NS Essay - There is a law of the Labour back benches: if they do it in Sweden, it must be all right.

So what is the truth about the Scandinavians, so often held up as model social democrats? Anthony Gi

Imagine a country where the following changes have been (or are being) introduced by a centre-left government: choice of primary and secondary schools, along with decentralisation of the education system; choice in healthcare, along with foundation hospitals; welfare reform, geared to making the economy more competitive; conditional unemployment benefits; a drive to get single mothers into the labour force; more early-years childcare; a commitment to balanced budgets; an insistence that immigrants accept the host society's values; a bigger role for the private sector in pension provision.

The UK under new Labour? One might well think so, as this list accurately summarises much of new Labour's programme. But no, the country in question is Sweden, assumed by many to be the most "socialist" society in Europe.

It has been said that "there is a law of the Labour back benches which runs: if they do it in Sweden, it must be all right". Well, those backbenchers had better sit up and listen, because there are close parallels between the current programmes of new Labour and those of the Swedish social democrats - and of the centre left in other Nordic states.

The UK and Scandinavia in recent years (together with some other states, especially the Netherlands) have pursued a different path from the central European and Mediterranean countries, such as France, Germany and Italy. In the former, centre-left modernisation has been more extensive - and also more successful, as measured both by electoral criteria and by the effectiveness of national policies. Some say "modernisation" is an empty term. It is not. It means creating left-of-centre policies that allow more effective responses to the changes transforming contemporary societies. The Nordic social democrats, and new Labour in Britain, have been in the vanguard of such modernisation.

Indeed, ideological revisionism in Sweden preceded by some years Labour's reformulation of Clause Four. And certain Labour policies, such as active labour-market schemes or foundation hospitals, followed Scandinavian models. (The influence the other way round does not seem to have been as great.) Nordic social democracy remains robust not because it has resisted reform, but because it has embraced it.

Though there are naturally differences between them - for instance, taxation takes a higher proportion of GDP in Sweden than in Finland - the Scandinavian social democracies have long shared certain characteristics. In contrast to the Beveridge model, which tends to target benefits upon those in greatest need, the Nordic welfare system has a wider range of universal programmes and benefits. The state is a major employer, particularly of women. The tax and benefits system redistributes substantially, with the result that income inequality is generally lower in Scandinavia than in almost all other parts of the European Union.

The system first came under strain in the late 1970s and then again in the early 1990s, when the Scandinavians faced serious economic problems, marked by financial crises and rises in unemployment. Between 1990 and 1993, Sweden's GDP declined by 5 per cent. Unemployment reached 8 per cent, an increase of 6.5 per cent in three years. There was no extended Thatcherite period in Scandinavia. However, right-wing parties, during short periods in government, introduced a number of reforms. These were at first resisted by the social democrats, but later extended and amplified by them - in the economy, education and healthcare.

Take Swedish schools. Up to the late 1980s, Swedish education was highly centralised. Central government controlled finance, overall educational goals and the curriculum. Yet over the next few years, the school system became one of the most decentralised in the EU. In 1992, education vouchers were introduced, allowing parents a free choice of schools. The vouchers represent up to 75 per cent of the per-student cost of the local state school and can be taken to any approved private school, whether profit-making or not, denominational or not. The Stockholm-based Research Institute of Industrial Economics has found that the competition has led to improved standards in state schools and that vouchers have not led to greater advantages for the more affluent: on the contrary, poor Swedes choose independent schools in greater numbers than rich Swedes.

The reforms were set up by a conservative-led government, but were sustained and amplified under succeeding social-democratic administrations. The number of private schools - privately operated rather than fully privatised: they get state funding according to the numbers enrolled - has grown rapidly. In some urban areas as many as 30 per cent of all children attend them.

Healthcare in Sweden, also previously centralised and bureaucratic, has undergone similar reforms. Local councils now have control, and can experiment with different forms of service provision, contracting out some types of service to non-state agencies. Most have introduced a purchaser-provider split. More than 80 per cent of Swedish counties now have contracts with private providers, and these account for a quarter of all patient visits. Private primary-care doctors receive funding on the same basis as state-employed doctors, according to numbers of patients registered. Patients can choose their physician, whether public or private - a right extended in 2002 to cover doctors anywhere in the country. User charges have been extended: since 1990, the proportion of healthcare spending that comes from private sources has increased from less than 10 per cent to more than 20 per cent, mostly through higher patient charges.

Sweden and Denmark have pioneered foundation hospitals, or their equivalents. They are still in their early stages but the results so far are encouraging. At the Karolinska Institute in Stockholm, for example, waiting times have fallen sharply and the quality of treatment has measurably improved. Alan Milburn studied the Swedish and Danish models when, as secretary of state for health, he was developing his plans for foundation hospitals in Britain.

Choice has been extended beyond education and health. Sweden and Denmark are piloting voucher schemes so that the elderly can choose between providers for home care and other services. As in other areas of the welfare system, the need to economise drives change, as well as the demand for wider consumer choice.

