Buttonwood

The perils and rewards of economies in rehab

Why investors in serial recidivists like Pakistan keep coming back for more




Arecent edition of “The Joe Rogan Experience”, a popular podcast, features the comedian Artie Lange. Mr Lange is an engaging personality who, as he candidly admits, has battled with drugs and gambling. Not long out of his umpteenth period in rehab, he is working in stand-up again. “This business keeps taking me back,” he says with something like amazement.

Forgiveness for recidivists is found outside show business, too. In July the imf approved a $6bn bail-out for Pakistan. As the fund acknowledged at the time, with something like weariness, Pakistan is back in rehab less than three years after completing its previous programme. But the fund has not abandoned it. And nor have investors. Pakistan is enjoying a flood of foreign capital on the promise of reform. The Karachi stock index is up 25% since the start of October.

This may seem hard to fathom. The imf regards the chance that its programme will fail as “particularly high”. Yet a band of investors are prepared to bet on success. A rehab economy such as Pakistan offers a rare opportunity. It is one of the few places where investors can find high interest rates, a devalued currency and cheap-looking stocks.

True, things could go very wrong. Look at Argentina, which was embraced by investors after Mauricio Macri was elected in 2015 on a platform of orthodox economics, only to be abandoned when his reforms failed. But if things go right, the returns can be substantial.

Rehab economies follow a familiar pattern. The cycle begins when the economy bumps up against a budgetary or balance-of-payments constraint. The trigger may be external: an oil-price shock, say, or a shift in policy by the Federal Reserve.

Funding dries up. Then comes capital flight. Foreign-exchange reserves are run down so that the government can sustain the illusion that the local currency is worth more than it really is. Hard currency is then rationed. That leads to shortages of essential imports, which further hamper the economy.

With luck, at this point the authorities recognise the hole they are in. To get out of it, they must embrace more orthodox economics. In practice, this means letting the currency fall, getting rid of subsidies in order to cut the budget deficit, and starting to use monetary policy as a way to tame inflation rather than finance the government. Sometimes (but not always) the imf is brought in to lend hard currency and give policy advice.

This, more or less, describes events in Pakistan leading up to mid-2019. It also describes the cycle in Egypt up to the start of 2016 when it entered its (successful) imf programme. And, for that matter, it is the same pattern seen in Pakistan in 2012-13.

At this stage of the rehab cycle, if things are to go well, the fund’s money needs to act as a catalyst for other sources of capital. This is needed as a kind of bridge finance—to pay for essential imports and allow the rebuilding of foreign-exchange reserves, until exports pick up in response to a cheaper currency.

That might seem a big task. Economies in rehab are typically unstable places (Ireland in 2010 was a rare exception). Pakistan is unlikely to threaten Denmark’s place at the top of global rankings of security, governance and development. But investors are not betting that a rehab economy will become a paragon, only that it will improve, at least a bit.

A first task is to lure back capital shifted offshore by rich locals when they saw the crisis coming. The twin attractions are the high interest rates needed to curb inflation and a cheaper currency, which acts as reassurance against a further devaluation. Once the locals come back, yield-hungry foreigners will follow.

And before long, so will stockmarket investors.

Like Egypt, Pakistan has a wide range of listed companies for investors to buy—from industrial firms to banks to consumer stocks, says Andrew Brudenell of Ashmore, a fund manager. It may take a while for firms to see the benefits of improved economic stability. But investors are tempted to buy when stocks are trading at attractive price-to-earnings multiples.

Such bets can pay off handsomely. Reforms to improve macroeconomic stability have led to bountiful investment returns in surprising places. An obvious danger is that hardship and social unrest derail the reform process.

Another is that reformed characters have a tendency to fall from grace again. But progress is never in a straight line. When the potential is great and the price is right, there will always be people willing to bet that next time will be different.

World Bank warns on ‘towering’ $55tn emerging market debt pile

Fastest and widest surge in borrowing poses risk should era of low interest rates end

Tommy Stubbington


Water buffalo graze and bathe outside a Samsung Electronics Vietnam Co. Plant at Yen Phong Industrial Park in Bac Ninh Province, Vietnam, on Thursday, Sept. 1, 2016. Samsung Electronics Co. and its affiliate have built a factory town with 45,000 young workers and hundreds of foreign component suppliers -- a miniature version of the family-run chaebol conglomerates that dominate business back in Korea. The investment has been a windfall for businesses in Bac Ninh -- almost 2,000 new hotels and restaurants opened between 2011 and 2015 according to the provincial statistics office -- helping raise the province's per capita GDP to three times the national average. Photographer: Linh Luong Thai/Bloomberg
The World Bank warned that emerging market economies were more vulnerable today than before the global financial crisis © Bloomberg


Developing countries racked up a “towering” $55tn of debt by the end of last year, in a borrowing surge since the financial crisis that has been the fastest and widest in modern history, according to World Bank research.

