There IS an Alternative: The Danish Formula of Inclusive Capitalism

  • Chih-Mei LuoEmail author


The world has witnessed sea changes in the EU politics in the last decade, from the continuing rise of populist right parties (PRPs) in a number of EU countries since 2014 to the unexpected results of the Brexit referendum. In essence, the EU politics has entered into a watershed period, departing from the conventional consensus on politico-economic liberalization, in the form of European single market and single currency, to the anti-establishment and anti-EU, in the form of trade protectionism and populist nationalism. Despite their individual differences in national contexts, all these events shared a common striking characteristic—it was those left behind and economically disadvantaged voters who delivered such results. The phenomenon, as Goodwin (2017) indicates, was a ‘working-class revolt’, and with workers becoming the ‘core clientele’ of these populist movements, they have formed a ‘new type of working-class politics’.

1 Background and Rationales

The world has witnessed sea changes in the EU politics in the last decade, from the continuing rise of populist right parties (PRPs) in a number of EU countries since 2014 to the unexpected results of the Brexit referendum. In essence, the EU politics has entered into a watershed period, departing from the conventional consensus on politico-economic liberalization, in the form of European single market and single currency, to the anti-establishment and anti-EU, in the form of trade protectionism and populist nationalism. Despite their individual differences in national contexts, all these events shared a common striking characteristic—it was those left behind and economically disadvantaged voters who delivered such results. The phenomenon, as Goodwin (2017) indicates, was a ‘working-class revolt’, and with workers becoming the ‘core clientele’ of these populist movements, they have formed a ‘new type of working-class politics’.

The fact that PRPs voters versus non-PRPs voters and Brexit voters versus non-Brexit voters were divided along with the lines of winners and losers of European integration and globalization highlights the significance and imperative of addressing economic inequality and distributive justice. According to the latest surveys, as many as 65–70% of households in advanced economies faced either stagnant or declining incomes during 2005–2014 (Munich Security Conference, 2017: 9). The wealth inequality was even worse, twice the income inequality in Europe and the US (Hutton, 2015: 103). The top 1% of wealth holders increased their share of all household wealth from 45.5% in 2000 to 50.1% in 2013. Together with the top decile, they achieved the record high of owning 87.8% of the world’s wealth. Meanwhile, the median wealth per adult, an indicator of reflecting the economic life of an average person, was below the level of 2007 in all regions, except China (Credit Suisse Research Institute, 2017: 16–17). In the UK, only 10% of overall income growth went to the bottom half of the income distribution between 1979 and 2012 (Institute for Public Policy Research, 2017: 2), while in the US, the incomes of the top 1% grew by 31% and the incomes of the remaining 99% grew less than 0.5% between 2009 and 2012 (World Economic Forum, 2017: 23). The Institute for Public Policy Research (IPPR) (2017: 15) even contends that, from 2008 to 2021, the UK economy would enter into the longest period of earnings stagnation for 150 years since the 1860s. Jacobs and Mazzucato (2016: 1) therefore argue that economic inequality has grown to ‘levels not seen since the 19th century’.

2 The Significance of Economic Inequality

When economic growth no longer translates into the higher earnings and improvements of living standards for a majority of working population,1 disillusion in mainstream parties and free-market system were the natural answers delivered from voters in one election or referendum to another. Political backlashes, revealing in the Brexit referendum and in the latest general elections in the UK, the Netherlands, France, Austria, Germany, and Italy, were then understandable. A survey conducted by McKinsey Global Institute (2016: 6) found that citizens who held the most negative views on free trade and immigration were the same group who felt their incomes were stagnant or falling and were more likely to support PRPs.

Commentators (IMF, 2017a: xvii; World Economic Forum, 2017: vii; Jacobs and Mazzucato, 2016: 5–10; Hutton, 2015: 9 & 101–2) were further concerned that, despite the world economy returned to growth from the global financial crisis since 2008, the recovery, in terms of growth rate and labour productivity, was slowest in modern times. This has led some economists to question whether Western capitalism has entered into the so-called secular stagnation as the ‘new normal’, in which structural weakness of investment and demands resulted in low and chronic growth. The root of such low growth was argued to be the stagnant living standards and rising inequality .

3 Effects on the Economy

Economic inequality influences economic performance, but how the two interrelate with each other was inconclusive among theoretical economists. In the past, most economists, such as Lazear and Rosen (1981: 841–64), Bourguignon (1981: 1469–75), and Barro (2000: 5–32), believed that economic inequality was inevitable in the early stage of economic developments, but it should be short-lived as growth would gradually ‘trickle down’ through the layers of society from the rich to the poor, the so-called trickle-down economics. By contrast, Galor and Moav (2004: 1006–26), Aghion et al. (1999: 1615–60), Perotti (1996: 149–87), and Stiglitz (2013: 115–30) contend that economic inequality is negative to growth, as it would deprive the poor from having access to better health and education opportunities, lower public investment, and distort resource allocation through rent seeking of the rich in law and regulation.

Empirical evidences from recent studies support the view that inequality impedes growth, at least for the medium term. Cross-country studies by Berg et al. (2012: 150–65) and Ostry et al. (2014: 15–26) found that income distribution was strongly related to growth duration. More equal societies tended to support growth longer and more durable. An increase in Gini (a measurement of income inequality) by 1% was estimated to result in lowering the growth duration by 11–15%. Kumhof et al. (2012: 5–27) found that income inequality, compounded with financial liberalization, has led to global current account imbalances between developing and developed countries. Stockhammer (2015: 935–54) further points to economic inequality as the major cause of the global financial crisis, as working-class households had to rely on mortgage debt to keep up with consumption in the face of stagnant or falling wages, while rich households had greater propensity to speculate on financial assets.

Official reports from international organizations also hold similar views. In its annual survey, the IMF (2017b: 1) indicates that some inequality is inevitable in a market economy as a result of differences in talent, effort, and luck, but excessive inequality would lower economic growth. A joint report from International Labour Organization (ILO) and OECD (2015: 2–12) indicates that the decline in labour share on private consumption would result in the decline in private investment and then induce economies to rely on more credit/household debts or net exports in order to maintain aggregate demand. This would ultimately lead to the instability and imbalances of the world economy. Oxfam (2014: 9–10) points out that extreme economic inequality not just prevented the growth from lasting but also undermined the future growth. It was the missing link explaining why the same growth rate would result in different rates of poverty reduction. Berg and Ostry (2011: 13–18) from the IMF estimate that 10% decrease in inequality could increase the growth duration by 50%, while countries with more structural inequality tend to grow more slowly. Reports from the OECD propose that rising inequality between 1985 and 2005 might knock more than 4% off growth between 1990 and 2010 in half of OECD countries due to under-investment in human capital (2017a: 37–8). By contrast, a reduction in inequality by 1 Gini point could translate in an increase in cumulative growth of 0.8% in the following 5 years, or, on a 25-year horizon, it could lead to a cumulative gain in GDP of 3% (Cingano, 2014: 17–18).

4 Effects on Politics and Society

Additionally, economic inequality has wider social and political implications. In societal terms, the IMF (2017b: 1) points out that economic inequality would erode social cohesion and bring social division, leading to political polarization. A survey by IPPR (2017: 29) found that high levels of economic inequality were correlated with physical and mental illness, crime, social trust, and education attainment. Wilkinson and Pickett (2009: 11–44, 2017: 11–20) found that economic inequality eroded social trust, increased anxiety and illness, and encouraged excessive consumption. Social and health problems were found irrelevant to the levels of incomes but relevant to that of economic inequality. By contrast, more equal societies enjoyed higher levels of interpersonal trust, mutual support, and lower level of violence.