Workfare, or the New Deal, was much criticised when introduced in the UK after 1997 - particularly the changes in the benefit system for single mothers. "New Deal" is an Americanism, suggesting the programme was derived from the Clintonite new Democrats, and so in some part it was. Yet Sweden has had such active labour-market policies for more than 30 years. One of the prime architects of the New Deal, the economist Richard Layard, explicitly drew on the Swedish experience. Other Nordic countries have followed Swedish practice over the past 15 years or so. Danish reforms dating from the mid-1990s, for example, oblige people, after a short period on welfare, to look actively for jobs or to engage in education or training. Otherwise, they risk losing their benefit payments. Finland has introduced similar reforms - and both countries have active labour-market schemes for the disabled.

The Scandinavians, in other words, have recognised that being in work is the best protection against poverty. So 80 per cent of single mothers in Denmark, for example, are in the workforce, a far higher proportion than in the UK. High-quality, subsidised childcare helps make this possible, but there are private as well as state providers and there are also user charges. The norm in Sweden and Denmark is that parents pay a third, the state two-thirds. Single mothers in Denmark, however, pay nothing.

All these changes remain controversial in Scandinavia. Critics say that the ethos of the Nordic welfare state has been undermined and point to evidence of increasing inequalities. The Gini coefficient (a statistical measure of inequality where 0 would denote perfect equality) rose from 0.28 to 0.33 in Sweden between 1991 and 2000; inequality also grew in most other industrialised countries over this period. The real point of the reforms, the critics say, has been to cut back on costs: as a consequence, previously "free" facilities are weaker and welfare benefits are lower.

Yet the view that the policy innovations are retrograde and purely defensive does not stand up to scrutiny. Like all western countries coping with profound economic and social changes, the Scandinavians had to adapt to survive. Keynesian demand management, the chief means of sustaining full employment in the postwar welfare state, no longer works in today's globalised markets. Citizens will no longer accept a top-down approach to social problems; they want empowerment and choice. There are no wholly satisfactory solutions in these changed conditions, but the Scandinavians have responded more effectively than most. They have set up a new model - one that has found a balance between economic success and social solidarity.

Swedish social democracy also stood in need of reform because, for 30 years, the country had been slipping more or less continuously down the league table of prosperity. In 1970, Sweden's GDP per head was the third-highest in the world; by 2000, it had fallen to 17th. Many blamed this decline on high levels of taxation, on welfare feather-bedding, or on both. And Sweden certainly has one of the world's highest taxation rates, reaching a peak of 53 per cent of GDP in 1998, and still standing at just over 50 per cent. The comparable figure for the UK in 2003 was 41 per cent - a figure that had risen under new Labour from well under 40 per cent.

It should be noted, however, that differences in actual social expenditure are smaller than these gross comparisons suggest, because they do not take account of taxes on benefits and tax breaks. For example, social benefits in Denmark are taxable, whereas in the UK by and large they are not. Gross public expenditure for 2002 was 24 per cent of GDP in Britain, and approximately 36 per cent in Sweden and Denmark. Net public expenditure - what a country actually spends on social and welfare benefits - brings the UK much closer to the Scandinavians, the net figures being 22 per cent and roughly 27 per cent, respectively.

Overall taxation rates may eventually have to be lowered further to reverse Sweden's relative economic decline. Yet the country seems to be faring well. Its economy is healthy, its unemployment rate low, its growth rate reasonable. The other Nordic countries are also doing well. They have maintained growth rates above the EU average during the recent global economic downturn; except in Finland, they have low unemployment and, just as important, high rates of employment; and they have adjusted their public finances to avoid long-term debt.

They are struggling to cope with their growing ethnic minorities and the challenge of integrating them into the wider society. However, rates of poverty, including child poverty, in Scandinavia continue to be the lowest in Europe. Inequality may have increased in some ways, but the Scandinavians remain remarkably egalitarian by international standards, and certainly, despite new Labour's progress in cutting poverty, by British standards.

What lessons can Britain learn? One is that Nordic egalitarianism comes not just from progressive taxation, but from policy. New Labour may need to embrace the virtues of welfare-state universalism. Welfare-targeting and means-testing have increased under this government, partly because of the role played by tax credits. But British ministers are learning that some services are stronger as well as more equitable if provided universally - even if there is an element of charging. Their commitment to universal, full-time childcare is an encouraging move in this direction.

Yet, whatever new Labour does, the UK is not about to become like Scandinavia. All students of welfare agree that some aspects of Scandinavian social democracy cannot be exported, including the high levels of taxation. The UK has to find its own balance between economic competitiveness and social solidarity. Its starting point is quite different. It is a country which, until recently, had a poor economic record, much higher levels of inequality and decaying public services. The Scandinavians have been adapting an already more advanced form of social democracy to a changed social environment. The parallels are striking, however. The Scandinavian example should put to rest the claims that new Labour has abandoned its core social-democratic principles, or that there is a leftist formula that it is failing to follow.

There is no way back to old Labour, or to classical social democracy. Modernisers of the world, unite!

Anthony Giddens, former director of the London School of Economics, is the author of The Third Way (Polity Press, 1998)