Fuelled by the era of very low interest rates, total debt has rocketed to 170 per cent of emerging markets’ gross domestic product, a 54 percentage point increase since 2010, according to a World Bank report published on Thursday.

The findings are likely to fan concerns that developing countries have accumulated debt levels that could quickly become unsustainable should global rates rise.

“The size, speed and breadth of the latest debt wave should concern us all,” said David Malpass, World Bank group president.

The bank warned that, on many measures, emerging economies were more vulnerable today than before the global financial crisis. Three-quarters have budget deficits, while corporate debt denominated in foreign currencies is much higher and current account deficits are four times larger than in 2007.

Borrowers in the emerging world should try to mitigate these risks through greater transparency, which would help identify dangers, and pursue alternatives to borrowing by encouraging private sector investment and expanding their tax base, the bank said.

“Towering though it may seem, the latest global wave of debt can be managed. Across the world, interest rates are at historic lows, moderating the costs of the debt,” said Mr Malpass.

“But leaders need to recognise the danger and move countries into safer territory in terms of the quality and quantity of investment and debt — sooner rather than later.”

The bank’s “Global Waves of Debt” report compares the recent borrowing frenzy with three previous episodes of rapid EM debt accumulation, all of which ended in financial crises.

Compared with the preludes to the Latin American debt crisis of the 1980s, the Asia financial crisis of the late 1990s and the global financial crisis of 2008 — when EM exposure was contained to specific regions and largely involved public debt — the researchers found the current build-up involves public and private borrowers, is not limited to one or two areas and involves new kinds of creditors, often originating from China.

China itself, whose debt-to-GDP ratio has risen 72 points to 255 per cent since 2010, accounts for the bulk of the boom, but nominal debt levels have doubled in the rest of the developing world, the bank found.

For now, historically low interest rates make a crisis less likely, according to the report, but the authors said that roughly half of the 521 national episodes of rapid debt growth since 1970 have resulted in crises which significantly hurt incomes.

Why This Boom Could Keep Going Well Beyond 2019

by: Mises Institute
 
By Thorsten Polleit
 
 
Summary

- The Austrian business cycle theory offers a sound explanation of what happens with the economy if and when the central banks, in close cooperation with commercial banks, create new money balances through credit expansión.

- The market interest rate plays a crucial role in the boom and bust cycle.

- Since central banks have established a rather firm grip on market interest rates, the chances are that the ongoing boom will continue - and it may well continue for much longer than most market observers expect at the current juncture.
 
 
The Austrian business cycle theory offers a sound explanation of what happens with the economy if and when the central banks, in close cooperation with commercial banks, create new money balances through credit expansion.
 
Said credit expansion causes the market interest rate to drop below its "natural level," tempting people to save less and consume more. Credit expansion also drives firms to increase investment spending. The economy enters into a boom phase.
 
However, the boom is unsustainable. After the effect of the injection of new money balances has worked itself through the economy, consumers and entrepreneurs realize that the economic expansion has been a one-off affair.
 
They return to their previously preferred savings-consumption-investment affinity: once again, they save more, consume, and invest less. This manifests itself in a rising market interest rate and the boom subsequently turns into bust.
 
Credit Market Distortion
 
The market interest rate plays a crucial role in the boom and bust cycle. As it is manipulated downwards by the central bank, a boom sets off, and as the market interest returns to its "natural level," the boom turns into bust. This explains why central banks have been increasingly trying to gain full control over the market interest rate in recent years: for he who controls the market interest rate controls the boom and bust cycle.
 
The major central banks around the world have effectively taken over the credit markets in an attempt to prevent the current boom from turning into yet another bust. On the one hand, monetary authorities fix the short-term market interest rate in the interbank funding market.
 
By doing so, they also exert a rather strong influence on credit rates across all maturities.
On the other hand, central banks influence long-term interest rates directly: They purchase long-term bonds, thereby determining their price and yield.
 