In political terms, economic inequality endowed economic elites the excessive influence over politics, media, and public debates. An empirical research on 2000 policy debates in the US over 20 years found that economic elites and business interests had substantial impacts on US government policies, while the public had little or no influence. Similarly, financial institutions were reported spending more than €120 million per year on influencing EU policy-making. Economic inequality thus translated into political inequality (Oxfam, 2014: 59–60). Accordingly, Stiglitz (2013: 158–64) argues that such economic and political inequalities undermined the public trust in politics and, in the long run, ‘democracy would be in peril’ (Ibid.: 181).

It is then understandable why in the Eurobarometer survey social inequality and unemployment were perceived by Europeans being surveyed as the most important challenges that the EU faced (European Commission, 2017). Another survey on ten EU countries (Raines et al., 2017: 2–3) reports that only 34% of the public felt they have benefited from the EU, compared with 71% of the elite, highlighting the public perceptions of uneven distribution between the elite and the public of gains produced from European market and monetary integration. In the light of its wide-ranging negative effects on economic, societal, and political well-beings, Pope Francis regards economic inequality as ‘the root of social ills’ (quoted from Lagarde, 2014), while the then US president, Barack Obama (2014), admits the rising inequality as the ‘defining challenge of our time’.

5 Economic Inequality in an AI Era

The need of addressing economic inequality has become even more imperative as the world economy has been moving into the Fourth Industrial Revolution. Although the exact impact of automation was uncertain, McKinsey (2017: 27–35) estimates that automation technology, such as machines, robots, and artificial intelligence (AI), had the potential impact to nearly half, 49%, of the global workforce. It would push distribution of income more favourable to capital owners relative to workers and thus increase income inequality. McKinsey Global Institute (2016: 18) projects that some 30–40% of the population may experience stagnant or falling market income as automation technology accelerates. What caused commentators (Ostry, 2017: 1; IPPR, 2017: 66–7; Aoun, 2018: 2; Sundararajan, 2017: 7) most concerned was that automation would not just replace labour for capital2 but also change the power relations between capital and labour. Labours would be harder to bargain with employers for any pay rise, while the return to capital would rise as a result of automation growth. These would therefore accentuate the existing trend of economic inequality.

If not addressing the challenges of economic inequality in time, Piketty (2014: 571) warns that the consequences are ‘potentially terrifying’, because, in history, it took war and depression to arrest inequality. Streeck (2014: 63–4) accordingly predicts that capitalism was in critical condition and the world economy risked the possibility of breakdown on the scale of the 1930s. The World Economic Forum (2017: 6–11 & 23 & 31–2) accordingly asked for reforming market capitalism right immediately. ‘To save globalization, its benefits must be shared more broadly’. Otherwise, ‘rising income and wealth disparity’ would be the biggest risk for the global economy in the next ten years.

6 Worldwide Consensus Is Forming, But Divided on Causes and Diagnoses

A worldwide consensus was forming on the need of reforming capitalism and searching for a new model that can be shared by the majority of population—the so-called inclusive growth model or inclusive capitalism.3 Decision-makers in both public and private sectors, such as the EU (2017), OECD (2017a), IMF (2017b), and World Economic Forum (2017: vii & xii), have been actively engaged in related discussions. However, commentators were divisive on the origins of economic inequality. For some, such as Piketty (2014: 25–7), Jacobs and Mazzucato (2016: 11), and Hutton (2015: 12), economic inequalities are the symptoms of the failings and dysfunctions of Western capitalism and they are structural. As Piketty explains (2014: 25–7), this is because the average rate of return on capital r is always larger than the average rate of economic growth g (r > g), fundamental in capitalism.

The IMF (2007: 161–92, 2017a: 125), OECD (Bassanini and Manfredi, 2012), and McKinsey Global Institute (2017: 7–10), in line with arguments of populist right parties, attribute economic inequality to technological changes and globalization over the past 40 years. The former was estimated to account for around half of this trend, while the latter contributed to a quarter, especially in reducing labour income shares in tradable sectors in advanced economies (IPPR, 2017: 31). But in their latest reports, both IMF (2017b: 4) and OECD (2017a: 28–34) recognize economic inequality as a compound outcome produced by both global forces and country-specific policies.

However, Onaran and Guschanski (2017: 60 & 155–62) disagree with this perspective that technology and globalization could benefit both the rich and the poor and their effects were intermediated through policies. Oxfam (2014: 14 & 21) also argue that economic inequality was not inevitable in market capitalism, neither was it a necessary outcome of globalization and technological progress. It was ‘the result of deliberate policy choices’. The World Economic Forum (2017: xii) also regards economic inequality as ‘largely endogenous rather than exogenous’, not ‘an iron law of capitalism’. Hutton (2015: 4) attributes the worsening economic inequality largely to the dismantling of the social security system in the name of ‘rolling back the state’, rather than the interaction of globalization and new technologies. Resolution Foundation’s report (Corlett, 2016: 8–9) equally contends that, given the fact that there was a large variation of economic inequality between countries, it was not inevitable and domestic policies do play a key role.

To distinguish which factors were more deterministic of causing economic inequality was unrealistic, if not possible. Market capitalism did not exist in vacuum. Neither did globalization and technological changes. They were embedded in socio-political systems which national policies have shaped and directed. Their effects, whatsoever, have interacted with, as well as being channelled through, national policies. As Stiglitz (2013: xliii & 35 & 100) points out, ‘markets often lead to high levels of inequality’. ‘But it was not market forces alone’. ‘At different times, different forces have played different roles’.

Different diagnoses on the origins of economic inequality, accordingly, have led to different prescriptions. For those who held the global forces accountable for rising economic inequality, economic protectionism and trade defence policies were the policy responses to tackle economic inequality, as can be seen in the US Trump administration’s trade policies and the EU’s trade defence measures. International organizations, such as IMF (2017b) and OECD (2017a), suggest internal rather than external policy approaches, such as progressive income taxes, universal basic income, quality public schooling and healthcare, active labour market policies, and sufficient unemployment benefits. Some initiatives were even tried in some areas, for example, Ontario’s trial on universal basic income and Microsoft’s trial on affordable internet access in some developing countries (The Guardian, 24 April 2017).

These policy suggestions, based on their different diagnoses on the causes of the issue and with their different prescriptions to policy dimensions, were rather one-sided than comprehensive, rather partial than systematic, and rather patchy than holistic, depending on the business functions of individual proposers. What the right policy combination is remains unclear. As the World Economic Forum (2017: vii) observes, ‘inclusive growth remains more a discussion topic than an action agenda’. Moran (2015: 98–100) thus reminds that ‘the big problem…is turning vision into reality’ and to specify ‘how that economy might in day-to-day fashion be steered’. The IMF (2017b: 6) and OECD (2017a: 73) therefore suggest that in-depth studies at individual country level were needed in order to embody the substance and operation of inclusive capitalism so as to provide practical policy lessons.

