What are the Policy Lessons from Sweden? On the Rise, Fall and Revival of a Capitalist Welfare State

Abstract

This paper discusses a number of questions with regard to Sweden's economic and political development:

• How did Sweden become rich?

• What explains Sweden's high level of income equality?

• What were the causes of Sweden's problems from 1970 to 1995?

• How is it possible that Sweden, since the crisis of the early 1990s, is growing faster than most EU countries despite its high taxes and generous welfare state?

These questions are analysed using recent insights from institutional economics, as well as studies of inequality and economic growth. The main conclusion is that there is little, if any, Swedish exceptionalism: Sweden became rich because of well-functioning capitalist institutions, and inequality was low before the expansion of the welfare state. The recent favourable growth record of Sweden, including the period of financial stress (2008–10), is a likely outcome of a number of far-reaching structural reforms implemented in the 1980s and 1990s.

Keywords:

• Sweden
• welfare state
• equality
• growth
• institutions
• capitalism

JEL classifications:

• O43
• O52
• H50
• I38

Notes on contributors

Andreas Bergh is Assistant Professor at the Department of Economics at Lund University and is also Research Fellow at the Research Institute of Industrial Economics. His research concerns public and institutional economics.

Notes

The author would like to thank Assar Lindbeck for useful comments on an early version of the article.

1. After the 2008 financial crisis, Sweden was portrayed as a ‘rock star of recovery’ in the Washington Post (24 June 2011). The Economist used the words ‘North star’, noting that ‘unlike much of the rest of Europe, Sweden is roaring ahead’ (9 June 2011). Two years later, Sweden is described as ‘The next supermodel’ (2 February 2013).

2. In earlier versions of the OECD statistics, Sweden actually placed third. However, Luxembourg later revised its GDP figures.

3. As noted by Myhrman (1994), Sweden's prosperity has often been attributed to the presence of natural resources (such as forest and iron ore) and to the absence of war.

4. Mauro did in fact use instrumental variable analysis (based on ethnolinguistic fractionalization) to argue that his findings represented a causal effect from institutions to growth, though this issue is discussed further below.

5. For some critique on the view of institutions as determinants of growth, see Glaeser et al. (2004).

6. For a survey of the method of using instrumental variables to identify causal relationships, see Angrist and Krueger (2001). When institutions are bundled under the economic freedom label, Heckelman (2000) and Dawson (2003) analyse the timing of changes using so-called Granger causality tests, and concluding that economic freedom comes before economic growth, and not the opposite. For a critique of Acemoglu et al. 2001, see Albouy (2012).

7. For research on financial development in general, see King and Levine (1993) and De Gregorio and Guidotti (1995) whose findings also support a causal link from financial development to economic growth.

8. Interestingly, Bergh and Erlingsson (2009) show that the same factors – rationality and consensus in the policy process – played an important part in the reform process during the 1980s and 1990s, when Sweden was radically transformed in several ways, as described in Section 5.

9. See, for example, Canning and Pedroni (2008) and Barro (1990). Note, however, that even such traditional explanations are related to institutions. For example, a country's education level can be seen as a proxy for the quality of the underlying institutions associated with education.

10. Since 1980, membership rates have dropped slightly, a trend that have since then accelerated.

11. For some anecdotal evidence on the role of capitalistic dynasties in Sweden still today, see af Kleen (2008).

12. See Roemer et al. (2003) for an attempt to evaluate the extent to which fiscal regimes in 11 welfare states equalise opportunities for income among citizens. Results suggest that the systems in Sweden and Denmark in the early 1990s were highly redistributive, possibly aiming for equality of outcome rather than equality of opportunity.

13. Depending on time perspective and the counterfactual used, it can actually be argued that the lagging behind of Sweden started already in the 1950s – see Krantz (2000).

14. For further information on the components of the index, see the appendix ‘Explanatory Notes and Data Sources’ in the 2010 report.Available from: www.freetheworld.com. See also Berggren (2003).

15. This welfare state categorization follows Bradley et al. (2003), who stay close to the three categories described by Esping-Andersen (1990). Using other types of classifications (cf. Abrahamson 1999) leads to the same conclusions regarding in what way Sweden differs.