1. Macroeconomic policies and trends
Overall trends
As seen in Graph II:1, the period 1960-94 can be divided into various phases, with quite particular characteristics.
Graph II:1. Growth of real GNP per capita. Sweden 1961-93.
It may therefor be convenient to divide the 1960-94 period onto two distinct phases: 1960-74, and 1975-94.
Economic Policies 1960-74
With the foundations laid for the Swedish welfare state during the preceding decades, the 1960s basically represented a decade without major new socio-economic reforms, but with a quantitative expansion of the existing system.
The "strong society" – read: strong state – became, in the 1960s and early 1970s, the official Social democratic catchword aimed at summarising the public sector’s responsibility for giving all citizens a good life. The welfare components of the "strong society" were symbolized by a spectacular growth of transfer payments of various kinds: family allowances, housing subsidies, sickness benefits, generous unemployment compensation, early retirement allowances, and others. The 1960s also witnessed a steady growth of public expenditures on education, health and other social services.
In 1970, the share of public expenditures to GDP has reached 43 percent, and it continued to rise3. Of this 43 percent, around 10 percent was spent on health, and another 8 percent on education.
Exports developed favourably, and the high rate of economic growth enjoyed in the 1950s accelerated further in the next decade. Between 1960 and 1969, industrial production increased by an outstanding 70 percent, and labour productivity in industry with a similar figure (in absolute numbers, employment in manufacturing industry peaked in the mid-1960s, and has continually declined since then). The annual growth rate of per capita income reached almost 4 percent over the decade.
As in the preceding decades, macroeconomic policies were, by and large, successful. Demand management within a classical Keynesian framework dominated policy-making, and all through the 1950s and 1960s, fiscal policies do appear to have had a countercyclical effect (for a good discussion see, for example, Lindbeck, 1975, chapter 5). In textbooks in economics from the 1960s, students were told that business cycles belonged to the past, and that politicians, equipped with modern economic theory based on Keynes, had learned to handle both inflation and unemployment.
The overriding objective of monetary policies was to maintain a low rate of interest, and to channel credit into priority areas (not least to the housing sector, which through a variety of selective interventions received a privileged share of loanable funds).
Trade policies were, as always, liberal. Within the framework of EFTA (European Free Trade Association), GATT and other international organisations, Sweden continued to pursue continued trade liberalisation.
Sweden did maintain, however, a rather strict control of foreign exchange movements, primarily on capital account transactions. With a fixed exchange rate vis-à-vis all major trading partners between 1949 and the mid 1970s, the governments did not have to bother about exchange rate policies. The current account deficit run during most of the period 1960-75 was comfortably financed with foreign borrowing.
The 1960s and 1970s witnessed a tendency towards a more active state industrial policy. In the name of job protection, regional balance, or technological progress, selective state interventions in support of industrial development became increasingly common. Towards the end of the 1960s, when left-wing radicalism came to have a certain influence within trade unions and the Social Democratic Party, an active industrial policy was also, in some circles, regarded as a step towards "socialism".
Private productive investment was stimulated through a rather sophisticated system of tax and depreciation regulations, some of which could also be used for countercyclical purposes. For example, special tax privileges were granted if enterprises set aside profits to so-called "investment funds" during good times in order to invest later, when government thought that aggregate demand needed to be raised.
While high industrial profits were accepted, or even encouraged, by the Social Democratic governments, the tax system was thus designed in a way that gave strong incentives to reinvestment The industrial entrepreneur was supported, while the "rentier" was punished with increasingly high taxes on distributed dividends and capital gains.
Tax policies, and industrial policies in general, favoured large-scale enterprises. To a large extent, the "Swedish model" was based on strong, centralised trade unions and by a strong, centralised employers' association dominated by the large transnational companies. Consecutive Social Democratic governments firmly believed in large corporations and organisations, and the Swedish economy became heavily concentrated as regards both ownership and productive structure. While this policy may have been functional during a certain period, it also resulted in discrimination of newcomers, and a very low rate of entry of new firms.
To indicate the dominance of large-scale corporations, a comparison between the distribution of employment according to firm size reveals that in 1986, enterprises with more than 500 employees accounted for 60.6 per cent of total private sector employment in Sweden, compared to an average of 30.4 per cent in the European Community (for data and an interesting discussion, see Davis and Henrekson, 1995).
According to a recent study, less than 1 per cent of all state support to private manufacturing enterprises went, in the early 1990s, to companies with less than 25 people employed (source: LO-Tidningen 22 September 1995). Although comparable studies from earlier periods are lacking, there is reason to believe that the situation was similar during the previous decades.
