As a small nation with a population of 5.4 million people, Denmark sits with the prosperous nations of the world and has done so for more than 35 years. Its economy rests on the pillars of high wages, narrow income disparities, investment in skills and education, and high levels of taxation to fund an advanced welfare state. These pillars are typical of all five Nordic countries. Though compared with other small countries like Sweden and Norway, Danish political history is characterised by a number of distinct traits. First, a long history of lost wars and territories carving into the public mind a sense of national vulnerability making it possible to establish a common and widely accepted understanding of national identity. Secondly, a history of state authority being centralised in the hands of a relative small elite enabling this to run the country based on national strategies and interests. Thirdly, a history of being a small and open economy emphasising the need for politicians to base their conflicts on politics of pragmatism rather than on politics of ideals or ideologies. Fourthly, a political culture marked by institutionalised class co-operation and a high proportion of organised wage earners making it possible for governments and peak organisations to institutionalise macro policy concertation in the form of routinised bargaining. All these traits belong to the long history of the Danish nation. In the following, I will distinguish between the long and the short history in an attempt to explain why Denmark – as a small country located in one of the most dangerous geopolitical centres of the world – has been able to survive as a state and even prosper to become one of the richest economies in the world. Among these four traits one explains this paradox of vulnerability and success better than the rest: Being a small land with a long history of lost wars and territories creating a sense of national vulnerability explains why the national identity has developed to become relatively homogenous and the political system has evolved to be based on a culture of negotiation and compromise rather than competition and confl ict.
      Skagen – the small town at the Northern tip of Denmark – is a well chosen example of this paradox of success and vulnerability.

SKAGEN – AN EXAMPLE
Skagen is one of the beautiful places of the world. It lies between two seas – the North Sea on the one side and the Kattegat on the other. The northern tip of Denmark stabs between the two seas like a curved bough, with England to the west, Norway to the north and Sweden to the east. At Skagen’s widest point, there are only a few miles between the two seas; at Skagen’s tip, the two seas collide with violent force. Artists, authors and royal families have been drawn to Skagen for more than a century in a romantic celebration of the sea and the sky. Skagen is more than sea and sky, however. I was born in Skagen and my own memories of Skagen are mixed. In the 1950s and 1960s, Skagen was one of Europe’s largest fishing towns. The city was home for roughly 500 fishing boats and trawlers from Norway, Scotland, the Soviet Union and Sweden were landing fish from the North Sea, the Norwegian Sea and the Arctic Ocean. The massive fishing industry created jobs and wealth for the town. In the town there was a stink of fish, which was commonly referred to as “the smell of money.” This wealth also created class divisions. My memories from that period are mostly of rotting fish and an awareness of the difference between “the others,” who were rich, and the ordinary people like me, who were not. But for centuries, Skagen has been at the centre of the geopolitical conflicts of the great powers. The mightiest navies in the world have sailed past and weighed anchor. Similarly, fishermen from around the world have landed their catches and come in to rest after long journeys. Long before there was any talk of globalisation, Skagen was home for a plethora of languages and international trade; and as long as Denmark has been nestled in the midst of one of the world’s most explosive geopolitical centres, The Skagerrak has played a central role in international conflicts. This was where fishermen could report on how Admiral Nelson’s British fleet had course towards Copenhagen during the Napoleonic Wars; and this was where Hitler’s Wehrmacht constructed the most fortified part of his “Festung Europa” with heavy artillery, armoured bunkers and anti-aircraft batteries. And this was the spy-hole from which NATO could observe the Soviet fleet on its way up the Norwegian coast towards the Norwegian Sea and the Arctic Ocean.

DENMARK – A NEGOTIATED ECONOMY
Denmark – in the centre of global trade and geopolitical conflicts – in many ways explain the need for politicians and citizens alike to build a negotiated economy, where an essential part of social conflicts are dealt with through historical compromises and where the allocation of resources is conducted through organised negotiations between trade unions, employers associations, and governments alike. For a country under the spell of greater nations and located in the centre of international trade historical compromises have been widely used as an instrument for solving social conflicts and securing survival. The first classical example is the politics of collaboration with the Hitler’s Germany under the Second World War. During the occupation 1940-1945, the Danish government collaborated with the occupation forces and was able to create an image of Denmark as a sovereign country even when occupied; a strategy later followed during the cold war when Danish sovereignty was guaranteed mainly by NATO and US forces. The second classical example is the labour market. Wages, working hours, and other conditions of work are generally determined neither by individual market agents nor by legislation, but rather through organised negotiations between collective organisations. The third example is the welfare state. Income expectancy, social security and other conditions of welfare are generally determined neither by family fortune nor by social coincidence, but rather through a universal welfare system based on high taxes.
      More than in other countries, negotiation appears as an appropriate instrument for securing the state and for solving conflicts of interest in the Danish case. Over a history of more than 100 years, a particular system for political and economic governance has been build making negotiations a mechanism for the (re)allocation of resources and the (re)distribution of political power. The building of a negotiated economy in many ways is the basic feature explaining the Danish road to success. As such a negotiated economy is not only an instrument to (re)allocate resources; it is also an instrument for achieving mutual understanding as well as an instrument to assure social peace. It involves the development of a shared mutual understanding of Denmark’s vulnerability and a common understanding of the need for the country to adapt to ever changing shifts in external conditions. It creates social cohesion through an agreed upon (re)distribution of social privileges and social equality through a negotiated (re)allocation of welfare benefi ts and social goods.

