This is the
pre-copy-editing text of the article which appeared as:
"The Danish 'Miracle': Luck, Pluck or Stuck?" Comparative
Political Studies 34:2, March 2001, pp131-155.
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The Danish "Miracle": Luck, Pluck or Stuck?
Herman Schwartz
Government and Foreign Affairs
PO Box 400787
University of Virginia
Charlottesville VA 22904-4787
434 924 7818
434 924 3359 (fax)
e-mail: hms2f@virginia.edu
http://www.people.virginia.edu/~hms2f
Ó Herman Schwartz 1999
no citation or quotation with permission
Author's
Note: A
longer version of this paper delivered at the 1999 Society for the Advancement
of Scandinavian Studies Annual Meeting contains text, tables, and figures not
presented here because of space considerations, and is available at http://www.people.virginia.edu/~hms2f/Sass-99.html.
Thanks to Karen Anderson, Robert Cox, Leslie
Eliason, Christoffer Green-Pedersen, Asbjørn Sonne Nørgaard, Jonas Pontusson,
and David Waldner for comments. All
errors remain mine. Unless noted, all
data, including that for the figures, are from OECD
(1999a), Economic Outlook, annex tables, various dates through #65,
June 1999. “12 Small OECD economies” (in the figures) refers to an average of
values for Australia, Austria, Belgium, Denmark, Finland, Ireland, Netherlands,
New Zealand, Norway, Spain, Sweden and Switzerland; OECD-18 to the 18 rich OECD
economies.
Abstract:
The
1980s and 1990s saw employment “miracles” in Denmark, Australia, and the
Netherlands. This paper analyzes the
dynamics and substance of Danish policy responses to poor export, employment,
and fiscal performance to see whether remediation should be attributed to pluck
(intentional, strategic remediation of dysfunctional institutions to make them
conform with the external environment), luck (environmental change that makes
formerly dysfunctional institutions suddenly functional), or just being stuck
(endogenous, not entirely strategic change that leaves institutions in
conformity with the environment). It
addresses these issues to remedy biases in the literature toward
Sweden-as-model, toward pessimism about the welfare state’s survivability, and
toward privileging intentional action.
The analysis finds that stuck (endogenous dynamics) probably explains as
much as pluck (strategic choice), suggesting only limited transferability for
policy lessons from the “miracles.”
The Dutch miracle is the best publicized of a
number of employment “miracles” in the OECD.
However, Australia in the 1980s and Denmark in the 1990s also
experienced employment miracles. The
contrast with rising unemployment in France, Germany, and Sweden created a
small literature looking for transferable policy solutions. The first three were particularly attractive
to analysts uneasy with the British or New Zealand neo-liberal policy route to
employment gains, because they generated relatively good employment outcomes
without sacrificing essential features of their welfare state.
Most of the literature on these economic
miracles assumes that actors= intentional policy behavior changed dysfunctional local
institutions in ways that created desirable economic outcomes. However, deliberate policy choices that
bring local institutional structures into better conformity with the
environment are not the only possible cause for desirable economic
outcomes. Positive outcomes can also
occur if the external environment changes in ways that make what were
dysfunctional and unchanged institutional structures more functional in the
context of the new environment.
Similarly, dynamics that are endogenous to a given but dysfunctional
institutional structure can create unintended changes that accidentally make
institutional structures more functional in the context of a changed
environment. This paper analyzes the
Danish case to see how much of the Danish miracle can be attributed to pluck
(strategic, intentional change), luck (environmental change), or just being
stuck (endogenous, not entirely strategic change).
This analysis thus addresses three biases in the
literature. First, parochially, writing
on welfare states, and social democratic welfare states in particular, has
always viewed Sweden as the epitome of both.