The credit market "government securities" can be expected to already be under full control of monetary policymakers, and it is just a technicality for any central bank to extend its purchases if needed to bank and corporate debentures and mortgage debt.
 
Keeping the Boom Going
 
If and when central banks succeed in keeping market interest rates at very low levels, the "correction mechanism" - namely a rise in market interest rates - is put to rest, and the boom can be kept going, while the bust is postponed.
 
Basically, all major central banks around the world have taken recourse to policies controlling market interest rates, and quite effectively so as the economic expansion - fueled by overconsumption and malinvestment - in the last decade testifies.
 
The question is, however, whether the boom can last indefinitely, whether the economies can flourish with chronically artificially suppressed interest rates? This is a rather complicated question, deserving of an elaborate answer. To start with, the boom can be kept going as long as market interest rates remain suppressed below the economy's "natural interest rate."
 
If, however, the market interest rate hits zero, things take a nasty turn, as people would stop saving and investing. Why save and invest, why take any risks that do not yield a positive return? In fact, with the market interest rate hitting zero, capital consumption sets in, the division of labor collapses.
 
A nightmare scenario: If the market interest rate disappears, we will fall back into a primitive hand-to-month economy.
 
Causing Price Bubbles
 
Against this backdrop, we may say the following: As long as there is still room for pushing the market interest rate down further, the chances are reasonably good that the boom continues and that the bust will be adjourned into the future. As per the charts below, current market interest rates in the US have not reached rock bottom yet. Corporate and mortgage credit costs in particular still have some way to go before hitting zero.
 
 
Meanwhile, the forced depression of market interest rates drives up asset prices such as, for instance, stocks for at least two reasons. First, expected future profits are discounted at a lower interest rate, thereby increasing their present value and thus market price. Second, lower interest rates reduce firms' cost of debt, translating into higher profits - which also contributes to higher stock prices in the market place.
 
It should therefore not come as a surprise that the decline in market interest rates in recent years has indeed been accompanied by buoyant stock prices - as illustrated in the chart above.
 
Just to point out one thing again: The decline in market interest rates is only one factor among many others which explain why stock prices have gone up in recent years. But it is a significant factor, and it contributes to the build-up of a price bubble.
 
Wiping Out Investment Returns
 
As long as the boom keeps going, people rejoice - especially so when asset returns remain buoyant - and they do not question the underlying forces driving the "make-believe world of prosperity."
 
However, a monetary policy of ever-lower interest rates can only go so far. For if central banks push their key interest rate and government bond yields to zero, they basically drag down all other investment returns with them.
 
This is because investors, in a desperate search for yields, would bid up the prices for assets such as, say, stocks, land, and real estate. As the purchase price of these assets rises relative to their "intrinsic" value, future investment returns diminish and in the extreme case converge towards the central bank's zero interest rate.1
 
At least, in theory, a central bank nailing down its key interest rate at zero would also drive investment returns of existing assets towards zero.
However, the division of labor would already start unraveling at a market interest rate of slightly higher than zero. The reason is that acting man - be it as a consumer or an entrepreneur - has a time preference that is always and everywhere positive, and so is its manifestation, the originary interest rate (or "natural interest rate").
 
The originary interest rate is always and everywhere positive, it cannot fall to zero, let alone become negative.
 
A Helping Hand from Above?
 
Since central banks have established a rather firm grip on market interest rates, the chances are that the ongoing boom will continue - and it may well continue for much longer than most market observers expect at the current juncture.
 
However, there should be little doubt that the longer the boom keeps going, the bigger the distortions in the economic and financial market system will become.
 
This in turn suggests that the severity of the crisis that must be expected to unfold at some point in the future - at the latest when all market interest rates have been pushed onto the zero line and investment returns have become negligible - is driven to ever-higher levels. This is something we do know from the Austrian Business Cycle Theory. But it is certainly not enough to come up with a reliable forecast.
 
It goes beyond the science of economics to come up with quantitative forecasts. What economics can do, however, is pointing out and making intelligible the conditions under which today's economic and financial systems work; in particular that market interest rate manipulation through central banks causes damages on a grand scale and will end badly - something that may only be prevented by a helping hand from above.
 
 
1. Value is subjective, but by "intrinsic value," I mean value based on demand that would have existed in the absence of extreme interventions by central banks.

China Stays the Course, Straight Into the Storm

By: Phillip Orchard 


For all the pressure weighing on the Chinese economy, and for all the warnings exhorting the Communist Party of China faithful to prepare for pain, Beijing has not exactly been acting like it’s a crisis.


