Swedish Models
Johan Norberg
TO BE A Swede is once again to be admired. Sweden is "the most successful society the world
has ever known", declares the left-wing British newspaper the Guardian; "Swedes lead Europe
in reform", claims the free-market-oriented Financial Times; only the Nordic model "combines
both equity and efficiency", explains a recent report initiated by the European Commission.
In a contentious European debate marked by hostility, riots and unrest, Sweden looks like a
safe bet--neutral, uncontroversial and with no natural opponents. Sweden is a Rorschach test:
The Left sees a generous welfare state, and the Right sees an open economy that pushes for
deregulation in the European Union. The only thing British reformists and French protectionists
could agree on at the EU summit in Brussels in March was that Europe should learn from the
Scandinavian model's combination of generous social provisions and a high-growth economy.
Sweden is seen as the proverbial "third way", combining the openness and wealth creation of
capitalism with the redistribution and safety nets of socialism. It is the best of both worlds.
But things in Sweden are not as good as the advocates would like to believe. Long the paragon
of social democracy, the Swedish model is rotting from within. Ironically, the unique social and
economic foundation that first allowed Sweden to construct its political edifice--and which
makes it such a difficult model for other countries to emulate--has been critically weakened by
the system it helped create. Far from a being a solution for the new sick men of Europe,
Sweden must face serious and fundamental challenges at the heart of its social model.
The Origins of the Welfare State
TO SAY that other countries should emulate the Swedish social model is about as helpful as
telling an average-looking person to look like a Swedish supermodel. There are special
circumstances and a certain background that limit the ability to imitate. In the case of the
supermodel, it is about genetics. In the context of economical and political models, it is about
the historical and cultural background.
Gunnar and Alva Myrdal were the intellectual parents of the Swedish welfare state. In the 1930s
they came to believe that Sweden was the ideal candidate for a cradle-to-grave welfare state.
First of all, the Swedish population was small and homogeneous, with high levels of trust in one
another and the government. Because Sweden never had a feudal period and the government
always allowed some sort of popular representation, the land-owning farmers got used to seeing
authorities and the government more as part of their own people and society than as external
enemies. Second, the civil service was efficient and free from corruption. Third, a Protestant
work-ethic--and strong social pressures from family, friends and neighbors to conform to that
ethic--meant that people would work hard, even as taxes rose and social assistance expanded.
Finally, that work would be very productive, given Sweden's well-educated population and
strong export sector. If the welfare state couldn't work in Sweden, the Myrdals concluded, it
wouldn't work anywhere.
Sweden's economic success story began in the late 19th century, after a fundamental political
shift towards free markets and free trade. Swedish traders could export iron, steel and timber,
and entrepreneurs created innovative industrial companies that became world leaders. Between
1860 and 1910, real wages for factory workers rose by about 25 percent per decade, and public
spending in Sweden didn't surpass 10 percent of GDP.
The Social Democratic Party came to power in 1932 and has governed Sweden for 65 of the last
74 years. They realized early on that a party of class struggle wouldn't be able to hold on to
power in Sweden. Instead, they became a party of the middle class by creating social security
systems that gave the most pension, unemployment, paternal-leave and sick-leave benefits to
those with high wages. (Most benefits were proportional to the amount paid in, so the wealthy
middle class would have an interest in supporting the system.) It was a policy of socialization
from the consumption side: The government would not take control of the means of production,
but would instead tax workers, in the form of sales and income taxes, to provide welfare. It was
markets and competition for big business, a welfare state for the people. Still, as late as 1950
the total tax burden was no more than 21 percent of GDP, lower than in the United States and
Western Europe.
This meant that the Social Democrats were eager to please industry and not allow the social
agenda to interfere with the economy's progress. Free trade was always the rule. Regulations
that were introduced were adapted to benefit the biggest industries--for example, wages were
equalized, but for the purpose of keeping wages low for the big companies, while small and less
productive companies were forced out of business. The trade unions, for their part, were
relatively positive to the creative destruction of capitalism, so they allowed old sectors like
farming, shipping and textiles to pass away, as long as new jobs were created.
These policies, and the fact that Sweden stayed out of two world wars, meant that the economy
yielded amazing results. Sweden was rich: In 1970 it had the fourth-highest per-capita income
in the world, according to OECD statistics. But at this stage the Social Democrats began to
radicalize, with coffers filled by big business and heads filled with ideas from an international
leftist trend. Social assistance was expanded and the labor market became heavily regulated.
