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'Free markets to thank for Swedish model success'

'Free markets to thank for Swedish model success'

Published: 10 Sep 2012 15:46 GMT+02:00
Updated: 10 Sep 2012 15:46 GMT+02:00

While Sweden is often held up as a shining example of the benefits of a generous welfare state, a new paper argues that free markets, rather than a large state sector, are the real key to Sweden's economic success.

"Sweden's success has had nothing to do with the welfare state," the report's author, Nima Sanandaji, tells The Local.

"If you want to argue for the benefits of a free market economy, Sweden is a great example."

Sanandaji, an Iranian-born Kurd who came to Sweden as a child, lays out his contrarian case in a paper published recently by the Institute of Economic Affairs in the UK.

The "Swedish model" of high taxes and generous welfare benefits has long been held up by parties on the left in the UK and the United States as an example of a high-tax society with solid economic growth.

In recent years, Sweden has also received a great deal of attention for the way in which the country has successfully navigated the global financial crisis without suffering from a prolonged rise in unemployment or negative growth.

But Sanandaji, who founded the liberal Swedish think tank Captus, explains that much of the praise for Sweden's economic model is misplaced.

"The idea of Sweden being some sort of socialist utopia is very widespread. Sweden has a lot of positive social outcomes and is known as a social democracy with high taxes. But this myth is more a product of correlation rather than causation," he says.

According to Sanandaji, the ingredients that have contributed to Sweden's success – high social trust and an embrace of free-market ideology – were in place well before the country's welfare state expanded in late 1960s and 1970s.

"Sweden was a place with high equality, few social problems, and a high life expectancy before it started expanding its welfare state," he says.

He points out that in 1975, Sweden was the 4th richest industrialized country in terms of GDP per head.

But by 1993, following two decades of increasing taxes and an expansion of the state sector, Sweden had fallen to 14th.

"Since the start of the social democratic era in Sweden, the country's growth trajectory has been lower," says Sanandaji.

"Sweden has done best when it has had a small welfare state. When the welfare state expanded, it crowded up private sector jobs and growth."

In Sanandaji's view, Sweden's ballooning public sector left the country handicapped in terms of its economic potential, having a "devastating" effect on entrepreneurship.

Since 1970, Sweden saw a significant drop in the establishment of new firms, he explains.

Moreover, of the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, while 21 had been founded before 1913.

"In reality, Sweden should be richer than it is. It's like other countries are running next to an Olympic runner with weights tied to his feet," he explains.

"Sweden should be richer than the United States."

Not only has Sweden's expanding state hampered the country's growth, according to Sanandaji, it has even altered traditional "Swedish" or "Scandinavian" social norms of hard work, and social trust which he credits with spurring Sweden's past economic success.

"Since the early 1980s, Swedes have become more accepting of taking welfare benefits to which they are not entitled," he says.

As evidence, he points to figures from the World Value Survey which shows that the percentage of Swedes who said it was "never justifiable" to claim benefits to which one wasn't entitled dropped from 82 percent in the early 1980s to 55 percent at the start of the 2000s.

Sanandaji says as well that Sweden's large state structure and rigid labour market rules are also to blame for the country's struggle to integrate foreigners.

While a shift from labour migration to refugee migration has also contributed to higher unemployment rates among Sweden's foreign-born, Sanandaji contends that even highly-educated foreigners have struggled to enter the Swedish labour market.

"The social problems we have today are often centered on immigrants because they have such a hard time gaining access to the Swedish system," he explains.

"If the Swedish system is so good, then immigrants should also experience good outcomes. But that's not the case. It becomes much harder for immigrants to succeed here than compared to, for example, Canada."

Sanandaji says the policies of the current centre-right government is bringing Sweden back toward the sort of low-tax, free-market oriented country that helped spawn its success in the 20th century.

"Sweden was the perfect country for big government, but Swedes are now moving in a different direction," he says.

"In reality, Sweden's 'Third Way' was a failed experiment and the two decades of Third Way-socialism in the 1970s and 1980s should be seen as a parenthetical detour, rather than the norm."

David Landes

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Your comments about this article

11:41 September 11, 2012 by skatty
Most of the countries have mix economy, even US and Canada. There is not totally free market economy anywhere on this planet. For easy understanding read " 23 things they don't tell you about capitalism, by Ha-Joon Chang".

