The Dynamic Welfare State: How Adaptation Can Save the Swedish Economy

By Feng, Tian | Harvard International Review, Winter 2008 | Go to article overview

The Dynamic Welfare State: How Adaptation Can Save the Swedish Economy


Feng, Tian, Harvard International Review


The Swedish welfare system thrives in spite, or perhaps because of, its contradiction of contemporary economic thought. By ignoring the most basic principles of the deadweight loss of taxation and the inefficiency of transfer payments, the Swedish system has persisted in the face of international and European trends towards smaller government. At the same time, this Nordic state has adapted to international changes, allowing it to survive storms that have affected Europe's economic giants. For these reasons, the Swedish system has been a quandary for social scientists, economists, and political theorist alike. Today, Sweden faces a slew of new challenges; it needs to call upon its malleable nature to reform and adapt, as it has so successfully done in the past.

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A Meteoric Rise

Two centuries ago, Sweden lagged behind the rest of Europe; it was failing agriculturally due to its frigid climate and suffering industrially as well. Like much of the rest of Europe, Sweden adopted a parliament known as the Riksdag. It also created a socialist economic system, including a strong welfare program. In the twentieth century, largely because of its military neutrality in the two World Wars, Sweden quickly surpassed former giants like Great Britain and France. Because it profited from post-war reconstruction and did not suffer from any infrastructural losses as did the rest of war-torn Europe, Sweden managed to propel itself forward in the latter half of the 1900s.

But in 1993, the humming Swedish system was tested by troubles that had long been overlooked. The model welfare state could no longer handle the artificial employment rate created by the injection of government jobs into the system, massive government spending, and inflation that governmental policies had not addressed. Simply put, the government was growing too fast to be sustained by the private sector. By 1990, government spending matched 57 percent of the GDP, government jobs accounted for 33 percent of total employment, and annual inflation hit 10 percent. All of these factors led to a spike in unemployment between 1992 and 1993, constituting an implosion in the model welfare state.

Dealing with Disaster

Sweden has come far since the economic crisis of 1993. Due to stringent reforms made in response to the economic faults of the 1990s, government spending is still large, but has been limited. With the exception of 2001, the government has posted a surplus every year since 1993, allowing debt to decrease from 74 percent of GDP in 1993 to 47 percent of GDP in 2006, according to Statistics Sweden, the government authority for official statistics.

Over 90 percent of Sweden's industrial production is now privatized. These gains in private sector growth are a direct result of massive deregulation of industries in response to the early 1990s recession. Because Sweden responded quickly to the crisis and recognized the importance of the private sector, it maintained the benefits of competition. In addition, Sweden's central bank, the Sveriges Riksbank, now keeps a tight rein on inflation. Prices are growing at 2 percent a year, allowing the economy to have a rather stable platform compared to the rest of the world.

All of this reform has been effected without sacrificing many of the government-funded social benefits that Swedes enjoy. Everything from childcare to transportation is subsidized, and workers receive several months of sick leave and vacation each year. Even after becoming unemployed, Swedish workers receive welfare benefits that cover around 80 percent of the lost income if they had previously held a job for 12 full months. Those without jobs also receive subsidized training for new occupations so as to avoid structural unemployment. This social insurance, combined with a relatively low 5 percent unemployment rate, contributes to Sweden consistently being named in surveys as one of the happiest nations in Europe. …

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