Gross domestic product growth is quite likely to fall below 6 percent next year for the first time since the CPC took power. Yet senior officials have been telling anyone who will listen that the government will not throw open the stimulus floodgates anytime soon. 

Chinese exports are dropping, particularly to the United States. Yet Beijing has shown near-zero willingness to make major concessions on structural issues in trade talks with the Trump administration

Private firms are defaulting on dollar bonds at a record pace, and a string of bank failures over the summer has authorities scrambling to prevent online rumors from triggering bank runs. Yet Beijing’s bailout packages have been cautious, at best, and for the first time, Beijing has been signaling a real willingness to let some investors and bankers pay the price for their imprudent decisions. The closely watched recent plenum produced no hints that Beijing is planning to change course.


This underscores three things: One, China fears shocks to the system more than a gradual loss of growth or economic dynamism. Two, its tools for staving off economic pain have become less effective, while the risks of using them have soared. Three, the worse conditions get, the more tightly the CPC will try to micromanage its way through the coming storm – inevitable trade-offs be damned.


China Fears Shock, Not Stagnation


To be clear, Beijing isn’t exactly letting a natural, cleansing recession take root. To goose growth, it’s implemented 2 trillion yuan ($284 billion) in tax cuts and pushed local governments to accelerate infrastructure spending. It’s doled out state support to more than 300 listed private companies facing a risk of default. 

This summer, it orchestrated a series of takeovers of ailing banks. And it’s expected to set a growth target just slightly lower than this year’s 6-6.5 percent window, despite deteriorating conditions at home and abroad. GDP figures in China are notoriously unreliable as a measure of real output. But such targets tell us quite a bit about how much economic activity Beijing expects local and provincial governments to generate – and how much it’s willing to let them binge on debt to get there.


Still, Beijing appears to be serious about breaking its habit of overreacting to the first sign of trouble, discarding painful reforms and deleveraging efforts en masse and flinging itself on the altar of debt-fueled growth. Its fiscal stimulus this year, for example, has amounted to a small fraction of the trillions of dollars in spending it unleashed after 2008. Its monetary easing measures, meanwhile, have been aimed solely at staving off the liquidity crunch that has resulted from its crackdowns on systemic risks like shadow banking, not on turbocharging growth or staving off its inexorable structural slowdown.



The most obvious explanation for Beijing’s restraint is the fact that external conditions may very well get a lot worse in the next two years. The global slowdown currently underway is not the same thing as a 2008-style global crisis. Naturally, China is loath to use up too much stimulus firepower now – especially since it’s still cleaning up the mountain of debt and financial risk it created with its response to 2008. 

To the extent that Beijing has been willing to kick-start certain sectors, it’s mostly been to ensure enough growth to allow its sweeping deleveraging agenda and other painful reforms to continue. And Beijing thinks these reforms must continue.


What Beijing cares about most is stability. It cannot avoid a structural slowdown, as its investment-led growth model will inevitably require ever-higher levels of credit to achieve returns. (This reality is also making its stimulus less effective). But with some pluck and some luck, it thinks it may just be able to guide the economy to a soft landing. 

And so long as the slowdown happens gradually, it thinks it has the tools to handle the political risks of stagnation. In other words, it can intervene selectively to rescue firms or banks that are “too big to fail,” use state-owned enterprises and pressure on factory owners to soak up excess labor, use state banks to metabolize toxic assets and shift debt around, and intervene selectively to stabilize property markets. And where it deems it prudent to let economic forces run their course, it can crack down on any social unrest that may result from layoffs, declining property values and so forth.


What Beijing fears most is a shock – whether triggered by an external bubble or by a rupturing of any one of its interconnected internal socioeconomic fault lines – that sows panic, overwhelms its ability to respond, and exposes the inherent rigidity and clumsiness of its tightly centralized system. This is why it can’t abandon growth-sapping deleveraging measures. 

It’s why Beijing is desperately trying to deal with its moral hazard problem in the financial sector by forcing banks and investors to think twice before assuming the state will guarantee any losses. Most important, it’s why China is refusing to liberalize the economy or its political system – whether at the behest of U.S. trade negotiators or centuries of economic and political science theory.

