Libera the Swedish Model

7/30/2019 Libera the Swedish Model

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AFFLUENCE DESPITE THE WELFARE STATE

Nima Sanandaji
http://www.libera.fi/


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The Swedish ModelReassessed

AFFLUENCE DESPITE THE WELFARE STATE

Nima Sanandaji


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Libera Publication Series

October 2011

Libera Foundation

Sepnkatu 9

FIN-00150 Helsinki

Finland

www.libera.f

Publisher: Libera Institute Ltd.

Design: Manual

ISBN 978-952-280-002-2 (nid.)ISBN 978-952-280-003-9 (PDF)

About the Author

Nima Sanandaji has a Masters Degree rom the Chalmers University o Technologyin Gothenburg, an Advanced Masters Degree rom The Royal Institute o Technology

in Stockholm, and has previously conducted research studies at both Chalmers andthe University o Cambridge. He is the president o the think tank Captus.

Nima has previously published six books, covering subjects such as entrepreneurship,womens career opportunities, and innovation within the IT sector. One o these books,as well as several published reports, ocuses on Swedish integration policiesand entrepreneurship within immigrant groups in Sweden. Nima has also writtena number o articles or Swedish newspapers, such as Atonbladet, Expressen, and

Veckans Arer, and international publications, such as The Wall Street Journal.

As with all Libera publications, the views expressed in this paper are those o the author and do not reect those

o Libera or its representatives. Libera has no preconceived view, with the exception o its oundation deed.

The report can be downloaded or ree rom www.libera.f/.
http://www.libera.fi/http://www.manual.fi/http://www.manual.fi/http://www.libera.fi/


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Contents

Preace 5Introduction 7

Free market success story 9Capitalism without capitalists 12The (hidden) rise in taxation 14The work ethic and dependence on government benefts 18Failing integration policies 21Impressive social outcomes even beore welare state expansion 23Free-market Sweden? 25Conclusions 29

Sources 30


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Preface

In The Swedish Model Reassessed, Nima Sanandaji oers a novel historicalperspective on the development o the Swedish economy. Contrary to the commonly-

held view, he believes the success o Swedish society is not due to the welare state.Rather, it is a Johnny-come-lately: expansion o public welare started only around1970. By 1985, taxes exceeded 50% o GDP, and by the mid 1990s Sweden haddropped rom one o the top positions to a mid-level rank in terms o wealth andeconomic growth.

Sanandajis key insight is the primacy o the prevailing values. Honesty,rugality, and thrit were part o Swedish culture even beore the Reormation,

which institutionalized basic virtues. This moral capital, arduously built up overcenturies, has sustained Sweden (and the other Nordic countries) through manyvicissitudes and supported entrepreneurship, inventiveness, and economic growth.It also brought Swedish emigrants in the United States well above average fnancialbenefts.

The welare state depends on high taxation, which is made possible by the presenceo moral capital. Yet the bureaucratic welare structure is inexorably eroding the

very moral resources which make it easible. In due course, economic decline isinevitable. This has become apparent in Sweden, and contributed to a political swingater decades o social democratic rule. The new right-o-center administration hasalready made an appreciable dierence.

The present treatise should inspire a closer examination o the long-terminteraction between values and economic success. Comparisons between dierentcountries and regions would be illuminating. To measure morality will no doubt

be methodologically difcult. Nevertheless, the revelation o the cause and eectmechanisms would be well worth the eort. Democracy itsel is built on the basiso morality.

Helsinki, 8 September, 2011

Gustav von Hertzen

ChairmanLibera Foundation


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Introduction

Sweden is oten regarded as a country whose policies should be emulated by thosein other nations wishing to expand the size o their governments. The reason is that

Sweden combines a large public sector with many attractive eatures, such as lowcrime rates, high lie expectancy, and a high degree o social cohesion.

However, as this report argues, the success o Swedish society is not due to thewelare state, as is oten assumed. Rather, it is the result o cultural and demographicactors, as well as a avourable business environment throughout most o Swedensmodern history.