7 Research Questions and Aims: Inclusive Capitalism in Action

This research is an attempt to fill in this gap—to translate the aspiration for inclusive capitalism into policy practices by studying an indicative country: Denmark. A country-study approach was chosen because, as Putnam (2015: 243) points out, pursing an inclusive growth model must be cost-effective. It must learn ‘from practical experience what works where’ and from ‘best available evidence’ that it has promises. Based on such criteria, Denmark was selected as an appropriate case for the following reasons. First, this research defines an inclusive growth model in a literal and straight manner as an economy able to be equitable to be ‘inclusive’ and able to be competitive to ‘grow’ simultaneously. In the able-to-grow sense, Denmark has been ranked as one of the top ten countries of the IMD World Competitiveness Ranking for several years and one of the top five countries in the IMD World Digital Competitiveness Ranking in 2017 (International Institute for Management and Development, 2017). Second, in the equitable and inclusive sense, Denmark was ranked as the second best EU country on the Inclusive Development Index (IDI) of the World Economic Forum (2017: x & 48) and the best EU country on the Social Justice Index of Bertelsmann Stiftung, a German think-tank, in 2017 (Schraad-Tischler et al., 2017: 6–10). It was also the only country in the EU that had no any system barriers to social mobility during early years, school years, and working age (Eurofound, 2017: 49, Table 9). Social mobility has become a reference for observing the fairness and inclusiveness of societies, especially after the Brexit vote was delivered in a time when the UK society was experiencing downward social mobility (Social Mobility Commission, 2017: 1; Eurofound, 2017: 38). Third, Denmark, along with Norway, was the least unequal country across the life course among OECD countries (OECD, 2017b: 19, Table 1) and also one of the very few OECD countries that has not witnessed the rise of economic inequality since the mid-1990s (OECD, 2017b: 10). Measuring by Gini coefficient, household disposable income inequality was the lowest in Denmark among OECD countries (Causa et al., 2016: 7 & 20–1). In terms of cross-generational equity, the intergenerational income inequality in Denmark was also the world’s lowest, only 15%. In the US, nearly half of children born to low-income parents would become low-income adults. ‘American dream’, therefore, was believed as a myth in the US and was realized in Denmark (Oxfam, 2014: 48; Stiglitz, 2013: xlv). In a latest survey using economic, political, and social index, it was ranked among the happiest countries in the world (Helliwell et al., 2018: 21).

8 Analytical Framework

This research will adopt a systematic, whole-of-government/holistic approach to exploring Denmark’s inclusive capitalism in order to identify the right policy combination that underpins the whole economic system. It will resort to the Inclusive Development Index (IDI), compiled by the World Economic Forum (2017: viii), as the analytical framework (see Fig. 6.1). It is composed of seven policy pillars: education and skills, basic services and infrastructure, corruptions and rents, financial intermediation of real economy investment, asset building and entrepreneurship, employment and labour compensation, and fiscal transfers.
Fig. 6.1

Inclusive Development Index (IDI). Source: World Economic Forum (2017: viii)

9 The Danish Formula of Practising Inclusive Capitalism

According to the analytical framework of IDI, seven policy domains in Denmark will be briefly reviewed individually.

9.1 Pillar 1: Education and Skills

Education is the foundation of human development. As the IMF (2017b: 22) indicates, public education not only can reduce economic inequality across generations but also can lead to an improvement in economic efficiency, because education resources are allocated on the basis of individual’s capability rather than of their family socio-economic backgrounds. Different from other policies, education has potential to promote economic equity and growth simultaneously.

In terms of economic equity, as job competition tends to favour those with better qualifications, it simply explains the critical importance of a fair and equal education system. Economic equity and social mobility were found to be maximized in the least elitist system of public education, whereas liberal free-market approach to education often serves those who can afford desirable educational choices and thus, in private schooling system, intergenerational social mobility was significantly reduced (Eurofound, 2017: 51). Empirical surveys on different types of European welfare regimes found that origin-destination association was weaker for those with highest level of education, and therefore education is identified as one of the most important factors in reducing poverty and securing acceptable living conditions (Ibid.: 8–9 & 44).

In terms of economic efficiency, educational inequality would slow growth because it prevents economically disadvantaged people from fully developing their capacity. On the contrary, even expensive investment in early childhood education could produce real return rates, about 6–10%, outperforming long-term stock market returns in the US (Putnam, 2015: 231–3). Evidences from OECD countries suggest that education investment, from early childhood to adulthood, was found to produce strong returns for government tax revenue, as skill-upgrading was positively associated with wage rises (OECD, 2017a: 47). Rasmussen (2005: 54) and Hemerijck (2013: 272–3 & 277) therefore contend that in a world of knowledge-based competition, investment at all levels of education and throughout the life course becomes paramount. Inadequate schooling today may put individuals at risks of becoming insecure workers tomorrow.

In providing equal opportunities of education for children and young people, Denmark was the best country in the EU and had the least elitist model of public education (Schraad-Tischler et al., 2017: 99; Eurofound, 2017: 51). Denmark’s public expenditure on education, exceeded 8% of its GDP, was the highest among OECD countries (Hemerijck, 2013: 277–81). Education at all levels, from kindergartens to universities, was free, seen not as a privilege, but a right and duty (Rasmussen, 2005: 54).

Denmark’s emphasis on education started from early childhood education and care (ECEC) and continued to lifelong learning and vocational training in adulthood. In terms of ECEC, ECEC in Denmark was seen not only as a major arrangement to further female employment but also as key to later personal development because of its lasting effects on cognitive abilities. It was perceived as the first pillar of human capability formation. Inequality in ECEC, therefore, would result in growing income and wealth inequality in adulthood, perpetuating a vicious cycle (OECD, 2017a: 18 & 42–4; Eurofound, 2017: 50). In Denmark, ECEC has emphasized both the availability and quality. Moreover, as high as 94.1% of children over 3 and 72.7% under 3 were taken care of by these facilities. The facts that the high enrolment of ECEC showed low differences by income groups and that Denmark had a relatively high fertility rate, between 1.7 and 1.9, and female employment rate explain the success of its ECEC provision (Hemerijck, 2013: 269–72). ECEC in Denmark emphasized the curriculum quality with focus on learning since 2004 for ages 0–5 years on the one hand and improving involvement of mandatory preschool and preventing social exclusion on the other. The former has produced positive outcomes for both children and ECEC staff, who have been equipped with new methods of working. The latter has been addressed by a large programme for 2014–2017, called ‘Early Effort—Lifelong Effect’, particularly for disadvantaged children to look at their development and learning (Eurofound, 2017: 56).

In primary and secondary education, public school reforms were introduced in 2013 in Denmark that aimed to reduce the effects of social background in relation to academic results and to strengthen trust with the public school system. The concrete measures were to provide help for students with homework as such assistance would not be available at home for disadvantageous students. Longer school days were thus introduced with longer teaching and activity hours (Eurofound, 2017: 56). Early school leavers in Denmark, 7.2%, were low compared to other EU countries, with an average of 10.7% (Randall and Karlsdottir, 2018: 88–90). Denmark’s heavy investment in education yielded good results in educational outcomes. Denmark was the best performer on the index of skill acquisition among advanced economies and has been performing well in the results of OECD’s Programme for International Student Assessment (PISA), especially in mathematics, with lesser disparity between 5th percentile and 95th percentile scores in literary (Randall and Karlsdottir, 2018: 88–90; Nelson and Stephens, 2012: 216–17). The facts explain the equity and quality of public education in Denmark.