Xi Jinping’s Foremost Focus


This approach may sound reasonable enough on paper. But the problem for the CPC is it’s trying to micromanage a vastly complicated country of 1.4 billion people. The beauty of the market, of course, is it allocates resources in many economic sectors more efficiently than a relatively small number of distant, politically motivated policymakers ever could. In an ideal system, the risk-tolerance of banks or investors wouldn’t really be Beijing’s problem. 

Beijing presumably recognizes the trade-offs of centralization. But since the party can’t tolerate the risks of instability that come with liberalization without jeopardizing its control – and, in its view, risking a return to China’s historical vulnerability to disintegration – perhaps the only option is to focus on implementing a highly responsive state-led system of governance that operates as close to market efficiency as possible.


Thus, as illustrated at the recent plenum, “reform and opening” has tilted heavily toward the former. Indeed, improving governance and eliminating systemic risk have been President Xi Jinping’s foremost focus since taking power. This was a major driver of his sweeping anti-corruption campaign, which in turn paved the way for his staggering reorganization of the Chinese government a year ago. The widespread conclusion among party elites that a strongman was needed to push through these sorts of reforms is why Xi was able to consolidate power in the first place – and why any hints of major dissent in Beijing can be so alarming.


It’s clearly still a work in progress. Xi is constantly griping about “entrenched interests” blocking reform, the need to enforce political discipline and the importance of ideological purity. In July, he said China’s main problems were not structural economic woes or, say, imperialist U.S. trade tactics. Rather, according to the president, the biggest issue is that “rules are not followed and implementation is ineffective.”

This may sound like an overmatched college football coach blaming his players – humans who are prone to exhaustion and the temptation to take shortcuts or put personal interest ahead of the good of the team – for struggling to execute a convoluted scheme that works only with infallible players. 


Maybe, with the right amount of technocratic tinkering, disciplinary tools and ideological indoctrination, Xi really can implement the sort of efficient, corruption-free, stability-ensuring system of governance that has eluded every country in the region save for Singapore (a geographically blessed city-state that doesn’t have an existential fear of recessions) and Japan (a socially cohesive rich country that doesn’t have an existential fear of recessions). 

It’s a tall order, especially given that Xi’s own grip on power is not guaranteed

Just as likely, China will end up lacking the market-bred dynamism and/or the flawless governance needed to fulfill the extraordinary pledges the party had made to the Chinese people. Either way, to Xi, throwing out the playbook at this point isn’t really an option.

Finland Is a Capitalist Paradise

Can high taxes be good for business? You bet.

By Anu Partanen and Trevor Corson

Photographs by Mustafah Abdulaziz


           Credit...Mustafah Abdulaziz for The New York Times



HELSINKI, Finland — Two years ago we were living in a pleasant neighborhood in Brooklyn. We were experienced professionals, enjoying a privileged life. We’d just had a baby. She was our first, and much wanted. We were United States citizens and our future as a family should have seemed bright. But we felt deeply insecure and anxious.

Our income was trickling in unreliably from temporary gigs as independent contractors. Our access to health insurance was a constant source of anxiety, as we scrambled year after year among private employer plans, exorbitant plans for freelancers, and complicated and expensive Obamacare plans. With a child, we’d soon face overwhelming day-care costs. Never mind the bankruptcy-sized bills for education ahead, whether for housing in a good public-school district or for private-school tuition. And then there’d be college. In other words, we suffered from the same stressors that are swamping more and more of Americans, even the relatively privileged.

As we contemplated all this, one of us, Anu, was offered a job back in her hometown: Helsinki, Finland.

         Helsinki Central Station during the evening commute on Tuesday.


Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive — “socialist nanny states.” As we considered settling there, we canvassed Trevor’s family — he was raised in Arlington, Va. — and our American friends. They didn’t seem to think we’d be moving to a Soviet-style autocracy. In fact, many of them encouraged us to go. Even a venture capitalist we knew in Silicon Valley who has three children sounded envious: “I’d move to Finland in a heartbeat.”

So we went.

We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous, but perhaps not in the way many Americans might imagine. What we’ve experienced is an increase in personal freedom. Our lives are just much more manageable. To be sure, our days are still full of challenges — raising a child, helping elderly parents, juggling the demands of daily logistics and work.

But in Finland, we are automatically covered, no matter what, by taxpayer-funded universal health care that equals the United States’ in quality (despite the misleading claims you hear to the contrary), all without piles of confusing paperwork or haggling over huge bills. Our child attends a fabulous, highly professional and ethnically diverse public day-care center that amazes us with its enrichment activities and professionalism. The price? About $300 a month — the maximum for public day care, because in Finland day-care fees are subsidized for all families.