The evidence or this hypothesis comes rom three sources. Firstly, Sweden showedeven higher rates o growth and had a model society well beore the start o theSocial Democratic era in 1936.

Secondly, descendants o Swedes who migrated to the United States in the nineteenthcentury are also today characterized by avourable social outcomes, such as a lowpoverty rate and high employment, despite not being supervised by a caring welarestate in the US. This indicates that cultural actors such as the Lutheran work ethic

have played, and continue to play, an important role in the success o Swedish society.

Thirdly, starting in the 1990s, Sweden has dramatically scaled back the size andscope o government, which was ollowed by a recovery o the earlier strong growthrate. The period characterized by the most extensive welare state policies, around19701995, is associated with low growth rates. It is true that Sweden maintainsa high standard o living, despite steep taxes, but at the same time, it is wrong toassume that this proves high taxes do not aect the economy.

Auent Sweden could have been even more auent with lower tax rates. Thecombination o high taxes, generous government benefts and a rigid labor markethas led to dependency on government handouts among a large sub-section o thepopulation, and has limited the ability o Swedish society to integrate immigrantsinto the labor market.

Sweden compensates or its tax policy by employing market-riendly reorms in other

areas, such as trade openness, personal retirement accounts and choice o schools.Societies can prosper or many dierent reasons. Undeniably, the success o Swedishsociety hinges on the ree market policies to which the nation is again returning.


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Free market success story

The Swedish economic experience is rarely mentioned as an example o the powero ree markets. Yet ew other nations demonstrate as clearly the phenomenal

economic growth that comes rom adopting ree-market economic policies. Swedenwas an impoverished nation beore the 1870s, indicated by massive emigrationto the United States around that time. As a capitalist system evolved out o theagrarian society, the country grew richer.

Property rights, ree markets, and the rule o law, in combination with largenumbers o well-educated engineers and entrepreneurs, created an environment inwhich Sweden enjoyed an unprecedented period o sustained and rapid economic

development. In the hundred years ollowing the market liberalization o the late19th century, Sweden experienced phenomenal economic development.1

Famous Swedish companies like IKEA, Volvo, Tetra Pak, and Ala Laval wereall ounded during this period, and were helped by business-riendly economicreorms and low taxes.

An illustration o the vitality o the Swedish ree-market model is how well the

nation dealt with the Great Depression.

As a trade-dependent nation, Sweden was not only hurt by the global economicdepression, but also by the trade barriers other nations put up in a misguided eortto protect their economies rom the downturn. From 1930 to 1933, the numbero job opportunities available in Sweden decreased by 170 000, a fgure whichindicates that one sixteenth o all jobs in the economy were lost.2

The crisis could have been severe, especially since it occurred at the same time asmany young Swedes were entering the labor orce. But the Great Depression wasshort-lived in Sweden. Job creation occurred rapidly in the economy, characterizedby ree labor markets and low taxes.

1 Maddison (1982).2 Krantz (1997).


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As shown in Figure 1, more Swedes were working in 1935 than beore the crisis. 3The reason is that new, innovative businesses were created that replaced many othe jobs that were lost. The economic downturn spurred a structural transition romarming to industry in Sweden. During the crisis years, Nohab Flight engines, today

known as Volvo Aero, was born. Shortly ater the crisis, Securitas and SAAB wereounded.

A new method or creating paper mass was invented, leading to the creation oSunds Defbrator, today known as Metso Paper a leading developer o paperindustry equipment throughout the world. The successul ood company Dagrdswas also ounded in the 1930s. Yet today, close to a century later, Sweden still reliesheavily on many businesses started during or shortly ater the Great Depression.4

3 Ibid.4 See for example Johnson (2006).

Figure 1.

