The Danish Negotiated Economy

ETHOS Issue 11, Aug 2012

Introduction

Denmark is characterised by a number of distinct traits: a small and open economy, a stable democratic political system, a high proportion of organised wage earners covered by collective agreements, a political culture marked by social partnership, and a long tradition of institutionalised class cooperation. In this sense, Denmark has not only developed from a market to a mixed economy, but from a mixed to a negotiated economy.

Because of its political history, the institutional structure in Denmark is hybrid. Market power and state authority are mixed in corporate bodies. Public authority is delegated to a large number of private and semipublic institutions, and decisions are taken in negotiations among mutually autonomous and collectively organised partners.

Negotiations and the Economy

In Denmark, negotiations are widely used as instruments for decision-making in relation to the allocation of productive resources as well as the (re)distribution of output. This said, important changes have taken place in the last 25 years as a result of European integration and globalisation. For example, new and more extensive and intensive cooperative arrangements have been erected — with the result that a growing proportion of economic allocation is now conducted through institutionalised negotiations involving a still greater number of organised interests.

Consequently, we see a general long-term trend in the direction of a negotiated order in important sectors of the economy: in the labour markets managing the wage formation by consensus mobilisation; in the political system managing state reforms through cooperative negotiations; in intensive formal and informal relations between the state and organised interests managing European integration; and finally in adapting national industrial structures through collaborative arrangements between the state and other actors.

The negotiated economy, however, is more than an instrument for decision-making. In general, the negotiated economy consists of several types of organisations, each covering different functions. Some of these organisations analyse socioeconomic problems and identify the political measures necessary to solve them. Others describe actual problems in socioeconomic terms; at the same time they conceptualise social issues in ways that can achieve broad acceptance throughout the political system by the majority of the population. Others aim at transforming the dominant perception of socioeconomic problems into systematically structured, analytically justified language codes.

All these organisations attempt to mobilise mutual understanding of a socioeconomic situation, which functions as a discursive framework for negotiations. The actual framework, known as the socioeconomic discourse, has taken more than 50 to 60 years to develop and constitutes a blend of liberal and social democratic principles. It is liberal in the sense that it respects the autonomy of economic actors and organised interests, and it views the Danish economy as an open economy that is exposed to international competition and must find ways to be internationally competitive. It is social democratic in the sense that it portrays the national economy as a “community of fate” with a multiplicity of social interests, and attempts to secure the interests of the whole by inducing social pacts, helping the parts to act responsibly with respect to the overall socioeconomic balance.

Within this common worldview, multiple actors engage in institutionalised negotiations on the themes and procedures for negotiations, and sign agreements. Arbitration and sanctioning organisations conciliate and sanction breaches of agreements.

Reform of Society and State

In the 1990s and early 2000s, Denmark experienced a relatively short but very hectic period of prosperity after a comprehensive reorganisation of its political and economic institutions. In the 1980s, Denmark’s welfare state was reformed through a series of pragmatic compromises between multiple parties. At the beginning of the 1990s, the unintended consequences of this unplanned reform became evident. In 1960, Danish public expenditures, as a proportion of gross national product (GNP), were lower than the average within the Organisation for Economic and Co-operation and Development (OECD) (24.6% of GNP in Denmark versus 26% of GNP in the OECD). In 1992, the picture had changed: Danish public expenditure was 60.2% of GNP, compared to the OECD average of 48.5%. Again, it was not before the mid-1980s that the need to curtail internal cost and external demand was translated into a policy to reduce public expenditure, and not until mid-1990s that this policy achieved rather remarkable results.

Despite the successful application of austerity measures, severe macroeconomic problems remained. The growth of the competitive industrial sector was never sufficient to finance imports and growing welfare expenses. Austerity created a high and persistent level of unemployment. Annual inflation soared. Many believed that inflation was driven by public and private sector wage growth and began to doubt whether traditional corporatist institutions could still moderate wage demands. The efficacy of Keynesian demand management was also questioned, particularly when public sector spending appeared to be unsustainable. Consequently, the government needed new means to address the macroeconomic imbalances.

It was eventually acknowledged that the most decisive elements in the economic downturn stemmed in fact from the international nature of the crisis in the 1980s. This led to the recognition of the need to move from a policy of stabilisation (demand oriented) to one of growth (output oriented). The acceleration of economic integration across Europe, and the gradual deregulation of industrial and financial sectors under the World Trade Organisation and European Union, put pressures on the Danish industrial structure. This accentuated the relative importance of having a longterm structural policy and supply-side measures, and the need for reform of available macroeconomic instruments.

In Search of a National Strategy

This reform took place between 1976 and 1996. Measures towards a structural policy were established, including the development of an active industrial policy, the modernisation of the public sector, and the reframing of macroeconomic and microeconomic issues. By the end of the 1980s, greater understanding of the nature of international competitiveness led to the development of a new set of microeconomic problems and instruments. The need for structural adjustment was addressed with initiatives emphasising much closer coordination — across issues, and between public and private actors.

