The Swedish model works because the country had the courage to liberalize its economy, says the Montreal Economic Institute

Montreal, July 19, 2007 – In public discussions on the role and size of government in the economy, certain Quebec intellectuals and politicians can be heard praising the Swedish model. They often neglect to mention that Sweden experienced serious problems with public finances and unemployment in the early 1990s and that it got back on the road to prosperity by engaging in wise and courageous reforms focused on liberalizing its economy.

In an Economic Note published today by the Montreal Economic Institute, Yanick Labrie, an associate researcher at the Institute, concludes that “unlike the situation often prevailing in Quebec, the government and various groups in Sweden have taken a pragmatic approach and have not been afraid to question dogmas that were paralyzing the country’s economy, including the sacred nature of the welfare state and the public sector.”

A historical look at the Swedish economy

Mr. Labrie notes first that Sweden was able to emerge from misery and become wealthy because, starting in the mid-19th century, it reduced taxes and removed obstacles to international trade, enabling it to experience the strongest economic growth of any country in the world between 1870 and 1950. The situation began to deteriorate in the late 1960s, however, when the Swedish government began setting itself apart from other developed countries with its interventionist policies in the economy and the labour market.

A proliferation of government programs and regulations stifled job creation and business start-ups. Among the 50 largest companies active in Sweden, not one was started between 1970 and 2000. The total number of jobs grew only 8% during those 30 years, compared to 48% in Quebec. Dependency on government grew at an alarming pace: the proportion of Swedes drawing their income from tax receipts (by working for the government or receiving public transfers) rose continuously between 1970 and 1995, climbing from 28% to 65%.

In the early 1990s, Sweden was headed for a dead end, with some similarities to the situation in Quebec and across Canada at that time. A serious economic crisis sent production down 5%, raised unemployment by eight percentage points and increased the debt from 46% to 81% of GDP in just a few years. The world’s fourth richest country in 1970, Sweden gradually slid to 16th spot in 1995.

Economic liberalization to emerge from the crisis

Helped by the recession and the public finance crisis, political leaders had no trouble convincing the rest of society on the urgency in reforming the welfare state, the limits of which had become readily apparent. With the support of stakeholders, they decided to make more room for market mechanisms.

For example, a number of sectors were opened to competition, health care and education in particular. Many public monopolies and other sclerotic industries were deregulated: air and rail transport, taxis, electricity, telecommunications and postal services, as well as the retail sector and the sale of alcohol, were all liberalized to various degrees. These liberalizations led to considerable reductions in the costs of these services.

In the labour market, the main reforms dealt with legislation on temporary jobs, which was greatly loosened. Compensation for government employees is based now on performance and no longer just on the seniority principle. Jobs for life no longer exist for public sector employees in Sweden. Taxation of businesses and the capital they invest is among the world’s lowest, helping make them more competitive on the international market.

The results of these reforms have met expectations: public finances are doing well, inflation is under control, and economic growth and productivity are above average. (Between 1994 and 2005, productivity in the private sector grew 3.3% a year, or one-and-a-half times faster than the average among OECD countries.) Sweden’s economic environment is obviously not perfect, but Quebec would gain greatly by studying the true reasons for the success of the Swedish model.

The Economic Note, titled How to explain the success of the Swedish model?, was prepared by Yanick Labrie, associate researcher at the Montreal Economic Institute and lecturer at the Institute of Applied Economics of HEC Montréal.

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Information and interview requests: Jasmin Guénette, Director of Public Affairs, Montreal Economic Institute, Tel.: 514 273-0969 ext. 2232 / Cell.: 514 577-7471 / E-mail: jguenette@iedm.org