low unemployment linked to job creation, labor market flexibility and full employment; low inequality linked to compressed wages, welfare equity and social security for all; low public expenses linked to budgetary constraint, efficiency and the degree of central bank independence to regulate public spending in the regulatory state.

In consideration of the problem with rising unemployment in most European countries, with the Nordic countries being a partial exception to this trend, the inconsistency of these objectives is a headache for European and national legislators and executives. With reference to Figure 4.2 and the performance of failures 1–3, the European welfare and service policy trilemma consists of the following inconsistency. On the one hand, creating jobs and employment in the private service sector is a recommended strategy because the budgetary balance will not be disturbed. However, the strategy does touch the trilemma by entailing lower wage and non-wage costs and risking greater inequality. On the other hand, the strategy of generating service jobs in the public sector is again a trilemma because the strategy indeed impacts the limits of already overloaded budgets. Politicians are obliged to make decisions and are looking for a European model to overcome the trilemma, to find a model for job creation, for equality and for welfare, but within a sustainable economy in order to make Europe the most competitive region in the world, as was announced at the Lisbon summit meeting in 2000.3

The service economy trilemma of the regulatory state

Failure 1: High inequality

Failure 2: High unemployment

Low public expenses

Choice

Choice

Liberal Anglo-Saxon welfa re state

Low unemployment

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Corporatist Continental welfare state/bargaining system

The trilemma in the regulatory welfare state Interventionist universal Nordic welfare state

Low inequality

Choice Failure 3: High public expenses (high taxes) Figure 4.2 The three administrative traditions biasing choice options with none of them able to solve the so-called ‘trilemma’ in the regulatory welfare and service sector without generating ‘failures’

4.4 EUROPEAN GOVERNANCE TRADITIONS AND TRADEOFFS In short, and in our context, the equality–employment–public expenses tradeoffs of the European welfare state models and paths may briefly be described as the following: ●

The tradeoffs in the liberal welfare state model: As pointed out before, the Anglo-Saxon administrative tradition is weighing market solutions and regulatory measures, and less state intervention is an

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●

●

explicitly expressed objective in the service sector. Universal welfare and health coverage are not guaranteed. Workers’ health and social insurance is established through the employer, while the government covers the health expenses for the poor and the elderly who fall outside the insurance system. The response to the equality–employment tradeoffs, job creation and labor market flexibility was given priority, while job protection and social security were reduced. The use of contracting workers reduced the power of unions and increased wage inequality during the 1980s. The politicians and economists believed in a flexible labor market for full economic capacity exploitation, job creation, innovation and growth through a flexible labor market without fixed tariffs and expensive welfare services. For neo-liberal economists this is the ultimate precondition and solution for increasing productivity and revitalizing the European economy in a global world. The tradeoffs in the corporatist welfare state: The Continental administrative tradition favors corporative solutions and state interventionist measures. Social security, health and social insurance are guaranteed, although the latter is offered through a mixture of public and private institutional arrangements. Traditional welfare services are kept public as ‘services of general interest’. Trade unions are strong, but the problem is that too few jobs are created. In this tradition, the response to the equality–employment tradeoffs was to accept the employment consequences of a formal wage structure and hierarchical and rigid system of professionals, the latter of which also dominated the bargaining area. The labor market remained inflexible and the unemployment rate relatively high. The tradeoffs in the universal welfare state: The Scandinavian administrative tradition favors public institutional solutions, interventionist measures, universal welfare services, social security, public health and social insurance arrangements. Owing to outsourcing and contracting arrangements in the service sector, trade union power has diminished since the 1980s. In this tradition, the response to the equality–employment tradeoffs was to accept sluggish employment growth in private services while expanding the public service sector and public expenses, and therefore high taxes. The influence of professionals in the main bargaining area was limited because Scandinavian unions, unlike unions in countries such as Germany and France, were sharply divided between blue- and white-collar workers. In addition, the governments ran proactive measures for life-long learning, adult education and continuous training in order to adjust skills to the changing needs in both the private and the

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public sector. Close to 20 percent of all adults (those between the ages of 25 and 65) participate in some kind of adult education every year, compared with an average for the EU as a whole of around 8 percent. A rather flexible labor market has developed as a result. The payoff from the universal welfare state facilitates acceptance of the relatively high tax level.

4.5

THE FLEXIBLE LABOR MARKET

The Scandinavian countries have a long shared history and have experienced similar social and economic developments. The most common feature of their systems is a well-developed welfare state characterized by its universalism, which means that all citizens are entitled to basic social benefits and job protection, high social spending, high taxes and a large public sector. They have succeeded in achieving a high degree of labor market flexibility and are close to fulfilling the Lisbon goal of an overall employment rate of 70 percent. Employment policies lie at the heart of the Scandinavian countries’ labor market policy as social security policies lie at the heart of their welfare state policy. Obviously, these policies pay off only innovatively when they are associated with the described effective labor market flexibility. Why do these policies pay off innovatively in the framework of the trilemma and tradeoffs? Even if they did not invent the Lisbon strategy, the Scandinavian EU member countries are very much comfortable with it – particularly its initial triple focus on economic reform, employment and social inclusion in a knowledge-based economy and under regulatory governance. The similarity between the Lisbon priorities and the past and current actions of the Nordic countries has led some to ask whether or not the Lisbon reform agenda was simply an ambitious attempt by these countries to put their flexicurity model imprint firmly on to Europe’s economic and social model (Janssen 2005). This is unlikely to be the case. The Lisbon meeting in 2000 represented a collective recognition of the challenges the EU faces and the need for a common response such as a response which is able to draw on the best elements and paths of each member state’s social and economic models and administrative traditions. This means a consensus across different models, rather than the imposition of one single approach on all the others. Some feared that the Lisbon reforms represented a divisive Anglo-Saxon model that was far from a Scandinavian one and would therefore be only partially successful. This led to unjustified concerns that the actual agenda for

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growth and jobs would deliver the failure of high inequality (see Figure 4.2), i.e. less social protection and undermining of the role of the State. There was also a fear that the same standards were not always being applied to the large and the small. The divisive Anglo-Saxon model: The European politicians looked to the liberal, or more precisely neo-liberal, welfare state model of the AngloSaxon market-driven model of welfare and workfare (Rhodes 2000). During the 1990s, this policy was evidently successful. The unemployment rate continued to decrease in Western Europe, as in the USA. However, the opposite has occurred in European countries since this period. The flexible labor market failed to remain flexible. Studies show that the reason for this is to be found in the model (Ferrera and Rhodes 2000). The Anglo-Saxon model does not guarantee universal welfare and health coverage, for example people receive health insurance through their employer with the governments covering expenses for the poor and the elderly. Therefore, working people tend to cling to their existing job and to the employer that provides wage and social insurance benefit coverage. As a result, labor mobility is lost. (Actually, this phenomenon was addressed by President Bush4 in his State of the Union speech 2006 as a US labor market problem and challenge for which he also called for reform). Additionally, in terms of the trilemma, the Anglo-Saxon liberal model is achieving greater social inequality as an output that negatively affected the welfare state idea (Koukiadis 2006). In the long run, growing unemployment is predicted as the ultimate outcome because of fragmentation in the service sector, lost purchasing power and diminishing international competitiveness. The divisive Continental model: The European politicians then looked to the corporatist Continental model (Le Galès 2003). It is a state-centered model with strong trade unions and other social partners. Employee and employer unions are heavily involved in negotiations when bargaining over tariffs and social security arrangements. Given the tradition of corporatism, the development and expansion of the welfare state arrangements took place without driving out the market-based private sector, NGOs and the private charity organizations. The tradition relied on corporatist arrangements which allow for the coexistence of market ideals and positive evaluation of the state-centered welfare and workfare approach. However, internal mobility of the labor force appears on a rather low level since the transfer of a civil servant to another position occurs occasionally rather than automatically and is dependent on the fulfillment of certain legal requirements (EPC 2005). Also, the private sector is ruled by a great deal of labor market formalism and legal requirements. The EU politicians’ conclusion was that the model is too rigid concerning its policy system, and

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the system acts as a barrier to much-needed modernization or at least discourages such developments (OECD 2005). Nowadays, the Continental administrative and social model is in great trouble due to increasing unemployment in Continental countries such as Germany and France. In the spring of 2006, an unemployment rate as high as 14 percent was reported in Germany. In terms of the trilemma, the Continental corporatist model maintains the institutional bias for social security and traditional welfare state arrangements. Therefore, the model fulfills the EU goals of social coherence, i.e. relatively low inequality, and the corporatist regime makes budget constraints potentially feasible by imposing responsibility on the labor market actors to retain competitiveness. The main problem is its failure of innovation and labor market flexibility, i.e. too few jobs are created in the framework of workfare. European politicians have concluded that neither the corporatist Continental model nor the neo-liberalistic Anglo-Saxon model, as administrative follow-up welfare and workfare state models of the Lisbon process, seems to solve the challenges of the trilemma. In the welfare and service sector, both models generate failures (see Figure 4.2): the failure of achieving consistently low social inequality, low unemployment and low public expenses (Rhodes 2000).

4.6 THE DIVISIVE NORDIC FLEXICURITY MODEL IN FOCUS European politicians are looking to the Scandinavian administrative model for welfare state and order of labor relations. They are doing this because, unlike the situation in other European countries and whether the Scandinavian country is an EU member state or not, the labor market is functioning quite flexibly, new competitive jobs are created and the unemployment rate is kept generally low. All labor market statistics give evidence for this. Comprehensive outsourcing of public services as documented by the OECD (see Table 3.3) might well be a contribution to this by making the related labor market become more flexible. In particular, the adopted outsourcing mechanism has to some extent reduced collective employee leverage within labor market policy in the Nordic countries. Compared to the unreformed Continental administrative tradition, which favors corporative solutions involving strong trade unions and other employee organizations, it gives the reformed Nordic tradition an advantage (de Buck 2004). Public purchases of services resulting in signed contracts on deliveries with contractors imply regulatory superiority to the contractors as employers. The contract authorizes the employer

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to turn away all other interests to fulfill the contract and achieve results by using the labor force properly. This means searching the labor market to access expertise and a competent and skilled labor force in order to win bids and contracts on public procurements. Such performance generates labor market mobility and flexibility. Internationally, this is a well-documented effect and clearly represents a contributory effect to the actual Nordic labor market and workfare debate (see Beetham et al. 2002; OECD 2002). It is of importance to mention that, even under the historically rooted regulatory regime of the EU nailed to employment failure which generated the Lisbon process (Koukiadis 2006), the equity and equality in the Nordic member countries remained at an acceptable level and the heavy social security system and the labor market flexibility functioned well. The tradeoffs and trilemma of the service sector have satisfactory solutions. Environmental policy has usually been given priority. Despite the use of the market-type mechanism of outsourcing and the weakening of trade unions, the contemporary Nordic model has been shown to comprise prized pathdependent incitements for more than just flexible labor market performance. Dynamic and flexible labor markets function without the loss of benefits from universal welfare and social security arrangements. The flexible labor market’s mode of functioning per se depends on the continuous existence of these arrangements. This conclusion can be drawn from comparative studies on the Anglo-Saxon liberal welfare state model which is missing universal arrangements (Pierson 2001b; OECD 2002). The Scandinavian universal welfare concept in combination with industrial relation policies, such as upgrading the skills of the unemployed, encouraging the unemployed to remain active and search for jobs, helps to generate flexicurity. The special regulatory innovation in the Nordic states when using the market-type mechanism of outsourcing to provide public services is an important element in developing flexibility and is often overlooked. In this respect, the model may be considered to adhere to institutional structures of vital importance to the EU and its affiliated European countries because of the ability to generate and perform social innovations specific to the Lisbon process and despite the fear that the same standards are not always applicable to both large and small entities (Ferrera and Rhodes 2000; Europe’s World 2005).

