Sweden and the Revival of the Capitalist Welfare State

For some, Sweden is proof that a generous welfare state is fully compatible with a growing competitive economy. For others, it is a frightening example of what big government can do to a once thriving economy. Sweden and the Revival of the Capitalist Welfare State tackles a number of controversial questions regarding Sweden’s economic and political development: How did Sweden become rich? How did Sweden become egalitarian? Why has Sweden since the early 90s grown faster than the US and most EU-countries despite its high taxes and generous welfare state?

Andreas Bergh, Lund University and Research Institute of Industrial Economics uses new research on institutions and economic reforms to explain the rise, the fall and the recent revival of the Swedish welfare state. The central argument is that a generous welfare state like that of Sweden can work well, provided that it is built on well-functioning capitalist institutions and economic openness. The book explains how Sweden developed from a poor and highly unequal society to one of the richest and most egalitarian countries in the world by building a universal welfare state on a capitalist foundation. It also engages in an important discussion about the current and future challenges for the welfare state in general.

Sweden and the Revival of the Capitalist Welfare State

The Welfare State and Economic Performance

  The so-called Nordic model is well known for relying on a large public sector and pursuing egalitarian objectives, and yet average incomes are among the highest within the OECD. How have Sweden and the other Nordic countries managed to square large public sectors and high tax burdens with comparatively strong economic performance?

Professor Torben M. Andersen in a new report to the Swedish Long Term Survey investigates theoretical and empirical findings on the relation between the size of public sector and economic performance measured in terms of e.g. per capita income or growth. He concludes that The Nordic comparative position with respect to both economic performance and inequality reflects policy designs. Underlying this are several factors. One is that an extended welfare state relies on a high employment rate. If the employment rate falls, tax revenue decreases and social expenditures increase. Therefore the model has a built-in requirement of an employment focus. Likewise, being small and open economies facing international competition has been a background factor all along.

In a forward perspective some of the trends to be coped with are ageing, globalization and requirements to publicly provided services. These challenges are as such global and not specific to the Nordic model, and some countries face larger challenges than e.g. Sweden and Denmark, which have been front-runners in pension reforms. The quest is to find solutions in accordance with the goals of the Nordic model.

The Welfare State and Economic Performance

 

The Economist: The Nordic countries - The next supermodel

In a new special report the Economist gives praise to the Scandinavian countries:

"If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking. The Nordics cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality. Development theorists have taken to calling successful modernisation “getting to Denmark”. Meanwhile a region that was once synonymous with do-it-yourself furniture and Abba has even become a cultural haven, home to “The Killing”, Noma and “Angry Birds”."

The Nordic countries - The next supermodel

LARS CALMFORS: SWEDEN - FROM MACROECONOMIC FAILURE TO MACROECONOMIC SUCCESS

In this nice paper Professor Lars Calmfors takes a close look at the remaking of the Swedish econonomy and draws interesting conclusions:

» There is only limited support for the hypothesis that fundamental reforms require a deep economic crisis. Instead, most of the reforms in Sweden have been responses to long-standing problems rather than to acute crises.

» In most cases, there has been a strong perception among economists, policy makers and the general public of the problems that the reforms have sought to address.

» International developments have been important inspirations for many of the reforms. This holds true above all for the product and service market deregulations.

» Most of the reforms have been based on a broad political consensus. This is true for the tax reform, product and service market deregulations, the pension reform, the central bank reform and the establishment of a stricter fiscal framework.

» The Swedish experiences illustrate a number of ways of overcoming resistance to reforms from vested interests. The Swedish experiences illustrate a number of ways of overcoming resistance to reforms from vested interest. They include compensating transfers to potential losers (in the case of tax reform), strong ex-ante commitment (sometimes with the help of cross-party agreements or EU rules as discussed above, sometimes − as with the general labour market reforms − with the help of widely publicised pre-election promises), and complexity of the reforms making it difficult for the general public to see through them (as was probably the case with the pension reform).

Lars Calmfors: Sweden - From Macroeconomic Failure To Macroeconomic Success

LARS CALMFORS: WHAT CAN EUROPE LEARN FROM SWEDEN?

