Sweden Has Learned From Its Own Lesson

Commentary, Globalization, Johnny Munkhammar

The centre-right four-party Alliance won the elections in Sweden this Sunday, ending 12 years of Social Democrat rule. The Alliance promised to do stepwise market-oriented reforms, as opposed to the Social Democrats promise to do nothing. What conclusions can be drawn from this election and what might it imply for the rest of Europe?

Sweden is mentioned internationally much more often than its size would imply; it has only nine million inhabitants. And not only is it well known for ice hockey and beautiful women. Sweden has been very much in the spotlight when it comes to economic policy and reforms. What happens in Sweden is likely to have a broad influence.

A majority of the voters wanted change. This was despite the feeling that “you know what you have and not what you will get” that exists in any election. It was also despite the fact that a majority of the voters are to some extent dependent on the state. They voted for change despite the enormous resources of the Social Democrats. And indeed, a majority wanted change despite the fact that some things are working well in Sweden.

The Social Democrats were tired, arrogant and out of ideas. The opposition Alliance was united, focused on problems that people feel are real and presented visions for the future. But to the substance, it can be said that Sweden has learned from its own history. Sweden is a prime example of a country that has flourished thanks to a free economy. Now, a new government will take more steps in that direction.

In sum, Sweden became internationally known as the country that went from rags to riches with the second highest growth rate in the world between 1890 and 1950. Then, economic policy took a more socialist turn and it became a prime example of a society with a big state taking care of people from the cradle to the grave – using their own money. And in the 1990s, there was quite a lot of attention around the Swedish market-oriented reforms.

The summary of Swedish success and failure is a story of markets against the state. Every time Sweden has taken a step towards freer markets, it has been very successful. And every time it has increased the size and power of the state, success has sooner or later faded away.

During the phase when Sweden went from agriculture and poverty to industry and wealth, the economy was very open and flexible. Free traders won in the late 19th Century the battle for free trade, which was very important for exports and industry. Entrepreneurs started up small businesses easily in a dynamic environment with low taxes and strong property protection. In fact, the tax pressure rose only from 10 to 20 per cent of GDP between 1890 and 1950.

During the socialist phase, however, the size of the state exploded. The tax pressure increased to 50 per cent of GDP during the three decades up to 1980. Many companies were socialised by the state. The state interference in markets grew and the ultimate aim was a more centrally planned economy.

The socialist period created problems. Growth decreased and Sweden started its decline in the OECD list of countries in GDP per capita. Inflation soared and so did budget deficits, at times at around ten per cent of GDP. Unemployment reached high levels. Problems with matching supply and demand in markets with state intervention and in the welfare monopolies were mounting. Only one of the 50 biggest companies today has been started before 1970, which indicates which period was successful and which one that was not.

This was followed by a rather intense period of market-oriented reforms from the late 1980s to the mid 1990s. Inflation was reduced and the Central Bank made independent. The EU membership opened up markets and normalised several of the more radically socialist features of the Swedish society. Marginal tax rates were cut, making education and work more profitable. Many markets, such as telecom, taxi, finance and gas – were de-regulated. That led to a telecom success, with Ericsson as the flagship, and vastly lower prices for phone calls. A pensions reform substantially reduced the level of state pensions and allowed citizens to invest part of the state pension in the private market.

Where does that put Sweden today? A neo-liberal country that became socialist and then embarked on market-oriented reforms in several areas. Today, Sweden contains both socialism and free markets. But the same truth as before applies: where there has been free-market reform, there is success, and where there is socialism, there are problems.

The McKinsey Global Institute confirmed this in their recent thorough study of Sweden. The main explanation for better growth figures during the last ten years has been a substantial increase in productivity. In turn, the de-regulations fifteen years ago provide the explanation for that. But large parts of the Swedish society have remained un-reformed since the socialist era. And during the last ten years, almost nothing has happened.

The labour market is probably the best example of Sweden’s problems. McKinsey estimated the total unemployment rate to be 15 per cent. Sweden has decreased the size of the labour force more than any other European country during the last 15 years, shuffling away hundreds of thousands of people from being called “unemployed” to “early retired”. In EU-15, between 1995 and 2003, employment grew more in 11 countries than in Sweden. Youth unemployment is 22 per cent, the fifth highest in EU-25, and the number of people under the age of 30 that are “early retired” has increased from 13, 000 to 22,000 during the last six years.

The labour market is regulated concerning hiring and firing, it is very unionised and, in terms of wage bargaining, thus very collectivised. On top of that, the total tax level on labour is one of the highest in Europe and the biggest parts of the service sector – health care, education, elderly care, social insurance – are within the public monopolies. This is where Sweden is still plagued by socialism and where the need for reform is great.

The same tax reductions and de-regulations that worked in the past should work here. Opening up for individual deals in the labour market, entrepreneurs in welfare services and private insurance companies in social security would solve many problems. Freedom of choice would increase and new jobs would emerge. Much of this has not only been done in other countries; it has been practiced by Sweden before and in other areas today.

The centre-right Alliance has of course been cautious; but their main message in the campaign was one of reform. A majority of the Swedes shared that view and supported reform. In a way, then, Sweden has learned from its own history. The positive effects following the first reforms from the new government will imply that Sweden deserves its good international reputation to a larger extent.

Johnny Munkhammar is Program Director, Timbro, a Free-Market Institute in Sweden