Sweden, from Welfare State Benchmark to Liberalization Role Model

By: Diego Sánchez de la Cruz - @DiegoDeLaCruz - Jan 13, 2017, 1:14 pm
Sweden, from Welfare State Benchmark to Liberalization Role Model
To the progressives, Sweden became a myth, an incontestable model. (Posta)

EspañolIn the 1980s, Sweden was one of the most interventionist western economies in the world.

The old market model that enriched the Scandinavian country in the second half of the 19th century, and the first half of the 20th century, was left behind after decades of social-democratic dominance.

To the progressives, Sweden became a myth, an incontestable model. Even today, in 2017, we come across many analysts who believe that the socioeconomic success of this monarchy is due to the ideas of interventionism.

But that is not the reality. Sweden has been retracting the weight of the state for decades. In fact, it has gradually become one of the most liberal economies in the world.

How did this change come to be? Stefan Fölster has recently revealed the ingredients of Swedish reforms:

Control of public expenditure: State debt reached 80 percent of GDP during the mid-1990s, but today it has fallen to around 30 percent. Sweden moved from chronic deficits to budget surplus.

Pension reform: To avoid bankruptcy of the pay-as-you-go system, the government adjusted pensions according to the evolution of contributions, aiming to prevent imbalances. In addition, Sweden introduced a capitalization pillar that, following the Chilean model, allows 20 percent of a pension to come from a fund that is owned by the worker.

Tax cuts: The highest rate of the income tax was approaching 90 percent when Swedish social-democracy was in its full swing. In the 1990s, however, the government approved a first round of tax cuts, reducing direct taxation by 30 percent to the majority of Swedes, and leaving around 55 percent for the upper classes. For companies, corporate tax fell from 50 percent to 28 percent.

Deregulation of markets: The state controlled the energy, finance, telecommunications and transportation industries, and even the food stores! However, Sweden made a 180-degree shift to its statist policy, and returned to the private sector little by little. An extensive agenda of privatizations and liberalizations allowed the private sector to increase its weight on the country’s GDP by more than 20 points.

Monetary stability: Inflationary policies of the social-democratic era were left behind with the Central Bank’s change of policy, which managed to strengthen the crown by raising interest rates and combating rising prices.

Freedom to choose: Following Milton Friedman’s recommendations, Sweden introduced a “school voucher” to allow taxpayers to choose whether to take their children to a public or private school. The same has happened in health care, where a system of “checks” allows people to choose between public or private providers.

The reforms have been very successful. Sweden grew at 1.6 percent between 1976 and 1995, and increased to 3.1 percent between 1996 and 2005. In fact, between 2006 and 2012, its GDP increased at an average rate of 1.9 percent, while the Eurozone grew at 0.7 percent given the Great Recession, which did not have a significant impact in Sweden.

Source: author

Now, if we look at the the Heritage Foundation’s Index of Economic Freedom, we see that Sweden is ranked 26, with a score of 72 points out of 100. In 1995, the first edition of the report gave the Scandinavian country about 61 points, which today would amount to position 84 of the list.

And there are still some people who talk about Sweden as an interventionist model!

Diego Sánchez de la Cruz Diego Sánchez de la Cruz

Diego Sánchez de la Cruz is a political and economic commentator in Spain and a professor at IE University. Follow him: @DiegoDeLaCruz.