New Economist

Sweden moves to the right

The much vaunted 'Swedish model' is set for a major overhaul, with a four part centre-right alliance defating the Social Democrats in Sunday's election. Reuters's report Center-right alliance wins power in Sweden

A Center-right alliance led by Moderate Party leader Fredrik Reinfeldt won power in Sweden in an election on Sunday, ending 12 years of Social Democrat rule by vowing to lower taxes and trim the welfare state.

Reinfeldt, who will be the next prime minister, declared victory in a tight election. Social Democrat Prime Minister Goran Persson, one of Europe's longest-serving leaders, conceded defeat after 10 years in office and will quit as party chief.

According to almost complete results from Sweden's Election Commission, the four-party opposition bloc had won 48.0 percent of votes to 46.2 percent for Persson and his allies.

Taking the stage with his arms raised, a jubilant Reinfeldt told supporters: "We campaigned as the New Moderates, we won as the New Moderates and together with our alliance partners we will rule Sweden as the New Moderates."

The result was a victory for the alliance's pledges to stimulate job growth by fine-tuning, but not dismantling, the welfare system. Persson, whose party has ruled Sweden for six of the last seven decades, had vowed to continue government largesse and keep one of the world's heaviest tax burdens.

Despite Sweden's strong economic performance under the Social Democrats, opinion polls had shown many favored change in the Scandinavian country of just over 9 million people due to voter fatigue with Persson and a perceived lack of new ideas.

...The Moderate Party was crushed at the last election in 2002 but 41-year-old Reinfeldt enhanced his party's appeal by shifting it toward the center and paring down earlier tax and benefit cut promises.

He leads an alliance with the Folk Liberals, Christian Democrats and Center Party that says years of excessive benefits and high taxes have eroded Swedes' will to work. Reinfeldt also said the real unemployment rate was about 20 percent, almost four times the official level. Reinfeldt says changes are necessary now to preserve the welfare system for the future, a theme of reform across Europe.

Press reports are describing it as a shock - but to those who have been talking to Swedish friends, it was no surprise. The Moderate Party have engaged in a similar rebadging of their image to the overhaul the British Tories have undergone under David Cameron. They are no longer scare Swedes in the way they once did. Bloomberg's election report by Jonas Bergman adds:

Reinfeldt toned down the Moderate Party's previous tax- cutting message, which brought it only 15 percent support at the last election in 2002, and emphasized that the alliance would not cut spending on education and health care.         

The alliance has promised income and corporate tax cuts of about 60 billion kronor ($8.2 billion), partly financed by reductions in unemployment and sickness benefits, arguing that Sweden needs to stimulate hiring and wean people off welfare.         

"They have done almost everything right,'' said Anders Sannerstedt, a professor of political science at Lund University. "They changed their profile, Reinfeldt has transformed the Moderates and they have acted almost as one.

More on the Swedish model

I know I wrote about it Sweden only a few days ago, but can't ignore the long piece on the Swedish model in this week's Economist: Admire the best, forget the rest. An excerpt:

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.

Doing business: Singapore is No 1

Singapore overtook New Zealand as the most business-friendly economy in the world in 2006, while the United States held steady in third place, according to the World Bank's Doing Business 2007 report - published today.

The dominance of the Anglo-Saxon and Nordic countries continues (see my post on last year's report). Other economies in the top ten for ease of doing business were: (4) Canada, (5) Hong Kong, (6) the United Kingdom, (7) Denmark, (8) Australia, (9) Norway, (10) Ireland.

The top 10 reformers were, in order, Georgia, Romania, Mexico, China, Peru, France, Croatia, Guatemala, Ghana and Tanzania. In Africa, a more business-friendly approach has seen the region move up from last place to the middle of the pack among world regions in carrying out changes that make it easier to start and run a business.

The report praised China's acceleration of reforms, which saw its ranking improve from 108th to 93rd:

Watch out, rest of the world: China is a top-10 reformer. The government sped business entry, increased investor protections and reduced red tape in trading across borders. China also established a credit information registry for consumer loans. Now 340 million citizens have credit histories.

Although reforms improved India's ranking over last year, "it still ranks relatively low at 134 and lies 41 places after China, which is reforming at a faster pace than India."

Among Europe's biggest economies, Germany ranked 21st, France 35th and Italy 82nd, down from 69th in the previous report. Meanwhile, Venezuela plunged to 164th from 144th.

Why does this matter? As the report notes:

Publishing comparative data on the ease of doing business inspires governments to reform. Since its start in October 2003, the Doing Business project has inspired or informed 48 reforms around the world. Mozambique is reforming several aspects of its business environment, with the goal of reaching the top rank on the ease of doing business in southern Africa. Burkina Faso, Mali and Niger are competing for the top rank in West Africa. Georgia has targeted the top 25 list and uses Doing Business indicators as benchmarks of its progress. Mauritius and Saudi Arabia have targeted the top 10.

