The Danish Design Cluster
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Denmark and Danish Design DANISH DESIGN The Danish Design Cluster Final paper for Microeconomics of Competitiveness May 4, 2007 Alex Macoun Benjamin Kramarz Eli Nowersztern Jeppe Kofod Magnus Lundgren Page 1 of 32 Denmark and Danish Design DANISH DESIGN I. Introduction This paper analyzes the economic prosperity of Denmark in general and the structure of the Danish Design Cluster in particular. We describe a country among the most prosperous in the world that has benefited greatly in recent years from early labor market reforms in the 1990s. As prosperity has increased over the past decades, Denmark has increasingly shifted its cluster portfolio away from agriculture, fishing and food processing towards more value-added service industries such as business services, transport and logistics. In this context, the Danish Design Cluster plays a central role as one of the service clusters bound to become increasingly important to the future prosperity of the Danish economy. II.A. Country Analysis Denmark is the smallest country in the Nordic Region covering 17,000 sq. miles. Located in the Southern part of the Nordic Region, with Norway to the North and Sweden to the East, the country has its only land border with Germany to the South. The country consists of the peninsula of Jutland and approximately 400 islands of which 78 are inhabited. The capital Copenhagen in eastern Denmark is connected to Sweden’s third largest city, Malmö, by Europe’s longest rail and road-bridge, spanning 25,738 ft. The country’s population of 5.4 million is predominantly of Scandinavian descent, although immigrants and their descendants, mostly from the Middle East and South-East Asia, today comprise approximately 8.5% of the population. The official language is Danish, while English language proficiency is very high. Since the mid 20th century Denmark has been known for its “Scandinavian Model” of comprehensive social Page 2 of 32 Denmark and Danish Design DANISH DESIGN security, health services, and education, which has resulted in Denmark obtaining the world’s second-lowest Gini coefficient as of 2007. The World Happiness Index also ranked Denmark the happiest nation in the world in 20071. Denmark has a long history of independence dating back to the Viking Age of 800-1100 AD. In this period the country was first unified under one king and the name Denmark appeared for the first time. It was another thousand years before the country enacted a democratic constitution in 1849. Of more relevance to the current prosperity of Denmark are the economic gains of the second half of the 19th century during which Denmark transformed from a land of poor peasants into the nation with the most prosperous small farmers in Europe. Prior to 1880, Denmark’s prosperity was mainly based on exporting grain to rapidly industrializing countries such as Germany and the United Kingdom. As competition grew from other markets such as Australia and North America, Danish farmers switched to more intensive and profitable agricultural products such as fodder crops, bacon, butter, cheese, eggs, and meat. This increase in demand from the food-processing industry improved the industrial development in Denmark that was otherwise suffering from a lack of raw materials and heavy industry. Due to its small domestic market, Denmark is heavily dependent on trade, which accounts for approximately 2/3 of GDP2. Figure 1 shows how around 75% of Denmark’s trade is with other EU member states, primarily its immediate neighbors Germany and Sweden. The close trade linkages within the Nordic region have been fostered by the Nordic Council which since 1952 has provided for a common labor market and free movement across borders without passports between the 5 member countries. Page 3 of 32 Denmark and Danish Design DANISH DESIGN Denmark joined the EU in 1973 together with the United Kingdom, and pegged its currency to the German Mark around a narrow band from 1982 and onwards. Even when the Danes decided to remain outside of the European Monetary Union in 1993, Denmark lived up to the Growth and Stability Pact and the Central Bank of Denmark switched its peg of the Danish Crown from the German Mark to the Euro (then ECU). Figure 21 Denmark’Denmark’s trade trade partners partners in in 2006 2006 Source: Statistics Denmark Denmark has a well-functioning multi-party parliamentary system in which the 179 seats of parliament are up for election approximately every four years The Social Democrats, a centre-left party, has led the majority of governments since the Second World War, while the latest change of government came in 2001 when a centre-right coalition won the elections based on a campaign that focused on harder immigration rules and a promise not to raise taxes. Page 4 of 32 Denmark and Danish Design DANISH DESIGN II.B. Country Performance Denmark is today one of the richest countries in the world with a GDP per capita at purchasing power