In this paper Lars Calmfors, Professor of International Economics, argues that Sweden provides an example that fiscal transparency and a high-quality economic policy debate may be more important for budget discipline than formally binding rules and automatic correction mechanisms as being envisaged in the European fiscal compact.

Lars Calmfors: What can Europe learn from Sweden? Four lessons for fiscal discipline

NORTH STAR

The Economist notes that unlike much of the rest of Europe, Sweden is roaring ahead. Sweden learned a lot from its banking bust in the early 1990s. Budgetary rules and bank supervision were strengthened, helping to avert the risk of another bubble. Tight fiscal policy has pushed the public sector’s share of GDP down to only just over 50%. Without dumping the generous Swedish social model, the government has tweaked it in the direction of lower taxes and smaller welfare benefits. The results have been spectacular. After long being a case study in jobless growth (except in the bloated public sector), Sweden has become a big creator of private-sector jobs.

The Economist: The Swedish Economy

THE SWEDISH PIPPI LONGSTOCKING ECONOMY

At Davos, Bill Clinton, OECD:s secretary general an many others praised the Swedish economy. Gurria said that Sweden’s enviable situation is not a stroke of luck. The very severe crisis Sweden endured in the early 1990s triggered major reforms. Some of them have been painful but they helped put Sweden on a path of sustained and sustainable growth. And they served Sweden well to weather the recent global financial and economic crisis.Today, the Swedish economy looks as strong as Pippi Longstocking, the famous Swedish fictional character you know so well. It is important to keep up this strength, which stems from the ability to undertake ambitious reforms, even if they are socially or politically costly and if their positive effects are felt mostly in the medium- to long-term.

Angel Gurrías Speach

IS HEAVY TAXATION BAD FOR THE ECONOMY

Half a century ago, in 1960, taxes totaled about a quarter of GDP in Denmark, Sweden, and the United States. The tax take then began to rise in Denmark and Sweden, reaching half of GDP by the mid-1980s, where it has remained. In America it has barely budged, hovering between 25% and 30% of GDP throughout the past five decades. At what point does the harmful impact of taxes on the economy kick in? And how large is it? The Danish and Swedish experiences over the past generation pose a challenge for those who believe the answers to these two questions are “somewhere below 50% of GDP” and “large.” It’s a challenge that in my view has yet to be met.

Lane Kenworthy Consider the Evidence Blog

EMPOWERING WOMEN ECONOMICALLY, SWEDEN ON TOP

Using the Economist Intelligence Unit’s new Women’s Economic Opportunity Index as a guide, Sweden, Belgium, and Norway occupy the top spots. These countries have particularly open labour markets for women, high levels of educational achievement, and liberal legal and social regimes.

Martha McCubbin, Project Sydicate

ASSAR LINDBECK: THREE SWEDISH MODELS

According to Assar Lindbeck, there has been much talk, in Sweden as well as internationally, about a so-called Swedish economic model. But it is misleading to refer to one single economic model in Sweden. The economic system in Sweden has varied a great deal over time after the (late) industrial revolution in the second half of the 19th century. Although it is hazardous to divide the economic development in a country into different historical periods, it may be instructive to differentiate between three periods in Sweden – and hence three different Swedish mode

Lindbecks paper

JENS HENRIKSSON: TEN LESSONS ABOUT BUDGET CONSOLIDATION

Mr. Jens Henriksson, former state secretary at the Finance Ministry, share his experience of the huge budget consolidation i Sweden in the 1990s in

Jens Henriksson Bruegel lecture.

FINANCE MINISTER BORG: GETTING FISCAL CONSOLIDATION RIGHT: LESSONS FROM SWEDEN.

Mr. Anders Borg shares some lessons from the Swedish experience of dealing successfully with the fiscal deficits and mounting debt in the 1990s.

Anders Borgs speech at he London School of Economics.


ARI KOKKO GIVES A BROAD REVIEW OF THE SWEDISH MODEL

According to Kokko, the main characteristics of ‘the Swedish model’ are arguably related to the country’s knowledge-intensive industry and its advanced welfare state. The purpose of this paper is to discuss the historical development of these two features of the Swedish economy. The final part suggests some policy conclusions for today’s developing countries and emerging economies.

