Every nation-state has its own peculiar history. Nation specific institutions and structures have proven resistant to globalization and they give each national system its own distinct ‘personality’. In any specific period certain national systems tend to perform better than others in terms of wealth creation and in terms of the quality of life that they offer their citizens. Is it possible to learn from the successful examples when designing development strategies in the rest of the world? The assumption behind this chapter is that ‘learning-by-comparing’ is a fruitful exercise while ‘naïve benchmarking’ where attempts are made to replicate isolated successful institutions or mechanisms defined as global ‘best-practise’ may lead to unintended and negative consequences (Lundvall and Tomlinson 2002).
One way to explain why ‘naïve benchmarking’ does not work is to take the national system of innovation as point of departure. This concept was developed in the middle of the eighties (Freeman 1982; Lundvall 1985; Freeman 1987; Freeman and Lundvall 1988) and is now used world-wide as tool for analysis and policy. National systems of innovation of innovation differ in terms of what they do (industrial specialization), what they know (reflected in patterns of patenting and publishing) and in how they do and learn (different institutions and different organizational forms). The most important dimensions of innovation systems are the patterns of interconnectedness and interaction among individuals and organizations.
National systems of innovation are open systems and the domestic pattern of interaction may be more or less well adapted to the global context. For instance its institutions may be supportive to certain generic technologies that in a specific economic era offer the greatest opportunities (Perez 1983; Freeman and Perez 1985). This implies that the performance of a specific national system is contingent and what appears to be a well functioning system in one époque may turn out to be a failure at a later stage. In this paper we will argue that Denmark benefits from an institutional set up and a mode of learning that matches well the current context of the globalizing learning economy.
At the foundation of the evolution of the national system are processes of interactive learning among agents and organizations within the system. Such forms of interaction will tend to develop a certain degree of ‘congruency’ between the pattern of specialization in production and knowledge on the one hand and the institutions that frame economic processes and learning processes on the other. In this paper we will argue that there is a good match in Denmark between the different elements of the system. The flexible labor market, the education system fostering personal competence and the system for life-long training supported by public sector matches well the industrial structure; i.e. the population of small scale firms operating in traditional sectors. Economic and social equality and related high levels of trust support interactive learning between organizations and high degrees of participation in organizational learning.
The state may play a more or less autonomous role in relation to the evolution of international contingency and internal congruency. When the system gets out of tune with the global context and/or when there is growing friction between the production system and the institutions that frame it, a new agenda for public policy will present itself. The state and the political process may in such situations prove to be more or less ‘intelligent’ when it comes to cope with the new threats and challenges. In some cases the path dependency will be strong and attempts will be made to reinforce the current institutional set-up. In other cases social and political conflict may result in development of new directions of change. This will be reflected in the degree of adaptability of the system. In this paper we will argue that the Danish history has fostered adaptability in this sense. At the core of this adaptability we find positive relationships between state and civil society. This includes tripartite interaction in labor market regulation where social partners interact with the state but it goes further than that.
Brief introduction to the structure of the Danish innovation system
The Danish system of innovation is characterized by many small and medium-sized enterprises (SMEs) with only a few (in international terms) large firms. In general, Danish firms are innovative (making both product innovations, process innovations and organizational innovations), but the innovations mainly take the form of incremental changes. A big share of the Danish manufacturing value-added, employment, and export is within low-tech industries (defined as industries with low R&D-intensity), although the share is decreasing. There are important exceptions from the traditional dominance of low- and medium-tech sectors – the most important being the pharmaceuticals and other medico-related industries.
Low or medium R&D-intensity does not, however, mean that the production is not knowledge-intensive. In fact, production in many of the industries characterizing Denmark’s so-called low and medium-tech production is based upon extensive knowledge inputs related to a high degree of change and flexibility in firms’ use of resources, including rapid diffusion of new technologies and frequent incremental product innovation combining a high level of competence in industrial design with advanced organizational techniques and marketing methods. The innovations often reflect a practical and experience-based interaction between skilled labor, engineers, and marketing people.
There are different ways to measure the performance of a national economy. The most common refers to GNP per capita. Denmark is doing well according to this measure. Actually it has been in the top ten-league in this respect for the last 10 years. Behind this lies a high participation rate in the labor force in general and especially for women. GNP per working hour or per active worker is less impressive but here the relative size of the public sector may be a factor that results in a downward bias (value added in public service does not include capital income). Measurement of productivity in the private sector puts Denmark in a more advantageous position.
