While several countries, mostly in Europe, continue to struggle economically, one country stands out as an example to follow: Sweden. For almost two decades, the Scandinavian country has managed to maintain strong economic growth despite levels of taxation and public spending that rank among the world's highest.
As a result, many intellectuals and politicians can be heard praising the so-called "Swedish model." But what they fail to mention is that Sweden has experienced serious public finance and unemployment problems in the early 1990s and it is back on the road to prosperity after conducting wise and courageous reforms, mostly inspired by free market principles.
Unlike the situation that often prevails in Canada, the government and stakeholders in Sweden have shown pragmatism and were not afraid to challenge certain dogmas that were paralyzing the country's economy, including the sacrosanct welfare state and the public sector.
The rise and decline of the welfare state
First, an historical look at Sweden shows us that it has not always been a wealthy country. Until the middle of the 19th century, Sweden was a relatively poor rural society with an economy relying heavily on agriculture. Per capita income was not far from minimal subsistence levels, and episodes of famine were common.
However, by gradually liberalizing their economy, reducing taxes and eliminating barriers to international trade, the Swedes managed to achieve the living standards of other rich countries quite spectacularly. Sweden actually experienced the world's greatest economic growth between 1870 and 1950.
However, the situation began to deteriorate in the late 1960s when the Swedish government began to stand out from other developed countries with its policy of intervention in the economy and in the labor market. The heavy taxation required to finance all these programs, together with excessive regulation of the labor market, stifled entrepreneurship and greatly impeded the creation of new jobs and businesses.
None of the 50 largest companies active in Sweden started up between 1970 and 2000. The total number of jobs grew by only 8 per cent in Sweden over the past 30 years, compared to 48 per cent in Quebec and 77 per cent in the rest of Canada. In fact, there was no net job creation in the private sector since the middle of last century, even though the population of working age Swedes increased by about one million persons during this period.
Dependency on the state began growing at an alarming rate: the proportion of Swedes drawing their income from tax revenue (working for the government or receiving public transfers) climbed steadily between 1970 and 1995, rising from 28 per cent to 65 per cent. In the early 1990s, the relative impoverishment of Sweden picked up speed as the country went through its worst economic crisis since the 1930s.
Between 1990 and 1993, overall production fell by 5 per cent, the unemployment rate climbed by 8 percentage points and the debt increased from by 46 per cent to 81 per cent of GDP. The fourth richest country in the world in 1970, Sweden gradually fell to 17th spot in 1990.
Liberalization to overcome the crisis
With help from the economic recession and the public finance crisis, political leaders had no trouble convincing the rest of the population of the urgency in reforming the welfare state, the limits of which had become readily apparent. With the approval of stakeholders, they then decided to give a greater role to market mechanisms.
For example, political decision-makers chose to call upon the expertise of the private sector and to open up competition in many areas of activity. In health care in particular, services are now supplied in part by private companies, even if financing remains largely public (for example, in the form of education vouchers since 1992, giving parents the same public subsidy whatever school they choose for their child, whether it lies in the private or public sector).
The Swedish government also deregulated a number of public monopolies and other sclerotic industries: air and rail transport, taxis, electricity, telecommunications and postal services, as well as the retail sector and the sale of alcohol, have all been liberalized to various degrees. These liberalizations brought about a considerable lowering of the costs of these services.
The results of these reforms have been spectacular: public finances are in good shape, economic growth and productivity are way above the OECD average. Gross government debt is estimated at 38 per cent of GDP, among the world's lowest.
The economic environment in Sweden is obviously not perfect, but Canada would greatly gain from investigating the real reasons behind the Swedish economic success.
Yanick Labrie is an Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.