This literature saw Denmark as a weak version of this generic
“Scandinavian” (i.e., Swedish) model, whose incomplete acquisition of Swedish
institutions and policies left it burdened by higher unemployment, and fiscal
and current account deficits. The 1980s
seemed to confirm this vision, for Denmark entered the 1980s on a fast train to
macro-economic hell, while Sweden seemingly pursued its successful third
way. But in the 1990s, Denmark and
Sweden traded places. Sweden endured
rising unemployment, and current account and fiscal deficits, while the Danish
economy absorbed labor market entrants and generated current account and, for a
while, fiscal surpluses. Analyzing
Denmark on its own terms usefully corrects this Swedo-centrism.
Second, precisely because the generic
“Scandinavian social democratic model” was so closely identified with Sweden,
Sweden’s recent difficulties called into question whether social democratic
welfare states could survive in a globalizing economy. But to the degree that pluck underlay Danish
prosperity in the 1990s (or Australian and Dutch prosperity, since the policy
choices were similar), this suggests transferable policy lessons for those
wishing to avoid both neoliberal policy choices and the problems plaguing
Sweden.
Finally, this analysis corrects for the implicit
privileging of intentional action in causal explanations by explicitly
considering the possibility that while actors may have considered their actions
intentional, their policy choices might have been essentially endogenous
outcomes of the interaction of specific institutional structures and particular
environmental conditions. If markets,
like any environment, select for and reward specific institutional structures
and behaviors, then some actors will always appear to have made the “correct”
strategic response to their environment, even if they chose their strategy
somewhat randomly. But this may not
necessarily be the “optimal” response or strategy. Furthermore because actors do respond to their environment, that
environment is always changing, eroding the degree to which any prior “best”
response to a given environment fits the current environment. At any given time, stochastic changes rather
than intentional action may create what looks like an optimal or best response
to a given environment. But in this
situation causality will be located in the system (in the environment created
by other actors= behaviors), not in the
choices of specific actors who are usually studied in isolation.
This paper thus tests luck, pluck, and being stuck
as competing explanations for Danish “success” to illuminate the narrow trading
places question and also broader questions about whether any welfare state can
survive or thrive in the current world economy. To foreshadow the findings, Danish capacity to preserve the
welfare state in the face of severe macro-economic constraints without
generating popular dissatisfaction is only partly accidental. Intentional reform whose potential was
created by Danish political and social institutions did ameliorate Danish
macroeconomic problems. While this
makes it hard to adjudicate adequately between pluck and stuck arguments, the
Danish case suggests that neither environmental change nor endogenous dynamics
are sufficient or necessary conditions for a crisis of a welfare state composed
of publicly funded services and transfers.
Sufficient conditions for economic crisis and a crisis of the welfare
state rest in domestic policy choices and institutions.
What roles did luck, pluck, and being stuck play
in resolving Danish problems with current account deficits, unemployment, and
fiscal deficits? These three problems
threatened to erode the economic sustainability of a welfare state based on
tax-funded services and transfers.
Unemployment raises expenditures, decreases revenues, and erodes social
solidarity (Martin, 1996). The
cumulation of fiscal deficits into rising public debt and interest payments can
crowd out services and transfers.
Current account deficits and public foreign debt are simply an external
and more pernicious version of fiscal deficits, because foreign debt cannot be
monetized away. Current account
deficits are also a proxy for competitiveness, and so are often also associated
with higher unemployment as imports crowd out local production or as
competitors displace exports from third-party markets. In short, these three issue areas represent
core economic preconditions for a tax, service, and transfer welfare
state. However, I will also touch on narrowly
political issues of sustainability while discussing fiscal balance.
The structure of the luck arguments is
transparent: dysfunctional institutions
promoting excessive wage gains, a weak export capacity, and high (imported)
consumption in the 1960s and 1970s came into their own in the 1980s and 1990s
when world markets shifted in favor of differentiated quality production and
when declining global interest rates made past deficits less burdensome. Danish small- and medium-sized enterprises
(SMEs) were well suited to fragmented markets that put premia on good
design. Danish public sector
institutions did not need to be fixed once their interest cost decreased.
