The Swedish Economic Model

According to a paper by Johan Norberg, the Swedish economic model has major issues hidden within it.  He claims that the Swedish economy isn't as good as many people are claiming.

Long the paragon of social democracy, the Swedish model is rotting from within. Ironically, the unique social and economic foundation that first allowed Sweden to construct its political edifice--and which makes it such a difficult model for other countries to emulate--has been critically weakened by the system it helped create. Far from a being a solution for the new sick men of Europe, Sweden must face serious and fundamental challenges at the heart of its social model.

As the above video states, Sweden's economic success didn't happen over night.  It began in the 1870's, after a fundamental political shift that moved the economy towards a free market system. This shift permitted Swede to export raw materials  such as iron, steel and timber.  Additionally, it allowed those with an entreprenial bent to new industries that soon became world leaders in those fields.   During a 50year period that began in the late 1860's and ended about 1920, real wages for Swedish workers rose by about 25% per decade, while public spending stayed in the 10 percentile range of the GDP.  This kept the government and its expenditures small, and thus didn't burden the economy over much.

The Social Democratic Party came to power in 1932 and has governed Sweden for 65 of the last 74 years. They realized early on that a party of class struggle wouldn't be able to hold on to power in Sweden. Instead, they became a party of the middle class by creating social security systems that gave the most pension, unemployment, paternal-leave and sick-leave benefits to those with high wages. (Most benefits were proportional to the amount paid in, so the wealthy middle class would have an interest in supporting the system.) It was a policy of socialization from the consumption side: The government would not take control of the means of production, but would instead tax workers, in the form of sales and income taxes, to provide welfare. It was markets and competition for big business, a welfare state for the people. Still, as late as 1950 the total tax burden was no more than 21 percent of GDP, lower than in the United States and Western Europe.

This all changed in the late 1960's to early 1970's when the government began to heavily intervene in the economy to "save" faltering companies and prop up those industrial sectors that were under-performing against the burgeoning world wide economy.

Public spending almost doubled between 1960 and 1980, rising from 31 percent to 60 percent of GDP.  This was also the time when the model began to run into problems. From 1975 to 2000, while per-capita income grew by 72 percent in the United States and 64 percent in Western Europe, Sweden's grew by no more than 43 percent. By 2000, Sweden had fallen to 14th in the OECD's ranking of per-capita income. If Sweden were a state in the United States, it would now be the fifth poorest. As the Social Democratic Finance Minister Bosse Ringholm explained in 2002, "If Sweden would have had the same growth rates as the OECD average since 1970, our common resources would have been so much bigger that it would be the equivalent of 20,000 SEK [$2,500] more per household per month."  (emphasis ed.)

The real source of the issue is the fatal flaw of the Swedish system: The model as originally adopted in the late 19th Century was of a free market  economy.  Eventually the Social Democratic Party eroded the fundamental principles that underlined that system and permitted it to work efficiently in the first place.

The civil service is a powerful example of this phenomenon. The efficiency of the civil service meant that the government could expand, but this expansion began to undermine its efficiency. According to a European Central Bank study of 23 developed countries, Sweden now gets the least service per dollar spent by the government.

This underscores the concept that government in and of itself does nothing efficiently, at least not for any length of time.  Eventually, every bureaucracy (and bureaucrat) expands to the point of economic collapse ase every department demands more and more funding, as well as continually expanding regulations.  This has the effect of making it less and less able to function at all, much less with anything approaching efficiency.

On the economic side, the old Swedish system of encouraging investments in big industry worked well, as long as there was little need for innovation. Once that occurred, however, the system ran into trouble. The competitiveness of industry had to be propped up several times by depreciating the currency. Globalization and the new knowledge and service economy made it more important than ever to invest in human capital and individual creativity. High marginal tax rates on personal income, however, reduced individuals' incentives to take risks and to boost earning potential by investing in their education and skills, and made it extremely difficult to attract skilled workers from abroad.


Furthermore, the Swedish model was dependent on having a small number of large industrial companies. As these diminished in importance, or moved abroad, Sweden needed something to take their place. But the policies that benefited the biggest firms created a deficit of small- and medium-sized businesses. Those that did exist didn't grow, partly because of the risks and costs of highly burdensome employment rules that prevented the firing of workers. Indeed, the most important Swedish companies today are those that were born during the laissez faire period before the First World War; just one of the fifty biggest Swedish companies was founded after 1970. Meanwhile, services that could become new private growth sectors, like education and health care, were monopolized and financed by the government. As they grew in importance and size, a steadily growing part of the Swedish economy thus became protected from international market forces and investments that could have turned them into successful and productive enterprises.

Thus, while Sweden has some of the highest tax rates in the world, because of those rates, they have some of the least productive workers.  With the laws that make if very difficult to terminate inefficient workes, there is no incentive for businesses to expand their work forces.  Additionally, with some of the best benefits available, Sweden sees some of the highest rates of worker absenteeism.  Those rates are roughly 25% of the work force are on sick leave at any given time, despite having one of the healthiest populations in the world. 

With a huge influx of immigration from the Balkans, Middle East and Latin America, roughly 1/7th of the population are now immigrants.  This has effectively ended the homgenaity of the population that has existed for millenia.

Today, about one-seventh of the working-age population is foreign born, but no where near that proportion is actually employed. Sweden has one of the developed world's biggest differences between the labor-market participation of natives and immigrants. Many immigrant families are discouraged by the lack of job prospects and end up in welfare dependency.

This has led to a very high crime rate in many of the immigrant majority areas,

Despite little history of racial conflict, the labor market is more segregated than in America, Britain, Germany, France or Denmark--countries with far more troublesome racial histories than Sweden. A report from the free-market Liberal Party ahead of the election 2002 showed that more than 5 percent of all precincts in Sweden had employment levels lower than 60 percent, with much higher crime rates and inferior school results than in other places. Most of these precincts are suburban, so outsiders rarely see them. The number of segregated precincts has continued to grow. In some neighborhoods, children grow up without ever seeing someone who goes to work in the morning. Pockets of unemployment and social exclusion form, especially in areas with many non-European immigrants. When Swedes see that so many immigrants live off the government, their interest in contributing to the system fades.


Like in other parts of western Europe, the segregation of immigrant areas leads to insularity, crime and, in some cases, radicalism. Last year, Nalin Pekgul, the Kurdish chairman of the National Federation of Social Democratic Women, explained that she was forced to move out of a suburb of Stockholm because of crime and the rise of Islamic radicalism. The announcement sent shock waves through the entire political system. "A bomb waiting to explode" is one of the most common metaphors used when social exclusion in Sweden is discussed.

So, for many reasons, the Swedish economic model is failing...the rapid expansion of government and increase in economic regulation while at the same  time permanent employment and three fold increase in taxation has muzzled the economy there.  Thus both Saab and Volvo automobile manufacturing companies have failed to find buyers when they were put on up for sale last year.  However, it appears that a Dutch company is attempting to purchase Saab, though that sale is still pending.