The rate of unemployment is low (less than 2%) and the rate of inflation has remained moderate (3.4 %). The foreign debt is low and has been considerably reduced over the last 15 years. Public debt is also low.
Figure 1 – Denmark’s position international comparison 2003
There are more ‘holistic’ and impressionistic attempts to measure the relative performance of national economies. In April 2005 the Intelligence Unit of the British weekly The Economist defined Denmark as the most attractive country in the world seen from the investor’s point of view (the Economist). Recent years the World Economic Forum has presented rankings of international competitiveness where Denmark ends up among the top five.
A third way to measure welfare is through asking citizens about how they see their quality of life and how they evaluate different institutions in the society they live in. Also here Denmark comes out on top. Danes are among the most satisfied people in the world (the response pattern might reflect that each individual is in charge of his own happiness – declaring yourself not to be happy would be to accept failure).
A Danish paradox?
Denmark has realized these economic and social goals while developing an ambitious welfare state. This contrasts with the pro-market bias of standard economics as it is reflected in policy advice offered by international organizations such as the OECD and the World Bank. Big public expenditure, high and progressive tax rates and generous public social schemes have been characterized as hampering growth. This general message has been re-inforced through references to the threat coming from globalisation.
Globalisation has thus been referred to as a threat to the welfare state. However, as we shall see, globalisation does not affect welfare states uniformly, and actually the Scandinavian welfare model seems to prosper in the context of globalisation. Since 1990, the Scandinavian countries have outperformed not only Continental European countries on employment, economic growth and labour productivity but also the neo-liberal models of the UK and the US.
The paradox takes on an extra dimension in Denmark. Some of the success in Finland and Sweden may be explained by extraordinary heavy investments in R&D and in a strong growth in ICT-sectors. This transformation has not to the same degree taken place in Denmark where ‘low technology’ industries related to food, textiles and furniture still contribute strongly to exports. The absence of big multinational firms has been seen as another structural weakness of the Danish economy.
In this paper we will demonstrate that some of the assumed ‘weaknesses’ tend to become ‘strengths’ in the context of the globalizing learning economy where the capability and opportunity to learn is the key to success for individuals, organizations and regions. They form integral parts of an innovation system based upon experience based learning. In this alternative universe it is crucial for economic performance that a broad segment of the population is engaged in processes of change where they interact in developing, implementing and using new ideas. And it is here we find the secret behind the success of the Danish model.
A Danish model?
Denmark has in common with the other Nordic countries that most important rule setting for the labor market comes out of compromises between centralized trade unions and centralized employers’ organization. This stands in contrast to systems where rules are set through laws given by the state. Behind the autonomy of the interest organizations there is a complex of governmental laws. The most important is the state mediation authority who can be called upon when disputes develop.
The US labor market scholar Galhenson who introduced the concept ‘the Danish model’ already in the sixties referred mainly to this regulation mode of the relationship of capital and labor. In this paper we sketch a broader version of the Danish model. We try to demonstrate that in the context of the current ‘learning economy’ there are several mechanisms that support the dynamic performance of the Danish economy. The self-regulated labor market is part of this but there are several other dimensions related to the ‘national system of innovation and competence-building’ that need to be considered.
In the long run ‘adaptability’ may be seen as the most fundamental prerequisite for sustained economic growth.1 As we shall see the adaptability of the Danish system has both a macro-political and micro-economic dimension. The macro-political dimension may be illustrated by the fact that in periods of crisis the state, civil society and interest groups have interacted and established new frameworks for regulating and changing the system. This dimension will be discussed in section 2. We see the micro-economic dimension of adaptability reflected in interactive learning and incremental innovation as one key element behind the strong economic performance. Also important is the support these processes get from institutions related to education, training and labor market and this will be the major theme for the rest of the paper.
2. A history of adaptive policy learning resulting in a positive relationship between state and civil society
In this section we argue that state and civil society seem to be more in harmony in Denmark than in most other national systems. This results in a high degree of system adaptability in periods of crisis.
The historical roots of the adaptive governance mode
In Box 1 we refer to some crucial historical events that have shaped the current socio-economic system of Denmark and that have triggered new patterns of interaction between the state and civil society. They may also be seen as milestone in the building of social cohesion in the Danish society through integrating farmers and workers as full citizens.