In 80s Sweden has shifted to refuges from labor migrants, not because there have been lot of jobs in the country. There has been surplus in capital and capital should flow. You should invest it somewhere, or in something. Swedes got the refugees with the idea that it is going to work like US or Canada, which hasn't worked.

Swedish system is not good for immigrants and can't be good for immigrants, because it's not design for immigrants in general! The country used to get labor immigrants for factories and dirty jobs when it needed for decades ago. Many of the present refugees didn't even hear about Sweden before 80s.

At present; a large number of refugees are stranded in Sweden after years of struggling with unemployment, melancholy, nostalgia, darkness, coldness, boredom, isolation, discriminations, humiliation, public idiotism, nonsenses in medias, poverty, sadness, useless Swedish language , stereo typed society, unqualified bureaucracy to continue their life in a country with DEMOCRACY!
12:50 September 11, 2012 by isenhand
-In Sanandaji's view, Sweden's ballooning public sector left the country handicapped in terms of its economic potential -

Correct, however that had to do with the economy shifting from an industrial to a service based post-industrial economy. The Swedish model had as one of its bases the cooperation with industry. You can see in the statistics that that base had stared to have trouble from 1965. However, the Swedish model produced such success that the governments did not correct the situation. As the industry declined the government tock over with more government jobs, hence the -ballooning public sector-. By the time the Swedish model collapsed in the early 1990s the government employed about 73% of the work force, a situation that it could not sustain. However, during the time of the Swedish model, Sweden built a more equal society and we have ridden the wave of that success since the 1990s.

Now, however, we have a government that have started to brake down that success which has already started to have adverse effects. So, no, the free market doesn't lie behind Sweden's success but a model that mixed both free markets and cooperation to build an equal society. That equality lies behind Sweden's success.
14:59 September 11, 2012 by engagebrain
A completely free market would have seen the total collapse of the banking sector and probably the rest of the economy.
12:42 September 12, 2012 by Marc the Texan
A free market would not have allowed the market bubbles to get so big in the first place. That was all allowed to happen because of government subsidies and guarantees that should never have been made in the first place.

That said, there is obviously an important role for the the state to provide services that promote the general welfare. People in government are often too short sighted to see the other side of the coin. To paraphrase Bastiat, "what is seen, and what is unseen."
15:01 September 15, 2012 by riose
@Marc the Texan

Sure, because deregulation does not create bubbles.

The mortgage crisis in the US was Santa's fault.
03:54 September 16, 2012 by rolfkrohna
Comment: A free market would not have created the banking sector problem. This also explains why nations as China is doing so well. It does not have this centralized, intensive and widespread supervisory and control systems that Sweden has. Inventions and developments no longer become major companies in Sweden, they flee predatory taxes and bureaucrat oppression, and grow overseas. Other nations with the "Swedish model" was the Soviet Union, which collapsed. They were also a democracy with free elections, with highly centralized supervision and control. Examples of free nations with no or low taxes and limited oppression are today Hong Kong and Singapore, and they are doing very well.
12:47 September 16, 2012 by Taxalien
The study author brings up some facts which are well known amongst the elite of the political nobility (but not at all known in the lower echolons of the same nobility or the people), but where sections of the nobility have a different opinion. In other words, the debate is still lingering on, not perhaps because there isn't a conscious or sub-conscious understanding of which argument about the third way that won the day, but rather because there is a lot of vested power interest in keeping this debate conclusion away from the people so that the realisation of that conclusion doesn't have to be effected into actual politics.

Because if you did, socialists would totally lose their grip on power.

So instead there is an unethical way to make sure that this argument is brought to the people, and to ensure that the effect is felt not just now but also after the next political election.

And that is where the current "import a somali" regime comes in.

It will leave the whole political nobility (blue, red, green, pink) no other choice than to finally kill the welfare state somewhere around 2016.
05:40 September 19, 2012 by mkvgtired
@riose,

Regulations can be part of the solution. But dont kid yourself, FannieMae and FreddieMac were a huge part of the problem.
18:20 September 19, 2012 by riose
@mkvgtired

Well, explain Iceland.

Of course I don't defend a totalitarian-style regulated system, but regulation in most cases is beneficial in the long term.
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