Working Paper No. 2010/88

IS SWEDEN STILLTHE MIDDLE WAY?

Marquis W. Childs book got a tremendous amount of attention in the 1930's, Sweden: The Middle Way. The book’s thesis was, in short, that Sweden had found a uniquely effective way to deal with social and economic problems, a way that, according to Childs, put Sweden between the United States’ ”concentration of economic power in the hands of a few men” and ”the trials and hardships in Russia.” Sweden still is one of the most competitive economies. Author and journalist Per T Ohlsson notes in this speech that many Swedes are slowly starting to realize that no country, not even Sweden, is an island and that we do have some rather grave problems that have to be overcome, regardless of who’s in government, if we wish to maintain our competitive status and our social cohesion.

Ohlssons Columbia speech

THE SWEDISH MODEL REVISITED

In this book, the Institute for Futures Studies presents papers discussing issues as End of Equality?, The changing geography of state activity in Sweden. The purpose is to describe the changes in the Swedish model in a broad sense, even though the format does not permit an exhaustive account, and discuss it with an eye to current dilemmas and future challenges.
The Swedish Model, International edition 2008

READINGS ON THE SWEDISH BANKING CRISIS

There are several excellent papers in English on the Swedish banking crisis. Probably the most often quoted are:

Englund, Peter: The Swedish Banking Crisis: Roots and Consequences. Oxford review of economic policy, vol 15, no 3 1999.

Ingves, Stefan: The Management of the Bank Crisis – In Retrospect. Quarterly Review 1996:1. Sveriges Riksbank.

Andersson, M., Viotti, S.: Managing and Preventing Financial Crises- Lessons from the Swedish Experience. Quarterly Review 1999:1. Sveriges Riksbank.

Other interesting papers and speeches are:

Ending The Banking Support. Ministry of Finance. Memo Ds 1995:67

Drees, B., Pazarbasioglu, C. : The Nordic Banking Crisis: Pitfalls in Financial Liberation. Occasional paper 161, IMF 1998.

Bäckström, Urban: Financial Crises: the Swedish experience. Speech November 1998. Sveriges Riksbank

Heikensten, Lars: Financial Crisis - Experiences from Sweden. Speech July 1998. Sveriges Riksbank

Ingves, Stefan: The Nordic Banking Crisis from an International Perspective. Speech Oslo, September 11, 2002

Bergström, C., Englund, P., Thorell, P.: Securum and the Way out of the Swedish Banking Crisis. SNS 2003

Ingves, Stefan: Can the Authorities Manage Crisis in the Financial System? Speech March 2008. Sveriges Riksbank.

Lundgren, Bo: How to tackle a financial crisis - The case of Sweden in the 1990s. Speech notes September, 2008

Bildt, Carl: Sweden´s crash and recovery. International Herald Tribune 28 September, 2008

Another new paper comparing banking crisis is:

Reinhart, C., Rogoff, K.: Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison

FINANCE MINISTER BORG'S VISION

In this draft paper presented in Helsinki, june 2007, the Swedish Finance Minister Anders Borg comments on why the Swedish model worked, presents the new centre-right government employment stategy and discuss what makes a reform happen. Borg concludes that a policy for employment and less exclusion is a moral imperative, not only a financial necessity. Higher employment increases welfare, smooths income differences and creates resources to improve the welfare sevices.

Reconstructing the Swedish Model - Challenges and Priorities

See also:

"Re-establishing the Swedish Model", speech by Mr. Borg at the Economist Business Roundtable, March 5, 2008

THE NORDIC MODEL IN URGENT NEED OF REFORM

In this interesting report from the Research Institute of the Finnish Economy (ETLA) six researcher from the Nordic Countries, from Sweden professor Hans Tson Söderström, take a closer look at the characteristics and performance of the Nordic approach. They conclude that there is indeed a Nordic model, that the model has performed well in the past but todays challenges give rise to urgent need for reform.