4.7

REFORMS

There have been welfare reforms in order to adapt to new politics and economics in the global age. However, the basic structure of the welfare system of the Nordic countries has, in principle, been preserved with the partial

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exception of the pension reforms which Finland started in 1996 and which the others followed upon later. Generosity in the field of public welfare has to some extent decreased, but is still heavy. Briefly, the following list indicates the policy directions of the contemporary reforms which have been made: 1. 2. 3. 4. 5. 6.

Social benefit levels have been reduced, besides being directed towards stay-in-work concepts. Benefit periods have been shortened. Eligibility for social aid support has been tightened. There is stronger emphasis on rehabilitation, activation, education and training. More work-friendly social security rules have been adopted and implemented. Structural reforms in the old-age pension system to handle the increase in old-age pensioners in the future have been implemented.

Nationally, the political debate in the Nordic countries on welfare issues and labor relations has differed somewhat since the 1990s. In Denmark, the premise was how to deal with unemployment and the growth of social expenditure, and the latter was a main issue. In Sweden, the issue of focus was how to cut benefits and expenditure without destroying ‘the people’s home’, i.e. not devastating the social security framework. In Norway, the focus has been on how much more of public finances (‘oil money’) should go into the health system, old-age pensions, care for the elderly and labor market tasks without creating inflation and devastating competitiveness in the private sector. The Parliament (Stortinget) has set a ‘rule of action’, meaning an upper budget limit for governmental use of oil money in the public sector. Despite debate on the welfare state reforms, there is a general political agreement on the importance of sustaining the basic welfare model and paths related to institutional traditions.

4.8

THE ADVANTAGE OF FLEXICURITY

How does the Scandinavian state-centered tradition, the Nordic model of today in the framework of EU regulations, enable the realization of a flexible labor market, low unemployment, low inequality and budgetary balance? In a neo-liberal perspective, this is not a result of public interventions and social security used to reduce mobility, innovative actions and work efficiency (Veggeland 2004). Flexi-insecurity should be the ultimate solution.

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Of course, the explanation is not found in one factor only and I have drawn attention to the use of the market-type mechanism of outsourcing in the public sector in states with heavy public expenses. Studies come to the interesting conclusion that the keyword is ‘universal social security’ (Pierson 2001b). According to the Scandinavian basic model, working people/employees will not have their social security primarily dependent on private and employer insurance. Their social security should be, and actually is, by institutional path-dependence incitements anchored in public welfare arrangements with universal coverage and valid wherever they are working. Therefore, the basic safety arrangement makes it easier for everyone to move and change his/her workplace and provides the opportunity to find a new and more suitable job fitting his/her competence. The universal social security framework, social insurance, tariffs and access to the benefits of welfare and social security will be identical because they are universal.

4.9

SOME CONCLUSIONS

The slogan ‘being taken care of from the cradle to the grave’ is becoming highly valued again as the basic path of the Scandinavian welfare and workfare state model. In the perspective of the Europeanization processes following European integration, its ability to combine workfare and universal welfare and thereby generate flexibility in the labor market is its comparative advantage. The generation of flexibility, as an effect, is found anchored partly in the market-type mechanism of outsourcing the provision of services in the public sector in states with high public expenses as in the Nordic countries. This effect is conditional. The mechanism of outsourcing has to be embedded in an institutional framework of universal welfare state arrangements and social security. This is what makes it a model for social efficiency and labor market innovation. It tends to deliver a flexible labor market and employment without the loss of welfare and social security. This is why politicians, economists and the Eurocrats now keep saying ‘Look to Scandinavia’ and its flexicurity for a European social model.5 What makes the model highly prized is the belief in the comparative institutional advantages of the model and its supposed ability to deliver positive path dependence for future Europeanization processes. Such a model may be viewed as a relatively stable collection of practices and rules defining appropriate and favorable behavior of actors in the labor market (March and Olsen 2005). The practices and rules are embedded in the institutional structure of the model which legitimizes even its ‘failure’ (see Figure 4.2) of high public expenses. In bringing the Lisbon process back on track in respect of speeding up the effectiveness of the actions for

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accomplishing its basic targets, the most institutional value of the model is probably its potential ability to make the European Council’s endorsed ‘open method of coordination’ and regulation by persuasion to become linked to the public sector’s ability to transform fragmented incitements to holistic approaches (Veggeland 1999). Both the size of the state and the role played by the public sector say a great deal about the organization of the Nordic societal models and the choices made by those societies. Unfortunately, too often in the global age, the rather indeterminate objective of achieving competitiveness has focused exclusively on well-functioning markets and the performance of the private sector. All too frequently, the public sector has been a ‘forgotten variable’ in this equation (Koukiadis 2006). Talking about the relationship between the public sector and competitiveness may sound contradictory to many bound by neo-liberal thinking. The public sector is to the latter way of thinking often viewed as an ‘enemy’ to competitiveness, a static actor that performs a negative role, which is that of a regulator and a tax burden creator. Innovations in the public sector of the flexicurity type are often neglected or looked upon as something beyond the creation of economic productivity. As in the rest of Europe, the contemporary Nordic countries, in the framework of the EU, face two major challenges in the years ahead, which are the aging of the population and extensive immigration. Both demand a flexible labor market with a high rate of participation, a highly qualified labor force and a social and inclusive welfare state. The flexible Nordic labor market combined with its social security system is an advantage in this context, but culturally the Scandinavian societies are not automatically inclusive, especially when it comes to immigration from other continents. Actually, the aging of the population puts enormous pressure on the labor force and the financing of the welfare state. Fewer and fewer persons in the labor market have to support a larger and larger number of ‘non-active’ people such as children and the elderly (Iversen 2005, and official OECD statistics 2005). Even though the participation rate in the Scandinavian countries, in general, is already quite high by international standards, there is still potential for improvement. More than 25 percent of the population benefits in one way or another from government social spending corresponding to changing demographic conditions. Many of the non-active people are not able to work full time, for example because of health problems. Additionally, there is a policy failure in enabling the full integration of refugees and immigrants. Immigrants and refugees have a very low work participation rate, especially among women. There is no doubt that the process of integration has to be improved in the future by introducing new policies, but should it be done through the use of a ‘stick’ or a ‘carrot’?

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It is, however, the responsibility of the Nordic politicians to decide the method and to keep the model viable for Nordic citizens in the future through grants and funding measures. In the new European environment, the funding of welfare and social services is a national competence. The more specific importance of the EU is its competence to produce modeldependent national institutions through supranational laws and regulations (van Warden 1995). It is the institutional path dependence that the flexicurity model may generate for the future in the framework of the Lisbon process that makes the choice of such an innovative model for Europe so decisive, especially for sustainable development in the widest sense of the notion. This is what the President of the Party of European Socialists, member of the European Parliament and former Danish Prime Minister Poul Nyrup Rasmussen writes about the flexicurity model of the Nordic countries (Europe’s World 2005: 55): The Nordic model provides some well-functioning answers to our present challenges. It works through the complementary nature of most policy areas. It takes advantage of these in a proactive and ambitious way. It capitalizes on them. Thus it is proof that high productivity and income equality can be combined positively and that active labor market policies can ensure that people spend as little time as possible between jobs. It, moreover, confirms that lifelong learning, training and the development of employees’ skills are the key to a competitive and dynamic workforce, and that labor market flexibility and security are not contradictions but preconditions. I think, and hope, that the Nordic model can inspire more European countries to adopt a difficult, yet promising, new approach to combining reforms and investments.

NOTES 1. Torben Iversen (2005: 73) discusses the notion of politics with markets, but does not explicitly link it to the Scandinavian welfare state. He probably also includes the AngloSaxon model or perhaps makes it a general notion. If so, I disagree. 2. The ‘Equal’ program is one of the four programs belonging to the so-called Commission Initiatives. 3. The Lisbon summit meeting announcement, and the conditions for participation in European Monetary Union, require economic sustainability of the member states. 4. I had the pleasure of watching the entire speech on TV while residing in the USA at the time. 5. The saying is found in several recent European Commission documents. It is especially proclaimed by two of the EU’s social partners, the European umbrella organizations ETUC and CEEP (de Buck 2004).

5.

Scandinavian subsidiarity

5.1

THE PRINCIPLE OF SUBSIDIARITY

The Germans use the term ‘Leitbild’ meaning a leading light or picture. Since the adoption of the Maastricht Treaty in 1991, the principle of subsidiarity has become the political Europe’s and the Scandinavian countries’ ‘Leitbild’ as the European Community moves towards closer integration. The principle of subsidiarity requires that decision making in the EU should be taken at the lowest possible administrative level, but high enough to be effective. Or more precisely, according to the Maastricht Treaty in Article 3B, it is formulated as follows: The European Community shall operate within the limits of the powers and intentions accorded it by the Treaty. In those areas outwith its jurisdiction, the Community may act according to the principle of subsidiarity only if and when a projected action, in consideration of its nature and consequences, cannot be satisfactorily accomplished by member states, and would therefore be undertaken more effectively at Community level. The Community shall only operate to the extent which is necessary to achieve the goals set by the Treaty.