Around 1990, the conception of structural problems shifted from a focus on barriers to growth and adaptation in Danish industry, to the adaption of Danish society as a whole — including both the public and private sectors. This new conception of structural policy represented a much more continuous, simultaneous and, importantly, integrated structural adaptation of the public and private sectors. The concept of institutional competitiveness was introduced, and emphasis was put on institutional change.

Consequently, structural policy became more micro-oriented, entailing not only coordination and restructuring within and between policy sectors but also a continuous review of policies for the population as a whole. This entailed an ongoing emphasis on institutions (norms and incentives) and their reform. This shift in strategy was perhaps clearest in the area of public sector modernisation, where there were efforts to reconsider the role and boundaries of the entire public sector:

• From 1990, Fiscal Policy Statements published by the Ministry of Finance began to treat questions of structural transformation as the overarching consideration towards which most other policies were oriented, including stabilisation policies.

• Next, several programmes and plans were initiated to promote experimentation with new types of public sector governance and new relations between public and private bodies.

• In a third phase, drawing attention to the existing boundaries between state and economy, the microeconomic efficiency of the entire public sector became a key ingredient. The welfare state came to be looked upon as a primary instrument for shifting incentives and motivations for youths as well as the working population, through reforms to the tax structure as well as welfare benefits and services.

In Search of New Instruments

Since this strategic shift in the 1990s, the institutional reform of four policy areas has been at the centre of continuous negotiations and policy changes:

• Wage Policy

  Since 1987, a peculiar institutional arrangement on the labour market has made it possible for the government and peak organisations in the private and the public labour market to manage wage formation by consensus mobilisation. Indirect guidance and control of the wage formation was increasingly used to adjust nominal wages to ever-changing macroeconomic conditions. The flexibility gained by this lack of clear-cut distinction between state intervention and self-regulation was based on the willingness of the organisations to implement wage limits without government intervention.

• Structural Policy

  During the 1980s, institutionalised forms of investment through pension funds and wage-earner capital were introduced. A key premise for this development was a number of legal adjustments in 1983 that gave wage-earner funds and pension funds more leverage on the Danish capital market, allowing these funds to play an important role in capital allocation. This development was made possible by the emergence of bipartite and tripartite institutions, who came to a consensus on the necessary policy adjustments and structural changes.

• Welfare Policies

  Massive employment programmes were implemented from 1976 in the light of high (8% to 9%) unemployment rates. From 1982 to 1989, a new labour market policy was attempted. The intention was to restructure the composition of the labour force and improve its f lexibility through pre- and on-job-training programmes. Today, education (including re-education) is considered the primary mechanism for adjusting the labour force.

• State Reforms

  Public expenditures came under control due to strict austerity measures at the end of the 1980s. New models for managing the public sector were introduced, including limits established in the 1990s that made deficit spending next to impossible. Other public sector reform initiatives included privatisation programmes (few examples), deregulation (some examples), outsourcing (several examples), New Public Management measures (many examples), and decentralisation of the wage formation (very many examples).

Conclusion

Today, Denmark has a general system of negotiations. Each year, the Ministry of Finance negotiates the state budget with other ministries in order to prepare the government’s budget proposal for parliamentary approval. Once the budget is approved, the Ministry negotiates with local authority peak organisations to determine how much money the regions and municipalities get from the national budget. Every second year, the labour market organisations negotiate national wage agreements that set the parameters within which subsequent labour market negotiations transpire at the sector and firm levels. The Ministry of Finance participates as the peak organisation for all public employers at the state, region and county levels.

The emergence of a strategy for institutional competitiveness is a rather new phenomenon. Severe questions remain as to its implementation. Problems and ambiguities persist. The overwhelming complexity of a negotiated economy is one reason why the new national strategy has remained vague. Another is the small and open character of the Danish economy. While a time lag for policy adjustments is to be expected, questions about the efficiency of the change process have been raised. This is why the economic results of this highly cooperative political culture in Denmark have been slow in coming, yet have been very impressive once they took momentum in the 1990s up till 2008.

Significantly, the global financial crisis from 2008 did not mark Denmark as it had other European countries. Unemployment from 2008 to 2012 has been relatively low (6%); the balance of payment positive; foreign debt is now at a historic low; inflation has been moderate. Relative to Sweden and Germany, Denmark was hit by low productivity — a reminder of the need for ongoing labour market reforms. Private household debt did soar as a result of deregulation of the house market in the 1990s and financial policies in the 2000s. The general system for negotiations has been expanded to include more actors, levels and policies. A new wave of major labour market reforms was initiated by tripartite negotiations at the beginning of 2012. Denmark’s strategy for institutional competitiveness remains intact.