The Nordic Model: Embracing Globalization and Sharings Risks

COHEN: LOOK AT RADICAL REFORM

Roger Cohen, columnist in NYT, advises in this friendly Op-Ed presidential candidates Clinton, Edwards and Obama to make a stop in funky Stockholm, to look at the radical reform of the generous welfare state implemented by the new center-right government - and the strong economic performance of Sweden.

The Nordic Option

BAKER: A "MODEL" RECONSTRUCTION

Josiah Baker, researcher in Swedish economic policies, quotes in the Washington Times Finance Minister Borgs plan to reconstruct the welfare state, a quiet revolution of privatization, tax reduction and deregulation.

Sweden's turn from socialism

THE ECONOMIST: SWEDEN MASSAGING JOBLESS FIGURES

In a fairly sceptical review the Economist blames Sweden for being "a world champion at massaging its jobless figures", and the two big failings in the Swedish model are poor employment record and the very large public sector

Admire the best, forget the rest

SCHMITT: IS MCKINSEY RIGHT ?

John Schmitt at the Center for Economic and Policy Research, a think tank i Washington, D.C., argues that the McKinsey-method, that estimated 15-17 percent unemployment in Sweden, would find 13,8 percent unemployment i USA (including jail-population 15,2 percent).

Is the Unemployment Rate in Sweden Really 17 Percent

MCKINSEY: TRUE UNEMPLOYMENT 15-17 %

The McKinsey Global Institute in a frequently cited follow up study of Sweden 2006 gives credit for productivity growth and macroeconomic stability but exceptionally high taxation on labor and microeconomic inflexibility restrain development and contribut to a "de-facto" unemployment rate between 15 and 17 percent.

Sweden's Economic Performance: Recent Development, Current Priorities

LINDBECK: A RETURN TO LIBERAL REGIME

Assar Lindbeck, highly respected Swedish economist, argue in this short commentary that Sweden has seen three different "models" since the late nineteenth century: the "liberal" period (1870-1960s), the welfare expansion (1960s-1985) and the deregulation period after 1985 with a return to a more liberal economic regime.

The Three Swedish Models

CALMFORS: THINGS TO LEARN, BEWARE OF OVERSELLING

In this chapter in EEAG:s 2007 report, Lars Calmfors gives an excellent and balanced analysis of the economic achievement of the Scandinavian countries Sweden, Denmark and Finland. There are things to be learned for other countries but in the debate there is also some overselling, he concludes.

Scandinavia today: An Economic Miracle ?


DAVIS ET AL: TAXES PARTLY EXPLAIN JOBLESS GROWTH

This NBER-paper from Steven Davis and Magnus Henrekson finds many explanations for the weak market work performance in Sweden after the crises, as still high tax on labour, consumption and business, wage setting mechanisms etc.

Economic performance and work activity in Sweden


SACHS: NORDIC MODELS NO “ROAD TO SERFDOM”

Jeffrey Sachs argues in this article 2006 that high taxes and generous welfare states are not a “road to serfdom”, as Hayek suggested, the Nordic economies successfully combine dynamism, economic prosperity and social justice.

The social welfare state, beyond ideology


WOLF: MATERNAL STATE GONE TO FAR

The influential columnist Martin Wolf in Financial Times claims in this article 2006 that the maternal Nordic states fails, as their long run performance shows.

Decay and the welfare state

SINN: FAKE JOBS IN SCANDINAVIA ADD TO GDP

The director of the German IFO institute Hans-Werner Sinn claims in this article that government demand for labour in Scandinavia keeps wages high and inflate GDP, since wages are paid regardless of how useful and productive the government jobs are – but its better that market decides using subsidized wages.

Scandinavia’s Accounting Trick


FREEMAN ET AL: REFORMS FOR REVIVAL

This follow-up of the first influential NBER-report from 1997, US and Swedish economist again 2006 analyze the broad macroeconomic and structural reforms in Sweden after the crises in the 1990s and conclude that the reforms have contributed to a revival of growth and economic progress, but more needs to be done (papers in English, report in Swedish).

