Globalisation and the Welfare State

1 January 2017

A he formed a new gove As d ernment, Lars Lokke soug to s ght develop a set of long-term economic and social plans that would keep Denma internatio l ark onally competitive, despite its large pu ublic sector an costly welf nd fare spending However, s g. short-term rea action to the worldwide economic do e ownturn dom minated policy discussions. A long-stan y . nding debate about joinin the Eurozo was given new saliency when the European Ce ng one n entral Bank lowered its ra on ate “refin nancing opera ations,” which provided liq h quidity to the Eurozone, ju days befor Lars Lokke took e ust re e office.

Denmark was a member of the Europ w r pean Union but had retain its own cu ned urrency, the k krone. Likew wise, plans for rmulated a year ago to ex xpand the Dan nish workforc by looseni labor rule and ce ing es reduc cing welfare benefits had b b become unpop pular as unem mployment in ncreased.

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An nders Fogh Rasmussen had left a mixed legacy. Denm d d mark benefite from a balanced govern ed nment budge little publi debt, and lo unemploy et, ic ow yment. But its internationa reputation had suffered from s al d contro oversies over immigration.

As the lo r ongest ruling Liberal Part (Venstre) prime minist in g ty ter mode Danish hi ern istory, Ander Fogh had led a centerrs -right coalitio governme that developed on ent strict immigration policies. The policies m ese made it relativ vely easy for f foreigners to work in Denm mark, but d difficult for th hem to stay in the country and benefit from world-class educat n y t tion, skills tra aining and j job transfer programs; g generous un nemployment disability and sick lea t, ave benefits; and ; gover rnment-suppo orted pension

A ruling by the European Court of Justice in mid-2008 held th EU ns. at memb states had to grant residency permi to non-EU spouses and immediate f ber d its U d family memb bers of EU citizens. 1 Denm mark had dela ayed impleme enting the rule, but opting out would o g only further is solate the co ountry from its EU trading partners, who had no forgotten t ot that Danes n nearly scuttle the ed Maast tricht Treaty in 1992.

At on point cons ne sidered a cand didate for the EU presiden e ncy, Anders F Fogh’s eventual appointm ment as NATO secretary g O general becam controvers in early 2 me sial 2009 when Tu urkey threat tened to veto the choice, c citing concern over the Da ns anish govern nment’s suppo of a newsp ort paper that h published satirical depictions of th Prophet M had d he Mohammed. O Only high-lev interventio by vel on U. S. P President Bara Obama sm ack moothed the w for Ande Fogh to as way ers ssume the new role. 2 w Re estive unions also played into Lars L s d Lokke Rasmu ussen’s plann ning for his new govern nment.

Denm mark had the world’s lea e ading union membership rate, with m more than 80 of all wo 0% orkers belon nging to a union. Unlike ot ther heavily u unionized cou untries, Denm mark had a his story of arriving at nation nal agreeme ents between unions a n and employ yers through cordial, c h consensus-ori iented negot tiations. Dani ish unions h had long welcomed new immigrants into their o organizations and s, offere members benefits that i ed b included lang guage educat tion, skills tra aining, and cu ultural couns seling. Never rtheless, unions were an nxious about the scale of immigrat tion in the 2000s.

To order copie or request perm es mission to reproduc materials, call 1-8 ce 800-545Copyrig © 2009, 2010 Pr 7685, wr Harvard Busin rite ness School Publish hing, Boston, MA 02163, or go to ww ww. hbsp. harvard. e edu/educators. Th publication may not be his y digitized photocopied, or otherwise reprodu d, uced, posted, or tran nsmitted, without t permission of H the Harvard Business S School. 709-015 Denmark: Globalization and the Welfare State increasingly advertised jobs as requiring “fluent Danish,” and discrimination cases had grown in frequency.

Denmark was attractive to immigrants for its unique combination of high welfare spending, a large but efficient public sector, and a thriving private sector. Two decades of labor market reforms and prudent fiscal policy had contributed to low unemployment of 3. 3% (up from the previous year’s record low of 1. 6%), a positive current account, and a GDP per capita of $60,800 in 2008 ($34,700 at purchasing power parity), making Denmark the seventh wealthiest country in the world. 4 Progressive taxes and redistributive policies meant that Denmark had the world’s most equal income distribution.

In 2007, the Economist Intelligence Unit ranked the country as the best place in the world to do business, and an international survey in 2008 revealed that Danes were the happiest people in the world. 5 For the past 30 years, more than 60% of Danes consistently had rated themselves as “very satisfied” with their lives on Eurobarometer surveys, between 20 and 50 points higher than other Europeans. 6 Denmark was one of the easiest countries in the world in which to start a new business and its economy was integrated internationally, with Danish firms operating subsidiaries and affiliates abroad.

Its flexible labor market made Denmark an attractive location for firms from North America or Asia who wanted a European presence. A combination of latent internal and external forces, however, threatened this success story. Denmark was an extremely homogeneous country until the mid-1970s, but had since experienced a net influx of working immigrants and refugees from developing countries. As demographics shifted, Danes began questioning who benefited from their high taxes and Social Security payments, which started at 42% and reached 68% for top earners.

Political cartoons depicting the Prophet Mohammed published in several Danish newspapers in 2005 and 2006 sparked protests by Muslims around the world and revealed tensions about core values held dearly by most Danes. A country that prided itself on freedom of expression and open public debate leading to collective decision making now faced external criticism for its supposed xenophobia. To many Danes, the transition from a close-knit community to a more diverse society threatened the loss of democratic values. Likewise, Danes were concerned about the sustainability of their welfare state in the face of international economic pressures.

Denmark was the first developed nation officially to enter a recession in 2008. A national strike by nurses lasted several months in the spring of 2008 and underscored dissatisfaction with government liberalization of health care. With the unions on edge and public support for privatization waning, Lars Lokke Rasmussen considered how Denmark had found a way to balance openness to globalization and its social welfare state. Would this balance among competing forces continue to underpin economic growth? What welfare and immigration reforms would keep Denmark internationally competitive? Country Background

Covering 17,000 square miles of land on 400 islands (78 inhabited) and the peninsula Jutland (which connects to northern Germany), Denmark was the smallest country in the Nordic region (see Exhibit 1). Largely flat, Denmark had fertile agricultural land and easy access to the sea. To foster trade domestically and internationally, Danes had invested in infrastructure, including bridges and tunnels linking many islands and a combined bridge-tunnel across the Oresund Strait connecting Copenhagen to Sweden’s third largest city, Malmo (see Exhibit 6 for government infrastructure spending).

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