ECONOMIC HISTORY OF SWEDEN
Introduction
Historical circumstances produced a very specify growth of Swedish economy in the year 1990s-2000s.
To assess a country’s economic development, McKinsey Global Institute uses a framework consisting of three dimensions: economic growth (GDP and GDP per capita), inclusiveness (how well economic growth and opportunities are distributed throughout society) and robustness (the economy’s resilience to various shocks as well as broader sustainability criteria)(Mckinsey Global Institute, 1995). It is well known that Sweden’s economy grew faster than nearly all other countries during the last two decades.
Several countries in Europe and the United States are struggling with public debt issues and anaemic growth as a result of the financial crisis. In light of this, the Swedish economy is often held up as a model internationally. With an economic growth rate that has exceeded the growth rates of the EU-15 and the United States over the last 15-20 years, Sweden has advanced from 14th place in the OECD’s ranking of countries by wealth in 1993 to 11th in 2010.( )(Mckinsey Global Institute, 2010; OECD (1999). This growth is largely driven by increased productivity and businesses that are exposed to international competition have been the strongest engines of growth. Increased competition, skilled labor, a collaborate relationship between employers and employees, and a strengthened economic and political framework have been key enablers of this growth.
Swedish Growth Tracks Reform Trends
1970-1980s
In line with OECD (1999; 1989) analysis, Sweden was one of Europe’s poorest countries during most of the 19th century. A wave of free trade reforms spurred economic growth remarkably, which was sustained the ensuing one hundred years. In 1970, Sweden had advanced to fourth place in terms of GDP per capita among OECD countries, but fell to number 14 in 1993. The main reason was stagnating productivity growth, largely due to insufficient competition in many markets. In the 1980s, Sweden devalued its currency on several occasions to maintain its competitiveness. However, these actions only fuelled inflation and created a need for further devaluations. In the early 1970s, Sweden faced a severe financial crisis as the real estate bubble that had been inflated in the latter part of the 1980s burst, resulting in significant credit losses and a crisis in the banking sector( Fisher and Thurman, 1989). Coupled with a cost level in the economy that was too high and a failed attempt to defend the country’s fixed exchange rate, this led to a deep recession in which GDP contracted for three years in a row, unemployment increased by a factor of four and the public deficit ballooned to double digits (Rousseau and Wachtel, 1998; Lindbeck, 1983).
1993-1994
Bergh, (2011) in his studies “The Rise, fall and Revival of the Swedish Welfare State” stated that Swedish productivity growth has remained higher than in other countries except during the financial crisis from 2008 and 2009, when the Swedish manufacturing sector experienced a sharp downturn. While productivity growth recovered after 2009, it remains below earlier trends.
OECD (1999) statistical analysis shows that the Swedish economy reached a turning point in 1993-1994 and since 1993 Sweden has once again been climbing the OECD wealth league (ranking of countries by wealth).
Using Swedish metrics, Sweden’s GDP increased at an annual rate of 2.5 per cent 1993- 2010. Using the OECD metrics, for international comparisons, Swedish GDP grew at an annual rate of 2.7 per cent while GDP per capita increased by 2.3 per cent per year 1993- 2010. This implies that Sweden has grown faster than both the United States (2.6 per cent against 1.5 per cent per year, respectively) and the EU-15 (1.9 per cent and 1.4 per cent per year, respectively). Sweden now place 11th in the OECD’s wealth ranking, with a GDP per capita that is 15 per cent higher than the OECD average.
1993-2010
Reforming the Swedish economy in the nineties significantly impacted growth, private employment, and public finances.
From 1993 to 2010, the Swedish economy grew at an annual rate of 2.5 per cent, outperforming the EU-15 as well as the United States. Sweden’s GDP growth per capita,
2.0 per cent per year over the same period, was also higher than in the EU-15 and the
United States (OECD, 1999). As a result, Sweden advanced from 14th to 11th place in OECD’s ranking of countries by wealth and Sweden’s GDP per capita is currently 15 per cent higher than the OECD average. Sweden also scores high on several other key metrics that are commonly used to assess a country’s economic performance. The country has a comparatively low public debt, a balanced budget and a current account surplus. The strongest growth engine in the Swedish economy over this period has been the international sector, i.e. the manufacturing industry, business and financial services, and Commodities. This sector accounts for around one third of the Swedish economy, and its value added grew by 4.3 per cent per year from 1993 to 2010. The manufacturing industry, in particular, has achieved a rate of annual productivity growth of 5.7 per cent, which is very strong by international standards (Foreman-Peckoch (eds).1999). However, Sweden also differs from other European countries in that the number of jobs in the manufacturing industry is actually increasing if the share of business and financial services that are sold directly to the manufacturing industry is included.