Gross investment during the period 1960-74 was not particularly high by international standards—around 21 per cent of GDP, on average—but remarkably stable (see Graph II:2).
Graph II:2. Gross fixed capital formation as per cent of GDP. Sweden 1960-74.
Source:
Statistics Sweden (1994) "Statistical Messages N10 SM 9401".
Output, Employment and Prices 1960-74
Between 1960 and 1974, real GDP increased by over 80 per cent, and as seen in Graph II:1 above, Sweden managed to avoid major recessions during the entire period. The stability in the growth rate is, again, remarkable.
Unemployment data confirm the sustained success in macroeconomic management, combined with active labour market policies.
Graph II:3. Swedish Open Unemployment 1960-74 as per cent of total labour force.
Sources: OECD (l972 and 1995) "Labour
Force statistics 1959/70" and "Economic Outlook July 1995" .
Inflation remained low, or at least quite manageable, during the entire period. The international tendency towards rising inflation in the early 1970s was, however, also reflected in Sweden, although it lasted until 1975 until Swedish inflation reached two digits.
As an indicator of macroeconomic developments,
we may use the sum of the rate of inflation and the rate of unemployment
to construct whet is sometimes called a "discomfort index". In Table II:1
below, this "discomfort index" has been complemented with a "growth-adjusted
discomfort index" in which the annual rate of growth of per capita income
has been deducted from the sum of unemployment and inflation:
Table II:1. "Discomfort index" (DI) and "Growth-Adjusted
Discomfort Index" (GADI).
Sweden 1961-74.
| Year |
Rate of Un- Employment
(1)
|
Rate of Inflation
(CPI)
(2)
|
Discomfort Index
(DI)
(3 = 1+2)
|
Rate of
Growth of per
capita income
(4)
|
GADI
(=3-4)
|
| 1961 |
1.5
|
2.6
|
4.1
|
5.1
|
-1.0
|
| 1962 |
1.5
|
4.2
|
5.7
|
3.3
|
2.4
|
| 1963 |
1.7
|
2.4
|
4.1
|
4.7
|
-0.6
|
| 1964 |
1.6
|
4.8
|
6.4
|
5.8
|
0.6
|
| 1965 |
1.2
|
6.1
|
7.3
|
2.6
|
4.7
|
| 1966 |
1.6
|
6.4
|
8.0
|
1.4
|
6.6
|
| 1967 |
2.1
|
4.7
|
6.8
|
2.6
|
4.2
|
| 1968 |
2.2
|
2.6
|
4.8
|
3.1
|
1.7
|
| 1969 |
1.9
|
3.8
|
5.7
|
4.5
|
1.2
|
| 1970 |
1.5
|
4.8
|
6.3
|
5.8
|
0.5
|
| 1971 |
2.5
|
7.5
|
10.0
|
0.3
|
9.7
|
| 1972 |
2.7
|
7.0
|
9.7
|
2.1
|
7.6
|
| 1973 |
2.5
|
7.0
|
9.5
|
3.7
|
5.8
|
| 1974 |
2.0
|
9.4
|
11.4
|
0.7
|
10.7
|
| Average
1961-74 |
1.9
|
5.2
|
7.1
|
3.3
|
3.8
|
To this picture of sustained growth plus macroeconomic stability may be added that the income distribution continued to move in a more equitable direction. In the 1930s and 1940s, Sweden s income distribution became appreciably less skewed4, and already at that time, it appears as if Sweden had a by international standards highly equal distribution of income. This development continued in the 1960s and 1970s. As an indicator of decreased inequality, the Gini coefficient fell from 0.309 in 1967 – already very low in an international comparison – to 0.199 in 19805.
There were a number of factors responsible for Sweden s good record in terms of income distribution. Low unemployment is one, key factor. Another is the high level of basic education. The drastic increase in female participation in the labour force—between 1950 and 1973, the share of women in the labour force increased from 20 to 46 per cent (source: official labour force statistics quoted by Lindbeck, 1975, p. 212)—is also reflected in declining disparities in disposable income.
The progressive tax system reduced disposable income of high-income groups, at least during the 1960s and early 1970s, before various legal and illegal ways to cheat the system had become widespread. A generous system of transfer payments also resulted in a substantial transfer of disposable income between different groups. It has been estimated (see Lindbeck, 1975, Chapter 11) that the state tax system managed to transfer approximately 4.5 per cent of total disposable income from high to low-income groups in the 1960s. Not least important is the fact that the tax and transfer system to a large extent was designed to even out purchasing power and living standards between different stages of each individual s life. All this contributed to a reduction of the Gini coefficient, although the effects on actual living conditions of the tax and transfer system became increasingly disputed, and less transparent.