Comparisons among states or cities within a country are even stronger drivers of reform. Recent studies across 13 cities in Brazil and 12 in Mexico have created fierce competition to build the best business environment. The reason is simple: with identical federal regulations, mayors have difficulty explaining why it takes longer or costs more to start a business or register property in their city. There are no excuses.

You can download a 12 page overview (PDF, 1.8Mb), press notice, rankings, country reports and details of the methodology used from the extensive webite: www.doingbusiness.org

What's not to like about Sweden?

One of the fastest-growing developed economies in the world. Plenty of jobs. Generous welfare and a stable currency. What's not to like about Sweden? Quite a bit -- at least according to the Swedes.

So writes Bloomberg columnist Matthew Lynn today: Sweden Sends Message to Europe as Election Looms. Lynn continues:

As the country of 9 million people prepares for a general election on Sept. 17, there is a good chance the most consistently left-of-center of European nations will take a rare step toward the right. The four-party opposition spearheaded by the Moderate Party had a lead in recent polls ranging from 3.5 percentage points to 11.5 points over the governing coalition led by the Social Democrats.

That is more than enough to make a change of government a real possibility. "Almost 10 years without reforms have passed and problems are mounting,'' Johnny Munkhammar of the free-market think tank Timbro in Stockholm said in an e-mailed statement. "Lower real employment, increased poverty, very high youth unemployment. This only shows that Sweden should do much more of the market-oriented reform that created improvements 10-15 years ago,'' he said.

Plenty of his fellow countrymen are thinking the same way. If the Social Democrats are voted out, there may well be an important message for the rest of Europe. If they can't hang on to power even with the success of their economic policies, the outlook is less than rosy for other European governments that support expensive social systems.

On the surface, Sweden has done well in recent years -- far better than most other European countries. The government says the economy will expand about 4 percent in 2006, after growing 2.7 percent last year. The unemployment rate dropped to 7.5 percent in July, down from 7.8 percent a year earlier. Property prices have been strong, making everyone feel a lot richer ...

Sweden's government doesn't even need to borrow any money to fund all those generous Swedish social benefits -- this year it is expected to record a budget surplus of 2.7 billion kronor ($372 million), and that should rise over the next few years.

Not much sign of a crisis there.

Indeed the economy has been strong enough for the Swedish central bank, the Riksbank, to raise its benchmark interest rate to 2.5 percent. Some analysts say gross domestic product will grow even faster than forecast. London-based Capital Economics Ltd. said last week it expects the economy to grow "by something close to 5 percent'' this year.

So how come the Swedes are so grumpy? Most governments with that kind of record could expect to be swept back into power.

While unemployment levels are low by European standards, the government massages the figure by redefining some jobless as ill. "On a normal day, nearly a fifth of the potential workforce is on sick leave or receiving a disability benefit,'' the Paris- based Organization for Economic Cooperation and Development said in a report on the Swedish economy. More days are lost due to sickness than in any other OECD country.

Youth unemployment is running at more than 20 percent, one of the highest rates in the region. Most Swedes might have jobs now -- but they worry about whether their children will.

Economic growth might look strong, but it has been helped along by high levels of immigration. Sweden, like Ireland and Britain, is one of the European Union countries that grant eastern Europeans unrestricted access to the labor market.

...The country may be getting richer overall, but if people's living standards aren't rising, they won't feel any happier with the government. As Timbro's Munkhammar says, GDP per capita hasn't been growing nearly as fast as the general economy. In short, people aren't getting richer -- and they don't like it.

Meanwhile, taxes remain prohibitive, even by European standards. Sweden's income-tax rates can be as high as 60 percent, among the most punishing in Europe. With a total tax burden of slightly more than 50 percent of GDP, according to Eurostat, the Swedish government takes more of its people's money than any other country in Europe...

Also worth reading is a recent European Commission brief, The Swedish labour market model: performance under outside pressures, by Jonas Fischer in the Directorate-General for Economic and Financial Affairs.

Claus on flexicurity

For those interested in recent European debates about labour market reform and economic and social models, Claus Vistesen has a new post on Flexicurity - a working model for Europe? over at A Fistful of Euros weblog. The post also has plenty of comments below the fold that are worth a look, and Claus refers to some of my posts on the subject.

