How Sweden Was Saved By Free Markets

Terence Chong

Terence Chong

Terence Chong is a student ambassador of Adam Smith Center, and a current undergraduate at Yale-NUS College.

Sweden and Capitalism

A cursory glance at online political discourse in Singapore today will yield a common buzzword: inequality. This word paints a heart-wrenching image of a mass of people left behind in this rapidly digitalising age of global capitalism. Ask any idealistic university undergraduate how this problem can be solved, and the same politically correct answer will surface: a welfare state to equalise economic outcomes.

It is no surprise then, that there is a focus on the Scandinavian countries given their comprehensive welfare systems and high quality of life. Sweden, in particular, ranks 7th in the 2017 Human Development Report, which measures human welfare indicators such as expected years of schooling, life expectancy and income per capita.

The American senator and Democratic Party nominee for the 2016 Presidential Race, Bernie Sanders has fond praise for the Scandinavian nations and its welfare system. He said during his campaign:

‘I think we should look to countries like Denmark, like Sweden, and Norway and learn from what they have accomplished for their working people.’

Is this praise for Sweden’s welfare system justified? What can Singapore learn from this seemingly egalitarian nation?

In an effort to narrow the scope of this article, I shall only focus on Sweden, which has received quite a bit of attention from proponents of the welfare state.

 

The history of Sweden’s economic growth

Before we jump to policy conclusions, it is necessary to take a close look at how Sweden’s economy developed. The Scandinavian bloc is often cited as having high life expectancies and good health outcomes in areas such as infant mortality. But all these actually predates the expansion of the modern welfare state.

Between 1870 and 1936, Sweden enjoyed the highest growth rate in the industrialised world. In 1960, Norway had the highest life expectancy in the OECD, followed by Sweden, Iceland and Denmark in third, fourth and fifth positions. With political stability and implementation of sound policies, Sweden, which remained neutral in the two destructive world wars, was able to outpace the rest of Europe in growth.

The 70s and 80s however brought about a period of socialist policies. High employer taxes came, stifling business. In 1979, employer taxes were 37% regardless of company profitability, compared to 12% in the US. Tax take as a percentage GDP soared.

Children book writer and self-proclaimed Social Democrat, Astrid Lingren, found out that she paid 102% in taxes, as she paid income taxes on top of employer taxes. The infamous wage earners’ funds (Löntagarfonder) crushed profit margins in corporations. Under this policy, companies had to pay portion of profit into these funds, and these funds would buy shares in the companies. These funds, owned by labour unions, would buy shares in the companies.

It’s no wonder that rich businessmen like IKEA founder Ingvar Kamprad left the country, citing ‘high capital taxes’ as oppressive and would bleed IKEA dry. A culture of punishing people who went into business pervaded society, discouraging entrepreneurship.

Inequality was indeed drastically decreased in Sweden during the 70s and 80s, but at the expensive cost of economic growth. GDP growth during this period averaged 1-2%.

 

Development of tax take (% of GDP) Source: Pg. 19 of Scandinavian Unexceptionalism by Nima Sanandaji

 

Public and private sector cumulative net job creation (in thousands) Pg. 33 of Scandinavian Unexceptionalism by Nima Sanandaji

As a result of this expansion of the welfare state, public sector job growth soared, as the Swedish government had to hire more and more administrators to run this welfare system.

 

The tipping point

Public discontent in these socialist policies came to a boil on Oct 4th 1983, when a demonstration in Stockholm against the wage earners’ funds was attended by an estimated 90,000 people. In the 90s, the Swedish economy was in turmoil, with inflation rates of 10%, and soaring interest rates. People were starting to ‘game’ the system, despite the high degrees of social trust and good work ethic the Swedish culture instilled. All of these were in danger of being eroded by the welfare state.

The turnaround came in the 90s when political parties united across party lines to push market liberalising reforms and deregulation. Wage earner funds were abolished in 1991. Taxes were reduced. Utilities were deregulated. Pension, healthcare and education system were reformed to include a greater degree of privatisation. The result? An increase in innovation and entrepreneurship, family disposable income and GDP growth, resulting in Sweden’s rise to the economic powerhouse it is today.

Source: https://tino.us/2013/02/real-wages-in-sweden-1960-2013/?fbclid=IwAR3FgP0SiLywlsO5GPybhK98llDYdll0SUkOEK4BDs80bjo8TpwS4jO89To

 

Sweden’s welfare state

However, even after these reforms, Sweden is still hailed as proof of a working welfare state. It is important to note that this welfare state been reformed from the welfare state of the 70s and 80s. Compared to before, there is a marked reduction in the government’s role of public spending.

For example, Sweden’s rail network has been privatised, alongside many other state monopolies. A famous example would be Absolut Vodka which had been a large state-owned company before it was privatised. Political parties from different sides of the aisles realised that with government monopolies, there was inefficiency and lack of innovation.

Even the pension system – one of the bedrocks of the Swedish welfare state – is privatised. Instead of a central fund run by the state, there are hundreds of privately-run funds supervised by a state-appointed intermediary, the Premium Pensions Authority.

The Swedish healthcare system is decentralised with private providers and insurance. There is also a school voucher system for families. Interestingly, 50% of high schools are private. Having both private and public schools compete for students result in a better product. Both public and private schools charge similar rates of tuition, and Swedish schools are known to be some of the most innovative in the world.

Instead of having public unions, private unions exist to represent workers in negotiations with employers. Contrary to popular belief, no minimum wage laws exist in Sweden.

Instead of having a progressive tax system, the Swedish tax system is in fact regressive, meaning that it affects lower income levels as compared to higher income levels. Sweden’s top marginal tax rate of 56.9% applies to all income over 1.5 times the average income in Sweden. That is a very low ceiling for a top tax rate bracket. Corporate taxes, on the other hand, are 22%. According to ekonomifakta.se, a Swedish statistics board, the top 10% pay only 27% of all taxes.

 

The lessons to learn from Sweden

Now that we have uncovered the secret sauce that makes the highly touted Swedish welfare state tick, here are the main takeaways.

High degrees of economic freedom benefit everybody, from the richest to the poorest. Sweden, today is ranked 15th in the Economic Freedom Index. The wealth that is used to fund Sweden’s welfare state comes from their strong private sector which benefits from free-market policies.

When designing or advocating for welfare states, it is important to harness the strengths of market forces. By having private providers in a state-funded welfare system, we allow for market-based competition and innovation.

One thing to note about Sweden’s welfare state is that it is funded by and used by the working and middle classes, not the rich. This is something Singaporeans have to consider when calling for a welfare state. Are we prepared to pay for the services that we demand? Making the rich ‘pay their fair share’ is notoriously challenging as it can lead to marked decreases in economic growth, as well as possible emigration to evade increasing tax rates.

All in all, we must understand that Sweden is not an example of a successful socialist system, but an example of how free markets and capitalism saved a country from catastrophe.

 

Featured image credit.

Posted in
Terence Chong

Terence Chong

Terence Chong is a student ambassador of Adam Smith Center, and a current undergraduate at Yale-NUS College.