Higher education was another important area for social mobility. Increased access to higher education could lower the overall origin-destination association and thus help reduce economic inequality. But financial constraints may hold back a family’s decision to invest in higher education. Recently, there were concerns in many advanced countries about diminishing benefits of higher education as occupational returns have been declining. Yet, it was the prestige of educational establishment from which job applicants graduated, along with other skills, that counts (Eurofound, 2017: 8–9 & 72–3). Empirical studies by Brezis (2018: 203–8) further found that a higher elitist higher education regime was positively related to a higher wage gap and skill differential, as well as a higher Gini index, through the channels of higher competitiveness in the selection process and the gaps in budgets. Higher education in Denmark, while not compulsory, was free of charge. It also displayed lower levels of elitism and lower levels of inequality. It was worth noticing that unlike Sweden and Finland, students in Denmark were more evenly split between academic and vocational pathways (Randall and Karlsdottir, 2018: 92; Brezis, 2018: 203).

Denmark’s emphasis on education continued to adulthood. Denmark had a very high level of firm-based training, with 76% of workers receiving some training from their employers (OECD, 2017d). Vocational training, work-based learning, and skill upkeep were the most obvious methods of improving skills on a systematic and targeted basis and key to form a competitive and dynamic workforce. Denmark established 13 guidance centres in 2010, called ‘VEU centres’ and described as ‘one-stop entrance’, for adult education and training. VEU centres provided free one-on-one career guidance, various educational programmes, and technical skill training. Some centres also provided second-opportunity programmes for adults who were early school leavers (OECD, 2017a: 45–6). Denmark also had very high rates of lifelong learning, the second highest country in the EU, with 35% of its population involved (Hemerijck, 2013: 280–3).

The economic returns to heavy investment in extensive education reflect in the good competitiveness and productivity of the Danish economy and its adaptability in times of changes. Nelson and Stephens (2012: 221–3 & 226) point out that ECEC and active labour market policies spending on vocational training were the most effective variables on increasing the overall levels of employment, whereas ECEC and education attainment were found to be the most effective variables on knowledge-intensive service employment, regarded as high-quality employment. They conclude that ‘investing in people’ (education) increased both the quantity and quality of employment. Manufacturing jobs in Denmark were among the most ICT-intensive in OECD countries. ICT equipment and knowledge-based capital were estimated to contribute 11% of labour productivity growth in Denmark from 2000 to 2014. Denmark was also the only OECD country that has witnessed the greatest increase in the influence of ICT services sector in domestic production networks over the period of 1995–2011 (OECD, 2017d).

9.2 Pillar 2: Basic Services and Infrastructure

Public services, as Oxfam (2014: 90) rightly points out, were the ‘virtual income’ for people and can mitigate income and wealth inequality. They were estimated to reduce income inequality by 20% in average. Public services range widely, and in order to have a focused discussion, this research will look into two specific policy areas that single out in the IDI analytical framework—digital infrastructure and health-related services.

As the world economy has been changing by advances in technology and such changes were expected to accelerate in an AI era, access to an open digital infrastructure has become an important component of making an inclusive economy. Both citizens and business could benefit greatly from public investment in and provision of digital infrastructure to improve their market competitiveness, and therefore can contribute to social inclusion and economic growth. Access to fast broadband service was an essential condition to digital services (Johnsen et al., 2018: 160–1).

Denmark has been a top performer in providing public digital services. It was ranked as the world’s third best country on the index of ICT infrastructure in the survey of the Global Talent Competitiveness Index (Lanvin and Evans, 2018: 140). Digitalization has long been on the national agenda and the current Digitalization Strategy 2016–2020 was the fifth of this kind, marking a continuation of 15-year policy efforts on digitalization. Denmark’s digital strategy, as Johnsen et al. (2018: 162 & 167–8) explain, had dual aims—to provide good conditions for economic growth on the one hand and to reduce administrative burden and economic inequality on the other. These policies have effectively promoted the widespread and quality of public digital services in Denmark. For example, Next Generation Access (NGA) networks, which offered speed above 30 Mbps, have been set by the EU as a policy target to achieve by 2020. Denmark has completed 93% of household coverage by NGA networks in 2016, ahead of most EU countries. Good NGA coverage did not automatically translate into the internet usage by all people (Johnsen et al., 2018: 167–8). But Danish people were frequent internet users, with more than 1.2 subscriptions per person to mobile broadband in 2016, and 97% of people aged 16–74 were internet users (OECD, 2017d). Denmark was also the leading EU country in the public use of digital public services, with 73% of individuals having submitted completed forms to public authorities over the internet in 2016 (Johnsen et al., 2018: 167–8).

In terms of health services, narrowing health outcome gaps can help reduce inequality. Empirical evidences found that there was a strong positive association between lower inequality in health coverage and average life expectancy. Also, good health was an asset for everyone and the society, as it can improve school attendance and education outcomes and thus contribute to better employment and earnings. Public healthcare thus contains a distributional impact through financial protection. Universal health coverage (UHC) from public financing was found to drive down economic inequality. Public healthcare, together with public education, was seen as a powerful instrument that the government can address to reducing inequality (IMF, 2017b: 26–7; OECD, 2017a: 47; Oxfam, 2014: 90 & 97 & 99). Therefore, Kohler (2015: 30) contends that public healthcare, together with public education, should be a right-based approach to human development.

A healthy workforce was seen as foundation of the welfare model in Denmark. Health services have been provided by the government and were viewed as an approach to reducing social and spatial inequalities in access to healthcare (Rehn-Mendoza and Weber, 2018: 170 & 180). Denmark’s public spending on healthcare in relation to GDP, 8.6%, was the highest in the EU. Most of healthcare services were free and out-of-pocket payments (OPP) were limited, only accounting for 13.7% of total health spending, well below the OECD average (nearly 20%). One characteristic of public healthcare in Denmark was its very high spending on residential care/home-help services for the elderly, the highest among OECD countries. Municipalities had legal obligation to offer free long-term care to the elderly in need (Eurostat, 2018a; Klein and Hansen, 2016: 7; Hemerijck, 2013: 268–9). High investment in public healthcare has resulted in good quality and wide coverage of health services. According to the Euro Health Consumer Index, Denmark scored highly for its good health system outcomes, short waiting time, and wide reach of health services (Schraad-Tischler et al., 2017: 100). With the help of widespread digital infrastructure, Denmark also had the highest share of people using internet to access health services among Nordic countries (Rehn-Mendoza and Weber, 2018: 180).

9.3 Pillar 3: Corruption and Rents

The government, being the most authoritative allocator of resources, plays a unique, commanding high role in the economy. From a liberal economic perspective, it has been seen as a negative force to market function and should be limited to a minimum level. As Crouch (2015: 66–7) questions: ‘how can we trust the government to defend collective and public goods when it was captured by the powerful interest groups?’ Inclusive capitalism thus needs a ‘civic state’ (Kelly and D’Arcy, 2015: 88–9). By contrast, corruption is ‘the cancer in the system’. Systemic corruption in the government would distort governments’ decisions, weakening governments’ regulating functions, discouraging investment, and lowering the public trust in the government, which would lead to tax evasion (Hagan, 2018). Empirical studies confirm that corruption hit the poorest hardest not just because the poor heavily rely on the public services, but because it was much easier for the elites to capture public resources to enrich themselves through ‘crony contracting’. Corruption and favouritism with nepotistic hiring and promotion resulted in economic and social inequality and thus undermine the inclusive growth (Eurofound, 2017: 45; Oxfam, 2014: 62).