Employment in Sweden (thousands)

before and after the Great Depression

Source: Krantz (1997)

1925 1927 1929 1931 1933 1935 1937 1939

2300

2400

2500

2600

2700

2800

2900

3000


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The beginning o the 1990s saw a new crisis hit the Swedish economy. In atime when unemployment was alling in many other countries, it rapidly rose inSweden. Employment ell by twelve percent between 1990 and 1993. Soon Swedenollowed the global trend o strong economic growth. But rates o employment rose

only very slowly. In act, it took until 2008 until it had reached the level it was atbeore the early 90s ironically, the same year that a new recession hit Swedenand the world.5

Why was the recovery so much slower in the 1990s, compared to the 1930s? As willbe discussed in more detail later in this paper, the explanation lies in the policyshit in Sweden at the same time, which brought higher taxes and a rigid labormarket that crowded out private sector job creation.

5 SCB (2009).

Figure 2.

Employment in Sweden (thousands)

before and after the 1990s crisis

Source: Statistics Sweden (2009)

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

3600

3700

3800

3900

4000

4100

4200

4300

4400

4500

4600


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Capitalism without capitalists

Sweden was a wealthy and entrepreneurial nation in the mid-twentieth century.However, during the late 1960s, policies steered sharply to the let. Not only did the

overall tax burden rise (as is discussed urther in this report), but the system alsodiscriminated heavily against individuals who owned businesses.

The Swedish economist Magnus Henrekson has shown that the eective marginal taxrate (marginal tax plus the eect o ination) that was levied on Swedish businessescould be more than 100 percent o the profts. For example, in 1980 a private personwho owned a business could pay an eective marginal tax o 137 percent.

However, i the business was fnanced by debt, the tax rate dropped to 58 percent,since the eect o ination was reversed, and the business could make deductionsrom the high taxes. The situation was very much dierent or government ownerssuch as public pension unds, which did not pay taxes, but could make deductions.A public pension und that invested borrowed money aced an eective marginaltax rate that was minus 83 percent.6

Thus, whilst a private, individual owner, who invested her or his own money, actually

lost money by making a proft, in eect, the system almost doubled the profts ofrms owned by government pension unds. Henrekson drew the conclusion thatthe tax policies developed according to the vision o a market economy withoutindividual capitalists and entrepreneurs.7

The sharp let turn in Swedish economic policy did indeed aect entrepreneurship.Sten Axelsson, another Swedish economist, showed that the period between the endo the 19th century and the beginning o the First World War was a golden age or

the ounding o successul entrepreneurial frms in Sweden.

In 2004, 38 o the 100 businesses with the highest revenues in Sweden wereentrepreneurial.8 A ull 21 o these frms, a clear majority, were ounded beore1913. Additionally, 15 were ounded between 1914 and 1970.

Ater 1970, the establishment o new frms dropped signifcantly. Among the100 frms with the highest revenues in 2004, only two were entrepreneurial frms

ounded ater 1970. I the 100 largest frms are instead ranked according to how

6 Henrekson (2007). Calculations based on a real prot of 10 percent.7 Ibid.8 Entrepreneurial is dened as rms that were started from a privately-owned business in Sweden.


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many they employ, the fgures change. In that case, none o the largest frms wereentrepreneurial and ounded ater 1970.9

How can this dramatic drop in entrepreneurship be explained? Why is Swedenso heavily dependent on frms that in some instances were ormed more than onehundred years ago? One reason might be that it takes time or frms to grow large;another, that large frms played a more vital part in the economy in previous times.

These actors alone cannot explain the massive all in the number o newentrepreneurial frms in Sweden. Clearly, one important actor is the radicalizationo Swedish policies to the let, which impaired the development o the private sector.The policy o capitalism without capitalists has, coupled with regulation o thelabor market and a massive expansion o taxation and the public sector, crowdedout private sector job growth in Sweden.