In Chapter 3, we elaborated on the concept of the ‘lowest possible effective administrative level’ and criticized the failure of the consistent definition: downwards to national and local-level governments in a multilevel governance system, i.e. a multi-leveled government-centered concept, or outwards to national and local public and private independent agencies1 in the framework of the NPM system, i.e. a market-centered concept (Hooghe and Marks 2001). Yet, what kind of administrative practice may this principle of subsidiarity lead us towards (Veggeland 2004)? Does the Nordic administrative model favor a certain path? In a European Policy Centre Working Paper (EPC 2005) the authors’ answer is a unanimous yes and the answer is elaborated in the framework of the flexicurity scheme. I intend in this chapter to give the question an answer of a supplementary scope. Hence, I intend to elaborate the policy principle of subsidiarity in the framework of the Nordic model and public innovation. I want to do this because there is no clear-cut form which appears to show the European concept of subsidiarity in the framework of defined paths, renewal and administrative tradition dependence. 97

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The Maastricht Treaty text is formal and unspecific, but nevertheless defines indirectly the practice of subsidiarity at national state level, i.e. member state level, as a free choice between a state-centered practice and a market-centered practice or a combination of both (Veggeland 2004). It proves that the original concept of subsidiarity was to acknowledge and legitimize the right of member states to exercise decision-making power in political areas where the aims and intentions written in the Maastricht Treaty cannot be adequately realized at the supranational Union level. The principle was a decided regulatory innovation in the Community and as such should be implemented in accordance with national paths of governance (Rometsch and Wessels 1996).

5.2

GOVERNMENT TRADITIONS

Different governance systems among European states are empirically illustrated in Table 5.1, and the figures indicate extreme deviations from an average ranking. Table 5.1 reveals the institutional difference in organizing public governance through state-centered government versus marketcentered governance (Knill 2001). In this respect, Continental France and Anglo-Saxon United Kingdom represent the outermost cases, especially when concerning the average population per assembly of representatives. Table 5.1 Citizens per elected councilor and population per representative assembly of governments on national, regional and local levels in some European Continental, Scandinavian and Anglo-Saxon countries Country 1. France 2. Germany 3. Italy 4. Norway 5. Spain 6. Sweden 7. Belgium 8. Denmark 9. Portugal 10. UK

Number of citizens per elected councilor and MP

Average population per assembly of representatives

116 250 397 515 597 667 783 1 084 1 125 2 605

1580 4 925 7 130 9 000 4 930 30 040 16 960 18 760 32 300 118 400

Source: Council of Europe (1996).

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The so-called British Westminster government system is to a very small extent based on local and regional elected assemblies (scarcely existent in a government perspective) with authority to participate in the allocation of resources and welfare goods, hence the high number of constituencies behind every assembly of representatives in Table 5.1. The elected assemblies are few in the Anglo-Saxon governance tradition. The authority linked to legislation and regulations is concentrated in the national Parliament. With regard to the allocation of economic and social benefits the market mechanisms dominate and are performed by private actors or by independent public agencies. The principle of subsidiarity is realized as a market principle. In France, almost the opposite is the case. Besides the powerful National Parliament, 26 regional governments and more that 36 000 municipal councils participate in decision making and allocation processes (Loughlin and Mazey 1995), which accordingly, on the one hand, result in the low number of constituencies behind its representative assembly. On the other hand, the large number of elected assemblies in the government system from the municipality level to the national Parliament indicates that the government-centered principle of subsidiarity most likely is realized. Hence, if we define the UK in the framework of the regulatory state and its governance tradition, France is in the state-centered Continental tradition, and is still reinforcing its traditional interventionist mode of this social model through its ‘Contrat de Plan – État – Régions’ (Balme and Bonnet 1995). The Scandinavian states are, in Table 5.1, ranging somewhat between the Continental and the Anglo-Saxon states. We recognize that Norway comes quite close to the Continental structure of democratic state-centered governance, while Denmark shows figures that make the country range more closely to the Anglo-Saxon market-centered governance structure.2 Sweden ranks between the two other Nordic countries. The ranking is not surprising because of administrative reforms during the 1960s which brought about the following, at the local level: the municipalities were merged to make fewer numbers. This reform increased the territorial size and made the decision-making power of the new administrative units more effective. Counteracting reforms, in the 1970s, pursued direct elections of representatives to assemblies also at the county level. This reform replaced indirect election of municipal representatives to the assemblies of the counties at the regional level. These local and regional administrative reforms were the beginning of further reforms in the 1990s and 2000s. Actually, at the time, a wind of change started to blow over the Nordic countries, heralding a need for administrative renewal. Inspired by the EU’s devoted development strategy of neo-regionalism closely linked to liberalization of markets and the exclusion of political interventions and the introduction of the principle of

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subsidiarity, Nordic scholars and planners counseled their governments to take part in this new European reform (Veggeland 2000; Jørgensen 2004; Hallin 2004). In this political context, a strange alliance appeared in Nordic countries between social democrats and socialists on one side and neoliberalists on the other. The leftists found a strong central state necessary to secure social equality, welfare and fair distribution, taking into account the liberalization of markets and the growing number of arm’s length public agencies and other governmental bodies, while liberalists found the central state necessary as a regulatory authority. Their common conclusion was that an administrative reform should have as a target fewer representative local and regional authorities. So, it was the Anglo-Saxon and the neo-liberal government traditions and views, especially of the right-wing parties in the Nordic countries, which appeared in their political party programs. Actually, they combined three political goals: 1) A marked reduction in the number of municipal units. 2) The removal of elected assemblies at the county level, or merging of the latter to make the number of units less. 3) ‘Small is no longer beautiful’ but ineffective; the conclusion was that a simplified and efficient public sector is needed in the global age. With reference to Table 5.1, if these administrative reform goals and approaches had been implemented in the Nordic countries, they would have biased the development quickly in the direction of the UK structure, which would have meant a change in the Table 5.1 figures (Veggeland 2003). As elaborated in earlier chapters, all of the Nordic countries are well inside the definition of being universal welfare states, but public services and labor market policies have, since the 1980s, turned towards more marketfriendly solutions: welfare services in terms of being organized as independent agencies and other governmental bodies, and workfare in terms of liberalized labor market flexibility. This indicates the thesis that in the Nordic context the principle of subsidiarity has become somewhat transformed from decentralization of decision-making power downwards to local governments, to distribution of decision-making power outwards to a number of independent bodies as concretized in the Danish reform case (see section 5.3). It implies that the principle of subsidiarity is being implemented first and foremost as outward distribution of decision-making competence to agencies and not downwards to representative assemblies.

5.3

THE DANISH REFORM CASE

In 2006 in all of the Nordic countries, except for Denmark where an administrative reform was adopted in the Parliament in 2005 (Jørgensen

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Overgaard and Vagnby 2005), the governments are working on administrative reform proposals of the kind described. The concrete output of the endeavors is awaited and therefore beyond the scope of this book. Let us look more closely into the Danish case and see what can be elaborated on from this administrative reform. Owing to such an extensive reform, it might be postulated that right-wing policies probably have to be compromised with social-democratic and socialist beliefs in planning and representative policies. Actually, in Denmark, it was such a compromise that created the 2005 reform. The municipalities and counties (amter) were merged together, but the representative assemblies remained as democratic authorities at the county level, called the level of ‘regions’. This was the concession given to the social democrats (Jørgensen Overgaard and Vagnby 2005). See Table 5.2 for figures on this reform. The county-level sector traditional authorities and task responsibilities in different infrastructure sectors were spread mostly upwards to the state level or outwards to state agencies. However, the provision of different personal welfare and social services was transferred downwards to the new municipalities, which will force them to cope with new tasks and planning responsibility. They have to coordinate a new and larger spatial geography and they have to manage and assess a new urban pattern (Jørgensen Overgaard and Vagnby 2005). The new regions and the elected assemblies were left with the responsibility for spatial planning and for running the hospitals located in the regions (Jørgensen 2004). Furthermore, the hospitals are organized as arm’s length independent bodies, which makes the elected assemblies act more as a ‘business board’ rather than a democratic authority. It is agreed that the new representative regional authorities of Denmark have become quite empty of policy responsibility and decision-making power. In our framework, should this Danish administrative reform be noted and listed as a public innovation? Of course, the reform represents something Table 5.2 The new administrative pattern of the Danish administrative reform concerning the number of municipalities, regions and elected authorities

Number Inhabitants

Old municipalities

New municipalities

Counties (amter)*

Regions (regioner)

271 20 000

98 55 200

131 344 100

5 1 082 300

Note: * The cities of Copenhagen and Fredriksberg are not included. Source:

Journal of Nordregio, 2, 2005.

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new in the Nordic context, and an appropriate performance on the ground of the EU principle of subsidiarity was founded. Indeed, the Danish administrative reform must be noted as a public sector innovation. However, the reform is very much in focus because many mistrust the ability of the municipal authorities, without strong representative regional authorities, to solve cross-sector problems in an age of multi-level governance (Jørgensen 2004). The similarity between the Danish reform and the British municipal and regional fragmented governance structure with its coordination and policy coherence problems is striking. There are elements of Anglo-Saxon imitation also in terms of it being considered as a reform performance for implementing the principle of subsidiarity.

5.4

FIVE ‘FACES’ OF SUBSIDIARITY

As I wrote in the introduction of this book, subsidiarity, the politics of multi-level decision making, has become a complex challenge affecting all levels and scales of the public domain of steering. At the regulatory EU level, the Lisbon and Gothenburg agendas have set the context for an EU subsidiarity governance strategy to improve national and local innovation potentials and, thereby, the Community’s identity and competitiveness in the global age. The policy goal is to achieve good governance by making the Community’s economic and social development more solid, secure and sustainable in the enlarged Europe (Amin 1994; Rometsch and Wessels 1996). However, given the background of an unclear European conceptual picture of subsidarity, I will, hereby, attempt to sketch and depict ‘five faces’ of the concept, which are based on the interpretations of different member states and administrative traditions. The intention is to portray these faces succinctly while alluding to appropriate examples derived from the Nordic administrative and social model. Before embarking on this examination, it is worth reminding ourselves of the subsidiarity principle as defined in the Maastricht Treaty cited above. It refers to the devolution of decision-making competence in a framework of decentralization, multi-level governance and the efficiency of problemsolving efforts (Hooghe and Marks 2001). The subsidiarity principle in this framework is as follows (Veggeland 1995b):3 1.

Decision-making competence and power lie in the hands of the supranational EU, and should remain there as a direct benefiting result of the devolution of power upwards and the distribution structure prevailing within an integrated Europe.