Good governments therefore, as Schubert and Martens (2005: 15) suggest, should deliver transparency, accountability, and value for money. In terms of transparency, it was recognized by policy practitioners as a very effective tool to anti-corruption (Hagan, 2018). In the survey of Transparency International (2018), Denmark was ranked as the world’s second best country on the index of corruption perception and even the world’s best country on the index of corruption of Global Talent Competitiveness Index survey (Lanvin et al., 2018: 23). In terms of accountability and value for money, indeed, people evaluate the quality of public services on the basis of their personal experiences and the perceived responsiveness of public services affected people’s trust in the government most than other factors. According to a survey on OECD countries, a 10% increase in people’s satisfaction with public services would raise their trust in the government by 4.5% (OECD, 2017a: 69). Morel et al. (2012: 365–7) contend that the success of governance depends on its delivery quality. Without quality services, any public investment in education, labour market policy, and social welfare cannot be qualified as investment but rather as pure spending. Public governance in Denmark received strong credibility because of its high transparency and good delivery results. Public trust in government and public administration was high (Laursen et al., 2016: 2). Denmark’s public expenditure in relation to GDP, 53.6%, was among the highest in the EU, but there was a wide acceptance of high level of public expenditure and taxation. One major reason, as Schubert and Martens (2005: 17) explain, was the good quality and delivery of public services.

In short, the large public sector in Denmark was proved not a liability to but an asset of its competitiveness because its quality and uncorrupted services enabled business and individuals to develop. As Levitas (2015: 93) argues, the size of the government should not be a concern; the concern should be how it can be a force for common good in a capitalist economy.

9.4 Pillar 4: Financial Intermediation on Real Economy Investment

The financial sector was a key mediator between capital and industry as it could allocate capital into productive activities. But the role that it has played in the real economy has been questioned since the outbreak of the global financial crisis in 2008. According to the OECD report (2017a: 34–6), recent developments in this sector, mainly in the form of expansion of bank credit and stock markets, have been correlated with increasing economic inequality in the OECD. The expansion of bank credit, particularly for financing real estate, was found associated with slower household income growth due to bust in housing markets, and these negative effects hit people at the bottom of income distribution most. Stock market expansion, on the other hand, was found linked with stronger household income growth at the top of income distribution because stock holdings were concentrated in the hands of high-income people. In the eurozone, stock market wealth was four times more unequally distributed than household income. High holding concentration caused the expansion of stock markets, which delivered more dividends and capital gains, to only benefit high-income people and thus aggravated income inequality.

Furthermore, the expansion of the financial sector did not contribute to stronger growth in most OECD countries, but crowded out long-term investment. Short-termism and high trading frequency of stock markets reduced the willingness of business to invest and changed corporate investment behaviours (OECD, 2017a: 63; Jacobs and Mazzucato, 2016: 13). Therefore, the OECD (2017a: 63) reminds governments to promote more equitable financial markets that serve the real economy and channel capital into productive activities.

National financial systems can be roughly distinguished into two kinds: stock market-based or bank-based. The former is argued to be conducive to financing new start-up firms, especially in the cutting-edge technology sector, but may be harmful to industrial development in the long run due to its short-termism. The latter is believed to establish the long-term financial relationship mainly with established firms but is less helpful to supporting new start-ups. The Danish financial system was primarily bank-based. Commercial banks and mortgage banks dominated the financial system and accounted for two-thirds of financial sector assets, equivalent to about 400% of its GDP. By contrast, the Danish equity market was medium-sized by international standards, composed of vast majority of small- and medium-sized enterprises (SMEs), and its turnover has been low. The relatively large size of the Danish banking system in part reflected the high level of domestic interconnectedness (Lundvall, 2002: 87–8; Berg, 2017; IMF, 2014: 8–9, 2006: 24).

The other characteristic of the Danish banking sector was its unique mortgage financing model, which was once described as ‘most sophisticated mortgage systems in the world’ (Haldrup, 2017: 2). According to Danish law, all mortgages were granted by mortgage credit institutions (MCIs) to home-buyers and should be supported by ‘equivalent bond with maturity’, with cash flow being matched with underlying loans perfectly, the so-called balance principle. Loan-to-value ratios (LTVs), 80% at maximum, and valuation principles were also legally regulated. All mortgage-covered bonds were secured by associated ‘collateral pools’ of underlying properties, and MCIs were in principle non-profit organizations. These key elements—the balance principle of securitization, safety margins of LTVs , conservative valuation standards, diverse and sizeable collateral pools—of the Danish mortgage financing system resulted in a market-determined and transparent property market with public access to rich information on properties and affordable credit for those without large prior savings (Haldrup, 2017: 4–27). The mortgage-covered bond market was at the heart of the Danish financial system (see Fig. 6.2). In terms of GDP share, it was the largest in the world, accounting for 150% of Denmark’s GDP; in terms of monetary value, it was the second largest in Europe (IMF, 2014: 5–8 & 16; Chong, 2010: 372). Under such a system, MCIs faced little market and refinancing risks, and ‘there has never been an incident of default on a Danish mortgage bond’ (Chong, 2010: 373). Even during the global financial crisis, the Danish mortgage bond market was still unscratched and continued functioning. Berg and Bentzen (2014: 59–63), Gyntelberg et al. (2012: 64–6), Chong (2010: 397), and Haldrup (2017: 8) all attribute such exceptional performance to the good design of the mortgage finance system because the balance principle provided flexibility and transparency for borrowers and confidence and security for investors.
Fig. 6.2

The Danish mortgage financing system. Source: Quote form IMF ‘Denmark: financial system stability assessment’, 2014, p. 9

Nevertheless, it does not mean the Danish financial system was flawless and immune from financial crises. In fact, the Danish banking sector was seriously hit by the 2008 global financial crisis, and the number of banks decreased almost by half, down from 145 in 2007 to 74 in 2017. The reasons for such great losses of the Danish banking sector were common with those in other countries: high growth in bad-quality loans, misjudgement of credit risks, heavy concentration, and exposure to risky industries (Berg, 2017). The government had to rescue the sector with six bank packages by capital injections, liquidity support, and government guarantees (OECD, 2014: 11). It was widely believed that the collapse of the Danish banking sector was a result of the lack of control by both the banking executive management and financial authorities—Financial Supervisory Authority—for the two had close relationship with staff turnover. The corporate governance of Danish banks was further criticized for their unusual high remuneration of executive management and the male dominance at the top management level, which were found to be associated with excessive risk exposure to large customers and the construction sector (Rose, 2017: 168–93).

9.5 Pillar 5: Asset Building and Entrepreneurship

As the World Economic Forum (2017: 100) indicates, small business entrepreneurship and home ownership are usually the first means that working families can accumulate asset apart from savings and pensions. For most people, they provide a main ladder to the middle class. In terms of small business entrepreneurship, the degree of ease of starting and running a business in existing legal environments is critical for business and employment creation. Businesses are at the centre of supporting an inclusive economy, because as the OECD (2017a: 58–9) rightly contends, they are unique in creating and providing employment and in underpinning individual and collective welfares. In short, the sustainability of an inclusive economy replies on a thriving business sector. Regulatory clarity, fair cost for business financing, and flexibility in running business were found to be beneficial to inducing young companies. Young and small businesses were more affected by poorly designed regulations than larger and incumbent ones, which would limit their potential to grow and reduce the overall business dynamism.

