All Commentary
Thursday, March 1, 2007

The New Sweden

Europe Should Embrace the New Swedish Model of Liberalization

Waldemar Ingdahl is director of Eudoxa, a liberal think tank in Stockholm, Sweden.

The European Social Model is being heavily discussed in Europe. Some still laud it, but its problems are obvious, with low economic growth, an aging population coupled with “pay-as-you-go” pension systems, and widespread persisting unemployment.

In Sweden we have already solved this problem; we discarded the social model and replaced it with a free-market system.

This announcement may come as a big surprise to many in Europe, especially after former Prime Minister Göran Persson’s article in a Newsweek Special Issue, where he exalted the Swedish model for being both fair and competitive.

But in fact, from his election in 1996 until his defeat last September, Persson, former leader of the Social Democratic Workers’ Party, radically transformed what had been perceived abroad as the Swedish model. What we believe about a model might not be the truth but solely a projection of our ideological predilections and dated assumptions. (Persson was succeeded by Fredrik Reinfeldt, leader of the “center-right” Moderate Party.)

Initially the Swedish model meant the 1950s’ full employment and low inflation, something that was achieved through competitive industries, relatively low taxation (lower than the U.S. level at the time), and unregulated markets.

The admired Swedish model was in fact abandoned in the 1970s, precisely when it gained its international fame and admiration. Then the world’s highest tax rates were introduced, together with interventionism, particularly in social policy and the labor market. An ill-fated attempt to introduce the radical “next step” toward Yugoslav-style trade-union-controlled socialism ended the decade. The expansion of government was an effect not the cause of the system’s previous success. The result of this expansion was the dismal crisis of the early 1990s, when the Swedish Central Bank vainly tried to link an overvalued krona to the European Exchange Rate Mechanism and then protect it with 500 percent interest rates.

The rest of the decade consisted in the slaughtering of many of the Swedish model’s most sacred cows by the Social Democratic Party, but the process was executed in silence. It was not the conscious and explicit change of policy effected by Britain ‘s New Labor. Rather, it was a change of course in practice but not in theory or in the government’s rhetoric. The gap between word and action was wide.

When looking at Sweden today and comparing it to the rest of the EU, one is struck by its relatively free-market approach. It ranks 21st and 24th, respectively, in the latest Heritage Foundation and Fraser Institute indexes of economic freedom.

For a long time Sweden has been favorable to free trade, which is understandable since 60 percent of GDP derives from it. For a time in the early 1990s Sweden abolished all farm subsidies and had one of the most deregulated agricultural sectors in the world, before unfortunately being forced to re-regulate when entering the European Union’s (EU) Common Agricultural Policy.

In 1996 Sweden deregulated its market for electricity, allowing private competition in distribution. Today, half the nuclear power plants are owned by a German corporation.

Telecommunications, postal services, and public transportation have largely been deregulated, opening up new markets. The state monopolies have been abolished, and the telephone company has been partially privatized.

The introduction of a voucher system has opened up a market in which parents have a high degree of choice over where to send their children to school.

Health care has largely been opened to private alternatives, thanks to the doctors’ and nurses’ labor unions. In fact, one of Stockholm’s largest emergency hospitals, St. Göran’s, is a private company listed on the stock exchange.

Sweden has a comparatively low corporate tax rate of 28 percent. The process for opening a business is relatively straightforward, ranging from one week to a couple of months. Sweden presents few barriers to foreign investment, maintaining restrictions only in some limited national-security–related sectors. Most commercial banks in Sweden are privately owned and operated. Banks are allowed to offer a full range of services, and foreign banks have access to the sector. Few working days are lost to strikes. It is easy to close down factories and move investments abroad. There is no legal minimum wage. Unlike in other European countries, retailers do not have their hours regulated. In 2005 the government abolished inheritance and gift taxes. The Swedish Competition Authority has forcefully reacted against local politicians who restrict full competition.

Sweden has high immigration per capita and was, along with the Britain and the Republic of Ireland , the only original EU member not to impose restrictions on workers from new member countries.

The pension system has been reformed from the problematic “pay-as-you-go” formula to a program funded according to the performance of the economy. In the fully funded system all Swedes choose investments for their pensions. If the economy does not grow, pensions will be low, and there are mechanisms that prevent the system from going bankrupt.

These changes, which would have been seen as radical if enacted in the “Anglo-Saxon” market model, have paid off for Sweden , permitting a 2006 GDP growth forecast of about 4 percent. Inflation was lowered to an average 1.4 percent last year.

Granted, it is an easy task to become a paragon of liberalization in today’s Europe . But it shows that what many Europeans favorably refer to as the Swedish model is not applied anymore in Sweden . The remnants of the old model—high income taxation (60.3 percent on average), the high value-added tax (25 percent), the regulated labor market, and the insufficiently reformed social-redistribution systems—are the problematic areas in the Swedish economy, not its bold vanguard.

If someone had predicted in the 1980s that Sweden would follow the social-democratic model set by France or Germany, I as a libertarian would have agreed. Today I can say that Europe should embrace the Swedish model.