1788 Land reform created a class of farmers freed from feudal bonds
1852 The establishment of the first Folk High School for the emancipation of farmers
1868 The battle of Dybbøl, ending imperial dreams and triggering national reform
1882 The first dairy factory with co-operative ownership
1899 September Agreement recognizing rights for organization of workers and employers
1933 The Kanslergade Compromise on social reform among major political parties
Of these dates 1868 was crucial for the formation of a consensus oriented strategy among decision makers. The ruling class had to give up colonial ambitions. The event took on a symbolic meaning and led to a shift toward a more introvert national strategy with a social dimension. The new slogan was that ‘what had been lost outside now must be regained domestically’. This implied a kind of common effort aiming at building a strong nation and it was reflected in major efforts to establish a strong national education system.
It also led to a reorientation of corn exports toward Great Britain reducing the relative importance of the German market. The 1870s became a critical period of crisis and transformation. It was triggered by new competition from US and Russia in the export market for corn. Danish agriculture experienced a radical reduction in its exports to Great Britain and the agricultural sector had to be transformed. After more than a decade of painful adaptation – where the formation of the farmers’ co-operatives was a crucial element - the outcome was a completely transformed agricultural economy characterized by export of animal products such as butter and bacon, still with the UK as a major destination. A key element behind the transformation was the diffusion of farmers’ co-operativesprocessing milk and, later on, slaughtering and refining meat products (1882).
A prerequisite for this transformation was another social innovation; the introduction (1852) and rapid diffusion of ‘People’s High Schools’ (folkhøjskoler) – based on the ideology of the priest and social philosopher Grundtvig. These new institutions had as major aim to educate farmers and give them self-confidence both as producers and citizens. The transformation process was to a high degree driven by self-organization among farmers but it was supported and made legitimate by the state. The constitution protected the formation of free association and new legislation that supported the formation of high schools was passed. Already at this stage a mode of public policy interaction was developed where civil society and state supported each other, especially in periods of economic and social crisis. This mode was further developed through the major social compromises including the worker’s movement in respectively 1899 and 1933.
In the post-war period the building of the welfare state and the further development of labor market institutions ruled by tripartite bodies reinforced this tendency. The fact that in the post-war period (at least until 2001) neither the left- nor the right-wing governments had a stable majority in parliament contributed to a climate of consensus seeking. This form of governance where state and civil society interact in periods of transformation and reform matches well the specific form og economic dynamics where social equality and economic efficiency go hand in hand. In the section 4 we will link the degree of equality to trust and indicate how the high degree of equality is transformed into social capital fostering interactive learning.
3. Post war macroeconomic performance and the formation of the modern welfare state
At the end of the war the Danish economy there was wide fear for a new depression and an active economic policy was established that combined Keynesian active finance policy with income and wage policy. In the small and increasingly open economy ‘international competitiveness’ was defined as a major objective. This was reflected in a series of ‘economic policy packages’ designed as social compromises where strong and highly centralized trade unions accepted some degree of wage restraint in exchange for social reforms that increased social security and job creation.
One long term outcome was an unemployment support system that was more ambitious than in most other countries both in terms of income coverage and the length of period. Meanwhile, until the seventies and eighties, resources allocated to ‘active labor market’ policy were very limited, however. Another critical element of the reforms was to establish public care for children and old people. This made all women, including those with small children, free to join the labor market and at the same time it led to the creation of jobs mainly attracting women. As a result the participation rate of women became higher than in almost all other countries.2
Just after the war the economy was still strongly dependent on agriculture and agro-food. The industrial base was quite weak and private services and manufacturing were mainly connected either to private consumption, public sector or they involved agro-food, construction and shipping activities. The fifties was a period of transition with a major transfer of labor from agriculture to manufacturing and services. The growth rates were high but so was the rate of unemployment. In the 1960s there was a strong growth in public sector activities related to education, health, childcare and care for the elderly. Inflation rates become somewhat higher while rates of unemployment were low. The rate of labor productivity growth was high.
This economic policy strategy aiming at full employment and with inflation controlled by a combination of (stop-go) finance and incomes policy ran into problems at the end of the 1960s where deficits in balance of payment and public debt began to grow. The strategy was abandoned in the middle of the 1970s after a period of high inflation followed by stagflation.
1973 -1980 a period of crisis and transformation
1973 the rate of unemployment was record low (40.000 i.e. less than 1%) and when this coincided with the first oil crisis, inflation became high and accelerating. A period followed where restrictive economic policy led to high rates of unemployment for almost 20 years. It was only in 1990 that the rate of unemployment came down under 10%. Since then growth rates have been stable and unemployment has been shrinking year after year and it is now far below what was assumed to be ‘the natural rate of unemployment’ in the nineties.