The pluck arguments are more complex. Briefly, with regard to the private sector,
central and corporatist actors used an innovative industrial policy to resolve
problems plaguing the provision of collective goods for an economy
characterized by SMEs and high levels of long-term unemployment. On the labor market side a fortuitous shift
to an active labor market policy first eased tight and potentially inflationary
labor markets in the early 1990s and then firmed up softening demand for labor
in the mid to late 1990s. Meanwhile,
collective bargaining patterns shifted power downward from national
organizations and upward from shop stewards toward sectoral associations
(so-called cartels). This kept wage
increases below productivity increases.
On the public sector side, central actors with a reform and
reorganization agenda used two interlocking attributes of the public sector’s
institutional terrain -- intergovernmental corporatism and administrative
corporatism -- to moderate the growth of public consumption, thus allowing a
return to fiscal stability.
Stuck arguments would suggest that Danish
institutions evolved incrementally according to logics of appropriateness held
by actors in those institutions, and that the institutional outcomes were
either better than prior configurations or at least less dysfunctional than
those into which the competition stumbled (March and Olsen, 1989). Actors’ conscious policy choices were
conditioned by embedded notions about the social purpose of their activity and
what could be attained given the institutional landscape in Denmark. In that sense they were not perfectly free
choices, but rather conditioned by accidental or incidental qualities of those
organizations. Because the external
environment surrounding Danish production and public sector institutions was
also not characterized by optimal organizations, Danish organizations merely
had to be less dysfunctional than their global competitors in order to look
“good.” Note that stuck arguments are
thus not arguments for convergence toward any optimal organizational form, nor
do they offer much guidance about policy transferability. As Alchian (1950) and others have argued,
markets are like ecologies. Firms
display a multitude of strategies -- expressed as organizational structures --
that can be well or ill suited to their environments. Competitive pressures force firms to adapt their strategies
(organizational structures) but they do not enforce conformity. Ecologies with multiple niches permit
multiple successful strategies, and both successful and unsuccessful strategies
change the environment. Moreover,
competitive pressure on any given organization can be diffuse, if it is in an
ecological niche (market) with few competitors. Pressures on public sector organizations are even more diffuse,
since they have quasi-parasitic sources of revenue (or put differently,
something approximating a monopoly in the provision of regulated and common
pool services).
Luck,
Pluck, or Stuck: Private Sector Exports
and the Trade Balance
Luck:
A luck perspective would argue that Danish failure
to avoid current account deficits in the 1960s through 1980s derives from a
mismatch between an industrial sector dominated by SMEs and an environment
favoring long production runs of standardized goods; Denmark’s recent trade
success then is nothing more than a fortuitous change in world markets favoring
the differentiated goods at which SMEs excel.
This offset Denmark’s bad luck in sending two-thirds of its exports to
the slow-growing European Union.
The arguments about postwar fordism are
reasonably well known. Postwar
regulation of the economy created an environment favoring production of
standardized goods, with minimal design changes, using technologies mixing
assembly lines and dedicated capital goods with unionized semiskilled
labor. Thus the breakup of fordist mass
markets in the 1980s and 1990s should favor smaller, more agile firms producing
design-intensive goods with skilled labor and general purpose machinery.
Denmark’s industrial sector is both small in
relation to the economy and small in terms of structure (OECD, 1994, pp.
62-64). Only 20 % of private employment
is in firms with more than 500 workers, below the OECD average, while the share
of employment in enterprises with fewer than 20 employees is the second highest
in the OECD. This industrial structure
arguably creates some problems for the Danish economy. Despite the predominance
of SMEs, a substantial share of Danish exports are scale-intensive goods. Manufacturing specializes in consumer
nondurables (about 5 % of exports), design-intensive goods, intermediate metal
inputs for other firms, specialized machinery, chemicals (10 %) and food
production (20 %). Most of the first
four products are characterized by short production runs, high levels of
differentiation, and low levels of research and development (R&D), while
the last two are typically fordist.
Danish service exports (about 25 % of exports) are also produced by
large firms with scale advantages.