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This is a neo-functional perspective on multi-level governance in the EU. The variation conceives the legitimate establishment of a supranational authority at top European Union level with spill-over to the other administrative levels through elite socialization (Strøby Jensen 2004). It hardly relates to the current political wish favored by the Nordic model and its administrative tradition, the wish of ensuring that decision-making power is entrusted to lower-level authorities that are close to those most affected by these decisions. Decision-making competence and power should be kept in the hands of the EU member state governments in those circumstances where policy can best be planned and administered at the state level. This is the intergovernmental perspective on multi-level governance and confederalism in the EU (Cini 2004). The variation reduces the fear shown by many nation states that they will be totally dominated by the supranational EU policy-making machine. It legitimizes the continuation of the nation-state within the union structure proposed by the Maastricht Treaty. Furthermore, it marks a milestone on the way towards achieving the notion of ‘nearness’, but by no means approaches the desire contained within the original meaning of subsidiarity that real multi-level governance should be the ultimate output. It accepts the nation-state as a policy-making level while leaving the supranational EU as the supreme decision-making body. This variation is favored by countries with a strong centralized government structure, e.g. the United Kingdom, while being much less popular in Continental Germany where the lower-level Länder, on the basis of the German constitution, exercise considerable power. The independence of the Länder would thus appear to be threatened by the existence of a strong supranational–national power structure. In the early 1990s, the Länder went so far as to take their case to the German Supreme Court in order to prove the Maastricht Treaty proposals were constitutionally unacceptable. However, their bid failed, as the Supreme Court, in October 1993, ruled the proposals within the Maastricht Treaty do not, as feared, transgress or endanger the German constitution. In the current political Nordic countries, this variation of subsidiarity might very well be accepted but for other reasons than those of the Anglo-Saxon UK. Despite the Nordic model traditionally favoring decentralized government, as we have pointed out earlier, left-wing and right-wing political parties now argue for and encourage the making of a strong central government. The left-wing parties encourage this for social equality and fair distributive reasons, while the right-wing parties encourage this for regulatory reasons.

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Decision-making competence and power should be divided between supranational, state, regional and municipal administrative levels to increase the ‘nearness’ aspect, and to honor the principle of distributing and sharing representative democratic competence between the different territorial hierarchical levels. Certainly, this third variation is formed and biased by the traditional Continental and Nordic model of democratic government and belief in the participation of the people in political processes; the central state delegates tasks and competence to the lower echelons of the hierarchy where nearness makes participation feasible. Only the regulatory regime of the EU is viewed as a new disturbing element that modifies the national Weberian hierarchical structure, and calls for administrative reform in the framework of another kind of multi-level governance than the traditional national hierarchy. Among other things, it makes a democratic dilemma that the EU produces laws and regulations superior to national acts of law and not initially adopted in the respective parliaments. This third variation of representative and bureaucratic subsidiarity is naturally popular and still practiced by states belonging to democratic state-centered administrative traditions, including the Scandinavian tradition. The view is that the decision-making power ultimately lies in the hands of the citizens so as to counter the top-heaviness of centralized bureaucratic systems. However, as we have seen, despite the path dependence this tradition generates, innovative administrative reforms are under way. Decision-making competence and power should be distributed to many independent competing actors, governmental bodies and borderless agencies through outsourcing and contracting, in other words subsidiarity reaches out to the bottom line of the institutional society. Apparently, this variation of the notion of subsidiarity is inspired by the Anglo-Saxon administrative tradition and neo-liberalism. It resembles the administrative structure of the United Kingdom which was introduced by the Margaret Thatcher government as ‘the next step’ reform in the 1980s. The decision-making competence and power are distributed among the numerous and various organized administrative and development agencies and bodies according to their functional roles. Being judicial subjects, they act as independent public authorities, but only under regulatory and legal control (OECD 2002). Rising transaction costs and coordination problems in the wake of the fragmentation processes have come as negative feedbacks of the reform (Beetham et al. 2002). The fourth variation is of particular interest, as it has no historical paths in the Nordic context and therefore should not be viewed as a

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mode of subsidiarity that will be biased by this administrative tradition. But even so, we have elaborated that the recent modernization of government in the Nordic countries has brought forward this way of interpreting subsidiarity. The rational choice logic can be explained as follows: thinking efficiency in the public sector leads progressively to the thinking of the contextual benefit of institutional competition and further to the making of competition real by accepting the market-type mechanisms of outsourcing and the creation of public law administrations (PLAs) and private law bodies (PLBs) (OECD 2002). Lastly, the decision-making competence and power should be transferred to actors authorized and regulated by representative governments, contract-bound (variant 3) but organized as public partnerships embracing functional clusters of PLAs and PLBs. The fifth variation of subsidiarity recommends devolution of competence downwards through multi-level representative assemblies, but supplemented with contract-based public partnerships which coordinate and generate coherence in the multitude of independent agencies and governmental bodies. These partnerships form both vertical and horizontal organized clusters. This variation is particularly popular as subsidiarity policy in the Continental member states of the EU, and well performed for example in France as the ‘Contrat de Plan’ – État – Régions’ (Loughlin and Mazey 1995). The policy targets the achievements of sustained democratic control combined with the making of contract-based partnerships in order to reduce exponentially increasing transaction costs caused by fragmented administration. The latter problem is profoundly related to the modernized UK style of distributed public governance and to the public–private partnership model (Beetham et al. 2002). The public partnership scheme is an innovation with its origin in the 1982 regional reform in France (Balme and Bonnet 1995). The reform was meant to generate appropriate coordination and coherence of the market-type administrations through contractual relations and legal control of the modernized public sector. The contemporary Nordic model enforced by regulatory principles favors such a public contractual policy variation of the principle of subsidiarity with the public–public partnership model as the supreme approach. The implementation of the policy is to be found extensively in all of the Nordic states and especially in the implementation of European neo-regionalism and in the development of regional innovation systems (Hallin and Lindström 1998; Veggeland 2003; Higdem 2007). In our framework, it might be seen as an appropriate solution and innovation to the neo-liberal pressures and enforcement

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of market mechanisms into the welfare and workfare sectors of regulatory states. The administrative policy is satisfactory because it sustains supreme democratic control as in the traditional Scandinavian welfare state model. It represents an innovative reregulation because of the adjusted contractual concept. The Danish administrative reform agenda elaborated above is, in this regard, a variant of this kind of subsidiarity policy.

5.5 HOW THE NORDIC COUNTRIES PRACTICE SUBSIDIARITY Whichever of the above-mentioned subsidiarity policies you choose, the European debate on multi-level governance and subsidiarity is facing a political dilemma concerning the democratic criteria of authorization, accountability and popular representation (Beetham and Lord 1998). In what way are the administrations authorized? What makes them accountable? How are the administrations subordinated to steering and control of the representative assemblies? The fifth policy variation of the EU principles of subsidiarity, which has been transformed innovatively into the Nordic model, has to be seen from both a top-down and a bottom-up dynamic perspective. Let us call this the perspective of democratic and partnership subsidiarity, which relates to intergovernmentalism and neo-functionalism respectively.

5.6 THE INTERGOVERNMENTALISM PERSPECTIVE Intergovernmentalism occurred as an early theory of European integration, or perhaps more accurately as a conceptual approach to explain European integration as a rational choice process run by the national elites (Cini 2004). In the 1970s and 1980s, a variant liberal intergovernmental approach occurred that focused more on domestic politics and policy making as a contextual basic approach (Moravcsik 1993). The new approach was critical to intergovernmentalism’s failure to capture the multi-level nature of the Community’s policy processes. The idea behind the reformed intergovernmentalism approach was that it was impossible to understand the EC subsidiarity agenda without taking domestic politics into consideration. The elaborated first concept of subsidiarity and intergovernmentalism sends devolution of competence downwards through multi-level tiers of

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representative assemblies, i.e. authorization as a top-down political act. To be democratic, it was pointed out, the process ought to communicate the other way as well according to the new intergovernmentalism’s focus on domestic politics (Rosamond 2003). In a bottom-up perspective, the authorization of multi-level tiered administrations must be performed at the local level of elected representative assemblies and go deliberately all the way up through the domestic hierarchy to the supranational EU institutions. This is the perspective of the integration theory of liberal intergovernmentalism especially elaborated by Andrew Moravcsik (1993, 1998). According to him, it is important that such a political authorization process carries accountability and representation to the multi-tiered administrations involved as actors in the subsidiarity scheme. The perspective presents the notion of democratic subsidiarity because the criteria of authorization, accountability and representation are fulfilled. Essentially, it is a notion of existence and degrees of ‘nearness’ to the constituencies that make multilevel subsidiarity games democratic. The thesis here is that the Nordic countries in this liberal intergovernmentalism framework of ‘nearness’ perform democratic subsidiarity. If we look at Table 5.1, which reflects the number of citizens per elected councilor and average population per assembly of representatives, the thesis is formally confirmed in the following way. Comparatively the Nordic model favors subsidiarity politics based on a high degree of ‘nearness’ to the constituencies, but the Continental states especially. Of course, this is a formal consideration of the confirmation because the figures do not indicate the strength and volume of decision-making competence devoted to each tiered administration, but only the institutional potential for democratic subsidiarity executed as the politics of ‘nearness’. Accordingly, the institutional potential for the democratic subsidiarity of nearness is limited in the Anglo-Saxon state of the UK. The distance between the constituencies and the domestic ‘few’ representative assemblies is extensive. What about the highest effective level according to the principle of subsidiarity, the EU itself ? Derived from the contextual framework, it could be said that through liberal intergovernmental processes the EU institutions are properly authorized and also carry legal accountability, but because of a weak Parliament they suffer from a deficit of representation.4

5.7

THE NEO-FUNCTIONALISM PERSPECTIVE

In 1958, Ernst B. Haas published the book The Uniting of Europe: Political, Social and Economic Forces 1950–1957. Here, he explained the integration

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process of the European Coal and Steel Community (ECSC) to the Treaty of Rome as an economic spill-over process, a process triggered by the integration of the coal and steel industries which led to further extensive functional integration of other economic sectors. In the late 1980s and during the 1990s, the neo-functionalism approach and perspective underwent a revival. The new dynamism of the EC/EU, a consequence of the single market program and the multi-level governance concept in the new regionalism (Keating 1998; Veggeland 2000), made neo-functionalists focus on processes of political and administrative integration rather than only on economic integration. Political spill-over became the core notion to explain the progress of European integration and multi-level governance of the EU (Strøby Jensen 2004). The notion of spill-over refers to a process where political and administrative cooperation, conducted with a specific goal in mind, leads to the formulation of new goals in order to ensure the achievement of the initial goal. In our context, the single European market program politically and economically activated the ‘Regions of Europe’, and their goal became European multi-level governance based on relative autonomy to the local tiered levels. This goal gave rise to other goals, among them the political goal of subsidiarity adopted in 1991 as a Treaty principle. However, spill-over processes may be seen partly as the result of unintended consequences. Member states and regions might deliberately accept the penetration of supranational goals, but interpret the notions differently and formulate new ones of their own to ensure realization of the initial goals. This is what evidently happened to the concept of subsidiarity. The ‘nearness’ principle of democratic subsidiarity was easily adopted by states belonging to the Continental and Nordic traditions, but not easily adopted by the Anglo-Saxon states. In the latter, the ‘nearness’ notion was adopted, but spill-over processes meant it was reformulated not to be a goal of nearness by the constituencies but rather a goal of nearness by the market actors. These were often organized as public–private partnerships (Jessop 1994). The lowest-level actors were defined to be at the PLA and PLB level, were often organized regionally and were authorized by the government. The EU politics of subsidiarity came to legitimize pathdependent fragmentation of public administration as politics of blame avoidance (Weaver 1986). Since the 1980s in the Continental and Nordic states, PLAs and PLBs have been in development. To overcome the problem of fragmentation in the modernized public administration, the goal of organizing public partnership within the numerous bodies was introduced (Veggeland 2003). The public partnerships at both national and local levels were under the authorization