And if we stay here, our daughter will be able to attend one of the world’s best K-12 education systems at no cost to us, regardless of the neighborhood we live in. College would also be tuition free. If we have another child, we will automatically get paid parental leave, funded largely through taxes, for nearly a year, which can be shared between parents. Annual paid vacations here of four, five or even six weeks are also the norm.

Compared with our life in the United States, this is fantastic. Nevertheless, to many people in America, the Finnish system may still conjure impressions of dysfunction and authoritarianism. 

Yet Finnish citizens report extraordinarily high levels of life satisfaction; the Organization for Economic Cooperation and Development ranked them highest in the world, followed by Norwegians, Danes, Swiss and Icelanders. This year, the World Happiness Report also announced Finland to be the happiest country on earth, for the second year in a row.

But surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. Yes, Finland faces its own economic challenges, and Finns are notorious complainers whenever anything goes wrong. But under its current system, Finland has become one of the world’s wealthiest societies, and like the other Nordic countries, it is home to many hugely successful global companies.

In fact, a recent report by the chairman of market and investment strategy for J.P. Morgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. According to the World Bank, doing business in Denmark and Norway is actually easier overall than it is in the United States.

Finland also has high levels of economic mobility across generations. A 2018 World Bank report revealed that children in Finland have a much better chance of escaping the economic class of their parents and pursuing their own success than do children in the United States.

Finally, and perhaps most shockingly, the nonpartisan watchdog group Freedom House has determined that citizens of Finland actually enjoy higher levels of personal and political freedom, and more secure political rights, than citizens of the United States.

What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” From our perch, the term seems to have more currency on the other side of the Atlantic than it does here.

In the United States, Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez are often demonized as dangerous radicals. In Finland, many of their policy ideas would seem normal — and not particularly socialist.

When Mr. Sanders ran for president in 2016, what surprised our Finnish friends was that the United States, a country with so much wealth and successful capitalist enterprise, had not already set up some sort of universal public health care program and access to tuition-free college. Such programs tend to be seen by Nordic people as the bare basics required for any business-friendly nation to compete in the 21st century.

     Trevor Corson and Anu Partanen with their daughter at their public family health clinic.

     Student lockers in the the Jätkäsaari Comprehensive School in Helsinki. Finland’s public schools are widely recognized as among the world’s best.


Even more peculiar is that in Finland, you don’t really see the kind of socialist movement that has been gaining popularity in some of the more radical fringes of the left in America, especially around goals such as curtailing free markets and even nationalizing the means of production. The irony is that if you championed socialism like this in Finland, you’d get few takers.

So what could explain this — the weird fact that actual socialism seems so much more popular in the capitalist United States than in supposedly socialist Finland?

A socialist revolution was attempted once in Finland. But that was more than a hundred years ago. Finland was in the process of industrializing when the Russian empire collapsed and Finland gained independence. Finnish urban and rural workers and tenant farmers, fed up with their miserable working conditions, rose up in rebellion. 

The response from Finland’s capitalists, conservative landowners and members of the middle and upper class was swift and violent. Civil war broke out and mass murder followed. After months of fighting, the capitalists and conservatives crushed the socialist uprising. More than 35,000 people lay dead. Traumatized and impoverished, Finns spent decades trying to recover and rebuild.

A tram operator during the evening rush hour in the Kluuvi district of Helsinki.


So what became of socialism in Finland after that? According to a prominent Finnish political historian, Pauli Kettunen of the University of Helsinki, after the civil war Finnish employers promoted the ideal of “an independent freeholder farmer and his individual will to work” and successfully used this idea of heroic individualism to weaken worker unions. 

Although socialists returned to playing a role in Finnish politics, during the first half of the 20th century, Finland prevented socialism from becoming a revolutionary force — and did so in a way that sounds downright American.

Finland fell into another bloody conflict as it fought off, at great cost, the Communist Soviet Union next door during World War II. After the war, worker unions gained strength, bringing back socialist sympathies as the country entered a more industrial and international era. This is when Finnish history took an unexpected turn.

Finnish employers had become painfully aware of the threats socialism continued to pose to capitalism. They also found themselves under increasing pressure from politicians representing the needs of workers. 