Between 1950 and 2005, the Swedish population grew rom seven to nine million,but the net job creation in the private sector was zero. Jobs in the public sectorexpanded heavily until the end o the 1970s. As it became difcult to urtherexpand the already large public sector, job creation simply stopped.10

The inability o the highly-taxed Swedish economy to create new jobs ater the1990s crisis, as mentioned previously in this discussion, is thus closely related tochanging policies in Sweden. The move towards higher taxation has also limited

economic development in Sweden.

9 Axelsson (2006).10 Bjuggren and Johansson (2009).

Table 1.

Effective marginal taxes

(including ination) in Sweden in 1980

Calculations based on a real prot of 10 percent. Source: Henrekson (2007).

Owner Debtfnanced

Newmission

Reinvestment

Households (private owners) 58 137 52

Tax exempt owners(such as public pension unds) -83 -12 11

Insurance companies -55 38 29


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The (hidden) rise in taxation

In 1950, the Swedish tax revenues were around 21 percent o GDP. In the nextthirty years, taxes increased by almost one percent o GDP annually.11 How was this

massive increase in taxation possible?

One explanation is that many Swedes supported the policies o the leading SocialDemocratic party, which held power in government over much o the twentiethcentury. Another possible explanation is that the rise in taxation was eectivelyhidden rom the public.

As the Italian economist Amilcare Puviani predicted in 1903, and Nobel laureate

James Buchanan discussed urther, it is easier or politicians to raise hidden,indirect taxes rather than visible taxes.12 Changes in Swedish taxation stronglysupport this hypothesis. In Figure 3, it is shown that the entire rise in taxes since1965 can be attributed to the introduction and gradual increase o an indirect salestax (VAT) and the slow but steady rise o the indirect employers ees.

11 Ekonomifakta12 Cited by Baker (1983); Buchanan (1960).

Figure 3.

Hidden and visible taxes in Sweden (percentage of GDP)

Source OECD.

total

hidden

visible

0

10

20

30

40

50

60

1965 1970 1975 1980 1985 1990 1995 2000 2005


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Without this rise in hidden taxation, taxes in Sweden would have remained at around30 percent o GDP. The reason is that Swedish politicians have not increased visible

taxes, since such a rise would probably have been opposed by voters. As will beexplained later in this paper, Swedish taxes have lowered signifcantly during thepast ew years. One explanation or why they have not decreased even more mightbe that the total tax burden remains hidden. For example, in a survey conducted in2003, the Swedish public was asked to estimate the total amount o taxes they paid.

Almost hal o the respondents estimated that the total taxes they paid amountedto around 3035 percent o their income. At the time o the survey, the real tax

rate levied on an average income earner (including consumption taxes) was 63percent.13 Other more recent studies lend support to the idea that many Swedes areunaware o how much hidden taxes are levied on their incomes.14

13 Sanandaji and Wallace (2004).14 For example, Larsson (2009).

Figure 4.

Hidden and visible taxes in Finland (percentage of GDP)

Source OECD.

total

hidden

visible

0

5

10

15

20

25

30

35

40

45

50

1965 1970 1975 1980 1985 1990 1995 2000 2005


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Several studies rom Sweden support the idea that the nation is at, or close to, thetip o the Laer curve.19 For instance, one study showed that or each additionalSwedish krona levied and spent by the government, the eective loss in the privatesector can be up to 3 additional kronor.20

Although it is a popular belie that high taxes have not impaired economicdevelopment in Sweden, they have been shown by research publications to be sodamaging that they even prevent their own intention o increasing public revenue.Besides aecting the level o entrepreneurship and crowding out private sector

job creation, the big government policies have also aected the amous Swedishworking norms.

19 See for example Holmlund and Sderstrm (2007); Pirttil and Selin (2011).20 Hansson (2009).


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The work ethic and dependence on government benets

How was it possible or Sweden to experience such phenomenal growth ater theintroduction o a ree market economic model? One explanation is that Sweden

had an abundance o natural resources; another is that the nation was not directlyinvolved in either o the World Wars, which tore up other industrialized nations inEurope.