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and control of the tiered representative assemblies, and hence may be seen as a spill-over of an act against the negative fragmentation effect and a spillover biased by the Nordic state-centered model. Thus, the Nordic democratic notion of ‘nearness’ is clearly distinguished from the Anglo-Saxon market-centered notion of nearness. The thesis is that the Nordic countries in this neo-functional framework of ‘nearness’ perform democratic partnership subsidiarity. The Scandinavian subsidiarity concept achieves contract-based public partnership administrations to overcome increasing transaction costs. The function of the partnership administrations is to coordinate and generate coherence in the multitude of independent agencies and governmental bodies. These partnerships contain both vertically and horizontally organized clusters of actors. What about authorization, accountability and representation in regard to partnership bodies? Studies confirm that, in contrast to the Anglo-Saxon public–private market partnership concept, the Nordic public–public partnership concept rests on democratic authorization and gets its accountability from legal contracts, but with a deficit of representation (Higdem 2007). The public partnership scheme of subsidiarity is an innovation meant to generate coordination and coherence in the public sector, in addition to legal control of the markettype administrations of PLAs and PLBs as part of the modernized public sector. The Scandinavian countries’ practice of the ‘nearness’ principle and devolution of competence through subsidiarity has been executed along three different paths since the Second World War: ●

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One of the paths might be described as the process from politics promoting the decentralization of sectorial state-controlled institutions, to politics introducing administrative democratization in the 1960s and 1970s in the sense that elected local and regional assemblies were enforced. The second path might be described as follows: in the 1980s we witnessed deregulation politics whereby local administrative levels and regions were granted the distribution of public governance power so that they could plan their own development. This was closely linked to the regimes of the EU and the EEA through their supplemental politics of reregulation. And lastly, the third path is described as the process from the interventionist and planning central authorities’ top-down delegation5 of competence to the lower-level democratic authorities of the administrative hierarchy, to the supplementing contractualization of authority in the framework of public partnership.

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5.8 THE FUTURE FOR THE NORDIC COUNTRIES AND EUROPE AS VIEWED FROM A CONTINENTAL FEDERAL PERSPECTIVE ‘Europa: Ende des Föderalismus?’ questioned Karl Starzacher, President of the Hessen Landtag, in an article in the July 1993 edition of Verwaltungsrundschau. The question referred specifically to the future of German federalism as will eventually be determined by the political structure and reform of the European Union. Personally, Starzacher’s own answer was that the choice is between unitarian-federalism (‘Das Modell eines einstufigen Föderalismus’) and multi-federalism (‘Das Modell eines mehrstufigen Föderalismus’). The survival of German federalism, in its present form, would obviously stand a better chance if multi-federalism succeeded, i.e. a union which tolerates different forms of federalism within its confines. Starzacher, being born into the Continental federal tradition, naturally prefers multi-federalism, but admits that its implementation and smooth running would be subject to far greater difficulties than the adoption of unitarian-federalism. Even at this early stage, Starzacher recommends that a discussion on constitutional law and politics should begin with the subsidiarity principle in the Continental tradition as the basis (Starzacher 1993). The Nordic countries are, by contrast, not at all federal but unitary states. They are, in fact, very homogeneous and ramified by well-developed, mature hierarchies in which both regional and local administration levels enjoy a high degree of democratic competence. As described above, the degree of relative autonomy is constituted by different modes of decentralization and democratization, deregulation and reregulation, delegation and contractualization. However, constitutionally one has to remember that it is still the state authorities that make the laws and can overrule locallevel decision making. The competence and powers which have been transferred to lower-level tiers are the result of parliamentary legislation and not of the constitution.

5.9

THREE CONTRASTING NORDIC CASES

Within the Nordic context, it is interesting to study the territories which have attained the right to self-government and been given law-making competence as well, which are the Faeroe Islands, Greenland and the Aaland Islands. They have subordinated agreement-based governance and, particularly in relation to the multi-federal model proposed above, these small states represent special forms of subsidiarity in practice today.

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With regard to the constitutional relationship between Denmark and both the Faroe Islands and Greenland, Fredrik Harhoff, an expert in EU and international law, points out that the written Danish constitution proclaims the unity of the Danish kingdom as sovereign (Harhoff 1992). This means, formally, that the right to make laws and regulate taxation is a competence delegated to the two national governments of the Faroe Islands and Greenland by the Danish Parliament. In theory, this is retractable, as mentioned above. However, Harhoff states that the political reality of the situation is quite different. Not only through the Danish practice of the subsidiarity principle characterized by their special relationship with their motherland do the two de facto governments enjoy permanent constitutional status, but international law protects their status as well. Harhoff supports his claim with five points: ● ●

● ● ●

the large size of the legislative area under the jurisdiction of the Faeroese and Greenlandic parliaments; the establishment of an institutional apparatus between Denmark and the Faroe Islands/Greenland to control the common exploitation of underground resources in those areas; the quasi-sovereign states having entered into separate international agreements independently of Denmark; a state internal tribunal having been established to solve disputes between the different parties; the degree of self-sovereignty bilaterally agreed upon, by Denmark on the one hand and by the Faeroe Islands/Greenland on the other.

Constitutional power is, therefore, no longer vested solely in a nation-state mono-structure, but shared within a tripartite framework. The quasisovereign states are independent in certain areas of competence, while the motherland retains total sovereignty in the remaining areas. Here, we may perceive an example of subsidiarity in practice, and an acceptance of the supremacy of international law which have led jointly to the formation of federalism-like arrangements within the Danish kingdom. This is particularly interesting in the light of the vicissitudes affecting Danish EU membership. In 1972, the kingdom of Denmark, which naturally included its quasi-sovereign states, joined the EU (then the EEC). In 1984, an unsatisfied Greenland achieved an independent international status by leaving the EU, while it may also be said that the Faeroe Islands have never at any time signed the Treaty of Rome. This does not exclude the quasi-sovereign states from being influenced by Denmark’s continued membership of the EU. Where Denmark still exercises its sovereign rights over the Faeroe Islands and Greenland, the status quo prevails.

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However, the federal-like agreement does allow them to make international settlements as independent nations. Nowhere is this more apparent than in the area of international fishing rights. The Faeroe Islands and Greenland enjoy special rights to their own fishing resources, and their home-rule regimes are accepted by the EU in spite of the theoretical impediment of the mono-structured Danish constitution. This form of subsidiarity, whereby Denmark has obviously bowed to international law and the rights of the people, conjures up new possibilities within the sphere of regional rights and institutional orders and thereby represents an example of multi-federalism operating within the EU’s political framework today. Its significance is a far-reaching principle of importance both in terms of recent Nordic political history and in terms of the pending Nordic integration into Europe. The Aaland Islands nation represents another but different interesting Nordic example of subsidiarity as practiced in Finland. These islands of a mini-nation achieved special status within the greater territory of Finland on account of an international declaration in 1921 passed by the Finnish Parliament. The declaration of 1921 guaranteed them autonomy and a state of demilitarization. In the words of a statement by the Aaland Parliament (Alands Landskapstyrelse) in 1993, the declaration in 1921 had been accepted ‘to ensure and to guarantee the population of the Aaland Islands the preservation of their language, culture and local Swedish traditions’. In the opinion of the Government of Aaland, binding rule customary to international law with regard to the autonomy of the Aaland Islands has furthermore arisen as a result of practice and from a legal conviction in connection to this. Acting as an autonomous nation within the greater Finnish state territory, Aaland remains a demilitarized zone, has its own parliament and lawmaking competence, controls its own public finances and plans its own economic development. Aaland is, however, not allowed to make its own fiscal policy. This has caused a good deal of conflict between the Finnish and Aaland governments. Alternatively, attacks on the Aalanders’ autonomy are thwarted by the Islanders’ continual reference to their rights as written in the declaration of 1921. The same line of arguments was used by the Aalanders throughout the preliminary EU membership negotiations, at the beginning of the 1990s. According to existing international agreements, Aaland also has the right to veto international decision matters directly affecting its legislation, whether in connection with EU agreements or other international agreements. For this reason, the Aaland quasi-state arranged its own referendum concerning entering the EU as a member state in 1994. The veto right is also guaranteed by the special clause inserted into Aaland’s EU agreement.

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Aaland therefore conducts its negotiations with regard to EU issues independently, albeit through the Finnish foreign ministry. In reality, this is yet another example of subsidiarity clothed in the guise of federalism. The difference between this example and the previous ones is that the Danish government quietly acknowledges the principle lying behind the institutional functions and processes of ‘the fifth face of subsidiarity’ whereas the Finnish central state is more reluctant to do so (Hedegaard Jensen 1992). Through international guarantee of their autonomy, the Aaland Islands have been able to exercise a limited degree of government in spite of the mono-structure inherent in the Finnish constitution and the occasional adverse opinions uttered by the Finnish Parliament. It appears that Finland would prefer to be part of an institutional set-up based on ‘the second face of subsidiarity’, but cannot owing to the existence of international agreements which allow ‘the fifth face of subsidiarity’ to come into play. The EU has apparently accepted the legality of these international agreements and considers the Aaland Islands as a nation with its own constitutional status. In the long term, whether or not the Aaland Islands become an EU member, Finland will have to practice federalism not just in relation to the EU, but also within its own borders in the form of multi-federalism as described above.

5.10 NEW PERSPECTIVE AND A CONCLUDING COMMENT The concept of multi-federalism linked to the principle of subsidiarity adds an interesting dimension to European integration and to the developments which have occurred as path dependence in Nordic politics during this century. The above-mentioned example of how the principle of subsidiarity has been institutionalized in the relationship between Denmark and Greenland/the Faeroe Islands gives a clue as to how the Nordic countries may possess multi-level governance structures and regional identity which, within a European context, have much greater autonomous representative democratic units of advanced competence than the recent administrative Danish reform indicates (Veggeland 2000). The importance of cultural identity for practicing good governance and subsidiarity must never be overlooked or neglected as a circumstance. Such special circumstances might be said to exist in the Barents region in the extreme north of the Nordic area where very important political developments occurred during the 1990s (Tunander 1994). Here, it was the indigenous people, the Lapps, who claimed their international rights. Moreover, the inhabitants may, quite rightly, claim to be very dependent on the rich

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natural resources of their territorial environment and hence demand the right to control and exploit these. However, such an approach collides with the heavy national and international interests linked to the gigantic oil, gas, fisheries and security aspects of the Barents Sea region (Austvik 2006). Yet, in order to satisfy the conflicts of interests, the new institution of the transnational Barents Euro-Arctic Council and the Regional Council was established just after the collapse of the Soviet regime. The Barents EuroArctic Council is representative and consists of delegates from all the countries and governments around the Barents Rim, with the EU also being a signature power. The Council’s institutional authority is contract-based, given by the agreement on cooperation in the Barents region known as the ‘Kirkenes Declaration’ signed in 1993 (Stokke and Tunander 1994). The second level, the Regional Council, is made up of representatives from the national regions in the Northern periphery, which accords with the Nordic ‘nearness’ principle. Hence, the Regional Council includes one representative from the indigenous people, a Saami delegate. Obviously, here we recognize the path-dependent elements of the Nordic area practicing subsidiarity.

