Sweden's entrepreneurs face an uphill struggle

Entrepreneurship is often seen as a catalyst for economic development. By taking chances, working hard and being innovative successful businesspeople clear a path for social and economic growth. Although Sweden has a strong tradition of entrepreneurship, it has been falling behind in this area for some years now.

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Of the 25 members states of the European Union, Sweden only ranks 18th when it comes to the percentage of citizens that run businesses. Between 1995 and 2005 this figure dropped steadily in Sweden.

The current government often speaks about the importance of having a business-friendly environment. It is possible that they will improve the situation for small business owners somewhat compared to the former socialist government, but one should not necessarily be too optimistic.

An important problem is as follows: The economic models that our nation's decision makers use when looking at the economy are typically so-called neoclassical models. What distinguishes these models is that they often do not include entrepreneurship as a parameter. This is not mainly because neoclassical economists view entrepreneurship as unimportant, but since it is a difficult parameter to measure.

Still, when Anders Borg attempts to assess various possible reforms, the theories that he will most likely rely on often put little emphasis on entrepreneurs.

There is, however, plenty of research which shows the importance of entrepreneurship in economic development. For example, a new research article from Thomas Garrett and Howald Wall (both working with the Federal Reserve Bank of St. Louis) concludes that there is a strong correlation between economic policy and entrepreneurship even within the borders of the US.

By comparing the 15 least entrepreneurial states with the average of all states, the study shows that the policy environment accounts for between 37-95 percent of the difference in entrepreneurship. Private business thrives in states with low income taxes, whereas minimum wages are negative for entrepreneurship.

Old news? Well, perhaps it is a given that high taxes and regulated labour markets have a negative impact for the growth of the private sector. But then again, politicians might not always act on this information. One should remember that Sweden’s finance minister Anders Borg recently claimed that the OECD was exaggerating when they concluded that the regulated working labour market in Sweden was making it difficult to get employed.

Although the Centre party recently has become a staunch defender of small businesses, the current government shows limited interest in decreasing the regulatory burden placed on private companies and no interest in opening up the labour market. Unless reforms are introduced in both areas and unless the level of taxation is dramatically reduced, Sweden will continue to achieve far less than it’s potential when it comes to fostering the new generation of successful businessmen and women.

Readers might object that Sweden is doing well in one area – not having minimum wages. In theory, yes. But in reality, the labour unions' power to subject companies to blockades gives them the opportunity to force virtually all companies in many low-wage sectors to sign union contracts. Union contracts forced on to companies effectively have the same effects as minimum wages.

Nima Sanandaji

Nima Sanandaji is chief executive of think-tank Captus