One should, however, also look at the institutional rameworks in Sweden, especiallythe culture related to work and entrepreneurship. Beore the introduction o propertyrights and ree enterprise, Sweden was a poor nation, but still gited, with a strongProtestant work ethic.

For a long time, the religious, cultural, and economic systems in Sweden osteredstrong norms related to work and responsibility.21 These norms were important orthe success o the Swedish ree market system. Socialist politicians also saw them,coupled with the act that Sweden was a uniquely homogeneous society, as theoptimal starting point or an expanding welare state.

Since the norms relating to work and responsibility were so hard, Swedish citizens

did not usually try to avoid taxes or misuse generous public support systems. Also,the one-solution-fts-all systems o the welare state are typically less disruptivein a strongly homogeneous social environment, since most o the population hassimilar norms, preerences, and income levels.22

Thus, these strong social norms opened the way or a massive expansion ogovernment. But as Swedes became accustomed to a system o high taxes andgenerous government benefts, the norms gradually declined. In the World Value

Survey o 198184, almost 82 percent o Swedes responded that claiminggovernment benefts to which you are not entitled is never justifable. Sweden wasstill a nation with very strong morals related to public benefts.

21 Ibid.22 For example, it is difcult to introduce a system of social security that is generous to the middle class if

the income level varies signicantly between the middle class and those with the lowest incomes. If thebenet level is high enough to be generous to middle class individuals, it might be above what thosewith low incomes can earn, due to their lower productivity. In a homogeneous system, with less initialspread of income to begin with, a system can be designed that, to a large degree, feels generous tothe middle class, whilst not reducing the incentives of low income earners as much as it would in aheterogeneous society.


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As the population adjusted their norms to the higher tax regime, the number whoheld this view dropped steadily in urther surveys. In the survey o 19992004, only55 percent o Swedish respondents believed that it was never right to claim beneftsto which they were not entitled.23

Table 2.

Benet morale in Sweden

19811984 19891993 19941999 19992004 20052008

0.815 0.745 0.579 0.553 0.610

Proportion of answers agreeing to claiming government benets to which you are not entitled is neverjustiable. Source: Heinemann (2007) with the latest World Value Survey data for 20052008 added.

This deterioration o norms supports Swedish scholar Assar Lindbecks theory onsel-destructive welare state dynamics, in which the welare system erodes normsrelating to work and responsibility.24 Change in the work ethic is related to a risingdependence on welare state institutions.

Since the beginning o the 1990s, approximately one fth o the Swedish population

at working age has been supported by unemployment benefts, sick leave beneftsand early retirement benefts. Among others, Jan Edling, ormer economist at thelabor union LO, which has close ties to the Social Democratic party, has discussedthis high hidden unemployment, and its connection to the over-utilization o welaresystems.25

Recently, Swedish policies have shited strongly to the center-right, and a long-termsocial democratic hegemony has become a situation where the Social Democrats

are in deep crisis. One likely explanation is that the Swedish electorate wishes toagain strengthen the work ethic and responsibility norms that were eroded duringthe high tax regime.

23 Heinemann (2007).24 Lindbeck (1995).25 Edling (2010), Swedish Enterprise Institute (2006), Herin, Jakobsson and Rydeman (2006).


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Both government policy and the public debate in Sweden have ocused on reducingthe overutilization o welare services in recent years. As shown in Table 2, thisis correlated with an upward swing in beneft morale. Although Swedish societyhas been known or a strong work ethic and norms o responsibility, it has not

been resistant to the act that high taxes and generous welare programs diminishthe incentive to work hard, and instead create an incentive to overuse the welaresystem.

The combination o high taxes, generous benefts, and a rigid labor market hasclearly aected the integration o the oreign-born into Swedish society.