It should however be stressed that almost the
entire Swedish "welfare system" was, and is still, based on general, rather
than selective, coverage. This has been an overriding principle for the
Social Democrats ever since the 1930s, and has contributed to a high degree
of legitimacy of the various transfer schemes. While always existing, as
a last resort, social allowances based on income testing have never, during
the last decades, accounted for more than 2-3 per cent of all transfer
payments. Virtually all transfers, such as unemployment benefits, family
allowances, sickness allowances, pensions, etc., are insurance schemes
based on past income, up to a certain limit Child allowances, which are
equal for all income groups, constitute the only important exception.
2. Economic Policies and Developments 1975-94:
Sluggish Growth and mounting Problems
Deteriorating international conditions as from 1973 had a profound impact on the Swedish economy. Contrary to the situation in earlier decades, when external shocks had been overcome relatively smoothly, the crisis of the mid 1970s turned out to have a lasting impact.
The oil crisis and declining teens of trade led
to a crisis of international competitiveness of the Swedish economy, which
was aggravated by rising domestic costs. Between 1974 and 1976, nominal
wages in industry rose by 40 per cent The development of Swedish industrial
unit costs and market shares between 1971 and 1991 is illustrated in Graph
II:4.
Graph II:4. Unit Costs of Production and Relative Market Shares for Swedish Manufacturing Industry 1971-91. 1971=100.
Sources: Konjunkturinstitutet and
the Department of Finance (1979, 1985 and 1993) "Konjunkturläget 1979",
Analysunderlag till Konjunkturläget
1985" and "Analysunderlag till Konjunkturläget 1993".
The government attempted to "bridge over" the effects of the international recession by stepping up public expenditure, not least to ailing industries, in particular the steel industry, shipyards and the mining industry. Public spending on industrial policy—read: subsidies to loss-making enterprises - grew from 2.3 billion kronor in 1970 to 15.4 billion in 1979 (source: Axelsson, Löfgren & Nilsson, 1987, pp. 91-93).
The coalition of center-right parties that ruled
the country between 1976 and 19826,
breaking almost four decades of uninterrupted Social Democratic rule, only
accelerated the growth of public expenditures. The Social Democrats had
always sought to finance high and rising public expenditures with high
and rising taxes; when finally in power, the former opposition parties
only maintained the expenditure side of the welfare formula The result
was a drastic increase in the fiscal deficit, which by the early 1980s
reached over 10 per cent of GDP.
Graph II:5. Fiscal Deficit 1970-93 as per cent of GDP
Sources:
Statistics Sweden (1971, 1985 and 1995) "Statistical yearbook of Sweden"
(1971,1985 and 1995).
While the recession of 1974-75 was international, the effects of Sweden's attempts to pursue countercyclical policies rather made things worse.
The situation for Sweden in the mid 1970s was quite different from before. After World War II, Sweden enjoyed the great privilege of having a perfectly intact economy and labour force. The need to rebuild large parts of Europe, in combination with a hefty devaluation in 1949 which made the Swedish currency undervalued, meant that international demand for Swedish products remained strong. All through the 1960s, the expansion of the international economy, and continued global trade liberalisation, favoured Swedish industrial and skill-intensive exports.
In the 1970s, the situation had changed. The European economies had fully recovered from the impact of the war, and the technological and educational gap that Sweden had enjoyed vis-a-vis major European competitors had largely been bridged.
As a result of underlying long-term trends, in combination with an acute cost crisis, Sweden failed to benefit from the improvement in the international economy that took place in 1976-77. The balance of trade deficit widened, and successive devaluations in 1976-77 kept inflation high, without restoring the international competitiveness of the Swedish economy. After the second oil shock in 1979-80, Sweden did not try to repeat the experience from 1974-75 by pursuing an expansionary policy, other than through exchange rate adjustments.
During 1981 and 1982, Sweden devalued the currency again, a total of 24 percent. The monetary and exchange rate discipline in Swedish economic policies in the 1950s and 1960s gave way to a policy of accommodation; if domestic costs rose too rapidly, as they did again in the 1980s, the easiest solution was a currency devaluation.
The development of inflation in Sweden and in
the rest of the OECD is illustrated below.
Graph II.6. Inflation in Sweden (CPI) Compared to the Average for OECD Countries 1970-93.
