The Surprising Ingredients of Swedish Success -- Free Markets and Social Cohesion

September 5, 2012

A new paper demonstrates that Swedish economic success is a result of the free market and not the welfare state, says Nima Sanandaji of the Institute of Economic Affairs (U.K.).

Indeed, Sweden did not become wealthy through social democracy, big government and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. It also benefited from positive cultural norms, including a strong work ethic and high levels of trust.

  • As late as 1950, Swedish tax revenues were still only around 21 percent of gross domestic product (GDP).
  • The policy shift toward a big state and higher taxes occurred mainly during the next 30 years, as taxes increased by almost one percent of GDP annually.
  • The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden's relative economic performance. In 1975, Sweden was the fourth richest industrialized country in terms of GDP per head. By 1993, it had fallen to fourteenth.

Big government had a devastating impact on entrepreneurship.

  • After 1970, the establishment of new firms dropped significantly.
  • Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.

In addition, high levels of equality and favorable social outcomes were evident before the creation of an extensive welfare state. Indeed, generous welfare policies have actually created numerous social problems, including high levels of dependency among certain groups.

Since the economic crisis of the early 1990s, Swedish governments have rolled back the state and introduced market reforms in sectors such as education, health and pensions. Economic freedom has increased in Sweden while it has declined in the United Kingdom and United States. Sweden's relative economic performance has improved accordingly, says Sanandaji.

Source: Nima Sanandaji, "The Surprising Ingredients of Swedish Success -- Free Markets and Social Cohesion," Institute of Economic Affairs (U.K.), August 27, 2012.

 

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