Denmark’s firms are also heavily concentrated in low technology, low
growth sectors. Small firms typically
lack the funds to enter new markets and to generate significant amounts of
R&D. While Danish firms employing more than 500 workers represented only 20
% of employment, they generated 60 % of R&D spending in 1995 (OECD,
1999b). Finally, the absence of a
well-developed shares market in Denmark might make it hard for firms to attract
new capital. The Danish share market
amounted to only 8 % of gross domestic product (GDP) in 1980 in contrast to an
average of 25 % in Australia, Sweden, and New Zealand.
These problems should make it difficult for
Danish firms to export or to substitute local production for imports. And indeed, Danish exports by and large did
not grow as fast as export markets in the 1970s, when the fordist model (while
in crisis) created conditions conducive for scale-intensive production. Danish export performance in the 1970s was
below what a constant market shares analysis would have predicted, partly because
Denmark exported goods with below average growth rates and partly because it
exported those goods to countries with below-average growth rates (Horwitz,
1984). Over the 1980s, manufacturing
exports underperformed export market growth by about 11 % (OECD, 1994). Figure 1 and Figure 2 display
export performance and the trade balance.
Nonetheless, Danish export performance surged from
1986 through 1992, a period characterized by stagnant domestic demand and then
rising demand in eastern Europe. But
logically if there had been an environmental shift to post-fordist demand
structures in the 1980s, Danish export performance would have been consistently
high from the mid-1980s on, rather than plummeting precipitously after 1992 and
then recovering slightly in 1997.
Despite this relative decline, Denmark turned its pre-1986 trade
deficits into surpluses through 1999.
Pluck:
Does pluck explain this shift? The Danish
government and private sector actors generated a series of industrial policies
addressing the under provision of collective goods for SMEs in the 1980s and
1990s. In 1983 the existing Technology
Board (Teknologistyrelsen) put forward three new programs for technological
development after the OECD pointed out the typical weaknesses of Danish SMEs
(Annerstedt, 1989). The board helped
create networks to rapidly diffuse knowledge about new technologies, new
managerial strategies, quality control, and new financing arrangements. The Academy for Technical Sciences and two
other national technical institutes helped develop dispersed, locally
integrated engineering and consultancy services through the Danish
Technological Services Network. R&D
expenditures by Danish firms rose steadily from 1.13 % of GDP in 1986 to 2.02 %
by 1995 (OECD, 1996, 1999b). Despite
the initial lack of a comprehensive program, by the late 1980s public spending
on a variety of efforts amounted to Danish Kroner (DKK) 1.3 billion
(Christiansen and Sidenius, 1988).
On the financing side, the Teknologistyrelsen
allocated around DKK 2 billion for the acquisition and dispersal of foreign
source technologies. The Danish
National Bank and private actors used DKK 0.5 billion to capitalize Dansk
Udviklingsfinansiering A/s to provide venture capital in the absence of a deep
shares market, and directed public funds into public-private cooperative
R&D (Christiansen, 1989). The
government absorbed some of the exchange rate risk of overseas borrowing and
now guarantees up to 50 % of venture-type loans from banks (OECD, 1994). The shares market itself was deregulated in
the late 1980s, and by 1996 total capitalization of shares handled on the
exchange equaled 41 % of GDP. Budget
balancing after 1989 eliminated some programs, but the self-financing
public-private networks lived on.
Finally, as in many other small countries, the government elaborated a
strategy based on seven local clusters of firms, including traded services.
Private sector individual and collective actors
also responded to SMEs problems. Danish
firms seem to have compensated for some of their weaknesses by aggressively
substituting capital for expensive Danish labor at all levels of technology
(OECD, 1994, p. 66). This probably
allowed them to increase their share of low-technology markets. During the early 1990s the union-controlled
Lønmodtagernes Dyrtidsfond cooperated with Denmark=s largest food
processor, Mejeri Danmark, to consolidate the food processing industry, by
buying up smaller competitors and launching common brands in major European
markets (Nielsen, 1991).