HISTORICAL COMPROMISES
In Denmark, the most important requirements for a negotiated economy were established more than 110 years ago when representatives for labour and capital signed The September Agreement in 1899. This Agreement though is only the first of three historical compromises, which created the prerequisites for a negotiated economy. Historical compromises are historical in the sense that they impact the distribution of economic and political power. They are also historical in the sense that looking back from the present they can be seen to have established a legacy or a path followed subsequently by important actors whether involved in macro or micro economic decisions. The September Agreement had three decisive consequences for the distribution of economic and politic al power still of importance today. First, the Danish labour market became collectively organised. Second, industrial conflict became institutionally isolated. Finally, authority was delegated from the Parliament to the labour organisations to regulate, judge, and sanction the relations between employers and employees. Based on this particular institutionalisation of class conflict a second historical agreement was worked out in the 1940s during and immediately subsequent to the German occupation of Denmark. The Post-War Agreement entailed that the Danish economy would be opened to the world outside and that this opening would be followed by the establishment of a welfare state directed at facilitating the geographic and functional mobility of the labour force. Labour market policy became the most important policy in the welfare state and the coordination of collective agreements with policies to fight unemployment was to be conducted via negotiations between the government and peak organisations. The third historical compromise occurred at the end of the 1980s but followed the power distribution already established by The September Agreement. The Monetarist Agreement dealt with the overall monetary and fiscal stability of the Danish economy vis-à-vis other selected countries. It involved the peak organisations’ de facto acceptance of the policy that the currency should be pegged to the Deutschmark, and that capital markets should be liberalised and a radical program for fiscal retrenchment should be entailed. These three historical compromises together established the preconditions for the present Danish paradox: How one of the worlds most open economies can house one the world’s biggest welfare states and still be among the world’s most prosperous nations!

DENMARK – A SUCCESS TODAY
Today Denmark is noted for its extraordinarily high tax rates, its large welfare state, and its hefty regulatory burden on business. Yet more than ever Denmark continues to compete successfully against the other advanced capitalist economies. This is puzzling from many perspectives. For example according to mainstream economic theory a national economy is supposed to need exactly the opposite tax, welfare, and regulatory policies in order to compete successfully in the global economy. How does Denmark manage to defy this prescription and be so successful? I will argue that Denmark’s success is based to a significant degree on its institutional competitiveness, by which I mean its capacity to achieve economic success as a result of its negotiated economy and the political, economic, and cultural institutions this entails.
      Institutional competitiveness stems from the benefits that firms derive from operating within a particular set of institutions-benefits that afford them advantages over their competitors. For example, if firms operate where labour unions are well organised rather than weak, where centralised corporatist combined with firm-level wage bargaining is the norm then firms are more likely to experience co-operative relations with their employees. If firms operate where training and educational systems are negotiated at the national level and offer nationally coordinated apprenticeship programs rather than just general education as in USA for example, then their employees may be better trained to begin with and may have greater opportunities for upgrading their skills throughout their careers. If firms operate where finance capital tends to come from pension funds and collectively negotiated investment schemes rather than stock markets, then they may be less pressured to maximize profit in the short term and more likely to take a more patient view that emphasises increased market share, investment in research and development, and long-term growth. And if firms operate where employers are well organised rather than weak, where businesses are part of corporative arrangements rather than not, then firms are much more likely to take part in subsidised jobs and training programs for the long term un-employed and participate in active labour market programs. Briefly speaking, if firms operate in an environment of a highly skilled labour force, patient investment capital, and co-operative labour-management relations then they are institutionally competitive and their competitive advantage stems from the institutions within which they operate.
      To illustrate this point, I will provide three examples of how institutions helped Denmark to achieve its economic success during the last twenty years. Specifically, I will discuss the institutional underpinnings of labour market policy, training and skill formation policy and structural policy.