Sources: OECD (1984 and 1995) "National
Accounts – Main Aggregates", and Statistics Sweden (1994) "Statistical
Messages N10 SM 9401".
The recovery of production and employment that took place internationally as from 1982 helped Sweden to overcome the recession, but also to hide the underlying crisis.
Industrial restructuring – one of the hallmarks of the "Swedish model" in the past – stagnated, and the entire expansion of employment that took place in the period 1965-85 was in the public sector. While labour productivity continued to increase rapidly in most goods-producing sectors, growth was jobless, and the "transfer gains" witnessed in previous periods, when labour was transferred from stagnating to dynamic areas and firms, failed to materialise.
Gross capital information declined to 18.8 percent of GDP (average 1975-93), compared to 21 percent in 1960-74. The rate of return on new investment, as expressed by the ICOR (Incremental Capital Output Ratio), declined even more.
The lack of dynamism is also reflected in a very low rate of creation of new enterprises (for data and a discussion, see Davis and Henrekson, 1995). Barriers to entry, and a tax and subsidy system that discriminated against small and medium-sized firms, aggravated the sclerosis of the Swedish economy.
Large-scale capital outflows, facilitated by the removal of remaining restrictions on capital movements in the 1980s, reflected systematic problems, inter alia, to the heavy tax burden, distorted incentives and rising allocative inefficiency, and a lack of flexibility on the labour market. All this served to undermine Sweden’s future growth prospects.
Political developments also weakened the spirit of consensus traditionally characterising Swedish society. A certain ideological polarisation took place in the 1970s and early 1980s. Left-wing radicals outside and within the Social Democratic Party managed to get support for a number of controversial proposals, the most controversial of which was the bill, enacted in 1984 after one decade of heated debate, to implement a scheme for compulsory savings through which part of industrial profits should be converted into so-called "wage earners funds", managed by trade unions and used to increase labour’s control over large-scale enterprises. On the political Right, the welfare state was increasingly challenged by conservative and neo-liberal currents which sought to reduce the role of government, and to replace collective responsibility with private schemes for social security.
When the Social Democrats returned to government in 1982, the international recession was over. The new government gave first priority to a reduction of the fiscal deficit. Between 1982 and 1989, public expenditures decreased from a staggering 67 percent of GDP to 60 percent. At the same time the progressive tax system automatically raised public revenue, and the state budget was strengthened from both the income and the expenditure side. The budget situation thus improved dramatically (see Graph II.5).
The devaluations in 1981 and 1982, and favourable world market developments, gave a strong impetus to exports. Domestic demand also rose vigorously, stimulated by full employment, rising incomes and a tax system which punished savings and encouraged consumption and borrowing. The deregulation of the domestic credit market in the 1980s also gave rise to a drastic increase in private spending; at the end of the 1980s, Swedish household savings amounted to 4 percent of GDP.
Good luck with declining oil prices as from 1986,
and strong foreign demand for Swedish exports, helped to conceal the underlying
problems. As illustrated by the "discomfort index" (Table II:2), the development
1982-90 looked good, in several respects. By the end of the 1980s the Swedish
economy was, however, overheated, and both the current account and the
state budget began to show rising deficits. The price eventually to be
paid for correcting the mounting macroeconomic imbalances turned out to
be a very deep recession, from which the economy has not yet recovered.
Table II:2. "Discomfort index" (DI) and "Growth-Adjusted
Discomfort Index" (GADI).
Sweden 1975-93.
| Year |
Rate of Un-
Employment
(CPI)
(1)
|
Rate
of Inflation
(2)
|
Discomfort
Index
(DI)
(3 = 1+2)
|
Rate of Growth of per
capita Income
(4)
|
GADI
(5= 3-4)
|
| 1975 |
1.6
|
14.5
|
16.1
|
3.9
|
12.2
|
| 1976 |
1.6
|
11.9
|
13.5
|
0.5
|
13.0
|
| 1977 |
1.8
|
10.3
|
12.1
|
-3.3
|
15.4
|
| 1978 |
2.2
|
9.7
|
11.9
|
0.5
|
11.4
|
| 1979 |
2.1
|
8.0
|
10.1
|
3.2
|
6.9
|
| 1980 |
2.0
|
13.0
|
15.0
|
0.8
|
14.2
|
| 1981 |
2.5
|
9.5
|
12.0
|
-1.2
|
13.2
|
| 1982 |
3.2
|
8.3
|
11.5
|
-0.3
|
11.8
|
| 1983 |
3.5
|
10.1
|
13.6
|
1.1
|
12.5
|
| 1984 |
3.1
|
7.6
|
10.7
|
4.5
|
6.2
|
| 1985 |
2.9
|
6.6
|
9.5
|
1.7
|
7.8
|
| 1986 |
2.7
|
6.8
|
9.5
|
3.8
|
5.7
|
| 1987 |
2.1
|
4.8
|
6.9
|
2.8
|
4.1
|
| 1988 |
1.8
|
6.5
|
8.3
|
2.1
|
6.1
|
| 1989 |
1.5
|
8.1
|
9.6
|
1.4
|
8.2
|
| 1990 |
1.7
|
8.8
|
10.5
|
-0.6
|
11.1
|
| 1991 |
2.9
|
7.6
|
10.5
|
-1.4
|
11.9
|
| Average
1975-93 |
2.8
|
8.2
|
11.0
|
0.6
|
10.4
|
| Average
1961-74 |
1. 9
|
5.2
|
7.1
|
3.3
|
3.8
|
The Emerging Crisis of the Public Sector
As indicated above, both the Social Democratic governments and the center-right coalition that ruled Sweden between 1976 and 1982 continued to expand the "welfare state". The problem was, however, that the financing of the all-embracing welfare system required a rapidly growing economy.