Stuck:
Disproving a “stuck” argument is easier than
proving one. A stuck argument ultimately
rests on the degree to which actors’ behavior flowed from a given logic of
appropriateness rather than a strategic appreciation of and response to their
environment. Most private sector actors
certainly could be accused of simply acting out of a preexisting logic of
appropriateness, especially Mejeri Danmark’s drive to consolidate food
processing. Food processing firms
everywhere consolidated in the 1980s.
Similarly, the preference for cooperative efforts and the diffusion of
knowledge through extension systems was characteristic of Danish agricultural
policy in the nineteenth century and carries over into all industrial policy
today. Amin and Thomas (1996) show this
clearly while making what they think is a pluck argument.
Some government efforts, however, suggest a true
strategic vision that was ideologically and normatively at odds with
traditional Danish practices.
Annerstedt (1989) argues strongly that “industrial modernists” pushed for
truly new remedies for SMEs’ technological deficiencies. These modernists worked outside the usual
policy networks and arenas, exploiting the vacuum created by dissensus between
government and business organizations.
Their program also diverged somewhat from the usual “help to self help”
orientation of Danish government policy in its commitment to making firms
change, and strongly in the intensity of government involvement and
directiveness. Precisely these programs
were cut from post-1989 budgets after the social liberal party Venstre defended
small industry’s right to be left alone (Nielsen, 1991).
Evaluation:
The weight of evidence here mostly favors a
stuck argument. Luck should have
produced a secular rather than cyclical or erratic pattern to Danish export
success. The industrial policy of the
1980s clearly helped boost Danish export performance for a while, suggesting
that pluck matters. But if pluck
explained everything, then Danish export shares would have expanded gradually after
the initiation of the aggressive industrial policy of the 1980s. However, the termination of much financial
support for industrial policy in 1990 correlates well with declining export
performance, and this termination also corresponds to political changes that
restored policy making to patterns “appropriate” with normal Danish policy
making. Finally, Danish export growth
also seems sensitive to absolute and relative labor costs and not just to
problems with firms= size. The abrupt slide in Danish export growth
from 1992, and the corresponding decline in the trade surplus from 6.0 % in
1992 to 3 % in 1997, indicates that the elimination of the trade deficit in the
later 1980s and early 1990s has more to do with the unusually high level of
demand created by German reunification, and perhaps by falling relative unit
labor costs (RULCs) from 1986 to 1988 (about which more later), than with a
favorable structural change in Danish industry or a determined effort to change
structures. Score this 60 % stuck, 30
% pluck, and 10 % luck.
Luck,
Pluck, or Stuck: Private Sector Collective Bargaining and Employment
Luck:
The luck argument in labor markets is very
short: markets worked in the normal
fashion. Rising unemployment from 1987
on led quite normally to wage moderation and a rising share of income going to
capital just as the international economy began to pick up. The wage share of
business sector value added fell from around 75 % in 1980 to 66 % in 1985,
recovered to 70 % in 1987, and then fell again to 61 % in 1994 (OECD, 1996). This in turn permitted the modest export
expansion noted above and a downturn in unemployment despite a stable
employment-to-population ratio in the mid to late 1990s (Figure 3 and Figure 4). There is a .41 correlation between
unemployment rates and capital income in the business sector from 1988 to 1997;
the correlation between RULCs and capital income is similar.
The luck argument has two problems. The first concerns timing. Luck cannot explain how from 1983 to 1987
just as unemployment fell from 10.5 to 7.7 % (local definitions), RULCs were
rising from 81.3 to 103.4 (1990 = 100) and labor recovered 4 percentage points
of value added. Similarly, just as
Danish RULCs began to edge upwards, in the late 1990s, unemployment actually
declined rapidly from 10.1 % in 1995 to an estimated 6.4 % in 1999 (Figure 5). Second, Danish collective bargaining
practices changed considerably in the late 1980s, away from a centralized
system, but it is precisely at this point that relative unit labor costs
stabilized and labor gave up 9 percentage points of value added to business.