New book: Beyond the European Social Model

London-based think tank Open Europe have published a new book: Beyond the European Social Model. The book, which is available to down load free chapter-by-chapter or as a whole book (1.1Mb PDF), takes a critical view of the European Social Model - it argues that "the high-tax and highly regulated 'social model' is not working, and that the time has come for the EU and its member states to take a different approach." Here are the individual chapters:

Section 1: Is the Social Model working? If not, which policies are working in Europe?

Chapter 1. The Myth of the Scandinavian Model, Martin De Vlieghere
Chapter 2. The social failure of the European Social Model, Lorraine Mullally
Chapter 3. Will the European Social Model wreck the Irish miracle?, Constantin Gurdgiev
Chapter 4. Welfare State or Unfair State?, Johnny Munkhammar
Chapter 5. The European Social Model – One size doesn’t fit all, Chresten Anderson

Section 2: Lessons for reformers: the state of play and the way forwards

Chapter 6. Sex, Drugs and the Dutch Social Model, Eline van den Broek
Chapter 7. Social Tallies and Silicon Valleys, Meelis Kitsing
Chapter 8. Employment and welfare reform in the EU, Barry Watts
Chapter 9. The Better Regulation initiative and EU values, Malgosia Kaluzynska
Chapter 10. EU Regulation - lightening the load, Paul Stephenson

The authors are big fans of the Irish economy ("the efficient alternative"), and highly critical of the Scandinavian economies. I would take issue with several of their assertions. But agree or disagree with them, the book is a quick and provocative read.

UPDATE: Finnsense has a good critique of the book's chapter on The Myth of the Scandinavian Model. Here's a small taste:

A recurrent theme is just how crass his analysis is. He seems to have no taste for the subtleties of very small economies. As his graph admirably shows, Sweden and Finland took a massive and disproportionate hit in 1989 with the collapse of the Soviet Union, yet he doesn't mention that. He also fails to mention the various factors influencing the Irish boom. One of these is the vast amounts of EU cash pumped into the country over decades. Another is the outsourcing boom from the US, facilitated in no small part by the fact the Irish were a) very poor to begin with and b) speak English.

Read the whole thing.

Poland bottom of the EU league

A new report by the London-based Centre for European Reform puts Poland at the bottom of the league for competitiveness among the 25 European Union nations. Their Lisbon Scorecard VI report was launched by EC President Barroso in Brussels today, and will be launched in london on Wednesday. The report put Italy as low as 23rd out of the 25 EU members, down with Bulgaria and Romania. The report is not yet available online, but EU Observer today carried the following report, Poland 'villain' on economic reform scorecard:

Denmark, Sweden and Austria top the list of this year's Lisbon scorecard on EU states' competitiveness issued by the Centre for European Reform (CER). The CER's Lisbon Scorecard is a yearly document issued by the London-based think- tank assessing member states' progress on the so-called Lisbon Agenda – the bloc's aim to become the most competitive economy in the world.

...Denmark and Sweden are once again this year's numbers one and two on the scoreboard, while Austria has climbed from place five to place three, Aurore Wanlin, researcher at the CER told EUobserver. The UK and the Netherlands took place four and five on the 2006 scorecard, with the Dutch dropping from number three to five on the 27-strong list which comprises the EU-25 plus acceding states.

"Austria has made important reforms in the area of flexible employment," Ms Wanlin explained of Vienna’s surge on the list. She added that "Denmark in particular has shown that flexible labour market rules can be combined with a high level of security, for example by training programmes offered by the state."

The new old age

As the pool of young recruits dries up, companies and countries are putting the retired back to work, writes Newsweek's Stefan Theil in The New Old Age. Once again, there are lessons from Finland:

..half of working-age Americans now expect to work into their 70s, whether by financial necessity or by lifestyle choice. In Japan, 78 percent of baby boomers between the ages of 55 and 59 say they plan to work beyond the official retirement age of 60.

These trends are forcing rich nations to rethink the long-held assumption that early retirement is a competitive advantage. Older workers were (and often still are) seen as less productive and more expensive, and thus ripe targets for corporations seeking to pare costs. OECD labor-market economist Mark Keese says governments from Germany to Ireland have long subsidized early retirement in order to free up jobs for the young, by offering generous benefits at very early retirement ages. Or they've doled out "disability" pensions to millions of still-young workers, often because of political pressure to get them off the unemployment rolls.

As a result, the average retirement age in rich nations has been falling steadily from as high as 69 in 1950 to 61 or lower in many OECD nations today. In an extreme case like France, with an average life span of 83 years, the average worker retires at 59 and lives off a state pension for more than two decades—a situation Keese calls "obviously not sustainable." All across the Western world, says Keese, current retirement policies are "relics of a bygone age."