Wanting to avoid further conflicts, and to protect their private property and new industries, Finnish capitalists changed tactics. Instead of exploiting workers and trying to keep them down, after World War II, Finland’s capitalists cooperated with government to map out long-term strategies and discussed these plans with unions to get workers onboard.

More astonishingly, Finnish capitalists also realized that it would be in their own long-term interests to accept steep progressive tax hikes. The taxes would help pay for new government programs to keep workers healthy and productive — and this would build a more beneficial labor market. These programs became the universal taxpayer-funded services of Finland today, including public health care, public day care and education, paid parental leaves, unemployment insurance and the like.


Oodi, Helsinki’s new central library, was built with broader civic goals in mind. It offers access to 3D printers and other high tech equipment, expansive public space, as well as traditional library services.


If these moves by Finnish capitalists sound hard to imagine, it’s because people in the United States have been peddled a myth that universal government programs like these can’t coexist with profitable private-sector businesses and robust economic growth. As if to reinforce the impossibility of such synergies, last fall the Trump administration released a peculiar report arguing that “socialism” had negatively affected Nordic living standards.

However, a 2006 study by the Finnish researchers Markus Jantti, Juho Saari and Juhana Vartiainen demonstrates the opposite. First, throughout the 20th century Finland remained — and remains to this day — a country and an economy committed to markets, private businesses and capitalism.

Even more intriguing, these scholars demonstrate that Finland’s capitalist growth and dynamism have been helped, not hurt, by the nation’s commitment to providing generous and universal public services that support basic human well-being. These services have buffered and absorbed the risks and dislocations caused by capitalist innovation.

With Finland’s stable foundation for growth and disruption, its small but dynamic free-market economy has punched far above its weight. Some of the country’s most notable businesses have included the world’s largest mobile phone company, one of the world’s largest elevator manufacturers and two of the world’s most successful mobile gaming companies. 

Visit Finland today and it’s obvious that the much-heralded quality of life is taking place within a bustling economy of upscale shopping malls, fancy cars and internationally competitive private companies.

Stockmann department store in the city center. Finland is home to a number of famous interior design brands.


The other Nordic countries have been practicing this form of capitalism even longer than Finland, with even more success. As early as the 1930s, according to Pauli Kettunen, employers across the Nordic region watched the disaster of the Great Depression unfold. For enough of them the lesson was clear: The smart choice was to compromise and pursue the Nordic approach to capitalism.

The Nordic countries are all different from one another, and all have their faults, foibles, unique histories and civic disagreements. Contentious battles between strong unions and employers help keep the system in balance. Often it gets messy: Just this week, the Finnish prime minister resigned amid a labor dispute.

But the Nordic nations as a whole, including a majority of their business elites, have arrived at a simple formula: Capitalism works better if employees get paid decent wages and are supported by high-quality, democratically accountable public services that enable everyone to live healthy, dignified lives and to enjoy real equality of opportunity for themselves and their children. For us, that has meant an increase in our personal freedoms and our political rights — not the other way around.

Yes, this requires capitalists and corporations to pay fairer wages and more taxes than their American counterparts currently do. Nordic citizens generally pay more taxes, too. And yes, this might sound scandalous in the United States, where business leaders and economists perpetually warn that tax increases would slow growth and reduce incentives to invest.

Here’s the funny thing, though: Over the past 50 years, if you had invested in a basket of Nordic equities, you would have earned a higher annual real return than the American stock market during the same half-century, according to global equities data published by Credit Suisse.

Nordic capitalists are not dumb. They know that they will still earn very handsome financial returns even after paying their taxes. They keep enough of their profits to live in luxury, wield influence and acquire social status. There are several dozen Nordic billionaires. Nordic citizens are not dumb, either. If you’re a member of the robust middle class in Finland, you generally get a better overall deal for your combined taxes and personal expenditures, as well as higher-quality outcomes, than your American counterparts — and with far less hassle.

Why would the wealthy in Nordic countries go along with this? Some Nordic capitalists actually believe in equality of opportunity and recognize the value of a society that invests in all of its people. But there is a more prosaic reason, too: Paying taxes is a convenient way for capitalists to outsource to the government the work of keeping workers healthy and educated.

While companies in the United States struggle to administer health plans and to find workers who are sufficiently educated, Nordic societies have demanded that their governments provide high-quality public services for all citizens. This liberates businesses to focus on what they do best: business. It’s convenient for everyone else, too. All Finnish residents, including manual laborers, legal immigrants, well-paid managers and wealthy families, benefit hugely from the same Finnish single-payer health care system and world-class public schools.