Pluck:
Perhaps pluck allowed Danish labor market actors
to get RULCs under control and boost employment. Due et al. (1994) argue that Danish collective bargaining
arrangements experienced simultaneous decentralization and centralization after
1989. Centralized negotiations among a
small number of new “cartels” set broad frameworks in which specific local
negotiations over wages and conditions could then occur. The new cartels simultaneously moved power
in wage negotiations downward from union and employer confederations and upward
from stewards and firms.
Prior to these changes Danish collective
bargaining generated two different kinds of contracts. (Table 1 shows relative coverage.) Centrally bargained standard wage contracts
set industry-wide, essentially nonnegotiable wage increases and
conditions. Minimum wage contracts set
a floor beneath second tier, locally controlled plant level bargaining. From 1983 on employer associations and some
unions introduced a third variation into this system by creating minimum-pay
contracts in which central negotiations simply set a floor beneath wages and
conditions within five large sectoral groupings, but then all increases were
bargained locally at the plant level. Organizationally distinct,
sector-specific bargaining “cartels” emerged on each side around these minimum
pay contracts.
|
Table 1: Wage
bargaining structures in the DA/LO area (percentage of employees covered) |
||||
|
year |
1989 |
1993 |
1995 |
1997 |
|
Normal
(i.e., centrally set) wage increase |
34 |
16 |
16 |
16 |
|
Minimum
wage (local bargaining up to central maximum) |
32 |
13 |
12 |
17 |
|
Minimum
pay (central minimum, local top-up) |
30 |
67 |
61 |
46 |
|
Fully
local bargaining |
4 |
4 |
12 |
21 |
|
Source:
OECD, Economic Survey: Denmark, 1999, p. 66. |
||||
Minimum pay contracts remedied the tendency for
centrally set wages to generate across the board increases in pay for sectors
that were unable to generate commensurate productivity increases, as well as the difficulties centrally
set wages and conditions created for employers seeking to induce skills
formation and introduce multitask work practices (Pontusson and Swenson,
1996). Arguably this big change in the
structure of private sector collective bargaining created significant stability
in RULCs (which measure wage growth in relation to productivity) from 1986 on,
as Figure 5 shows. Productivity grew
faster than compensation in Denmark from 1986 to roughly 1998 (OECD, 1996). Wage restraint then generated rising employment
and large trade surpluses (Figure 2), but
not better export performance for Denmark.
(However, it might also have averted even worse deterioration in export
growth).
Finally, just as export performance
deteriorated, expanded early retirement and paid leave schemes after 1994
helped activate workers who otherwise would have slid into long-term
unemployment, reversing a secular decline in the employment-to-population ratio
in the mid 1990s (Figure
4).
Stuck:
As with industrial policy and exports, evidence
that actors consciously chose to change collective bargaining structures in the
direction described above provides enticing evidence for a pluck argument. The outcomes described by Due et al. (1994)
did not emerge spontaneously but rather as the outcome of political struggles
within employer organizations and unions as well as between them. But a comparison with other countries that
started out with similar collective bargaining structures and similar problems
shows quite similar responses to those problems in pursuit of successful wage
restraint and employment growth. Danish
collective bargaining changed in the same ways that bargaining did in the
Netherlands and Australia (Visser and Hemerijck, 1997; Schwartz, 2000). Those countries had relatively centralized
collective bargaining systems in which the state generalized wage gains and
cost of living increases across sectors through processes similar to the
“concatenation” found in Denmark. Dutch
state mediators or Australian arbitration courts intervened recurrently in
bargaining, and this frequent resort to legislated or juridically imposed
settlements meant that labor market actors conducted their conflicts under the
shadow of hierarchy (Scharpf, 1997).
Consequently, organized but market-vulnerable actors sought to
reestablish their autonomy in the 1980s by behaving responsibly and using state
institutions to punish or discipline potential defectors, rather than suffering
indiscriminate state sanctions.
Employers in all three countries sought one
firm-one contract type bargains from one industry-one organization type actors,
and all three bargaining systems saw rising proportions of purely locally
negotiated labor contracts. Moreover,
in all three countries actors located in the metals industry drove decentralization
following a long established logic of appropriateness present in that industry,
which exchanged wage gains for productivity gains and which then let employers
and workers adjust local wages to local conditions (Due et al., 1994;
Thornthwaite and Sheldon, 1996).