These two decades witnessed changes in the economic policy strategy. There was a strong pressure modernize the public sector and to make it both more productive and more service-oriented. Labor market policy became much more active. Access to unemployment support became more restricted for young workers. Joining European monetary currency collaboration excluded the active use of currency rate policy. Wage restraint was imposed more through high rates of unemployment than through explicit wage policy. There was also a shift toward a more long term perspective on international competitiveness moving the focus toward innovative capabilities and other non-price factors.
It is important to note that the political background for post-war policies was a series of minority governments and governments that needed to take the opposition into account. There was little room for purely ideological initiatives and policy outcomes were pragmatic compromises. Sometimes populist waves resulted in radical and problematic shifts in policy (the immigration issue where Denmark went from being the most open to become the most closed society). In other cases they may have secured a necessary modernization (the service orientation of the public sector).
It is important to note that the Danish model was in serious trouble in the 197
3. The learning economy as context
In order to explain the relative success of the Danish economy it is necessary to understand the global context within which it operates. In various contexts we have introduced an interpretation of what actually takes place in the economy under the term ‘the learning economy’ (Lundvall and Johnson 1994; Lundvall and Nielsen 1999; Archibugi and Lundvall 2001). The intention is to mark a distinction from the more generally used term ‘the knowledge-based economy’. The learning economy-concept signals that the most important change is not the more intensive use of knowledge in the economy but rather that knowledge becomes obsolete more rapidly than before; therefore it is imperative that firms engage in organizational learning and that workers constantly attain new competencies.
The wide use of information technology has become a prerequisite for competitiveness and in all parts of the economy including so-called low technology sectors the use of scientific knowledge offers new opportunities for firms. Especially in high income countries codified knowledge becomes more important than before. But these changes together with global competition increase the rate of transformation and change. As a result both individuals and companies are increasingly confronted with problems that can be solved only through forgetting old and obtaining new competencies. The rapid rate of change reflects that the intensified competition leads to a selection of organizations and individuals that are capable of rapid learning, thus further accelerating the rate of change.
The transition to a learning economy confronts individuals and companies as well as national institutions with new challenges. For the individual it becomes of critical importance to be able to upgrade skills or to get access to new ones over the life-cycle. Finding a workplace where there is ample opportunities to learn new skills may be more important than getting a high salary to start with. For the education system a strong emphasis on teaching basic subjects as language and mathematics needs to be combined with promoting what sometimes is referred to as ‘personal skills’ or ‘social skills’. The capacity to learn becomes the most important one in the learning economy – it is a problem that the national Pisa-tests do not give emphasis to such competencies.
At the level of the firm we may see the growing emphasis on new organization forms promoting functional flexibility and networking as responses to the challenges posed by the learning economy. In a rapidly changing environment it is not efficient to operate a hierarchical organization with many vertical layers and with departments and functions operating separately within the firm. It takes too long to respond when the information obtained at the lower levels has to be transmitted to the top and back down to the bottom of the pyramid. In many instances big vertically integrated companies are less effective than smaller units engaged in relational contracting and networking. An increasingly important dimension of competition becomes related to how attractive a firm is for labor and this will reflect the learning opportunities that it offers to its employees. This is correlated to the degree of participation and autonomy offered to workers. Therefore we should expect a trend toward a more participatory working life in the private sector.
For national economies the challenge is to combine a strong science base with establishing national institutions that promote individual, organizational and inter-organizational learning. Labor markets may combine high mobility with strong public investments in training or combine less mobility with strong investment in in house-training. In a recent paper (Jensen et al 2007) based upon Danish data we demonstrate that firms that combine a strong version of science-based learning with a strong version of experience-based (organizational) learning are the ones that are most innovative (se box 1).
3Box 1: Combining Science-based (STI) and Experience-based (DUI) modes of innovation promotes product innovation.
The table below taken from Jensen et al (2007) is based upon a clustering of 692 Danish firms. The odds ratio indicates compares the propensity to innovate using the low learning cluster (neither DUI nor STI) as benchmark). Also when sector, size and ownership are brought in as control variables we find that firms that combine the use of scientific knowledge with organizational learning are more than double as active in terms of introducing product innovations as are firms that are strong only in one of these two dimensions.