There is another way. Finland was facing a similar situation when recession hit in the early 1990s; at the time, only 20 percent of Finns between the ages of 60 and 64 were working. Since then Finland has introduced "bonus pensions" for people working until 68, giving them a financial incentive to continue working—and paying taxes. Employers are also now required to have occupational health and safety programs in place to monitor and prevent work injuries such as repetitive stress disorder or muscle pains produced by desktop jobs, with the ultimate goal of extending the average working life by two to three years. Already, the employment rate among those 60 to 64 has doubled. The result: lower pension costs, higher tax revenues and, Finland says, faster economic growth.

The Finnish case now stands as a potential object lesson for nations where government policy still pushes older citizens out of the work force. In part because companies in France and Germany are so used to phasing out older employees, fewer than 5 percent of workers older than 50 participate in training programs, compared with 33 percent in Sweden and 21 percent in Finland, according to a landmark study of retirement practices published in October by the OECD.

In many countries, well-meaning laws designed to protect older workers—such as special prohibitions on firing, or age-based mandatory severance payments—have had the opposite effect, making companies reluctant to hire them in the first place. That's one reason that in Italy, two in five employment ads state bluntly that anyone 45 or older need not apply.

Such baldfaced discrimination against older workers is, however, on the way out at many companies. ...The big picture seems to be brightening for older people who want to work. The OECD reports that employment rates for workers 55 to 64 have risen from 46 percent in 1994 to 51 percent in 2004.

Denmark's flexicurity model: ready for export?

Some European politicians are turning to the Danish 'flexicurity model' - a combination of easy hiring and firing, generous unemployment benefits and an active labour market policy - in an attempt to reinvigorate their sluggish labour market. This week French PM Dominique de Villepin, for example, announced measures to boost youth employment that seem to have been inspired by the 'flexicurity' model.

But if it's such a great system, why haven't other European countries adopted it already? After all, the model has been around for over a decade and has been actively touted by the European Commission. Two French labour economists, Yann Algan and Pierre Cahuc, attempt to explain this puzzle. In a new IZA discussion paper, Civic attitudes and the design of labor market institutions: Which countries can implement the Danish flexicurity model?, they argue that the generous unemployment benefits that form part of the Danish model can only work in a high-trust society where few cheat the system:

We argue that the flexicurity model is hardly sustainable in countries displaying weak public-spiritedness because the unemployment insurance design raises moral hazard issues that are much more difficult to overcome in countries where individuals are more prone to cheat over government benefits.

Besides, we are also able to document that civic attitudes cannot be systematically changed quickly just by changing institutions. This result has far-reaching consequences for the policy reforms agenda. It indicates that civic attitudes impose real constraints on the choice of labor market institutions. From this point of view, it is unlikely that countries with weak public-spiritedness can implement the Danish Model without specific action aimed at changing the values of their citizens.

...this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

France is not such a country. The authors demonstrate that it has a much less generous unemployment benefit system than the Danes, and the French are much more accepting towards welfare cheating. On that evidence no sane French politician would want to import the flexicurity model. The authors conclude:

...this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

This is an interesting proposition. While it doesn't wholly resolve the policy question, it takes us some of the way there. It also helps answer the vexed debate over whether the Nordic model is exportable.

Europe's leaders look to the 'Swedish model'

We will be hearing a lot more about 'flexicurity' and the Swedish and Nordic models over the next few months, with the Austrian EU Presidency - and the Commission - keen to promote them in preference to the supposed 'evils' of the anglosaxon model. Last Thursday, Nicholas Watts wrote in the Guardian that the next EU summit will highlight the Nordic model as a solution to Europe's "economic slumber". Here is an excerpt from Europe's leaders look north, but has Sweden really got the best of both worlds? It's a reasonably balanced piece - though I seriously doubt Watts' claim that the British government thinks the Scandinavian model "combines the best of both worlds".

Days after European leaders finally agreed a €862bn (£593bn) budget at last month's EU summit, key figures are looking to Scandinavia, which has enjoyed steady economic growth for 50 years while ensuring that a protective arm is thrown around its people.

Austria, which took over the EU's rotating presidency on January 1, will highlight the Nordic model at the next European summit in March, when leaders will try to chart a way out of the EU's economic slumber. Britain, the champion of flexible Europe, and Jacques Chirac, an opponent of the "Anglo-Saxon" economic approach, believe Scandinavia combines the best of both worlds: relatively low unemployment, at 5.8%, and generous social provision.

Joakim Palme, the author of a paper on the Nordic model for the EU jobs summit at Hampton Court last October, believes Europe's mighty but struggling economies are wise to look north. "I do not say the Nordic model should be copied. But if you are serious about combating poverty and inequality and want to combine that with growth and employment, it is difficult to discard the way the Scandinavians have organised the system of social protection."