On 26th February 2008, Mr. Fredrik Reinfeldt, Prime Minister of Sweden, gave a talk at the London School of Economics and Political Science. The subject that he presented was: "The New Swedish Model: A Reform Agenda for Growth and the Environment" The speech can be read in full from the Swedish Embassy:
The New Swedish Model
The passage that interested me the most was the following:
At the beginning of the 1970s Sweden also had the fourth highest GDP per capita measured in purchasing power parity. Sweden was blooming. Then came Sweden's mad quarter of a century.
Growth fell off. Unemployment rose. The quality of welfare declined. What, then, were the factors that made the Swedish model stop working?
The economic downturn that followed the two oil crises in the 1970s of course had a negative impact on Sweden. Also, the financial crises and macroeconomic shocks of the early 1990s had substantial consequences for the Swedish economy. But these shocks also affected other industrial countries. And it is difficult to argue that Sweden was particularly vulnerable to the international business cycle.
This alone cannot explain why Sweden fell from fourth place in the OECD's ranking of member countries by GDP per capita around 1970, to eighteenth place in 1997.
Instead, I would argue that the explanation lies in other factors. The vital balance between the institutions in the model disappeared and socialism swept over Swedish society.
We saw budget deficits and high inflation undermine macroeconomic stability. In many respects this was the result of irresponsible and short-sighted political actions. We saw a sharp rise in taxes, especially on labour, together with an expansion of benefit systems that undermined the work-first principle and made it less worthwhile to work.
The education system was distorted and Swedish schools focused less on knowledge. Changes in international competition were met with subsidies rather than reforms. Free enterprise was not encouraged; instead it was questioned.
We saw a rise in unemployment and the percentage of working-age people supported by various social benefits and subsidies rose from 10 per cent in 1970 to about 20 per cent in the present decade.
What took a hundred years to build was nearly dismantled in twenty five years.
My personal interest arises from the number of times from the 1970’s onwards, my left-wing colleagues told me with absolute dogmatic certainty that, although Socialism had run into difficulties in most Western European countries, Sweden was a shining example of a Socialist country, with a thriving economy and with social policies the rest of the world would do well to emulate.
Similarly,I was told with equal force that the Communist East German economy was the most prosperous and most stable in the world, immune from the buffeting of market forces in the Western world. The fall of the Berlin Wall, whose existence caused these same colleagues no problem, showed East Germany to be an economic basket case.
It is consoling that time writes its own history, plain for all to see. It is sad that so many prefer not to read it.