Swedish economic growth in an international perspective
Over the period of 1993-2010
To improve our understanding of Sweden’s economic performance, the role of international sector need to be considered. The international sector accounts for 35 per cent of Sweden’s GDP and has been the driving
force behind half of total GDP growth in the past 15-20 years, generating annual value add growth of 4.3 per cent – considerably more than the average growth rate of the economy of 2.3 per cent annually.
The international sector consists mainly of the manufacturing industry and business and financial services. Productivity growth in the Swedish manufacturing industry has generally been very strong (5.7 per cent annually from 1993¬2010) and only a small number of fast-growing emerging economies such as China and Brazil have been growing faster (OECD, 1999). Employment has declined somewhat, although significantly less than in other European countries. Business and financial services have grown, however, mainly thanks to an increase in employment (3.5 per cent annually from 1993¬2010) while according to McKinsey Global Institute (1995), productivity growth has been low (0.5 per cent annually from 1993- 2010). Even in international comparisons, Sweden’s employment growth in business and financial services was high during the period for which comparable data is available (0.5 percentage points higher per year than in the EU-15 and 1.1 percentage points higher per year than in the United States from 1993-2006). Productivity growth was also 0.5 percentage points higher than in the EU-15 from 1993-2006. Commodities have grown in line with Europe but at a significantly slower pace than in Australia, South Africa, China and other commodity-rich nations. This growth has been achieved on the back of a successful global commercial expansion as well as efficiency improvements in production in Sweden that have ensured that Swedish businesses continue to manufacture products in Sweden, especially in more advanced areas.
Local and public sectors also have a significant role to play in achieving a stable economy growth.
Economic Growth in Institutional Perspective
The importance of institution in economy’s growth is more or less mainstream economics.
Knack and Keefer (1995) in their studies took into account the role of institutions in economic growth. For example Knack and Keefer (1995) Institutions rule argued that certain types of institutional quality, especially property rights, trumps geography and trade are determinants of growth. Rothstein, (2008) has also reviewed existing evidence and provided further evidence that judicial efficiency, low levels of corruption, well-organized public bureaucracy, and well-defined private ownership co-varies with high levels of growth.
The Role of Institutions In Sweden Economy Growth
Myhrman (1994) was among the first to note that Sweden’s growth during the golden years of 1870-1970 can be explained by institutional reforms implemented mainly during the end of the 19th century. The types of institutional reforms introduced in the mid-1800s are exactly the types of reforms that are often found to be growth promoting by recent cross-country studies.
The roles of these institutional reforms were recorded in the late 1700s, when land reforms in the farming sector were beginning to be implemented. These reforms started, and were most radical, in Scania, the southernmost part of Sweden. Here, farmland was rearranged from being a patchwork of plots to organized squares of land set around centrally placed farms. Soon, similar changes took place throughout the country.
Apart from the obvious practical benefits from abandoning the patchwork of plots, land reforms were successful because they changed the incentives for peasants. Using data covering on average 450 farms present each year from 1702 to 1864, Olsson and Svensson (2010) show that property rights play a crucial part in explaining the rising agricultural production: secure property rights among self-owners combined with fixed taxes provided strong incentives for improved productivity compared to those peasants that were tenants under the nobility, where rising rents and the threat of eviction hindered investments. In some cases, the land reforms increased resource equality by allocating land more equally.
In the mid-19th century, private commercial and savings banks were established in Sweden. After some important deregulations of the credit market, these became important sources of credit for the private sector, which facilitated savings for farmers and benefitted private investment. The role of the Swedish Central Bank in granting credit to the private sector rapidly decreased (Larsson and Lindgren, 1989).
Institutional theories also explain similar events in 20th century. The high growth rates in the 1950s and 60s are usually attributed to successful macro-policies; however, Myhrman (1994) points out that Sweden during this period was also greatly helped by the fixed exchange rate via the Bretton Woods system, as well as an increase in trade through the GATT agreement. Anton (1969) accounts for another factor likely to have been important: the so-called policy making Swedish style, a term that refers to the spirit of consensus, predictability and rationality that has largely characterized Swedish politics during the 20th century.
