The Swedish Model for Economic Recovery
by C. Fred Bergsten, Peterson Institute for International Economics
Op-ed in the Washington Post
August 30, 2013
© Washington Post
Europe has been the source of unremitting gloom and doom for four years. The euro crisis has threatened the global economy. Most Americans, and many Europeans, have become exasperated with European nations' failure to respond decisively to their troubles.
So it is a refreshing—and brilliant—decision by President Obama to visit Sweden and meet with Scandinavian prime ministers en route to next week's Group of 20 summit in Russia. Sweden escaped the crisis in its neighborhood, and it quickly restored steady and stable growth. It presents a proven model for the types of reforms needed in much of Europe and many other parts of the world, including the United States, and Obama should carry this success story to the full G-20.
Sweden was the world's third-richest country in 1968 but became a massive welfare state in the 1970s and 1980s and a prototype for how not to run an economy. It slid to No. 17 in the global income rankings and experienced a deep financial and real estate crisis in 1991, according to a 2012 study from the Research Institute of Industrial Economics. To its enormous credit, Sweden reversed course with consummate skill and political courage; it has become a paragon of sensible economic and social policy.
Sweden's economic growth has been much higher than that of the rest of Western Europe, or the United States, since 2006. Data from the International Monetary Fund and the Organization for Economic Cooperation and Development show that Sweden has one of the lowest inflation rates in Europe; it runs a budget surplus every year; its corporate tax rates are considerably lower than US rates; and it spends more on research and development, as a share of its economy, than we do. Its firms are highly competitive in the world economy, and it runs sizable current-account surpluses.
After its crisis, Sweden reduced public expenditures by 20 percent of its GDP, slashing social transfers such as unemployment benefits and sick-leave compensation. It cut its public debt in half (its debt, as a proportion of the economy, is now about half that of the United States). It cut marginal tax rates and simplified its tax code so much that nearly two-thirds of Swedes simply confirm by phone that the declaration automatically prepared for them by the tax authorities is correct. The banking system was thoroughly reformed and emerged unscathed from the global financial crises.
Structural reforms were also adopted. Successive governments deregulated one market after another and privatized as market conditions permitted. All children receive vouchers so their parents can choose private or public schools at public expense. Swedish social security became a true insurance system, rather than a pay-as-you-go one with huge unfunded liabilities as in the United States.
Sweden remains a social welfare society, and government spending still accounts for half of its economy; it finances all education and health care, as is common throughout Europe. Sweden did not dismantle the social system but, in addition to drastically reducing its costs, adopted macroeconomic and structural reforms to make it sustainable and greatly enhanced its efficiency by privatizing the delivery of many educational and medical services. The country's guiding principle is that a successful social welfare society must be fiscally conservative and administratively efficient. This is the central Swedish lesson for the crisis countries of the euro area and elsewhere.
These policies, based on competition and openness, have been implemented and endorsed by most Swedish political parties. They also enjoy an intellectual consensus. The Social Democrats continued the reforms initiated by the center-right and even added a few. The metalworkers' union accepted major wage cuts at the height of the global crisis to protect its long-run prosperity, and its leader became chairman of the Social Democratic Workers' Party. In 2010, the government was handily reelected while most European governments were falling because of the crisis. Sweden's Anders Borg was named Europe's top finance minister for 2011 by the Financial Times.
Sweden now combines a social welfare society with a free-market economy and a high degree of government efficiency. The other Scandinavian countries pursue similar policies and have enjoyed similar success (if not quite as spectacular). This subregion of stability demonstrates that, with the right policies, European countries can prosper inside the euro area (Finland, de facto Denmark) or outside it (Sweden and Norway). Obama should highlight their progress and convey this message of successful reform to his G-20 counterparts in St. Petersburg.