Evaluation:
A luck argument is completely unpersuasive in
light of intentional action, the evidence on the timing of changes, and the
similarity of change across several countries.
Given that actors deliberately changed their behavior, can a stuck
argument be persuasive? The congruence
between Danish changes and equally successful change elsewhere, and the similar
origin of these changes in established bargaining patterns in the metals industries,
suggest that a stuck argument cannot be completely dismissed. While Australia, the Netherlands, and
Denmark all had centralized bargaining systems, they also all had incomplete
centralization of both business and labor organizations. Perhaps in this kind of structure endogenous
change allows politically dominant firms to impose their own, established
preferences on the others. Score this
two-thirds pluck, one-third stuck.
Luck,
Pluck, or Stuck: the Public Sector and
Fiscal Balance
Luck:
The public sector luck argument is fairly
simple. The single fastest growing
source of public sector deficits was rising interest expenditures on debt
accrued in the 1970s and 1980s (see Table 2, line 4, and Figure 6). As real interest rates rose through the
early 1980s, the cost of running deficits climbed rapidly. In the mid 1980s, despite a narrowing of the
interest rate differential between Denmark and Germany due to Danish entry into
the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), real
interest rates hovered over 7 %; debt service on gross public debt amounting to
72 % of GDP absorbed 8.8 % of GDP. But
as interest rates declined to less than 5 % by 1997, the cost of servicing old
debt declined to 6.7 % by the late 1990s, permitting a falling total fiscal
deficit (Table 2, line 5). The timing
of shifts in the total deficit comports somewhat with a luck argument. Slightly rising real interest rates in the
mid 1990s created renewed deficits after a period of falling interest rates and
surpluses in the late 1980s; falling interest rates after 1995 are associated
with renewed surpluses. The problem with the luck argument is that it fails to
explain the origins of public sector deficits in the first place, how and why
surpluses replaced deficits during the high interest rate environment of the
early to mid 1980s, and why deficits reemerged when real interest rates were
actually somewhat lower than in the 1980s.
Part of the answer surely is rising taxes in the 1980s, which helped
make rising interest rates affordable.
In addition, the expansion of transfers to persons (Table 2, line 6)
nicely mirrors the changing interest rate environment. Once interest rates fell, transfers expanded
from 19.6 % in 1989 to 24.1 % in 1995, more than absorbing the slack created by
falling interest rates.
|
Table 2: FISCAL INDICATORS (% of GDP) |
|||||||||||
|
General Government account |
1980 |
1986 |
1987 |
1988 |
1989 |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 |
|
1. Current Receipts |
52.9 |
59.1 |
59.7 |
59.5 |
59.1 |
56.9 |
56.7 |
58.2 |
59.9 |
60.3 |
59.5 |
|
2. Non-interest Expenditure |
52.3 |
46.9 |
49.0 |
51.1 |
52.2 |
51.1 |
51.4 |
54.2 |
56.0 |
56.6 |
54.4 |
|
3. Primary Budget Balance |
0.7 |
12.2 |
10.7 |
8.4 |
7.0 |
5.8 |
5.3 |
4.0 |
3.9 |
3.7 |
5.1 |
|
4. Net Interest Expenditure |
3.9 |
8.8 |
8.3 |
7.9 |
7.5 |
7.3 |
7.3 |
6.8 |
7.8 |
7.1 |
6.7 |
|
5. Budget Balance |
-3.3 |
3.4 |
2.4 |
0.4 |
-0.5 |
-1.5 |
-2.0 |
-2.9 |
-3.9 |
-3.5 |
-1.6 |
|
6. Transfers (exc. Interest) |
18.4 |
17.7 |
18.4 |
19.6 |
20.7 |
20.5 |
21.4 |
22.0 |
23.0 |
24.7 |
24.1 |
|
7. Consumption |
26.7 |
23.9 |
25.2 |
25.6 |
25.6 |
||||||
