In recent years defenders of the European social model—capitalism tempered by a generous and interventionist welfare state—have taken to praising Scandinavia to the skies. ...Sweden, whose 9m people make it by some way the biggest Nordic country, is a particular favourite. A year ago the Guardian, a British newspaper, said it was the most successful society the world had ever known. As if to bear this out, the Swedish economy grew at a sizzling annual rate of 5.6% in the second quarter of 2006, enough to trigger a spate of interest-rate rises by the central bank. Sweden's big companies, such as Ericsson, SKF, Telia and Volvo, are breaking export records.
A visit to the capital, Stockholm, confirms that life for most Swedes is pretty good. Yet there is disgruntlement in the air, and it is causing nervousness among the Social Democrats, who have ruled Sweden alone or with other parties for 65 of the past 74 years, and must on September 17th again face the voters in a general election.
...the biggest beef is, perhaps surprisingly, the economy. The opposition maintains that Sweden's economic record is nothing like as good as its fans believe. If so, that has implications for other Nordic economies—and raises doubts about whether other European countries are wise to look northwards for a model.
In truth, the Swedish economy's best years are long gone. Between 1870 and 1950, average growth in Swedish GDP and productivity was, by some measures, the fastest in the world. In 1970 Sweden was the fourth-richest member of the OECD club of industrial countries. But for most of the past 50 years the story has been one of relative decline, including a deep recession in the early 1990s (see chart 1). By 1998 Sweden had fallen to 16th in the OECD rankings. It has since climbed back a bit, but the relatively strong growth of the past decade should be seen mainly as a rebound from the 1990s trough.
For all that, even the opposition accepts that Sweden has some enviable economic advantages. Anders Borg, Mr Reinfeldt's chief economic adviser, praises the country's well-managed, export-driven, high-tech companies and its well-educated workforce. Female participation in the workforce is higher than in most other countries; English is widely spoken; and Swedes are thoroughly computer-literate. Sweden is one of the few rich European countries for which globalisation has been a benefit, not a threat. Most other European governments would be pleased if they could only emulate Sweden's success.
Too few jobs
Set against this are two big weaknesses. The worst is employment. Par Nuder, the finance minister, makes much of Sweden's having the highest employment rate in the European Union after Denmark, at just over 70%. The official unemployment rate is 6%. But Sweden is a world champion at massaging its jobless figures, which exclude those in government make-work programmes, those forced into early retirement and students who would prefer to be working. Sweden's suspiciously large number of workers on long-term sick leave are counted as working, and included in the employment rate (sickness benefits account for 16% of public spending). Absenteeism is common.
Earlier this year the McKinsey Global Institute, a think-tank, studied Sweden's labour market. It found that the rate of employment among working-age people had declined in the past decade. Indeed, Magnus Henrekson of the Research Institute of Industrial Economics says that Sweden has created almost no net private-sector jobs since 1950* (see chart 2). Youth unemployment is among the highest in Europe. The McKinsey boffins conclude that the “true” unemployment rate is around 15-17%, which puts Sweden among the worst job-fillers in the EU. It translates into more than 1m people without work.
...Obstacles to job creation are everywhere in Sweden. Although the country's big companies have long thrived, the regulatory and tax climate is chilly to newer and smaller companies. Only one of Sweden's 50 biggest companies was founded after 1970; and Sweden has the lowest rate of self-employment in the OECD. The much-vaunted trilateral partnership between government, employers and unions works if the employer is an established large company; for a new or smaller one, it simply adds to costs. High personal taxes and generous welfare benefits—which pay people who lose their jobs as much as 80% of previous incomes for three years—discourage work. The “tax wedge” (ie, the non-wage cost of employment) is too thick, especially for low earners.
Above all, the labour market is heavily regulated. The government's labour-market board, once praised for active labour-market policies that got most of the long-term unemployed back into work, now manages to find only one-tenth of the jobs that the unemployed eventually take. Assar Lindbeck, a veteran economist, suggests that the board has become a Social Democratic holy cow that should be slaughtered by any new government.
Although there is no formal minimum wage, Sweden's powerful unions enforce one in practice. The terms of labour contracts are largely set by unions, which dislike temporary or part-time work. In Waxholm, north of Stockholm, the unions managed in 2004-05 to force a Latvian firm that had won a contract to build a school to apply Swedish collective agreements to Latvian workers. The firm went bust—and the flow of cheaper workers from eastern Europe, which Sweden was one of only three EU countries to accept openly in 2004, dried up. In contrast to Denmark's unions.., Sweden's also make it expensive to sack anybody, which discourages hiring.
An overweening public sector has stifled growth in jobs in service industries. Sweden's public sector is, indeed, the economy's second big failing. Mr Nuder asserts that it is no worse than any other, and he claims that the Social Democrats welcome choice in education and health care. Yet Sweden's public sector accounts for 30% of total employment, twice the share in Germany. And, although public-sector productivity figures are unreliable, one recent assessment of efficiency of input use puts Sweden at the bottom of all OECD countries (see chart 3)...
* Economic Performance and Work Activity in Sweden after the Crisis of the Early 1990s, by Steven Davis and Magnus Henrekson. NBER papers, forthcoming
UPDATE: Emmanuel at A Fistful of Euros critiques The Economist: More Sweden, less tidbits
A small excerpt:
What’s fascinating in the article is that while it goes to great lengths to try (with mixed success) to rebut the idea that a big welfare state is compatible with a decent rate of economic growth (the well-known “welfare state as a free lunch” hypothesis) and a functioning labor market, it never tackles the main argument usually advanced in favor of Nordic social-democracies: that a huge dose of public intervention can bring about a lot of socially desirable outcomes that are not fully reflected in the GDP per capita. Like, for instance, a low level of poverty (OECD figures), a high level of subjective satisfaction, a less unequal society or a reduced gender pay gap (though see this and this on the glass ceiling). Indeed a composite index of 16 social indicators computed by the OECD finds Sweden well-ahead of the other developed countries (pdf, p 27). Now, I know that not all these results would necessarily sway a card-carrying libertarian (what’s wrong about income inequality anyway?), but surely some should, like the fact that social mobility is a lot higher in Sweden (and in the other Nordic countries) that in the U.S. or in Britain.