There’s a big lesson here: When capitalists perceive government as a logistical ally rather than an ideological foe and when all citizens have a stake in high-quality public institutions, it’s amazing how well government can get things done.

Ultimately, when we mislabel what goes on in Nordic nations as socialism, we blind ourselves to what the Nordic region really is: a laboratory where capitalists invest in long-term stability and human flourishing while maintaining healthy profits.

Capitalists in the United States have taken a different path. They’ve slashed taxes, weakened government, crushed unions and privatized essential services in the pursuit of excess profits. All of this leaves workers painfully vulnerable to capitalism’s dynamic disruptions. 

Even well-positioned Americans now struggle under debilitating pressures, and a majority inhabit a treacherous Wild West where poverty, homelessness, medical bankruptcy, addiction and incarceration can be just a bit of bad luck away. Americans are told that this is freedom and that it is the most heroic way to live. It’s the same message Finns were fed a century ago.

But is this approach the most effective or even the most profitable way for capitalists in the United States to do business? It should come as no surprise that resentment and fear have become rampant in the United States, and that President Trump got elected on a promise to turn the clock backward on globalization. 

Nor is it surprising that American workers are fighting back; the number of workers involved in strikes last year in the United States was the highest since the 1980s, and this year’s General Motors strike was the company’s longest in nearly 50 years. Nor should it surprise anyone that fully half of the rising generation of Americans, aged 18 to 29, according to Gallup polling, have a positive view of socialism.

A room in the offices of Supercell, a mobile gaming company, in the Ruoholahti neighborhood of Helsinki.


The prospect of a future full of socialists seems finally to be getting the attention of some American business leaders. For years the venture capitalist Nick Hanauer has been warning his “fellow zillionaires” that “the pitchforks are coming for us.” Warren Buffett has been calling for higher taxes on the rich, and this year the hedge-fund billionaire Ray Dalio admitted that “capitalism basically is not working for the majority of people.” 

Peter Georgescu, chairman emeritus of Young & Rubicam, has put it perhaps most succinctly: He sees capitalism “slowly committing suicide.”In recent months such concerns have spread throughout the capitalist establishment. The Financial Times rocked its business-friendly readership with a high-profile series admitting that capitalism has indeed become “rigged” and that it desperately needs a “reset,” to restore truly free markets and bring back real opportunity. 

Leading captains of finance and industry in the United States rocked the business world, too, with a joint declaration from the Business Roundtable that they will now prioritize not only profits but also “employees, customers, shareholders and the communities.” They are calling this “stakeholder capitalism.”

If these titans of industry are serious about finding a more sustainable approach, there’s no need to reinvent the wheel. They can simply consult their Nordic counterparts. If they do, they might realize that the success of Nordic capitalism is not due to businesses doing more to help communities. In a way, it’s the opposite: Nordic capitalists do less. What Nordic businesses do is focus on business — including good-faith negotiations with their unions — while letting citizens vote for politicians who use government to deliver a set of robust universal public services.

This, in fact, may be closer to what a majority of people in the United States actually want, at least according to a poll released by the Pew Research Center this year. Respondents said that the American government should spend more on health care and education, for example, to improve the quality of life for future generations.

But the poll also revealed that Americans feel deeply pessimistic about the nation’s future and fear that worse political conflict is coming. Some military analysts and historians agree and put the odds of a civil war breaking out in the United States frighteningly high.

Right now might be an opportune moment for American capitalists to pause and ask themselves what kind of long-term cost-benefit calculation makes the most sense. Business leaders focused on the long game could do a lot worse than starting with a fact-finding trip to Finland.

Here in Helsinki, our family is facing our second Nordic winter and the notorious darkness it brings. Our Finnish friends keep asking how we handled the first one and whether we can survive another. Our answer is always the same. As we push our 2-year-old daughter in her stroller through the dismal, icy streets to her wonderful, affordable day-care center or to our friendly, professional and completely free pediatric health center, before heading to work in an innovative economy where a vast majority of people have a decent quality of life, the winter doesn’t matter one bit. It can actually make you happy.


Anu Partanen is the author of “The Nordic Theory of Everything: In Search of a Better Life” and a senior adviser at Nordic West Office, a Helsinki-based consultancy. 

Trevor Corson is the author of two books and most recently taught American studies and writing at Columbia University.