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Failing integration policies

Sweden used to be very good at integrating immigrants. In 1950, the rate oemployment or the oreign-born was 20 percent higher than that or the average

citizen. This fgure dropped by 50 percentage points in as many years. In 2000, therate o employment was 30 percent lower or the oreign-born.26 In 1968, oreigncitizens living in Sweden had 22 percent higher income rom work, compared tothose born in Sweden. In 1999, oreign citizens had 45 percent lower incomes.27

While racism decreased signifcantly as time passed, the situation o those bornabroad in the labor market had worsened dramatically. A government study showedthat in 1978, oreign-born residents rom outside the Nordic nations had a rate o

employment that was only seven percent lower than that o ethnic Swedes. In 1995,the gap had expanded to 52 percent. 28

Why did this drastic shit occur? One reason is that Sweden shited rom laborimmigration to reugee immigration. However, it is important to remember that thenations rom which labor immigrants came to Sweden ater the Second World War such as Greece and Turkey were relatively impoverished at the time.

Also, many o the reugees who have come to Sweden rom nations such as Chile,Iran, and Iraq are rom the educated elite and middle class, seeking a better lieabroad. To give an illustrative example, a privileged group o well-educated Iraqicitizens ed rom Saddam Husseins reign to Sweden at the end o the 1980s andthe beginning o the 1990s.

O those Iraqis that stayed in Sweden between 1987 and 1991, they were 2.3 times aslikely to have a higher education o more than three years, compared to native Swedes.

So, how well did this highly-educated group do in the Swedish labor market? In 1995,only 13 percent o the women and 23 percent o the men rom the group were employed.29

Another Swedish research study has calculated the incomes o immigrants toSweden rom Iran and Turkey. Between 1993 and 2000, the income rom work orthe average Iranian immigrant was only 61 percent, and or the average Turkishimmigrant 74 percent, o the average income o a native Swede.30

26 Ekberg and Hammarstedt (2002).27 Ibid.28 Ekberg (1997).29 Rooth (1999).30 SCB and Arbetslivsinstitutet (2002).


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According to the US Census or 2000, those born in Iran had an income that was136 percent o the average or native-born residents, compared to 114 percent orthose born in Turkey. 31 Clearly, similar groups o immigrants had very dierentopportunities in the US compared to Sweden.

In 2004, when the Swedish economy was perorming strongly, the employment rateamong immigrants rom non-Western nations in Sweden was only 48 percent. Itshould be noted that this defnition in Swedish statistics also includes some peoplethat do not hold a regular occupation, such as those participating in publicly-fnanced labor market programs. 32

Dependence on government welare was nine times as high or non-Western

immigrants compared to those born in Sweden the same year. 33 That Sweden hasgone rom being a nation which successully integrated the oreign-born into thelabor market, to one where many immigrants are trapped in long-term dependencyon government handouts, is not only linked to changes in immigration policy, butalso to general economic policy.

The expansion o the Swedish welare state since the mid-twentieth century hascreated a situation where the incentive to work has reduced, whilst the incentive to

live o government handouts has increased. At the same time, regulations and laborunion domination impede entry into the labor market.34

There is no doubt that a generous welare system initially helps many immigrantamilies, cushioning the transition to a new country. However, as long-termdependency grows, it can easily transorm into social poverty. The act that socialproblems exist among immigrants to Sweden is not a coincidence.

I avorable outcomes were solely the result o the Swedish welare system,integration would be very successul, since good outcomes would simply betransmitted through the system. But such is not the case. The reasons why Swedenhas avorable social outcomes also have a lot to do with demographic and culturalactors that existed beore the rise o the high-tax welare state.

31 US Census 2000.32 Sanandaji (2009).33 SCB (2004).34 Sanandaji (2009).


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Impressive social outcomeseven before welfare state expansion

It is important to realize that many o the dierences between Sweden and the US

in terms o social outcomes existed already beore the rise o the welare state. In1950, long beore the high-tax welare state, Swedes lived 2.6 years longer thanAmericans. Today the dierence is 2.7 years.