Public spending almost doubled between 1960 and 1980, rising from 31 percent to 60 percent of
GDP.
This was also the time when the model began to run into problems. From 1975 to 2000, while
per-capita income grew by 72 percent in the United States and 64 percent in Western Europe,
Sweden's grew by no more than 43 percent. By 2000, Sweden had fallen to 14th in the OECD's
ranking of per-capita income. If Sweden were a state in the United States, it would now be the
fifth poorest. As the Social Democratic Finance Minister Bosse Ringholm explained in 2002, "If
Sweden would have had the same growth rates as the OECD average since 1970, our common
resources would have been so much bigger that it would be the equivalent of 20,000 SEK
[$2,500] more per household per month."
Too Much of a Good Thing
THE SOURCE of the problem was the fatal irony of the Swedish system: The model eroded the
fundamental principles that had made the model viable in the first place.
The civil service is a powerful example of this phenomenon. The efficiency of the civil service
meant that the government could expand, but this expansion began to undermine its efficiency.
According to a European Central Bank study of 23 developed countries, Sweden now gets the
least service per dollar spent by the government. Sweden still reports impressive results on
living standards (just as it did before the introduction of the welfare state in the years following
World War II), but not at all what you would expect from a country with the world's highest tax
rates, currently at about 50 percent of GDP. If the public sector were as efficient as Ireland's or
Britain's, for example, the expenditure could be reduced by a third for the same service. The
Swedish Association of Local Authorities and Regions reports that Swedish doctors see four
patients a day on average, down from nine in 1975. It is less than in any other OECD country,
and less than half of the average. One reason is that a Swedish doctor spends between 50 and
80 percent of his time on administration.
On the economic side, the old Swedish system of encouraging investments in big industry
worked well, as long as there was little need for innovation. Once that occurred, however, the
system ran into trouble. The competitiveness of industry had to be propped up several times by
depreciating the currency. Globalization and the new knowledge and service economy made it
more important than ever to invest in human capital and individual creativity. High marginal tax
rates on personal income, however, reduced individuals' incentives to take risks and to boost
earning potential by investing in their education and skills, and made it extremely difficult to
attract skilled workers from abroad.
Furthermore, the Swedish model was dependent on having a small number of large industrial
companies. As these diminished in importance, or moved abroad, Sweden needed something to
take their place. But the policies that benefited the biggest firms created a deficit of small- and
medium-sized businesses. Those that did exist didn't grow, partly because of the risks and costs
of highly burdensome employment rules that prevented the firing of workers. Indeed, the most
important Swedish companies today are those that were born during the laissez faire period
before the First World War; just one of the fifty biggest Swedish companies was founded after
1970. Meanwhile, services that could become new private growth sectors, like education and
health care, were monopolized and financed by the government. As they grew in importance
and size, a steadily growing part of the Swedish economy thus became protected from
international market forces and investments that could have turned them into successful and
productive enterprises.
In the early 1990s a deep recession forced Sweden to abandon a lot of the excesses from the
1970s and 1980s. Marginal tax rates were cut, the central bank was made independent, public
pensions were cut and partially privatized, school vouchers were introduced, and private
providers were welcomed in health care. Several markets were deregulated, like energy, the
post office, transportation, television and, most importantly, telecom, which opened the way for
the success of companies like Ericsson.
But Sweden retained the world's highest taxes, generous social security systems and a heavily
regulated labor market, which split the economy: Sweden is very good at producing goods, but
not at producing jobs. According to a recent study of 35 developed countries, only two had
jobless growth: Sweden and Finland. Economic growth in Sweden in the last 25 years has had
no correlation at all with labor-market participation. (In contrast, 1 percent of growth increases
the number of jobs by 0.25 percent in Denmark, 0.5 percent in the United States and 0.6
percent in Spain.) Amazingly, not a single net job has been created in the private sector in
Sweden since 1950.
During the recession in the early 1990s, Sweden had an unemployment rate of about 12
percent. The official rate has been halved since, but the difference has been offset by a dramatic
increase in other forms of absenteeism. For example, there are 244,000 openly unemployed
workers in a total population of 9 million. But this does not include 126,000 working in labormarket projects (the largely unsuccessful programs geared towards helping people acquire the
skills to find employment) or the 89,000 job-seekers who are receiving some form of education.