LABOUR POLICY – FIRST EXAMPLE
In the area of labour market policy, the Danish approach has generally involved a blending of elements from a liberal market economy and a mixed economy. Danish labour market policy during the 1990s has been described as a system of “flexicurity”. The combination of secured, but flexible employment contains three institutional elements in the Danish case. First, by European standards Danish employees enjoy quite low levels of employment protection. Hence, employers have much latitude to hire and fire workers in response to market signals as is typical of a liberal market economy. However, workers are not left alone to manage such employment uncertainties. So, second Denmark offers generous unemployment policies, health insurance, and other welfare benefits, as is often the case in mixed economies, to ensure that when workers become unemployed they have a social safety net that is substantial enough to protect them and their families from some of the worst problems associated with unemployment. Third, and again rem iniscent of mixed economies, Denmark has developed a set of active labour market policies that help workers obtain new skills and training so that they can return to work. Workers also receive assistance and encouragement in locating job opportunities for which they can apply. The flexicurity system points to Denmark as a negotiated economy rather than a liberal or mixed economy. And in recent years, as a result of labour market reforms and corporatist bargaining, important elements of the welfare programs, the active labour market policies and the collective agreement system have been decentralised to the regional level and the level of single firms and companies. This has had the advantage of infusing the system with an additional element of institutional flexibility that seems to better fit the needs of employers who are trying to adjust to the global economy. Indeed, it appears that this decentralised flexicurity system has contributed significantly to Denmark’s relatively low unemployment rates during the 1990s. The point, of course, is that without both welfare and active labour market policies and wage and other agreements it is not clear that Danish economic performance in this regard would have been as impressive as it was. Hence, the flexicurity system constitutes a vital component of Denmark’s institutional competitiveness.

VOCATIONAL TRAINING – SECOND EXAMPLE
Underneath the high flexibility of the labour force is a vocational training system that equips workers with general skills that makes it much easier to find jobs and acquire firm-specific skills, when re-employed. So, the second example of institutional competitiveness is the system that allows Danish firms to benefit from workers that work with high discretion, great flexibility and ease of co-operation with other professions. During the late 1980s and the beginning of the 1990s, the vocational training system underwent a reform mainly through collective agreements. First, by making trainingagreements, unions and convenors in collaboration with managers upgraded skills of blue collar workers, while simultaneously introducing new types of work organisation (teams, lean-production, and etcetera). This allows not only for a very successful adaptation to IT technologies in firms but also for novel ways of searching for continuous improvements without enlarging administrative hierarchies. Second, it provides a system that can be used on a wide scale to upgrade skills of workers, when unemployed, so that they will return to active employment equipped with novel technological skills and better abilities to understand the new, emerging work practises and forms of organisations. Thirdly, and as a consequence of the first two points, Denmark has unintentionally invented a countercyclical system that allows for upskilling of workers on a broad scale during a crisis, making the country ready to benefit fully from a coming boom. This unintended function of the system becomes in particular clear, when the Danish vocational training system is compared with Germany, also a high-skill system. However, when economic activity decreases in Germany, training declines as well, because it is dependent on how many new workers firms employ. By recruiting apprentices through vocational training institutions, by filling classes through an active labour market policy and by sending redundant workers in firms to further training courses for a period, Denmark actually makes use of cyclical downturns in a very dynamic and creative way.

STRUCTURAL POLICY – THIRD EXAMPLE
A third example of institutional competitiveness is the development of a structural policy. The structural policy has a rather long history from the 1970s until today and the clearest example is probably the public sector modernisation policy since 1985. Here policies were not only institutionalised that attempted to limit public expenditure and to make the public sector more efficient, several programs and plans were also initiated to promote experimentation with new types of public sector governance and new relations between public and private bodies. In 1990s and further on, these reforms were eventually institutionalised through experiments in contracting out the provision of public services to the private sector, various forms of public utility privatisation, and establishing contractual arrangements between ministries and government agencies. The development of structural policy during the 1970s, 1980s and 1990s was a deliberate attempt to reform the public sector with the intent to enhance the competitiveness of the whole economy by creating competitive advantages for the private sector. The structural policy then is an example of how the institutional competitiveness of the whole Danish society has become a topic for policymaking and a comparative advantage in itself. In the Danish political system awareness exists of the competitiveness of the Danish society which makes it possible to develop national strategies through negotiations between unions, employers, political parties and governments for how to use the public sector and the welfare system – its organisations and resources – to create competitive advantages for private firms and companies.