Reforming the Welfare State


MUNCHAU: DEVALUATION EXPLAINS GROWTH

Wolfgang Munchau writes in Financial Times that crises and devaluation, not the Swedish model, explains the strong economic performance in Sweden in recent years.

The devaluation saga of Sweden’s industrial rebirth


BHAGWATI: GLOBALIZATION CHALLENGES TO SWEDEN

The globalization defender Jagdish Bhagwati says in this entertaining speech that Sweden protect workers, not jobs, that’s good, but Sweden needs to do better to meet the challenges from globalization.

Globalization and Sweden


LINDBECK: NEW CHALLENGES FOR THE WELFARE STATE

The internationally well respected economist Assar Lindbeck summarizes 2006 in this paper “goods and bads” in the welfare state, concluding that financial difficulties, benefit dependency, individualization and minority group problems are major future challenges.

The welfare state – Background, Achievements, Problems


HENREKSON ET AL : SWEDISH MODEL HAMPERS ENTREPRENEURSHIP

Magnus Henrekson and Jesper Boine argues in this paper from 2006 that the polices in Sweden to promote innovation in big firms create problems when entry, exit and turnover of small and medium firms become more important for growth.

Promoting Entrepreneurship in the Welfare State

ROCHAS: THE COLLAPS OF FOLKHEMMET
Mauricio Rojas, Member of Parliament and assistant professor in economic history, gives a personal view of the transformation of the Swedish model from the maximalist "Folkhemmet" to a new Enabling State, giving citizens a new degree of control over consumption and savings.

Sweden after the Swedish Model


BECKER POSNER ON FRIEDMAN, SWEDEN

Gary Becker and Richard Posner discuss in their blog if Milton Friedman was annoyed that Sweden could achieve high levels of economic output despite high rates of taxation.

Becker, Posner on Sweden


FISHER, MATTHIESSEN: NORDIC ABILITY TO ADAPT TO GLOBALIZATION
Fisher and Matthiessen in Ecfin, EU Commission, in this short paper 2005 conclude that after momentums from economic crises and structural reforms, helped by universal insurance and relatively inclusive labour markets, the Nordic countries have shown ability to adapt to globalization.

How Bright are the Nordic Lights?


EPI: NO RECIPES, BUT SOURCE OF INSPIRATION

In this anthology from Economic Policy Institute 2005 different authors are asked if the Nordic Model is a recipe for success. Without articulating any clear answer they conclude that the countries may be a source of inspiration.

The Nordic Model – A Recipe for European Success?


DUTCH FINANCE MINISTRY: MANY SUCCESS FACTORS
This Dutch government study from 2005 finds that the success factors behind high economic growth and labour productivity in the Nordic countries seems to be for example good education, budgetary consolidation and accessible child care.

The lessons from the Nordics


THAKUR ET AL, IMF: BUMBLEBEE MAY FLY

The experienced IMF analyst Dr. Subhash Thakur and colleagues take a deeper look at the Swedish Welfare State in this IMF 2003 report and find that globalization makes it necessary to streamline the Swedish model while preserving its key elements, the welfare state (published by IMF).

Sweden's Welfare State, Can the Bumblebee Keep Flying?


LINDBECK: A DANGEROUS EXPERIMENT

Assar Lindbeck gives his insightful and concerned views on the development and future of the large Swedish welfare state (published in JEL 1997, vol 35, no 3, and in a book by SNS).

The Swedish experiment


FREEMAN ET AL: A WELFARE STATE IN TRANSITION
In this influential so called first NBER-report 1997 well-known economists from USA and Sweden collaborate to study the economic collapse in the early 1990s and to suggest reforms to reestablish a healthy Swedish economy (published 1997 by Chicago Press).

The Welfare State in Transition


OLSSON: HOW BRIGHT ARE THE NORTHERN LIGHTS?
In this report, Mancur Olsson concluded 1990 (just some years before the major crises in Sweden and Finland) that an economy open to imports and exports, avoiding special interest legislation, cartelization and collusion can be innovative and prosperous even with a large equality-oriented transfer systems.

How bright are the Northern lights?