A comparison o historical rates o income inequality in Sweden, The United States,Canada, France and Netherlands shows interesting results. Already by 1920, wellbeore the existence o a welare state, Sweden was among those with the lowestlevels o inequality within this group o countries.35

One important reason why Sweden perorms well on many social metrics has itsroots in history and sociology: Sweden and other Nordic nations have, or hundredso years, benefted rom sound institutions, such as a strong Lutheran work ethic,a homogeneous population, and high levels o trust, civic participation, andcooperation.

These cultural phenomena do not disappear when Swedes cross the Atlantic and

emigrate to America. On the contrary, they appear to bloom ully. The 4.4 millionor so Americans with Swedish origins are considerably richer than the averageAmerican, as are other immigrant groups rom Scandinavia.

I Americans with Swedish ancestry were to orm their own country, their per capitaGDP would be $56 900, more than $10 000 above the earnings o the averageAmerican. This is ar above the Swedish GDP, at $36 600 per capita. Swedes livingin the US are thus approximately 53 percent more wealthy than Swedes (excluding

immigrants) in their native country.36

It should be noted that those Swedes who emigrated to the US, predominatelyin the nineteenth century, were anything but the elite. Rather, it was oten thoseescaping poverty and amine. The success o this group shows the value o normsand institutions, which to some degree have been hindered, to create social goodby the economic policies implemented in Sweden.

35 Roine and Waldenstrom (2008).36 OECD (2009); US Census database.


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According to data rom the Bureau o Labor Statistics, Americans with Swedishancestry do not have signifcantly higher test-scores than other European immigrantgroups, and score no higher than Swedes in Sweden, which confrms that immigrantSwedes were not a selected elite group.37

A Scandinavian economist once said to Milton Friedman: In Scandinavia, we haveno poverty. Milton Friedman replied: Thats interesting, because in America, amongScandinavians, we have no poverty, either. 38 Indeed, the poverty rate or Americanswith Swedish ancestry is only 6.7 percent, hal the U.S. average.39 EconomistsGeranda Notten and Chris de Neubourg calculated the poverty rate in Sweden usingthe American poverty threshold, fnding it to be an identical 6.7 percent.40

This points us towards the conclusion that what makes Sweden uniquely successulis not the welare state, as is commonly assumed. Rather than being the cause oSwedens social strengths, the high-tax welare state might have been made possibleby the hard-won Swedish stock o social capital.

It was well beore the welare state, when hard work paid o, that a culture witha strong Protestant work ethic developed. As discussed previously in this paper,the modern system has eroded some o this norm.41 The Swedish welare state

does create some social good, or example, by providing relatively generous socialsecurity nets. Yet it is clearly not the only reason or the low poverty rate and longlie expectancy in the nation.

37 Bureau of Labor Statistics.38 Quoted among others by Kotkin (2009).39 US Census 20062008

40 Notten, Geranda and Chris de Neubourg (2007). Note that the Swedish gures also include poorimmigrants.41 Some of the facts and arguments in this chapter appeared in a column David Brooks published in The

New York Times on 3 May, 2010. It should be noted that the author of this paper co-authored an ar-ticle with the same statistics and arguments in The New Geography on the day prior to the publicationof Mr. Brooks article. The articles are included in the footnotes.


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Free-market Sweden?

When Sweden is used as an example in policy debates, not only the successes butalso the limitations are oten exaggerated. It is important to realize that Sweden

is not a socialist nation at heart. Taxes are high and the labor market is rigid, butpolicymakers have sought to compensate or this lack o economic reedom witheconomic liberalizations in other parts o the economy.

Five dimensions o economic reedom are included in the Economic Freedom Indexdeveloped by the Frasier Institute: size o government; legal structure and securityo property rights; access to sound money; reedom to exchange with oreigners; andlastly, regulation o credit, labor, and business.