NOTES 1. This is what the OECD (2002) has defined as PLAs and PLBs, which I refer to in Chapter 3. 2. Since the administrative Danish reform of 2005, which resulted in less than 100 municipalities and only five regions (earlier amter), the number of elected assemblies has decreased a good deal and made the structure even more similar to the Anglo-Saxon one. The governments of Norway and Sweden were also in 2006 working on concepts for administrative reform of the same kind, but adjusted to national systems and paths. 3. The following is based on an earlier publication, but rewritten. 4. Weak Parliament defines the well-known notion of the EU democratic deficit. 5. Delegation means that the competence may legally be withdrawn at any time by the state authorities.

6. Summing up the Scandinavian/ Nordic model 6.1

THE EUROPEANIZATION FRAMEWORK

I have in previous chapters focused on the five Nordic states which are influenced by Europeanization processes. Such an approach implies that I have given each of the nation-states some attention through statistics and tables, but have undertaken the analytical part as a general approach. Despite great differences among them in the sense of economic and urban structure, the number of inhabitants, the nature and size of the territory, and also affiliation to the EU, the Nordic region is a relatively unitarian polity developed through a long common history and political framework. Cultural, social and natural resources have made this region far up in the Northern periphery of Europe a strong polity of today. In the EU, the Nordic countries are currently performing relatively well, and in terms of references and according to the World Economic Forum, they are among the five most competitive countries in the world. They have succeeded in achieving a high employment rate and fulfill, or are close to fulfilling, the Lisbon goal of an overall employment rate of 70 percent. Economic and social models are shaped by history, which is also the case for the Scandinavian welfare and social security model. The model has been developed through reciprocal relationships with local and national societies, cultures and traditions in the framework of what we have denoted Nordic subsidiarity. The model has delivered innovative paths and satisfactory institutional responses to pushing challenges and needs enforced by Europeanization processes and has thus been transformed by circumstances of time. Additionally, the model, as with the other European social and administrative models, has developed certain institutions which reflect its particular path-dependent rationale: institutions which, on one side, enshrine the characteristics of those models and, on the other, ensure that they adjust and evolve. We have found that such a path-dependent rationale is the combination of a high level of job and social security and an active labor market policy, which in all of the Nordic countries has formed the basis for their being awarded the highest economic security rankings in the EU. 115

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This is confirmed by the so-called ‘economic security index’ created by the International Labour Organization (ILO). This index covers seven different aspects of security, such as labor market security (the availability of adequate employment opportunities), representation security (the protection of collective voices in the labor market) and income security (the protection of income through replacement benefits and other measures which reduce income inequality). The Nordic countries rank among the highest on virtually every indicator, and the overall conclusion of studies is that there is no mismatch between a relatively high level of job and social security and a low unemployment rate (Iversen 2005; EPC 2005). The Nordic economic and social model is made up of connected components: subsidiarity with multi-layer involvement and contract-bound government autonomy organized as vertical partnerships (Higdem 2007). Further, we have elaborated on the acclaimed component of ‘flexicurity’ – the combination of flexible labor markets and individual social security concepts of the Nordic countries – which is based on: 1. 2.

3. 4.

strong social security and broad public in-house welfare provision in accordance with the principle of subsidiarity; lower outsourcing threshold regulation than the EU public procurement directive stipulates, which makes it feasible for small and local businesses to become providers; active labor and long-life educational policies; and a highly mobile labor market linked to extensive multi-tiered outsourcing of services and goods, but where the social partners (trade unions and employers’ associations) are key actors with a high degree of responsibility for competitiveness and social sustainability.

The Nordic model favors subsidiarity and welfare state policies, employment and the active participation of the social partners that have secured the success of flexicurity in the Nordic countries. The conclusion is that the Nordic countries are of importance in Europe, not of scale, but of scope. I will return to this statement later on, and sum up further and more precisely what we have found as the content of this scope.

6.2

EUROPEANIZATION AND THE NORDIC ROLE

The term ‘Europeanization’ has become fashionable in the framework of European integration, i.e. of the EU, writes Johan P. Olsen (2004). I will follow his interpretation of the term and figure out the role of the Nordic countries and their positions in the Europeanization process. So, what

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is the content of the notion and what is changing when we talk of Europeanization? At least five different understandings or categories of the term are in use (Olsen 2004). I will elaborate on these categories and relate them to the role of the Nordic countries. As a first point, Europeanization may be understood as the changes in external territorial borders of the EU, as in the case of the several enlargements since the 1950s from the original six Continental founder states of the EEC which signed the Treaty of Rome to the 27 members in 2007. ●

●

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The Nordic role: Three of the Nordic countries, Sweden, Denmark and Finland, are EU member states, while Norway and Iceland are EEA members, which means that they have an agreement-based EU affiliation. The EEA agreement, adopted in 1994 between the EU and the organization of EFTA, constitutes and performs the allowing of the two countries to fully participate in the European Single Market. Actually, Nordic applications for membership in the European Community started in the 1960s, with Denmark in 1961 and Norway in 1962, but no negotiations resulted because the former French president Charles de Gaulle refused negotiation with another applier at the time which was the United Kingdom. Denmark and Norway applied again in 1967 and negotiations began in 1970. Denmark became a member in 1972 while a referendum in Norway gave a negative result. In 1992, three applications came from the Nordic countries, from Finland, Sweden and Norway, with negotiations from 1993. Sweden and Finland joined the Community in 1994, while Norway continued to be left outside after another negative referendum. The Faeroe Islands and Greenland,1 two old Nordic-speaking identity nations within Denmark but with home-ruling governments, have made the political choice not to be integrated into the EU. The Aaland Islands, a home-ruling and Swedish-speaking nation within Finland, on the other hand, held a referendum which made them part of the EU in 1994, like the homeland that this identity region belongs to administratively. As pointed out in Chapter 5, because Finland and Denmark are constitutional unitary nation-states, in a scholarly sense the independent institutional positions of these home-ruling nations may be seen as a historical outcome of the Nordic bottomup subsidiarity politics (remembering that top-down politics is part of this EU concept, as well).

As a second point, Europeanization might be understood as the creation of a single European market without barriers for the free flow of goods and services, labor and capital, with the political goal to create an economically

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strong and protected Europe. The regulatory principles followed are deregulation in order to create markets and reregulation in order to correct markets and promote economic and social sustainability (Scharpf 1999). ●

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The Nordic role: As EU or EEA members, all of the Nordic nationstates are part of this Europeanization process which is changing Europe through market integration. In this sense, the Nordic countries are fully involved in the European struggle for evolving economic competitiveness and prosperous development in Europe as a continent. Besides, all of the countries are characterized by solid and wealthy economies and are, therefore, considered positive contributors to the EU budget. In addition, Norway and Iceland, as EEA members, contribute Euro 250 million a year to the EU Solidarity Fund and will be contributing slightly more from 2007 when Romania and Bulgaria become member states. This means a transfer of fresh money to the EU development program targeting aid to the 12 poor Eastern European new member states to achieve social and economic cohesion. The EEA states are paying for access to the Single European Market.

As a third point, Europeanization may also be defined as a political project in support of building a unified and politically strong and democratic Europe. Since the very beginning and with the six founder states’ adoption of the Treaty of Rome, this has been one of the main goals of the EU; respecting and securing fundamental human and civil rights, freedom of speech, a free press and a multi-political party system and remaining democratic in this sense have been the basic conditions in every enlargement process for accepting the application for membership, for entering negotiations for membership and for new states’ membership into the EU. At the summit meeting in Nice in 2000, a charter of fundamental rights, human rights, social rights, economic rights and political rights was adopted and made part of the acquis communautaire. This political project generates ideological disputes and conflicting approaches in the Community with differing administrative and governance traditions. Federalists, with a strong supranational EU approach, stand against intergovernmentalists. The latter prefer the EU as primarily an intergovernmental cooperation arena limited mainly to the Single Market issue (Pindar 1998). As noted in Chapter 4 and elaborated by Christoph Knill (2001) among others, the state-centered Continental administrative tradition stands against the liberal market-centered Anglo-Saxon administrative tradition. The corporatist welfare state principles challenge the liberal welfare state political agenda.

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The Nordic role: Only the three EU Nordic member states are participating in the political project for promoting and securing democracy, stability, welfare and peace in Europe in the framework of the EU. It is a project of the greatest importance, where in the political institutions the two EEA states per se are excluded from participation in the decision-making processes. However, they to some extent indirectly contributed by being represented in the EU Comitologi/ expert system, in the Northern Dimension program and in the Baltic Sea development program where democracy and security issues are also part of the agenda. We have seen in other chapters that the Scandinavian welfare state model, with its heavy focus on universal arrangements and social security and its innovative flexicurity and subsidiarity policies, has received renewed attention in the process of Europeanization and as a political project. The model and its biased policies are perceived to consistently combine the advantages of welfare and social security with low inequality, and the EU fight against increasing unemployment in its member states. Politically, the Nordic countries affect European social integration not in scale, but in scope.

