I came across a nice speech from Bank of Finland (BoF) Governor Erkki Liikanen. He addresses the same question as I have put in the title.
The Euopean social model is widely criticised (Read Ned Phelps’ views on the same. The general belief is that European Social Model promotes equity ahead of competition and hence is slow to adapt to today’s world. That is why US continues to thrive but Europe continues to lag behind. BoF governor disagrees.
He talks mainly about Nordic Countries and says despite ” a large government sector, high tax rates, generous social protection and highly compressed wage structures” these countries have managed to grow impressively.
He attributes the success to 3 policies:
- Openness to competition
- Sound macroeconomic policies
- Strong and transparent institutional framework
Out of the three, the last one is most impressive. All Nordic countries are always there in the top 10 list of least corrupt countries. He also suggests the importance of education in these countries and the way education has helped them grow.
He also stresses on importance of public sector. However, his reasoning is different:
In Finland we face the most rapidly ageing population, so these are no longer hypothetical questions but a reality that policymakers must deal with today. The demand for welfare and health services increases as the population grows older, and at the same time, the room for financing extra expenditure by higher taxation is limited because of an already high level of taxation and increasing tax competition. How can we ensure that the public sector in general and welfare services in particular can adapt?
Read the entire speech. Nice take on European Social Model. It is a lesson for much needed inclusive growth in India.
Mostly Economics 
