10 October 1999 - Socialism on the Line

“No weapons. No slogans. No bulletproof vests.” That’s what the sign said at the main entrance of Christiania, the drug haven just outside Copenhagen that promotes itself as a Scandinavian social experiment, a diversity of people living and thriving together. To me, it looked like an experiment in Scandinavian tolerance for all things different.

Christiania was founded in the early 1970s by a group of squatters who entered an abandoned military base and defied the authorities to remove them. Three decades later, the squatters, many of them drug users and sellers, are still there, and naturally they’re not paying any taxes or rent. An older woman selling handmade jewelry told me that the police raid the village only four times a year to let everyone know that selling drugs is still illegal. The rest of the time, the police allow Christiania to exist as a paradise for soft-drug users.

This tolerance is a hallmark of Scandinavia. The region wants to support all kinds of people and all sorts of behavior, which it does through high levels of taxation and social services. But there’s a restlessness growing now, and its citizens, particularly the young, are beginning to ask, who’s going to pay for all this?

I was pleasantly shocked by Christiania, especially after just having been in Belarus and the three small Baltic states: Lithuania, Estonia, and Latvia. Before World War II, those four nations had been prosperous countries, but the ravages of the war and the decades-long cancer of Soviet Communism left them a dried husk of their former selves. Unlike the rest of Europe, however, Scandinavia has not suffered from this century’s world wars. It has had the chance to develop and maintain an advanced society. After the wild, vast tracts of Siberia, the Dodge City that is Moscow, and the forlorn Baltic states, entering Scandinavia was like emerging into a civilization of a higher order.

A quick story: I got a speeding ticket in Belarus. Then again, I was speeding. I was driving down the autobahn and passed a sign that read, “Workmen ahead, 40 kilometers per hour.” It was Sunday, though, and I didn’t see any workmen, so I continued on at 100 kph. Not surprisingly, the Belarus policeman didn’t see things the way I did. He argued that I should pay five million rubles on the spot, of course. That’s about $10.

What’s so sad about this experience — besides the fact of getting caught! — was that the policeman had no idea how much his own currency had collapsed. In fact, after demanding the initial fine, he changed his mind and lowered it to a million rubles, or two dollars. After all, he said, five million rubles was a bit excessive.

For the moment, Scandinavia is an entirely different world. Of course, most people have nothing but positive things to say about the land of Vikings and cellular phones. Everything is efficient and well organized, from shops to the post office to the railroads to its factories, telephones, and banks. In a shop, every shop, you take a number when you enter, and you’re waited on in turn. It’s a pleasure to be in a place where everything works, as opposed to some of the barbaric hellholes I’ve passed through during recent months.

Industrially, Scandinavia has put itself at the forefront of the modern telephony revolution. On a per-capita basis, Finland and Denmark have more telephones and modems than any other nation-including the United States. Scandinavia’s banks and citizens are far ahead of the rest of the world in electronic banking. It’s often noted in the international press that all four Scandinavian countries-Sweden, Denmark, Norway, and Finland-run a balance-of-trade surplus, and that a single company, Nokia, of Finland, accounts for 25 percent of the world’s sale of cell phones, beating out Motorola of the United States for first place.

And yet, while the nations of Scandinavia have prosperous economies that are on the cutting edge of modern life, there are concerns on the horizon. The Scandinavians have not yet cast off their old love affair with the socialist welfare state. In a world that is more and more dominated by a market economic model that insists each person rely on himself and not the government, these four countries spend so much on social services that it will be highly problematic for them to keep their long-term prosperity intact.

Danish women, for example, can take as much as a year off at almost full wages after the birth of each child. I met a schoolteacher who had not worked for four years-during which she had had four children-but who had collected income during the whole time. Great for her, but is this the best deal for the Danish taxpayer? Most of the unemployed in Denmark collect almost 100 percent of their former salary. That teacher was considering simply going on unemployment after her four-year leave. It’s not clear that any society can afford such a price.

Another example: To keep every last constituency content, Norway builds tunnels to nowhere-bridges and tunnels connecting islands where no more than a few people live. These are not sound economic investments for Norwegian society and only add to its extraordinarily high taxes. Young Norwegians are finally starting to wonder if it’s all worthwhile.

Like many places in the world that I’ve visited, these countries also have a demographic problem. All four have a low birth rate, and all have huge debts, the product of decades of high social and welfare spending. As a result, everybody here knows someone who has left the country, usually because taxes are so high. Like other countries that have experienced a brain drain, many of the best and brightest are abandoning their birthplace for more favorable environments.

In fact, the population was much different from what I expected to find in the land of blond hair and blue eyes. In the 1960s, 1970s, and 1980s, Scandinavia flooded the third world with foreign aid and opened its doors to immigrants from all over. Because the birth rate of the native Scandinavians is so low and that of the new ethnic groups so high, some local commentators predict that by 2025 there will be more Muslims in Denmark than Christians. To my surprise, in Copenhagen I even saw a demonstration for the PKK, the pro-Kurdish group, which was seeking the freedom of Ocalan, the Turkish outlaw rebel.

I can’t help liking Scandinavia, and I have invested here, principally in its smaller banks. But for a region where people don’t move around so much, Scandinavia has not only too many banks but also too many branches. It is simply overbanked, and something has to give. I believe this will result in a number of mergers, at a price that I expect to be greater than what these banks trade for today. Indeed, these four countries lead the world in electronic banking. So while I might advise buying the smaller banks here, I wouldn’t advise investing in the real estate, as there will be a lot of bank leases on the market over the next few years.

Once these small Scandinavian banks merge, the new larger entities will be attractive candidates for purchase by the giant European banks, as the Scandinavian banks will be able to provide not just a great banking base but also expertise in electronic banking, which the larger banks need. In addition to Scandinavian banks, I’ve bought Trelleborg, a mining and metals holding company, and information-technology firm Celsius-both Swedish companies undergoing restructuring after decades of wallowing in Scandinavia’s statist systems.

So there may be stability now, but I see social and political unrest down the road. There’s no escaping from the reality that productive assets, prosperous businesses, and profits are what create prosperity, not the state. Governments with tax rates as high as 70 percent have to realize sooner or later that what they tax will reduce national income. Burdened by an aging population, high taxes, and high debt, Scandinavia is a society vulnerable to the next global downturn. The Asians can and will compete with the Scandinavians on their electronic turf, and the high valuations the Scandinavians now enjoy on their telecommunications companies will suffer.

A prime example of such vulnerability is Ericsson, a modern economic star of Sweden, which, after Nokia and Motorola, comes in a respectable third in world cell-phone revenue. Even so, its ADRs, at $41, trade at a whopping 50 times its 1999 earnings estimates. So in a downturn, the Scandinavian electronics and telephony companies will suffer, as will its paper plants, which will discover that the world doesn’t need as much writing paper or shipping cartons.

There are great opportunities to make money in Scandinavia, but the savvy investor will have to monitor his investments closely and have a wary understanding of the Scandinavian liberal impulses that may well lead it into disaster.

Senior contributing editor Jim Rogers is on a three-year trip to research the state of the world at the turn of the millennium.