Towards the end of the 1980s, the emerging crisis of the Swedish economy was, to a large extent, a crisis of the tax and transfer system, and of the "strong society".
A selection of indicators can illustrate the development. Between 1970 and 1989, the share of public expenditures to GDP had increased from 43 to over 60 per cent While this reflected an international trend of rising public expenditures, the corresponding figures in European OECD countries was an average of 36.6 per cent in 1970 and 47.6 per cent in 1989 (source: OECD Economic Outlook December 1991, quoted in Henrekson, 1992, p. 51). Social security benefits expenditure reached, in 1991, 33.7 per cent of GDP, against an average of 16.2 per cent in industrial countries (source: UNDP, Human Development Report 1994, Table 40, p. 196). At the same time, public expenditure on health and education continued to expand, to reach around 11 and 9 per cent of GDP, respectively, in the early 1980s.
Table II:3 illustrates Sweden s total expenditure
on education in 1975 and 1980, as share of GDP and of total government
expenditure.
Table II.3. Total Educational Expenditure.
Sweden 1975 and 1980.
|
|
|
|
| 1975 |
|
|
| 1980 |
|
|
Of total educational expenditures, approximately 65 per cent went to primary and secondary education, 22 per cent to tertiary education and the remainder to vocational training, adult education, etc.
Demographic developments, and the changing structure of the labour force, can also be seen as both cause and effect of the malfunctioning of the Swedish economy. While the total size of the labour force has changed little since the 1960s, when the process of increased female participation in the Swedish labour force was virtually completed, continuos reductions in working time have led to an actual reduction in the aggregate number of working hours. At the same time, the share of population living on transfer payments has increased gradually. For example, the number of pensioners—including those benefitting from early retirement—increased from 9X8,000 in 1965 to 1.643,000 in 1980 and 1.900.000 in 1992. (Sources: LOU 1982:14, p. 37. and Eklund 1993, p. 112).
The only major sector where employment has expanded over the last 30 years is the public sector, where the number of employees increased from 572,000 in 1965 to 1.5 billion in 1992, when it peaked. The sum of people working in the public sector and living on various social security schemes, including pensions, increased from 1.863,000 in 1965 to 4.350,000 in 1992. At the same time, total employment in the private sector decreased from 3.634,000 in 1965 to around 2.800,000 in 19927.
The ratio between private sector employees and people employed in the public sector or not employed at all thus decreased from 1.95 in 1965 to 0.64 in 1992.
The steady increase in the tax burden should be seen against this background. In the mid 1980s, public revenue amounted to around two-thirds of GDP. While successive tax reforms, the most comprehensive one being implemented in 1989, managed to reduce income taxes, the overall tax burden remained exceedingly high.
The development of marginal income taxes—of some
relevance for incentives for savings and higher education, and for the
allocation of the labour force—is illustrated in Table II:4.
Table II:4. Average marginal taxes for industrial
workers and employees 1960-88.
|
|
|
|
||
|
Annual income (SEK)
|
Marg. Tax
(%)
|
Annual income
(SEK)
|
Marg. Tax
(%)
|
|
| 1960 |
13,500
|
38.5
|
20,000
|
43.3
|
| 1970 |
27,500
|
50.3
|
40,000
|
57.6
|
| 1980 |
71,000
|
62.1
|
98,100
|
64.6
|
| 1988 |
127,500
|
50.6
|
170,900
|
64.6
|