Since the late 1990s, there has been a decline in business creation and dynamism. Against this world trend, business dynamism has been keeping very high in Denmark. Business birth rates and death rates were among the highest in European advanced economies (Eurostat, 2018b). In terms of business-friendly regulations, Denmark was ranked as the world’s third best country on the ease of doing business index, only next to New Zealand and Singapore (Lanvin et al., 2018: 23 & 248). The industrial structure of Denmark was featured with many small- and medium-sized enterprises that excelled in pockets of high technology. SMEs accounted for 61% of Denmark’s economic value added (EVA) and provided 65% of employment. One characteristic of Denmark’s SMEs was its high productivity, 70% higher than the EU average, among which manufacturing and ICT sectors performed particularly well.

High business creation and dynamism could be partly attributed to Denmark’s SMEs-friendly environment. Since 2008, the Danish government adopted ‘Think Small First’ principle in all policy- and law-making activities, and Denmark performed comparatively well than other EU countries on assisting SMEs in internationalization, skills and innovation, and responsive administration (European Commission, 2016: 1–5). Apart from these enabling functions, the Danish government has played little direct role in directing the economy beyond competition policy (Schubert and Martens, 2005: 28 & 40 & 44; Madsen, 2002: 262). High business creation and market dynamism helped to develop a competitive and innovative economy. Knowledge-intensive sectors have been the locomotive in facilitating innovation and economic growth, and eco-innovation was viewed as a key driver in Denmark’s transition to a green economy. The Capital Region of Denmark—Region Hovedstaden—was one of the most innovative regions in the EU. The Global Innovation Index listed Denmark as the world’s top ten most innovative country. On the Global Cleantech Innovation Index, it was ranked as the world’s fifth best country. (Kristensen et al., 2018: 118–26 & 129).

In terms of home ownership, access to good and affordable housing is a fundamental human need and key to an inclusive economy. For most people, housing costs are the single largest household expenditure and represent a substantial financial burden. During the last decade, housing became less affordable and home ownership has been in sharp decline worldwide. The sharp increase in housing prices in relation to wages was one major reason of why wealth inequality has deteriorated much more than income inequality in OECD countries (OECD, 2017a: 13).

On housing equality, Denmark performed less well than most EU members. Less than half, 49.5%, of the total housing stock was owner-occupied, the second lowest in the EU. More than half of Danish people had to turn to the rental market, and entering the housing market has become difficult since 2010. The Danish government has provided a large amount of social housing and has solved 42% of overall rental needs. New policies aiming to increase social housing from 20% to 25% were also initiated by local governments; social housing, however, was far from meeting the growing demand. It was estimated that waiting list for social housing in Copenhagen has been growing to reach a 30-year delay. In addition, house price-to-income ratio was comparatively high in Denmark. Denmark’s average housing costs compared to disposable income and the rate of housing overburden were the second highest in the EU, resulting in household debt in Denmark being the highest among advanced countries. With such high mortgage debt, surprisingly, Denmark had the very low share of people arrears on mortgage payment (Pittini et al., 2017: 20 & 28 & 60–1; IMF, 2014: 10), which was related to its unique mortgage finance system, as explained in Pillar 4.

9.6 Pillar 6: Employment and Labour Compensation

A well-functioning labour market with high participation rate is the top priority for every country, not only because employment is a major source for financing welfare provision but also because quality employment prevents families and individuals from poverty and social exclusion (Hemerijck, 2013: 383). Denmark has been often cited by the OECD and EU as a role model for best practice in promoting labour market participation and quality employment. Unemployment, as a yardstick for observing the functioning of labour market, has been low in Denmark, less than 6%, since 2000, and its youth unemployment was also one of the lowest in the EU. Its employment rates, 77.4%, were among the top performers in the OECD, with high earnings quality, low labour market insecurity, and low long hours of working. High employment rate does not necessarily mean high productivity and welfare enhancement, as they may be achieved through low-paid jobs, temporary employment, and poor working conditions, which have been becoming a global phenomenon and referred to as ‘the working poor’. Low-income rates in Denmark were the lowest among advanced EU economies as taking up low-paid jobs would entail an after-tax income loss. Denmark was also the only Nordic country where productivity per person employed has kept growing even during the global financial crisis between 2007 and 2015. The Danish labour market also provided equal opportunities for different groups as its gender income gap and employment gap for disadvantaged groups were the second lowest in the EU. (OECD, 2017a: 38; Norlen, 2018: 69–71; Karlsdottir et al., 2018: 74–7; Klein and Hansen, 2016: 12).

Many commentators attribute Denmark’s outstanding performance on employment to its unique labour market system, the so-called flexicurity. It was a combination of flexibility and security and an outcome of serial labour market reforms since the 1990s. The need to introduce such a system, as Poul N. Rasmussen (2005: 52), the then Danish prime minister, explains, was for economic survival after the country experienced the sharp economic decline in the 1990s. Denmark, being an open economy, has well experienced the effects of globalization and adapting to it was a question of survival. Businesses needed flexibility to adapt to a fast-changing market competition and meet the challenges brought by globalization. On the other hand, more than one-tenth of jobs in Denmark were disappearing or outsourcing every year. Job changes became common for workers and lifelong learning and training were required for them to succeed in the job market and to avoid unemployment. ‘Flexicurity’ was a strategy to address these challenges faced by both employers and employees. It was composed of a ‘golden triangle’: first, flexible labour market which allowed employers to hire and fire easily; second, social security supported by generous unemployment benefits for unemployed workers; and, third, active labour market policies (ALMPs) which aimed to enhance employability, with or without jobs (Bonoli, 2012: 196; Madsen, 2002: 243–58).

Under such a system, employers were endowed with external, internal, and functional flexibility and employees with employment and income security rather than job security. By international standards, job security in Denmark was very low and job mobility was very high, with 30% of job changes each year. There was no minimum wage protection in Denmark, either. Although Danish trade unions were powerful as they were entitled to one-third of the seats of company boards and working conditions were regulated through collective agreements, collective bargaining between employers and employees has been decentralized to a regional and company level in the last 20 years to tailor to local conditions. Legislation was generally controlling and procedural in order to allow more internal flexibility for production fluctuations and business cycles (Jensen and Larsen, 2005: 56–7 & 59; Deloitte, 2015: 27–9; Kvist et al., 2008: 253). Denmark was ranked as the world’s best country on the index of easy hiring and redundancy and the world’s fourth best country on labour-employer cooperation in the Global Talent Competitiveness Index survey (Lanvin and Evans, 2018: 140). Employees were compensated by the provision with employment security and income security to enable them in job transitions rather than fearing these changes. Employment security functioned through constant skill-upgrading and income security was realized by providing generous unemployment benefits at a high replacement rate of 90% of their previous income for one year (Rasmussen, 2005: 55; Madsen, 2002: 243–58).