As a fourth point, an important part of the Europeanization process is the penetration of EU institutions into national and sub-national systems of governance. The EU has, in several chapters, been noted as a regulatory international regime with supranational authority, which implies that law making is a process that does not directly involve the national parliaments. Numerous laws, regulations and governance procedures have, through the years, been decided by the European Council of Ministers and have, thereafter, been handed over to the member states for implementation. The acquis communautaire areas, listed in Chapter 1, indicate how comprehensive the Europeanization process, as an institutional penetration, is. The acquis communautaire is the body of European treaties, laws and norms. It is composed of 31 chapters which all countries must adopt or negotiate transitions for, prior to enlargement. ●

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The Nordic role: All of the Nordic countries are exposed to the penetration of the EU institutional and governance arrangements. Europeanization through the numerous adopted EU laws and regulations is comprehensive and embraces almost every sector of society. Therefore, the decision-making process and EU democracy are highly debated topics which scholars study in depth. Without doubt, there exists in the EU a deficit of democracy and legitimacy. The Vice-President of the EU Commission, Margot

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Wahlstroem from Sweden, was asked if there was a plan B after the French and Dutch ‘No’ to the Constitution Treaty of the 2005 referendums. She replied that there was not a plan B but rather a plan D, ‘D’ standing for democracy in the EU. She continued arguing for a stronger European Parliament, more responsiveness from the power holders in the European Commission, and more open and transparent communicative and political processes. Actually, she indicated the Nordic model of democracy and subsidiarity, which besides emphasizing parliamentary representation also emphasizes openness, transparency, responsibility and responsiveness at all administrative levels when exercising power. Since then, Margot Wahlstroem has undertaken actions and initiated administrative reforms. In other words, Nordic democratic values have also penetrated the EU and enforced institutional reform. As a fifth point, Europeanization may also be understood as the EU’s struggle and endeavor to create and adopt a common social model for the Community. The ability of the model, which we have noted, should be to combine low public expenses, low unemployment and low social inequality in order to create economic growth and competitiveness in the Union. It should be a consistent model favoring a sustainable economic and social future of cohesion. We have described the expectations as the road to the ‘promised land’. However, as we have noted there is a political nut to be crushed which is the trilemma of the service economy (Iversen and Wren 1998). The challenge is, in keeping two policy factors ‘low’, whether the third one will get ‘high’ (see Figure 4.2). Once again, at a meeting in Lisbon in 2000, the European Council set out a ten-year strategic goal for the European Union. The goal was to make the Union ‘the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more jobs and greater social cohesion’. Then, on 22–23 March 2005, the EU Spring Council discussed the Commission’s mid-term review of the Lisbon strategy for economic, social and environmental renewal. More focus on knowledge-based industries and services, job creation and the simplification and national ownership via national action plans were made the key elements to more effectively re-launch the Lisbon reforms agenda. What most European politicians and economists believe as the basic condition to performing such an agenda is to regulate forward a flexible labor market with the ability to generate full employment and thereby solve the trilemma of the service economy. A flexible labor market is described as workfare without fixed tariffs and welfare, and with low

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public expenses. The neo-liberal economists especially proclaim this recipe as the ultimate path to a solution of the Lisbon issue, as the basic precondition for increasing productivity and revitalization of the European economy in a globalizing world. Therefore, as noted in other chapters, the first model of choice was: ●

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The Anglo-Saxon model: This model and administrative tradition is characterized by principles putting weight on market solutions and regulatory measures. Neither universal social security nor people’s health coverage is guaranteed by the state. Social insurance is given through the employer. The government covers the expenses for the poor and elderly without coverage who are not able to pay themselves. The tradition rightly generates low public expenses and low unemployment, but what effect does its high inequality-creating character have on the labor market? In the EU, it was observed as an unexpected and negative effect. Working people tend to cling to their existing jobs and to their employers from which they receive wages and social insurance benefits. Thereby, labor mobility is lost, and the desired flexible labor market is not realized. The EU started to look towards another model. The Continental corporative model: This model and administrative tradition is characterized by principles which put weight on corporative solutions and heavy state interventionist measures. In the Continental tradition, universal social security and the traditional welfare state arrangements are maintained and the corporatist character makes the trade unions strong. However, internal mobility of the labor force appears on a rather low level, since the transfer of a civil servant to another position occurs occasionally, rather than automatically, and is dependent on the fulfillment of certain legal requirements. Also, inherent in the private sector, formalism and legal requirements generate failures concerning labor market flexibility. The conclusion of the EU politicians is that the model performs a too rigid policy system with barriers to necessary modernization and the creation of new jobs. The advantage of the flexible labor market is missing and it remains unbiased by the Continental corporative model. The Nordic role: We have noted that the Scandinavian model and administrative traditions are characterized by institutional principles putting heavy weight on government and public solutions and interventionist measures. Universal welfare and social security arrangements with high public expenses are basic welfare principles, and

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tariffs and a high degree of job security dominate labor market relations. What about the trilemma of the service economy, and what about the competitiveness of the Nordic countries? A new Global Competitiveness Report 2006–07 from the World Economic Forum (2007) shows that the Nordic countries are at the top or near the top of the ranking of 125 states. The ranking is made from a wide spectrum of indicators, from independent courts of justice and health services to the number of cell phones and tariff establishment procedures. The ranking includes: 1) Switzerland, 2) Finland, 3) Sweden, 4) Denmark, 12) Norway and 13) Iceland. It is not strange that European politicians have recently started glancing at the contemporary Nordic model. However, it is obvious that the experts of the World Forum have not yet discovered the fundamental elements of the flexicurity model. Two weak elements pointed out in the Norwegian case are: 1) the difficulty of replacing and laying off employees, and 2) the rigid determination of tariffs and salary. These experts seem to be of the Anglo-Saxon ideological way of thinking. We have noted that, in all of the Nordic countries, the labor market functions rather flexibly and the unemployment rate is kept low, new competitive jobs are being created, equity and equality remain at an acceptable level, and the heavy social security system and the other welfare state arrangements are functioning well. Normally, environmental policy is also given priority. The model has shown that it includes prized path-dependent incitements for flexible labor market performance without loss of universal welfare and social security arrangement benefits. In contrast, the flexible labor market’s mode of functioning depends on the continuing existence of these arrangements. In this respect, the flexicurity concept may be considered to be inherent to institutional structures which are of vital importance to both the EU and affiliated European countries, because of its ability to generate and perform social innovation which is related to the Lisbon process.

As a sixth point, Europeanization processes not only relate to the framework of European nation-states, but also embrace the integration of subnational levels and the integration of national regions and municipalities into greater transnational European regions. Comprehensive structural policy programs and initiatives have been established for this purpose and are funded by Structural Funds. Cross-border transnational cooperation comes close to the EU’s core policy of the creation of a borderless Europe for peace, stability and

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economic growth (Veggeland 2000). The special development program of funding such structural policy is the Community initiatives: ● ● ● ●

the Interreg program targeting cross-border regional cooperation; the Urban program targeting cross-border urban cooperation; the Leader  targeting cross-border cooperation between periphery regions dominated by agriculture or fisheries; the EQUAL program for regional cross-border innovations and the testing of new ideas in practice.

The initiatives represent the central measures and economic incitements to stimulate states and regions to undertake the establishment of cooperation and partnership across borders. All of the Nordic countries and regions actively participate in the Europeanization process of this category. The Interreg A program is aiming at cooperation between neighboring cross-border regions. The Interreg C program supports cross-border cooperation between regions wherever they are in Europe. Of special importance is the Interreg B program. In the Nordic countries, the Interreg B program encompasses the following regions: ● ●

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The North Sea regions involve Norway, Sweden and Denmark in cooperation around the North Sea. The Interreg IIIB Baltic Sea region involves in cooperation all the Baltic Sea Rim countries and their domestic regions, from the Nordic countries in the west and north, Russia and the Baltic states in the east, to Germany and Poland in the south. The Barents Arctic region embraces transnational cooperation between Norway, Finland, Sweden and Russia. The region is an especially sensitive region. This is a strategically sensitive region with its huge amount of natural resources such as oil, gas and fish, environmentally sensitive because of its Arctic climate and small margin for survival of fauna, and politically sensitive because of unresolved border and sharing line issues concerning the Barents Sea (Schram Stokke and Tunander 1994; Austvik 2006). The Nordic role: Of course, cross-border regional cooperation of this kind is targeting economic development and infrastructure issues and finding common solutions to environmental problems, cultural development and the exchange for better understanding and so on. However, from a security point of view, the EU also sees the Nordic region as a frontier region with borders to the Russian Federation, and a strategic stabilizing actor in the Baltic Sea region and the

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Barents Arctic region cooperation. The cross-border cooperations are funded by the Interreg program of the EU and are an integrated part of the wider adopted Northern Dimension program which was initiated by the Finnish presidency in 1999. The Northern Dimension program explicitly declares democracy and stability in the border zones as a main targeted goal. Economically, the Nordic region has access to vital natural resources of oil, gas, fish, fresh water and space, besides the human capital of a well-educated and skilled labor force. This also makes the region a strategic hot spot, in addition to structural policy for the EU (Austvik 2006). Norway is one of the world’s leading petroleum producers. Since the discovery of this natural resource, in the late 1960s and early 1970s, the government policy has aimed to organize and keep national control. Extending regulations, and state ownership and control of the multinational enterprises of Statoil and Norwegian Hydro have made national control feasible despite Norway’s being a small country of 4.6 million inhabitants. Relatively huge revenues from petroleum activities are gained each year as a surplus and made available for the state budget. However, the Norwegian Parliament has implemented an economic steering impetus called a ‘rule of action’ which sets budget limitations due to rational calculations of rising domestic inflation and other economic imbalances in the wake of these revenues if dispersed into the national economy. This rule determines well-defined limits of yearly domestic budgetary use. Hence, the major share of the revenue surplus is put into a particularly innovative ‘petroleum fund’ run by the National Central Bank, which invests the money in businesses abroad instead of domestically. It is of interest that the performance of the investments follows certain ethical criteria adopted by the Parliament. The investments avoid international businesses accused of unfair labor conditions, not following human rights laws and regulations, use of child labor, being weapons industries for war and so on. One such example is the capital stock invested in the US-based multinational supermarket chain Wal-Mart, which was withdrawn in 2006 because of unfair labor relations. Wal-Mart, as an employer, has taken precautions against the employees’ right of trade union membership, thereby denying job condition quality control and wage protection. In 2005, the petroleum fund was named the ‘Public Pension Fund’ to officially settle that the accumulation of profits in the years to come is earmarked for the future. As is the case in other Western countries, Norway’s share of the elderly population will increase immensely and

Summing up the Scandinavian/Nordic model

125

Euro billion 400 320 240 160 80 0

2001 2002 2003 2004 2005 2006 2007* 2008* 2009* 2010*

Note: * Predictions. Source: Revised national budget 2006, www.regjeringenno.

Figure 6.1 The Public Pension Fund: value and prediction for growth of the Norwegian petroleum fund

●

6.3

lead to a challenging press on the fiscal part of the universal welfare state as well as the sustainability of the flexicurity scheme. Figure 6.1 shows the growing fiscal dimension of the Pension Fund. Future Norwegian generations will especially benefit from the Public Pension Fund, which intends to secure the vitality of the welfare state. Of course, the contemporary petroleum revenues are also important to balance the annual state budget and thereby sustain welfare and flexicurity today. Even Denmark, with a much smaller petroleum reservoir in the North Sea and therefore lower production, benefits greatly from these revenues and maintains an expensive welfare state with a balanced state budget.