And there are another 111,000 in "latent unemployment", people who are not defined as part of
the work force, but who can and would like to work. If all of these workers are included in the
calculation, Sweden's true unemployment rate is still 12 percent. (Although other countries'
unemployment figures, including those for the United States, also fail to reflect the real rate
joblessness, Sweden's array of government-funded projects for work and education particularly
distort the data. In addition, Sweden does not include in its figures students that are seeking
employment, breaking with international norms.)
Moreover, the unemployment rate says nothing about another hidden labor problem: rampant
absenteeism. Swedes are healthier than almost any other people in the world, but they are also
out sick more often than any other people, according to available data. In 2004, sickness
benefits absorbed 16 percent of the government budget, while health absenteeism has doubled
since 1998. With a sickness benefit of up to 80 percent of a recipient's income (depending on
his or her wage level), it is not surprising that there is an epidemic of absenteeism. Moreover,
about 10 percent of the working-age population has retired with disability benefits. A researcher
at the main trade union, LO, recently left his job when he was not allowed to publish his
estimate that close to 20 percent of Swedes are unemployed, either openly or hidden in labormarket projects, long-term sick-leave and early retirement.
Immigration and Politics
SWEDEN HAS no official minimum wage, but trade unions with political power set de facto
minimum wages through collective bargaining. That de facto minimum wage for workers in
Sweden is equal to about 66 percent of the median wage in the manufacturing sector, compared
to 32 percent in the United States. In economic terms, this means that if you are less than 66
percent as productive as the median Swedish manufacturing worker--perhaps because you are
unskilled, have no experience or live in a remote area--you will probably not find a job. Any
company that would hire you would be forced to pay you more than what you are able to
produce. And if you are never successful in gaining employment, you will not gain the skills and
experience to raise your abilities and productivity.
Immigrants are the hardest hit. Since the early 1980s, Sweden has received a large number of
refugees from the Balkans, the Middle East, Africa and Latin America, which has ended the
country's homogeneity. Today, about one-seventh of the working-age population is foreign
born, but no where near that proportion is actually employed. Sweden has one of the developed
world's biggest differences between the labor-market participation of natives and immigrants.
Many immigrant families are discouraged by the lack of job prospects and end up in welfare
dependency.
Unemployment problems in turn result in de facto segregation. Despite little history of racial
conflict, the labor market is more segregated than in America, Britain, Germany, France or
Denmark--countries with far more troublesome racial histories than Sweden. A report from the
free-market Liberal Party ahead of the election 2002 showed that more than 5 percent of all
precincts in Sweden had employment levels lower than 60 percent, with much higher crime
rates and inferior school results than in other places. Most of these precincts are suburban, so
outsiders rarely see them. The number of segregated precincts has continued to grow. In some
neighborhoods, children grow up without ever seeing someone who goes to work in the
morning. Pockets of unemployment and social exclusion form, especially in areas with many
non-European immigrants. When Swedes see that so many immigrants live off the government,
their interest in contributing to the system fades.
Like in other parts of western Europe, the segregation of immigrant areas leads to insularity,
crime and, in some cases, radicalism. Last year, Nalin Pekgul, the Kurdish chairman of the
National Federation of Social Democratic Women, explained that she was forced to move out of
a suburb of Stockholm because of crime and the rise of Islamic radicalism. The announcement
sent shock waves through the entire political system. "A bomb waiting to explode" is one of the
most common metaphors used when social exclusion in Sweden is discussed.
Those immigrants who do keep their entrepreneurial spirit intact often take it elsewhere.
Hundreds of unemployed Somalis and Iranians leave Sweden every year and move to Britain,
where they are often successful in finding work. The contrast in experience can be staggering.
The Swedish economic historian Benny Carlson recently compared the experiences of Somali
immigrants in Sweden with those of Somali immigrants in Minneapolis, Minnesota. Only 30
percent had a job in Sweden, about half as many as in Minneapolis. And there are about 800
businesses run by Somalis in Minneapolis, compared to only 38 in Sweden. Carlson quoted two
immigrants who together summed up the disparity. "There are opportunities here", said Jamal
Hashi, who runs an African restaurant in Minneapolis. His friend, who migrated to Sweden
instead, told a different story: "You feel like a fly trapped under a glass. Your dreams are
shattered."