ALMPs played a critical role in this ‘flexicurity’ system. Politically, they ensured that the welfare system would not be misused and justified the generous welfare provisions by gaining the public support as benefits receivers had the right and duty to participate in various activation schemes. Compared to other OECD countries, Denmark’s ALMPs focused on ‘activating’ the unemployed, spending most on job training rather than direct job creation and employment assistance (Kvist et al., 2008: 237–41; Bonoli, 2012: 185–7). Economically, job training and education provided by ALMPs were proved to produce positive employment effects for the unemployed. Rasmussen (2005: 54) contends that ALMPs were more effective in getting the unemployed back to work than lowering unemployment benefits. The survey on participants of activation schemes found that the majority of them believed these schemes had positive effects on their lives and made them better qualified for job searching. Socially, ALMPs had a bigger vision of promoting an inclusive society. They were employed as policy tools to increasing social integration and reducing inequality. It is noteworthy that, despite its confirmed effectiveness, ALMPs had its limits. A significant minority, 24%, held a negative view on their employment effects. Also, the gap of employment rates between immigrants and natives still persisted across generations (Madsen, 2002: 243–58; Kvist et al., 2008: 222–4; Klein and Hansen, 2016: 8–9 & 11 & 18–19).

Under such design, ALMPs have turned the nature of Danish social welfare systems from passive compensation of unemployment risks to the active promotion of employability, and from dependency schemes to springboards for new opportunities, as they equipped the unemployed with new skills and better qualifications instead of simply repairing damages. ALMPs, which protected and enhanced the employability of the unemployed, were found to increase overall employment levels, particularly to quality jobs (Hemerijck, 2013: 165; Rasmussen, 2005: 54; Jensen and Larsen, 2005: 61–2; Nelson and Stephens, 2012: 206 & 211). This can explain why trade unions in Denmark were not concerned about job security, but about developing workers’ competences. Jensen and Larsen (2005: 63–4), the then president of the Danish Confederation of Trade Union and director general of the Confederation of Danish Employers, respectively, jointly point out that from 1975 to 2000, employment in the textile industry fell by 80%, around 50,000 jobs, because of outsourcing, but two-thirds of unemployed workers managed to find new jobs within a year. Nearly 60% of Danish workers being surveyed thought it would be ‘easy’ or ‘very easy’ to find a new job. In other words, ALMPs have Danish workers well prepared for globalization and large-scale industrial readjustments.

Furthermore, ALMPs enhanced the competitiveness of Danish workers. Jobs can be distinguished into four types: discretionary learning, lean production, Taylorist organization, and traditional organization. Different types of jobs have different exposures to global competition, and discretionary learning jobs, involving complex problem-solving, were the least exposed to global competition. Empirical evidences found that the higher the expenditure on ALMPs , the more likely the discretionary learning patterns of work organizations would be (Lundvall and Lorenz, 2012: 239–41 & 245–8 & 254). Denmark’s spending on ALMPs per head was the largest in the OECD, and its ratio of discretionary learning jobs was the second highest in EU-15 countries, only next to the Netherlands (Hemerijck, 2013: 258–9; Lundvall and Lorenz, 2012: 239–41). In short, ALMPs enhanced employment security, justifying income security guaranteed by generous unemployment benefits and complementing flexibility for businesses to pursue competitiveness. Denmark’s flexicurity therefore reconciled two seemingly incompatible objectives—flexibility for employers and security for employees—promising that there will be no left behinds or losers in economic changes.

9.7 Pillar 7: Fiscal Transfer

As many commentators suggest, fiscal policies, if properly designed, can simultaneously promote social inclusion and economic growth. For the former, they were confirmed to be able to reduce economic inequality by about one-third directly through progressive taxation and indirectly through transfer spending on education and health (IMF, 2017b: 6–7; McKinsey Global Institute, 2016: 14; OECD, 2017a: 49–51; Oxfam, 2014: 120). For the latter, redistribution policies on education, childcare, health, labour market participation, and unemployment benefits were confirmed to be associated with higher growth (Cingano, 2014: 20; Crouch, 2015: 65). On the contrary, if badly designed, fiscal policies could exacerbate economic inequality (Oxfam, 2014: 81–2). Fiscal policies, indeed, were powerful policy tools to address the rising economic inequality, but their design depended on social preferences, administrative capacity, and fiscal sustainability on the one hand and fiscal sovereignty has been constrained by growing financial globalization on the other (IMF, 2017b: 27–8; OECD, 2017a: 28). One characteristic of fiscal policies in advanced economies in the last three decades was the introduction of neo-liberal tax reforms, in which corporate income tax and personal income tax were lowered in order to attract investment, thus shifting tax bases from progressive income tax (PIT) regime towards regressive tax structures. These trends have been argued to contribute to the rising economic inequality (Kohler, 2015: 17; IMF, 2017b: 28; OECD, 2017a: 26).

Denmark was different from other advanced economies in tax regime, tax revenues, and public spending. In terms of tax regime, similar with other advanced economies, its personal income tax rates have been reduced after several reforms in the last decades, ranging from 38% to 55.8%, but Denmark still maintained the PIT structure. It still had one of the highest personal income tax rates in the OECD. By contrast, Denmark’s tax rates on business were relatively modest by international standards. Its corporate tax rates, used to be as high as 50% in the 1990s, had been reduced to 22% from 2016 after several tax reforms, below the OECD average level. Similarly, Denmark taxed capital gains for individuals at progressive rates from 27% to 42%, but for companies, the rates were reduced to the range of 0–23.5%. Denmark had no wealth tax (Deloitte, 2015: 9–12 & 22–5; OECD, 2006: 12; Copenhagen Capacity, 2018).

In terms of tax revenues, Denmark’s tax-to-GDP ratio, 45.9%, was the highest among OECD countries. Unlike other OECD countries, Denmark’s tax revenues came mainly from personal income tax (personal income, profits, and gains), much less from corporate income tax. The former accounted for 55.2% of the total revenue, much higher than the OECD average of 24.4%, while the latter accounted for only 5.6% of its total revenues, well below the OECD average of 8.9%. Also, unlike most OECD countries, Denmark almost had no revenue, only 0.1%, from social security contribution. Its revenue from property taxes, value-added taxes (VAT), and other consumption taxes was at the similar level with the OECD average (OECD, 2017b: 3, 2017c: 1–2).

In terms of public spending, Denmark’s public spending in relation to GDP, 53.6%, was the third highest in the EU, next to Finland and France. The characteristic of its public spending was that it spent most of its tax revenue on education, health, and social protection (such as unemployment benefits and social assistance). The former two were the highest in the EU, while the latter one was the third highest in terms of the ratio of GDP. These three policies altogether accounted for 72.6% of its total spending. By contrast, Denmark’s spending on defence and public order and safety were relatively low compared to the EU average (Eurostat, 2018a).

Fiscal redistribution policies had asymmetrical effects: they benefited people at the bottom of the social class pyramid more as their disadvantages associated with lower social class origins have largely disappeared. Fiscal transfer has effectively reduced market income inequality in Denmark, measured by Gini coefficient, by 35% (Eurofound, 2017: 8–9; OECD, 2017a: 260). For example, rising housing prices once deteriorated economic equality in the early 2000s in Denmark, but it was partially offset by progressive taxation. The share of taxable income held by the top 1% was around 5% in Denmark, and the share of households living in relative poverty, measured by living below 50% of the median disposable income, was among the lowest in the OECD. Such performance has been stable in the last decades and was exceptional among OECD countries, as income inequality has worsened in most OECD economies (Causa et al., 2016: 7 & 19–21). In terms of income distribution, Denmark was the most equitable country in the EU (Lindberg and Rispling, 2018: 110–1). Such relative economic equality was found to be helpful to shaping Denmark’s economic pattern. Economic equality promoted social trust between employers and employees and enhanced employees’ willingness to job training and learning. Denmark was the best country on organizational learning (in)equality in EU-15 countries, characterizing it as a learning economy, good at learning by doing and by using and interacting, rather than in large-scale intensive science-based sectors (Lundvall and Lorenz, 2012: 249–50 & 252–3).

