Hot Swedish Models!

Worth A Look, Poverty, Frontier Centre

Sweden is a country of many economic and political contradictions: the highest tax pressure in the Western world and low corporate taxes, school vouchers and state-run universities, a regulated economy but a free private sphere. In short, part socialism, part market economy — part big state and part freedom.

The Nordic countries, and perhaps Sweden in particular, are now often cited as countries to learn from for the rest of the EU. A word like “flexicurity” has been invented, the Sapir report (a panel tasked by the European Commission with assessing the prospects for EU growth) was very favorable to the Nordic countries and they rank high in Lisbon Agenda scorecards. And now, in March, EU leaders will devote their summit in part to learning from the Nordic countries.

As a Swede, in a way that makes me proud and happy. But on the other hand, looking at the contradictions, I feel obliged to point out that some if things are worth copying from Sweden others should be entirely avoided.

There are two good Swedens to learn from: One is the hugely successful country that literally went from rags to riches between 1890 and 1950, with one of the highest growth rates in the world. This was not least thanks to a tax pressure between 10 and 20 percent of GDP, a truly limited state, with open borders and very good conditions for entrepreneurs.

Or there is the Sweden that started reforming in the 1990s. Marginal tax rates were cut, markets were deregulated, the Central Bank was made independent, public pensions were cut substantially and some free competition was allowed in health care. School vouchers were introduced — still even controversial in the US — and markets were deregulated, the prime example being telecom, opening up for the development of Ericsson and a something like 75 percent decrease in the price for phone calls. This led to a higher growth and increased prosperity for several years around the Millennium shift.

But there is also another Sweden, a country that one can learn much from, but should definitely not imitate. It is the country that introduced an extreme version of the European Social Model of a big state. The tax pressure was raised from 20 percent in 1950 to some 50 percent in 1980. The state monopolized welfare services and social security. The labor market was highly regulated.

The Swedish experience from walking this path is that it is a dead-end. It is even counter-productive. And when it comes to this model, the big state, Sweden has not reformed. The tax pressure is still the highest in Europe. Ever since the taxes reached this level, growth has been declining. If Sweden were a state in the US, it would be the fifth poorest. During the past 15 years, average annual growth has been 1.4 percent — lower than the average for the US, the OECD and the EU.

Employment has been developing very poorly. There are nine million people in Sweden, and some 1.5 million people of working age don’t go to a job. The unofficial total unemployment is some 20 percent. In the EU-15 between 1995 and 2003, employment grew more in 11 EU countries than in Sweden. In 2004, according to UNCTAD, only 12 countries out of 183 in the survey had a net outflow of investments — the basis for any job creation — and one of them was Sweden.

Thus, many people are dependent on the state. Early retirement, sick leave, unemployment, temporary labor-market programs — there are many categories. Employment is decreasing and dependency on the state is rising. About 60 percent of the adult population is to some extent dependent on the state.

And indeed, those welfare services that were said to benefit from public monopolies and a big state are deteriorating. Despite an increase of almost 70 percent in spending since 1979, Sweden’s public health-care system is coming apart at the seams. The Swedish Association of Local Authorities and Regions reports that doctors see an average of four patients a day, down from nine in 1975. The number of hospital beds is down by 80 percent since 1975. More than 50 percent of patients have to wait over 12 weeks for an examination and then at least 12 more weeks for treatment. Public schools and public elderly care also experience great problems.

These are all natural results from this so-called social model. The big state stands in the way of prosperity and better living standards. In this regard, other countries — in the EU or anywhere in the world — should not copy Sweden.

Sadly, the market-oriented reforms that largely were introduced in the beginning of the 1990s have come to an end. Practically nobody wants to roll them back, the freer markets that were introduced seem to remain. But no new reforms in that same spirit have been introduced for almost the last ten years, with the exception of the so-called death tax, which was abolished in 2005. There may be several reasons for this: a shift in government in 1994 to traditional Social Democrats and the fact that the reforms coincided with an economic recession following the failed big state of the 1970s and 80s.

But the facts remain: no new reforms are introduced in Sweden and the positive effects of the old ones are fading. During the last year, according to the Index of Economic Freedom by the Heritage Foundation and Wall Street Journal, 18 EU countries increased their economic freedom, but Sweden had the lowest score in five years. Now, the greatest need is for Sweden to regain reform momentum and can learn from other European countries, not the other way around.

The author is the Director of Timbro, a free-market institute in Sweden