During and after the crisis in the 1990s, a number of key reforms were implemented through cross-party decisions. These laid the foundation for a stable macroeconomic framework (Lars, 2012). Even before the crisis, in 1991, an extensive tax reform (the “tax reform of the century”) was implemented, resulting in lower rates of marginal income tax, lower rates of corporate tax, a broader tax base and more uniform taxation of different types of income.
In the mid¬1990s, a pension reform was implemented, which introduced self-funding and linked the size of pensions to economic performance. This created a more robust pension system and strengthened incentives to continue working in old age. In the second half of the 1990s, new budget rules were also introduced: a process for budget decisions in which the Swedish parliament is required in a single context to decide on total government expenditure, a surplus target for public finances and a government expenditure ceiling.
More so, in the mid-19th century, compulsory elementary school was introduced and railways were heavily expanded. In addition, men and women were given equal rights of inheritance, which furthered women's active participation in the economy.
In a nutshell full understanding of the Swedish growth requires that standard explanations such as education, infrastructure, natural resources, and the absence of war be complemented by institutional factors. Sweden’s period of high and sustained growth started with the introduction of property rights, free trade and non-corrupt meritocratic government bureaucracy.
Important Institutional Reforms and Events in Sweden During the 1800s.
Late 1700s Land reforms improved agricultural productivity.
1826 An institute of technology is established in Stockholm (which in 1876 was converted into the Royal Institute of technology.
1842 Compulsory elementary school is introduced.
1845 Equal rights of inheritance for men and women were introduced, free press was established, and the last formal aristocratic prerogative for higher positions in the state was abolished 1846 Compulsory guild training is abolished.
1848 Introduction of the joint-stock company law.
1862 Municipalities replaced parishes, and regulated municipal autonomy were introduced. New general criminal code includes a new law on misconduct in office.
1850-1860 lowered tariffs. Standard rate postage within Sweden was introduced. This played an important role in developing newspaper distribution and literacy.
1856-1866 The infrastructure was improved through the expansion of state-owned railways, which also prompts a shift to standardized time in Sweden in 1879.
1864 Freedom of trade was established.
1866 The four-estate system was abolished, establishing a modern bicameral Parliament.
1840-1862 Several new public boards and agencies are established for infrastructure investments, creating a need for meritocratic recruitment of civil servants.
1860s Interest rate control was removed and banks set up as limited companies were allowed.
1873 The Swedish currency Krona was introduced. Being tied to the gold standard, this provided a stability that made overseas trading easier.
1895 The Companies Act modernized legislation, and responsibility was being transferred to the newly established Patent and Registration Office.
1868 Direct payments for services to individual civil servants was being abolished. From now on, the fee/money should no longer belong to the individual civil servant but be state property.
1869 Parliament decides that taxes must be paid in money instead of in goods.
1855 – 1875 Weberian-style bureaucracy was being introduced through a series of reforms that transformed being a civil servant into a fixed wage, and full-time jobs are now available only through open meritocratic. Sources: Compilation based on Myhrman (1994), Rothstein (2008) and Schön (2000).
Conclusion
Every aspect of the Swedish economy has changed due to implementation of reforms. GDP and productivity growth are higher than in most comparable countries. In order for Sweden to be able to sustain and improve its economic growth in the coming decades, the country should strive to move from one to three strong engines of economic growth and also improve the economy’s long-term competitiveness by further expanding the supply of skilled labor. To achieve this, Sweden would benefit greatly from bold measures in these areas: Sustain the high growth in the international sector through increased innovation productivity. Competition from companies in emerging markets is increasing rapidly, as is the pace of innovation globally. The number of engineers in the world, for instance, more than doubled from 1998 to 2008 and increased by a factor of four in China.
Sweden should therefore ensure that it maximizes the return on its R&D investments by becoming a leader in innovation productivity in the same way as it has become a leader in production efficiency in many industries.
Also significant increase of productivity in the public sector would go a long way in boosting the economy growth. With an ambitious approach, there are good reasons to believe that productivity in the public sector could be raised by 25-30 per cent over the next ten years (while maintaining the same level of quality). Key elements include more ambitious targets, greater transparency on results, consolidation of Sweden’s public administration structure (primarily the municipalities) and a national centre of excellence for public procurement.