In short, Denmark had a relatively large public sector. Its fiscal transfers were financed by general tax revenue, mainly from personal income tax, based on progressive tax structure, and spending most revenues on enabling and equalizing policies such as education, health, and social protection.

10 Characterizing the Danish Formula of Inclusive Capitalism

Evaluating by the above seven pillars, Denmark did not perform all that well in all criteria. It has performed particularly well in education and skills, basic services, corruption and rents, employment and labour policies, as well as fiscal transfers, but much less well in financial intermediation and asset building, mainly housing equality. More precisely, what Denmark has performed well was in areas involving capability developing for labour, from childhood to adulthood, and in areas involving market competition for capital, from business creation to operation. The Danish model could be ‘socially inclusive’ because it maximized the chances for everyone in their life course (through public education and health) and in the labour market (through ALMPs ). It could be ‘economically productive’ because it provided sufficient flexibility, skilled labours, quality infrastructure, and friendly corporate taxes for business to compete in the world market. The Danish formula could be seen as successful as its strong competitiveness shows the success of education and labour market policies, leading to an innovative and learning economy and its good adaptability to global competition. Its high employment rates represent the success of ALMPs and public childcare policies. Its low-income inequality and sustainable economic growth show the success of public governance and taxation. The Danish model has proved to be a triple-win formula: pro-business (because of high flexibility and ease of doing business), pro-labour (because of income equality and social protection), and pro-government (because of fiscal sustainability), resulting in an outcome of ‘triad of high employment, distributive justice and decent levels of economic growth’ (Hemerijck, 2013: 289). Inclusive capitalism thus embodied in a day-to-day reality in Denmark; not just existed in academic and media discussions.

Looking further, quality public services in education, health, ALMPs , digital infrastructure, and public administration all originate from one common source: the government staging at the centre as a big investor and enabler. Without right policy-making, heavy public investments could be counter-productive. Equally, without reliable and uncorrupted public governance, progressive and heavy taxation could not be accepted and be effectively collected, and all meaningful public investments would collapse as a result. The Danish formula thus formed a self-producing organism: governance as the generator of driving inclusive capitalism by enabling individuals through public education, public health services, ALMPs , and social protection, so as to provide quality and skilled labours for businesses. Businesses were enabled by high flexibility, uncorrupted governance, and quality infrastructure. High business creation and dynamism, accompanied with lifelong learning workforce, resulted in a competitive and innovative economy. A growing and competitive economy further underpinned sustainable fiscal transfers through high and progressive taxation, which directed most public spending back to education, health, and social protection (see Fig. 6.3).

Fig. 6.3

The Danish formula of inclusive capitalism

In short, right thinking behind policy-making and effective governance held the key to the success of the Danish formula. At the policy-making level, the right thinking behind policy-making—treating economic policies also as social policies, and vice versa—reconciled economic growth and equality simultaneously. Public policies, indeed, reflect the values and preferences of a society, and they differed from country to country. Hemerijck (2013: 156 & 164) argues that a variety of egalitarian policies in Denmark derived from its ideological roots in Lutheranism and its corresponding ethos of public responsibility. However, such arguments neglected a fact that the Danish model has been transforming since the 1990s. It was not a priori assumption, but rather posterior practices. Also, as economic inequality has become a global risk and seeking equal chances to good living is a common need for all humankind, implementing inclusive capitalism was a universal call and should transcend national preferences to different values and ideologies. At the policy implementing level, to what extent administration capacity in Denmark could deliver quality services, while being responsive and uncorrupted, determined whether and how the Danish formula could be successful or not. The administration was the interface between the state and the people, translating static policies into real, concrete services. That was an interesting mystery beyond the scope of this chapter and required further investigation.

11 Conclusion

Inclusive capitalism, as World Economic Forum (2017: ix) indicates, cannot be achieved by single policy solely; it is ‘an integrated system’. As Madsen (2002: 262) warns, taking isolated policy within this specific combination and transferring to other social-economic-political environments may run high risk of being unsuccessful. While having its limits and deficiencies, the Danish formula largely embodied inclusive capitalism as a policy eco-system, composed of a wide range of policies surrounding acquired equal opportunities. At the core, it was more about the right thinking behind policy-making and effective governance than the policy constellation it presented. For effective governance, good policies and best practices can be emulated relatively easily, but the institutional capacity of delivering good governance could not be built up just overnight. The role of state was rediscovered and re-emphasized in the Danish formula.

What was more challenging, however, was the thinking behind policy-making. The Danish formula highlighted a simple fact that policies related directly to personal development, such as education, health, and labour market policies, were the most critical ones as they could address economic growth and inequality simultaneously. They constituted the organic body of producing an inclusive economy. For a very long time, the world has been embracing the neo-liberal ideology, believing that economic growth and justice were a trade-off and cannot co-exist. Market liberalization policies promoted by the EU and ‘Washington Consensus’ in the last decades embodied such an ideological orthodoxy. Yet, the Danish formula of inclusive capitalism has overcome such a dichotomy and provided a responsible answer to economic inequality other than trade protectionism and populist nationalism. It has proved that social investment in human capital was both an economic and a social strategy, and a large public sector, contrary to the neo-liberal arguments, can be productivity-enhancing and competitiveness-promoting. The Danish formula has shown that to get economics right (to be competitive and growing), it has to get policies right (to be enabling and inclusive). To get policies right, it has to get the thinking right. It turned out that it was not capitalism needed to reform. It was the prevailing liberalist orthodoxy that guided EU governance in desperate need of overhaul.


  1. 1.

    Due to the decoupling of economic growth from income growth, economists, such as Stiglitz et al. (2009: 12–18) and Coyle (2017: 19), call for designing a better indicator than the current one—gross domestic product (GDP)—to measure economic welfare so as to reflect the distribution of income, consumption, and wealth more correctly. Hay and Payne (2015: 26) propose a hybrid measurement of social, environmental, and developmental index (SED) to replace the index of GDP, while the OECD proposes the ‘Better Life Index’ and the World Economic Forum proposes the UN’s ‘Human Development Index’ as the alternative (World Economic Forum, 2017: 10).

  2. 2.

    However, David Author (2015: 3–30) from MIT contends that such worries of ‘automation anxiety’ (2015: 4) were overdue, because most automated systems lack flexibility. He predicts that middle-skill jobs combining specific vocational skills with middle level of ‘literacy, numeracy, adaptability, problem-solving, and common sense’, the so-called ‘new middle skill jobs’, will be growing in coming decades (2015: 27).

  3. 3.

    Hay and Payne (2015: 3–50) term it as ‘civic capitalism’ and Hutton (2015) terms it as ‘stakeholder capitalism’.


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Authors and Affiliations

  1. 1.Public Administration and PolicyNational Taipei UniversityNew Taipei CityTaiwan

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