A quarter of a century ago the economic policies of Sweden’s Social Democrats faced harsh criticism from political opponents as well as from academics. The party had governed the country continuously from 1932 to 1976, mostly in minority government, and then again 1982-1991 (and yet again 1994-2006 and from 2014 to date). Some critics thought then that they had gone too far in their emphasis on increased equality of incomes at the expense of economic efficiency. Others claimed that the tax burden imposed on households and firms had become too heavy. Others still thought that trade unions had been given too much say in economic affairs. Official statistics suggested that Sweden was lagging behind several OECD countries as measured, for example, by national income per person. That was then.
Sweden and Argentina
Yet no one could deny the revolution in living standards that had taken place under Social Democrat governments led by Prime Ministers Per Albin Hansson (1932-1946) and Tage Erlander (1946-1969). Sweden had been one of Europe’s poorest countries in 1900 and had lost about a quarter of its population through emigration to North America, a bit more than a million people during 1870-1920 out of a population of five million in 1900.
Around 1900, Sweden had roughly the same per capita national income as Argentina, a rough parity that lasted until 1930 when the two economies began to diverge. Argentina was badly hurt by the Great Depression of 1929-1941 while Sweden managed to insulate itself largely from its effects through pragmatic economic policy, including leaving the gold standard as well as deliberate public deficit spending under the influence of the Stockholm School that anticipated the teaching of John Maynard Keynes.
Parliamentary democracy took hold in Sweden in 1917, followed by equal suffrage in 1919. Political power was transferred from conservative parties to social democrats and farmers’ parties. Argentina was reasonably democratic until the crash of 1929 gave rise to authoritarianism, and did not see democracy restored until 1983. Under authoritarian government, economic policy in Argentina became reactionary and inward-looking, enabling the land-owning class to usurp disproportionate wealth and power. Under social democracy, by contrast, economic policy in Sweden emphasized open trade with the rest of the world as well as economic and social equality. Neutrality also helped Sweden to emerge after WWII as one of the most affluent countries in the world. The difference between per capita national income in Sweden and Argentina that had been negligible in 1900 had tripled in 1960 and was six-fold in 2016 in terms of purchasing power.
After 1990, official statistics suggested that Sweden had fallen behind Denmark and other industrial countries in terms of national income per person. The financial crisis that struck Finland, Norway, and Sweden in 1991 but not Denmark was partly to blame for this development. The Swedish authorities took the criticism directed at them seriously. They listened to economists, including the advice of a special crisis commission chaired by Professor Assar Lindbeck. This was true whether the Social Democrats were in office or their centre-right opponents – as happened during 1991-1994 and 2006-2014. There were differences as well as similarities. The centre-right government abolished the property tax on real estate while the Social Democrats abolished the inheritance and gift tax and introduced a successful programme of budget discipline. Government expenditure was held back and, with healthy GDP growth, was gradually reduced from 64% of GDP in 1995 (just after the financial crisis) to 50% in 2015. This turnaround led to lighter tax burdens and a lighter debt burden for the government.
The Gini index, a common measure of inequality in the distribution of income, moved upward, both in terms of labour income alone and total income including capital gains. An increase in the Gini index signals less equality, which in Sweden resulted mostly from globalization, technical change, liberalization of markets, and reduced trade union influence on wage formation. Even so, Sweden kept its place among the countries considered most egalitarian. Studies suggest an increase in wealth inequality after 2008.
The controversial wage earners funds that had been established by law in 1983 on the initiative of the Trade Union Congress (LO) were abolished in 1991, a decision that the Social Democrats did not reverse on their return to office in 1994. These funds were intended to give union representatives direct influence on business investment and thus to create a counterweight to owners of capital and promote economic democracy. Opinion was divided as to which would weigh more heavily, the redistribution of power from capital to labour that the funds were intended to effect or the concentration of wealth in the funds. Many feared the funds would reduce the efficiency of investment and also living standards in the long run. The experiment proved short-lived, from 1983 to 1991, and is with hindsight widely viewed as having produced meagre results. After all, cross-border capital movements were set free by law at the same time so capital would most likely have fled from Sweden rather than succumb to partial trade union control.
Well done, yes, but…
All things considered, Sweden has done well. The authorities reacted well to criticisms offered by economists and others concerning the dangers that can stem from excessive government involvement in the economy, overly ambitious redistribution of income, and trade unions that show signs of behaving like a state within the state. The tax and collective bargaining systems were reformed to moderate wage increases/inflation and avert devaluation cycles familiar from the past. A flexible exchange rate and an independent central bank pursuing an inflation target were also important. State monopolies gave way to competition in several areas in the wake of Sweden’s accession to the EU. The economy started to grow more rapidly again.
Reform pays. Yet, there is much that remains to be done, for example in the housing market that remains rigidly regulated and in integrating immigrants that Sweden has welcomed in relatively larger numbers than other European nations. Sweden has a rather poor record of integrating immigrants into Swedish society and giving them timely jobs (than the nine years it takes on average now). This has led to the resurgence of a nationalist party, the Sweden Democrats, now the third largest party in Parliament. Neither of the traditional blocs, left or right, can govern without their or each other’s tacit support. The current coalition government led by Social Democrats is a weak minority government. The four centre-right parties appear unable to agree on a common programme to take to the electorate in 2018. Earlier achievements notwithstanding, the outlook for Sweden appears uncertain.
Even so, all things considered, the Swedish model – or, more precisely, the Nordic model – has proved a resounding success. Relatively small in size, Sweden and her Nordic neighbours are unwavering champions of free trade and globalization which makes them vulnerable to downswings in the world around them. At the same time, their economies have proved resilient when faced by adversity. From the 1930s onward, the Nordics understood the economic and social importance of distributive justice, a lesson that the UK and especially the US are now suddenly having to learn the hard way.
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Thorvaldur Gylfason is professor of economics at the University of Iceland and Research Fellow at CESifo (Center for Economic Studies) at the University of Munich. A Princeton PhD, he has worked at the International Monetary Fund in Washington DC, taught at Princeton and edited the European Economic Review.