Sweden Goes Free Market

Scandinavian countries were known for statist economies, but thanks to responsible spending and pro-growth policies they have survived the financial crisis.

Anders Aslund suggests that Scandinavia still provides a model to emulate - but now a free market model.

Since the early 1990s, Sweden has cut public expenditures

from 71 percent of GDP in 1993 to 52 percent in 2008—that is, by almost one-fifth of GDP. Public revenues fell also with lower taxes, but only from 60 percent of GDP to 54 percent of GDP. As a result, Sweden’s budget deficit of 11 percent of GDP was transformed into a budget surplus of 2.5 percent of GDP. Meanwhile, its public debt declined from 78 percent of GDP to 47 percent of GDP. Finland’s public finances went through a similar tightening.

Growth has not suffered but accelerated during this financial cure because of stimulation of supply rather than demand. ... As the crisis hit the world in the fall of 2008, the Scandinavian countries had budget surpluses and public debts of around 45 percent of GDP. These very open economies were badly hit by the crisis, which was worst for Finland, which had a GDP fall of 8 percent in 2009 and is already experiencing a double dip. Thanks to their remaining social transfers, the Scandinavian countries cushioned unemployment and provided large instant stimulus through these automatic stabilizers. Unemployment is almost as high as in the rest of the European Union, and is a major concern, but no unemployed need sleep in the street. The nonsocialist governments were adamantly opposed to any socialization of failing enterprises. Hardly any discretionary subsidies to dubious companies in structural crises were admitted. Sweden let Ford sell Volvo to Chinese Geely and GM Saab to Dutch Spyker.

As a result, the Scandinavian countries stand out as having pursued a responsible financial policy before, during, and after the global financial crisis. Sweden maintains a budget deficit of only 2 percent of GDP this year, aiming for a nearly balanced budget next year, and 2 percent of GDP budget surplus during the coming business cycle. Their economies are bouncing back, as always led by the export industry. Sweden is expecting a growth of nearly 5 percent this year after a similar decline last year. After their experiences with “Keynesian” demand management in the 1970s and 1990s, Scandinavians no longer believe in it. Their lesson is that sound fiscal balances are preferable and safer, while growth is brought about through supply measures: deregulation, privatization, and investment in human capital. Proportionately, they have the largest investment in research and development in the world ...

With the social democrats obtaining only 30 percent of the vote [in recent national elections] even in their “homeland” Sweden, their statist model seems history.