NORDIC FLEXICURITY

Finally, let us sum up why the contemporary Nordic state-centered model tends to enable the realization of a flexible labor market with the repercussions of low unemployment, low inequality and budgetary balance. In a neo-liberal perspective, as the World Forum experts note as the weakness of the model (World Economic Forum 2007), high job security, strong employee unions, and an extensive and expensive public sector due to high universal welfare standards are believed to cause low mobility of skilled

126

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workers and inefficiency, and the necessity of high tax levels kills innovative public and private actions. Employment policies lie at the heart of the Nordic labor market policy. It is well known that one important instrument for achieving labor market flexibility and therewith full employment is an active public labor market policy. Programs for such a policy were established in Sweden as early as the 1960s. Such programs are based on three pillars, namely a combination of pragmatic and changing regulations based on negotiated tripartite agreements between the state authority, the employer unions and employee unions, a well-developed social security for the unemployed, and an active training policy targeting the unemployed and giving them new qualifications (Jensen and Neergaard Larsen 2005). Strong social partners do not necessarily imply labor market rigidity. On the contrary in all of the Nordic countries, they have played and still play an influential role in creating labor market flexibility (it is noteworthy to mention that approximately eight out of ten workers are members of a trade union). Active labor market programs serve a twofold purpose in the Nordic countries: 1) to upgrade the skills of the unemployed and therewith to avoid bottlenecks in the labor market, and 2) to encourage the unemployed to remain active and search for jobs. Ultimately, the aim of the system is to prevent people from joining the ranks of the long-term unemployed. If a person is out of work for more than a year, his or her chances of getting a job decrease and there is a risk of social exclusion. Hence, active labor market programs are an important integrated part of the Nordic flexicurity concept. The Nordic countries also put a great deal of emphasis on adult education and continuous training. The overall conclusion is that there is no mismatch between a relatively high level of public intervention in the labor market, strong trade unions and job security; valuable repercussions are social inclusion and a high employment rate. Active public labor market programs are essential, but as noted earlier the term ‘flexicurity’ refers also to the combination of labor market flexibility and the Scandinavian universal welfare state model. The explanations of how this combination works concerning repercussions may be multiple, but we have noted that studies make the interesting conclusion that the keywords are the Nordic universal social security model combined with its form of practicing subsidiarity. That is, according to the model, and especially in contrast to the liberal welfare state model, the working people or employees do not have their health and social security primarily bound to insurance arranged by responsible employers, or have the arrangement of health and social insurance as a private responsibility (Pierson 2001a). Nordic social security is anchored in collective public insurance arrangements with universal coverage and is

Summing up the Scandinavian/Nordic model

127

valid wherever individuals work, besides being in accordance with the principle of nearness. Naturally, this basic universal safety net makes it easy for everyone, for individuals and families, young people and older people, males and females, to move and change their workplace and to find a new and more suitable job fitting their competence. The universal social security and welfare framework, social assurance, tariffs and the access to welfare will be identical because of the universality and the subsidiarity. Flexicurity is the repercussion from embracing this social universalism. In regard to the public service sector ‘trilemma’ which was shown by Figure 4.2, we noted that the Scandinavian welfare state model was good at generating low unemployment and low inequality, but not in generating low public expenses. As neo-liberalists criticize, this means, among other things, a high tax level which may bias towards low innovation inclination. Citizens often evaluate the quality of the public services on the basis of their own experiences, i.e. whether they feel they are getting value for their money. The public sector has traditionally been charged with the management of different policies such as security, education, health, etc. One of the biggest challenges in updating and reforming the public sector to make it live up to the expectations and demands of welfare, as noted, has been to bring it closer to the citizens, i.e. realize the principle of subsidiarity as a principle of nearness and democratic responsiveness. Hence, access, openness and democratic control are fundamental features of a high-quality public welfare service. E-government has become an element of Nordic subsidiarity. The Nordic countries generally have a high level of information and communication technology penetration, and the public sectors have led the way in Europe through introduction at all administrative levels. This has given many citizens and businesses an easier instrument for dealing with the public sector, and to get flexible access to welfare services. E-government has made it feasible for the public service sector to organize itself more flexibly and has therewith contribute to the making of flexicurity. Obviously, the strong drive to introduce e-government has also provided a boost for hightech companies in the private sector and therewith employment.

6.4

FINAL CONCLUSION

In the wake of the regulatory EU regime, the contemporary Nordic countries experience up-coming satisfactory public innovative policies. Regulatory innovations such as lower outsourcing thresholds than the EU directive of public procurement stipulates and democratic bottom-up subsidiarity in structural policies benefit from paths of the Scandinavian social and administrative model. The innovation of Nordic flexicurity is

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concluded to be a repercussion of the policy responses to the challenges of the service economy trilemma: the occurrence of negative tradeoffs when trying to keep unemployment, inequality and public expenses low. The flexicurity policy generates and delivers the prized labor market flexibility without loss of the benefits from universal welfare and social security arrangements. On the contrary, the flexible labor market’s mode of functioning depends, per se, on the continuing existence of those arrangements. In this respect, the contemporary Nordic model in the global age may be considered to be inherent to institutional structures of vital importance for both the EU and affiliated European countries (Ferrera and Rhodes 2000; Europe’s World 2005; EPC 2005). The model’s ability to favor regulatory innovations should not be overlooked.

NOTE 1. Greenland actually joined the EC together with Denmark in 1972, but withdrew its membership a few years later.

Appendix I. Official language

Capital Form of government Area Total km2 Including water Population Total (2005–06) Density/km2

Nordic country files

Finland

Denmark

Norway

Finnish (92%) Swedish (5.5%) Helsinki Republic

Danish

Norwegian Swedish

Copenhagen Oslo Monarchy Monarchy

Stockholm Reykjavik Monarchy Republic

337 030 9.4%

43 094 1.6%

385 199 6.0%

449 964 8.8%

103 000 2.7%

5 255 580 15.59

5 032 335 116.78

4 671 900 12.00

9 060 430 20.00

304 334 2.95

0.963

9.49

0.956

Human Development 0.941 0.941 Index (HDI) Independence 4 January – date 1918 Currency Euro (EUR) Danish krone (DKK) EU member 1994 1972 EEA member – – NATO No Yes membership

129

Sweden

7 June 1905 – Norwegian krone (NOK) – 1994 Yes

Swedish krone (SEK) 1994 – No

Iceland Icelandic

17 June 1944 Icelandic krone (ISK) – 1994 No

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Index Aaland Islands 110–12 active labor market support 7 and policy and programs 35, 126 accountability 73 Acquis communautaire 6, 12 administrative hierarchy 51 administrative innovation 66 administrative traditions 20 aging populations 95 Amsterdam Treaty 3 Anglo-Saxon model 2, 7, 45, 90–91, 121 arm’s length agencies 2, 54

Faeroe Islands 110–12 federal elements 2 flexible labor market 34, 67, 89 ‘flexicurity’ 35–6, 81, 89, 93–4, 97, 126–7 fragmentation 54, 67, 72 ‘full employment’ 40 ‘good governance’ 59, 74 government traditions 98–9 Greenland 110–12 ‘hard and ‘soft’ regulations 4

Baltic Sea Region 123 Barents Region 114 Community initiatives 123 constructivism 17 Continental model 2, 7, 90–91, 121 Contracts and contracting 69, 88 ‘Contrat de Plan – État – Régions’ 105 convergence theory 10 corporatist Continental welfare state 87 and corporatist arrangements 90 ‘creative destruction’ 42 cultural identity 113 decision-making competence 102–5 democracy (EU) 6, 99 Danish administrative reform 100–101 deregulation 14–15, 18–20 devolution 102, 109 divergence 1, 10, 20 East Nordic tradition 32 EEA and ESA 12–13 elected assemblies 98–9 ethical criteria 124 Europeanization 11–12, 15–16, 115, 117, 122 European administrative traditions 20 European social sub-models 31

identity (EU) 6 income protection 45–6 industrial relations 92 in-house provision of services 20, 57, 60 innovation in the public sector 39, 109 innovative administration 10, 26–9, 72, 128 market-driven innovation 18 intergovernmentalism 106–7 interventionist policy 2, 37 and state 8–9 job security 8, 88 ‘Keynesian’ tools 38 knowledge-based economy 4 labor market flexibility 8, 35 labor productivity 47 Lapps 113 legislation (EU) primary and secondary 13–14 liberal welfare state 57 Lisbon strategy and process 4–5, 7 ‘logic of appropriateness’ 6, 27 139

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Paths of public innovation in the global age

Maastricht Treaty 97–8 macroeconomic effects 65–7 market-centered administration Anglo-Saxon tradition 20–22 market-type-mechanisms (MTM) 33, 52–3, 55–6, 109 mass democracy 37 microeconomic effects 68–71 modernizing government 49 monetary policy 43 multi-agency governance 53 multi-level governance 102–3 multi-level tiers 106 negative integration 21–2 Neo-functionalism 1, 24, 107–9 Neo-liberalism and neo-liberal views 48–50, 56, 68 Neo-regionalism 105 New institutional theory 27 New Public Mangement (NPM) 2, 43 ‘Next step reform’ 104 Nordic flexicurity 82, 91–2 Nordic model 8, 33, 35, 106, 122 Nordic role 117–20, 123–4 Nordic states 48, 52, 58, 100, 103, 109, 115–16 and traditions 91 and flexicurity 125–7 Northern Dimension 124 OECD recommendations 27 ‘open method of coordination’ (OMC) 4, 7, 95 outsourcing 52, 59–65 partnership subsidiarity 106 path dependence 10–11, 22–3, 26, 29, 70, 115 performance (EU) 6 ‘Petroleum Fund’ 124 and ‘Public Pension Fund’ 124–5 politics against, by, with markets 80–81 ‘politics of blame avoidance’ 28 pooled sovereignty 6, 52 positive integration 21–2 principle of subsidiarity 75, 97–8, 100 private law bodies (PLBs) 53–5 public law administrations (PLAs) 53–5 public–private partnerships 53, 55–6

public procurement directive 61–2 public–public partnerships 109 rational choice 105 regulatory competition 63 regulatory state 8–11, 51 reregulation 14, 18–20, 76 ‘satisfactory’ implementation 14 and decision and transformation 27, 78 Scandinavian regulatory innovation 63–4, 66 Scandinavian welfare state model 7, 31–2, 36–8, 41, 48–50, 78 ‘Scharpf’s Law’ 70 Schumpeterianism 40–41 self-reinforcing or positive feedback processes 23–4, 68 services of general interest 59, 62 social expenditures 39 social inequality 40, 83–4 social security and insurance 88–92 spill-over 108 stagflation crisis 41–2, 48 State-centered administration Continental tradition 20–2 Scandinavian tradition 36–8 ‘steering without rowing’ 22 subsidiarity 102–6 supply-side policy 43 tendering 62, 69 Thatcher, Margaret 104 threshold values for bidding 72 and for transaction costs 25 tradeoffs 84–5, 87–9 transaction costs 25, 65, 67–8, 71 transparency 73–4 ‘trilemma’ in the service sector 82, 84–7, 120 unitary states 110 universal welfare and social security 37 universal welfare state 88 vouchers 53 Weber bureaucracy 27 West Nordic model 32 World Economic Forum 5