A Model No More
SO IF THE Myrdals were right when they said that if the welfare state couldn't work in Sweden,
it wouldn't work anywhere, what will it mean if Sweden's system fails? The answer seems
obvious.
The Swedish model has survived for decades, but the truth is that its success was built on the
legacy of an earlier model: the period of economic growth and development preceding the
adoption of the socialist system. It is difficult to see how other countries--especially the troubled
systems of Western Europe so keen to adopt the Swedish approach, but which lack the unique
components for a welfare state first noted by Gunnar and Alva Myrdal--could cope with a similar
welfare state. Bigger and more diverse countries with a weaker faith in government and more
suspicion towards other groups would likely see an even stronger tendency to exploit the
system, work less and abuse social assistance. The United States and much of Western Europe
face immigration challenges at least as daunting as Sweden.
The economy has rebounded since the recession of the 1990s and the reforms that followed--in
contrast to the stagnant continental economies--mostly because of a small number of successful
global companies. But the problem is that a growing part of the population is left out and old
attitudes about work and entrepreneurship are fading. Since 1995 the number of entrepreneurs
in the European Union has increased by 9 percent; in Sweden it has declined by 9 percent.
Almost a quarter of the population of working age does not have a job to go to in the morning,
and polls show a dramatic lack of trust in the welfare system and its rules.
The system of high taxes and generous welfare benefits worked for so long because the
tradition of self-reliance was so strong. But mentalities have a tendency of changing when
incentives change. The growth of taxes and benefits punished hard work and encouraged
absenteeism. Immigrants and younger generations of Swedes have faced distorted incentives
and have not developed the work ethic that was nurtured before the effects of the welfare state
began to erode them. When others cheat the system and get away with it, suddenly you are
considered a fool if you get up early every morning and work late. According to polls, about half
of all Swedes now think it is acceptable to call in sick for reasons other than sickness. Almost
half think that they can do it when someone in the family is not feeling well, and almost as
many think that they can do it if there is too much to do at work. Our ancestors worked even
when they were sick. Today, we are "off sick" even when we feel fine.
The real worry is that Sweden and other welfare states have reached a point where it is
impossible to convince majorities to change the system, despite the dismal results. Obviously, if
you are dependent on the government, you are hesitant to reduce its size and cost. A middle
class with small economic margins is dependent on social security. This was Bismarck's plan
when he introduced a system that would make those dependent on it "far more content and far
easier to handle."
Sooner or later, politicians begin to identify a new, influential bloc of voters--those who live at
others' expense. A former Social Democratic minister of industry recently explained what his
party meetings in northern Sweden looked like: "A quarter of the participants were on sickleave, a quarter was on disability benefits, a quarter was unemployed."
This creates a damaging cycle. With high taxes, markets and voluntary communities are
crowded out, which means that every new problem has to find a government solution. If change
seems too far off, a large part of the electorate becomes more interested in defending good
terms for unemployment and sick-leave than in creating opportunities for growth and jobs. And
that goes even if you have a job. If regulations make it difficult to find a new job, you worry
more about losing the one you have and will see suggestions of labor market deregulation as a
threat. OECD interviews show that well-protected workers in Sweden, France and Germany are
much more afraid of losing their jobs than workers in the less regulated United States, Canada
and Denmark.
In that case, sclerosis creates a public demand for policies that create even more stagnation.
This might help explain the lack of reform in Europe, despite all the political ambitions. The
more problems there are, the more dangerous radical reforms seem to the electorate: If things
are this bad now, the logic goes, think how bad they'll be without state protection. For example,
it seems like the Swedish voters are now willing to oust the Social Democratic government in
September. But that is only after the center-right opposition abandoned the more radical
suggestions--such as labor-market reform and reduction in social security benefits--that it used
to champion.
Radical reform seems far off. On the other hand, just like the step-by-step construction of the
welfare state that slowly but steadily reduced the willingness to work and the sense selfreliance, incremental reforms to expand freedom of choice and reduce the incentives to live off
fellow-citizens might rejuvenate these fundamental values and increase the appetite for reform.
Johan Norberg is a Swedish writer and a senior fellow at the Centre for the New Europe, a
Brussels-based think-tank. He is the author of several books, including In Defense of Global
Capitalism (2003).