parity (PPP) of US$35,6603 in 2006. This ranks Denmark as the 7th most prosperous nation in the world. Figure 2 shows the development of GDP per capita Figure 32 Nominal GDP per capita at PPP Labor market reform: FlexSecurity Source: The Economist Intelligence Unit in PPP for Denmark and a number of other Northern European countries over the past 25 years. Denmark has been outperforming its neighbors since the mid 1990s. In order to explain this we have decomposed Danish prosperity into three components4: Labor utilization, labor productivity, and domestic purchasing power. Labor utilization: The biggest driver of Danish prosperity is the nation’s utilization of its labor. Denmark has one of the highest labor force participation rates in the world with around 80% of its population between the ages of 16–64 enrolled in the labor force5. At the same time Danish employees work an average 1551 hours a year, Page 5 of 32 Denmark and Danish Design DANISH DESIGN while employees in other Northern European countries such as Norway (1360 hours/year), Germany (1437 hours/year), and the Netherlands (1367 hours/year) work significantly fewer hours6. In addition to its high labor force participation rate and high number of hours worked per employee, Denmark began restructuring its labor market in the 1990s using a model referred to as FlexSecurity. The FlexSecurity model was introduced in 1994 during a major labor market reform and was a model that combined safety for employees while at the same time providing employers with the flexibility to easily let go of their workers. Table 1 provides a summary of the major components of the Danish FlexSecurity system. The FlexSecurity system provides employers with a flexible labor Table 1 Features of the Danish FlexSecurity system FlexSecurity Feature Reduced legislative framework The law establishes no legal minimum wage,work hours per week, or right to strike Decentralized negotiations at company or branch level Protection of employees Optional unemployment system co-sponsored by the state and the employees In case of lay-off employees will receive 90% of previous wage for up to 4 years (ceiling of app. $40,000 a year) Incentives for job search Participation in "job activation" programs are mandatory the first six months of unemployment Extensive opportunities for re-training of employess High cost associated with system Public expenditure on employment programs represents 1.66% of GDP in 2005 pool in which it is very easy for them to both hire and fire employees. 30% of the Danish work force changes jobs every year, while an average Dane only remains with the same company for 8 years7. To protect people from the possible economic hardships associated with a flexible labor market, the system also allows people to collect unemployment benefits while searching for new jobs. To keep incentives for employees to regain employment, various institutions such as forced activation and limits to how long unemployment benefits can be collected, are put in place. This early restructuring of the Page 6 of 32 Denmark and Danish Design DANISH DESIGN labor market contributed to a drastic reduction in the unemployment rate from 9.7% in 1990 to 4% in 2006 – well below the consistent EU rate of 8%. Figure 3 below shows how the combination of high labor force participation rates, low unemployment rate, and high average hours of work per employee has resulted in extraordinarily high level of average working hours per head of population. Figure 43 Average hours worked per head of population Source: OECD Labor productivity: The Danish workforce is in general very well educated with an average of 13.4 years of educational training. Education is provided for by the Danish state and all levels of schools are free of charge to all citizens. At the same time however, Denmark has a GDP per hour worked of only $43.30. This makes Denmark the eighth most productive nation in the world, behind other developed nations such as the USA, Germany, France, the Netherlands, Belgium, and Ireland. Cost levels: As figure 4 demonstrates Denmark has the second highest cost level in the world, behind only Iceland. These high price levels are holding back the country’s level of prosperity. Page 7 of 32 Denmark and Danish Design DANISH DESIGN Figure 4 Ratio of Danish prices to local prices, January 2007 Source: OECD Note: Note: Calculated from comparative price levels, defined as the ratio of PPP factors to exchange rates II.C. Danish National Business Environment For a small economy, Denmark’s export portfolio is very diversified, with 32 different clusters exporting above US$500m annually8. Although Danish exports as a whole show low rates of growth (increasing their share of the world export market by only 0.075% between 1997 and 2005), the economy is shifting away from lower value, endowment-dependent clusters such as fishing and agriculture, and into more knowledge intensive service industries like business services and high-end transportation and logistics.