INSTITUTIONAL COMPETITIVENESS
So far I have argued that Denmark’s success as a nation has been based on “soft factors” – on its negotiated economy; its capacity to achieve economic success as a result of the competitive advantages that firms derive from operating within a particular set of political, economic, and cultural institutions. It has long been recognised that small advanced capitalist countries with open economies, like Denmark, are fundamentally different from large ones. Small countries are both more vulnerable to changes in the international political economy and must be capable of flexible adjustment in order to respond to international challenges. In turn, flexible adjustment requires political and economic actors to engage in policy learning and negotiation. To put all of this into somewhat broader terms, the negotiated economy and the related institutional advantages, is based on a model of stakeholder capitalism where the interests of the fi rm’s stakeholders are well represented in national, regional, and local strategies for the enhancement of comparative advantage for firms and industries alike. All three examples above are pointing in this direction: In a negotiated economy comparative advantages are developed collectively by decision making involving firms, business associations, labour unions, other interest groups, politicians, and state bureaucrats. And that given the attention to stakeholders a negotiated economy can provide capacities for policy learning, national leadership, and coordination across policies through deliberations and discussions that help a wide variety of actors reach collective understandings and agreements with each other. In other words, deliberation can enhance the capacity of actors to cope with new or unfamiliar challenges by enabling them to develop a common diagnosis of the situation and agree to a collective response. And it can enhance support among business and other groups for social policies that build social cohesion and trust. This sort of deliberation, trust, and cooperation, which is formally institutionalized and culturally sanctioned in Denmark’s negotiated economy, provides the possibility for the sort of learning and flexible adjustment required by the Danish firms and companies to operate in global markets and to do so successfully.

DENMARK – THE BLEAK SIDE
Though, even if Denmark by many accounts is a very successful country it also has its bleak sides. The positive side of Denmark is its political stability, social equality, high growth rates, industrial modernism, and the consensus-oriented tradition for dealing with social confl icts through negotiations and compromise. The negative side is that of relatively high rate of exclusion from the labour market, combined with relatively high mortality rates, stress-related illnesses, and problems related to the different lifestyles of those who are socially included as opposed to those who are socially excluded.
      Once again Skagen is a well chosen example. Even if my memories from the 1950s and 1960s are mixed, today Skagen is much changed. Today Skagen is like a museum of days long gone. De-industrialisation and the end of the cold war have made its marks. Today, one can spot Russian tankers transporting oil from St. Petersburg to the global market as well as convoys and containerships from all over the world serving the global economy. But in contrast to earlier times, all sail past and none weighs anchor. Today Skagen has lost its position as a geopolitical centerpiece. No fleets are passing and no spies are flocking. Today Skagen is only blooming in the tourist season and most of the year the streets of Skagen are deserted. The hospital has been closed as has the police station. There are not many fishing boats. Those working are few. Most of the town’s labour force has been excluded by international competition moving the fishing industry to other countries and establishing a labour market demanding flexible, highly skilled workers able to up-grade their competences constantly. The excluded instead are rendered dependent on social benefits and now – very much in difference to earlier times – the welfare state is the town’s single greatest employer as well as the town’s most important source of income. The “included” and “excluded” live in harmony on the surface, but with considerable differences in terms of their quality of life. In Skagen, the long history of Denmark meets the short history of the global economy, sometimes in ways that reflect the new class structure – and even sometimes the class conflict – of the negotiated economy. Indeed, during the summer, Skagen is hectic and occasionally violent – at least when local youth confront the rich outof- towners. “No big problem”, as they say in Skagen. Perhaps! But one wonders whether Skagen provides a glimpse of how the short history may affect the future of the negotiated economy. Will it make it or not? As every other economy the Danish has not always and at every period in time been a success. In the 1970s, Denmark went through a major economic crisis as it also did in the 1950s – every time forcing the partners of the negotiated economy to renegotiate past compromises and to fi nd new solutions to old challenges – being vulnerable.
      So, today once again there is pressure on the negotiated economy elite to come up with strategies and programs. In previous periods, they were obliged to interpret the geopolitical situation and to find ways to secure the survival of the nation. Today they are obliged to monitor the global conditions for competition, analyse them in the light of past experiences, and convert this knowledge into national strategies for institutional competitiveness. At the same time, they must do so while obtaining legitimacy from a population where two-thirds are working more and more efficiently to compensate one-third for being excluded. They must also decide how the unemployed are to be activated and how the unemployable are to be compensated through welfare benefits. In the short history, social appeasement is associated with economic engineering; and the enhancement of legitimacy is linked to the never-ending search for comparative advantages. Denmark is not only a negotiated economy it is also an experimenting economy. And its economic growth and welfare depends on the ability of the elite to make the right choices.

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