A study ound that between 1970 and 2004, Sweden and other Nordic nationsscored poorly on the frst dimension: size o government. However, on the otherour dimensions, the Nordic nations had much higher scores than other groups oindustrialized nations.42

Since the beginning o the 1990s, Sweden has implemented a number o reemarket reorms which, in some cases, even surpass the US system. School vouchers

were successully introduced, creating competition within the rame o publicfnancing. Similar systems are increasingly being implemented in other publicprograms as well, such as health care and elderly care. Another example is that thepension system has been partially privatized, giving citizens some control over theirmandated retirement savings.43

In Figure 5, the overall scores rom the Economic Freedom Index published by TheHeritage Foundation and The Wall Street Journal are shown or the US, Sweden,

and Finland over the period 1994 to 2009. Although Sweden still ranks below theUS, it is clear that the country has caught up most o the gap that existed in themid-1990s. Finland has, interestingly, even surpassed Sweden. This illustrates thatSweden is not alone among the Nordic nations to move towards greater level oeconomic reedom.

42 Bergh and Henrekson (2010).43 See for example: Freeman, Richard B, Birgitta Swedenborg and Robert H Topel (2010).


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Figure 5.

Heritage/WSJ economic freedom index overall score

Source: Heritage Foundation and Wall Street Journal Index of Economic Freedom.

1995 1997 1999 2001 2003 2005 2007 2009 2011

50

55

60

65

70

75

80

85

USA

Sweden

Finland

Figure 6.Frasier economic freedom index overall score

Chain-linked summary score index. Source: Frasier Institute (2010).

1970 1978 1988 1998 2008

USA

Sweden

Finland

4

5

6

7

8

9


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Conclusions

The Swedish model is oten dramatized in the public policy debate, described aseither a social democratic utopia or a ailed socialist experiment. These views are

ar rom the truth. Sweden is a successul country in terms o low poverty rate andlong lie expectancy. However, these actors have much to do with Swedish culturethat existed already when taxes were still relatively low.

As Milton Friedman has previously noted, the millions o US residents o Swedishdescent also have a low poverty rate. As is shown in this report, they combine thiswith a living standard that is over 50 percent better compared to Swedes living inSweden. The transormation o Sweden rom an impoverished agrarian society to a

modern industrialized nation is a rarely mentioned, but quite signifcant, exampleo the role o ree markets.

One should remember that the golden age o Swedish entrepreneurship, whereone successul frm ater another was ounded in the small country and gainedinternational renown, occurred during a time where taxes and the scope ogovernment were quite limited. Sweden shited to radicalized social democraticpolicies in the 1960s, 1970s, and the 1980s.

However, this transormation was not successul, as it led to long-term diminishedentrepreneurial growth, lagging behind in terms o wealth compared to otherindustrialized nations, and an erosion o previously strong work and beneft norms.The move towards high taxes, relatively generous government benefts, and aregulated labor market, is related to the situation in which Swedish society hashad difculty integrating even highly-educated immigrants, and where a fth o thepopulation o working age are supported by various orms o government handouts.

It is, however, important to remember that Sweden, like other Nordic nations, hascompensated or these policies by improving economic liberty in other felds. Somereorms, such as the partial privatization o the mandatory pensions system andvoucher systems in schools and health care surpass what has been possible toimplement in most developed nations.

Swedish society is not necessarily moving away rom the idea o a welare state,

but continuous reorms are implemented towards economic liberty within the scopeo welare. The rise o government has been stopped and even reversed in recentyears. The nation is again returning to the ree market policies which served it sowell in the past.


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What should other nations learn rom the Swedish model? The successo Swedish society is not linked to the welare state as is oten assumed.Rather, it is the result o cultural and demographic actors, as well as a

avorable business environment, throughout most o Swedens modernhistory.

The combination o very high taxes, rigid labor markets, and generoushandouts constrain entrepreneurship and wealth creation in Sweden.The nation would be even more auent with a ree market-orientedpolicy. Sweden is now moving closer to its ree market roots, reducing

taxes considerably, and rising in indices o economic reedom.

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