A story of failure behind the image of prosperity

 

Sweden's economic performance, so beloved of the left, in reality tells a story Ireland copies at its peril, argues Constantin Gurdgiev

In the world of ideological battles, Sweden occupies a unique place as a perennial favourite of the proponents of socialism. Yet, as Ireland's social engineers drum the beat of the Swedish model, the Nordic spirit of egalitarianism is, itself, increasingly turning away from state intervention in the lives of its citizens.

While Sweden embarks on the path travelled by this country in the 1990s, the question that remains unanswered is why the Irish left can't come to grips with the fact that socialism never works.

The origin of the Swedish welfare state lies in the free-market declaration of free commerce in 1864, which laid economic foundations for the establishment of the social democratic system in 1932. The fundamental lesson of Sweden's past and present is that social welfare is not possible without decades-long accumulation of wealth - the ingredient still lacking in Ireland today.

Another misperception concerning the Swedish model is that the welfare state's main objective is to improve the lives of the poor. From 1932 to 1990, the State systematically stifled all independent initiatives, monopolising demand, supply, financing and regulation of all social services.

The result was a large, highly politicised welfare sector, immune to external influences. Consumer preferences were ignored. Grossly inefficient spending was financed by ever-escalating taxation, just as in Ireland during the 1980s.

The obvious casualties of the Swedish welfare state were income and employment. Between 1950 and 1989, the public sector accounted for all net job creation. In the last 30 years, Swedish employment has grown by just 9.3 per cent - half of the average of the pre-enlargement core European Union 15 member-states and eight times less than the US.

Swedish GDP per capita declined from the world's fifth-highest in 1970 to 14th in 2003 - an abysmal record unmatched by any other OECD country. Today, the country's GDP per capita is half that of Luxembourg and a third lower than in the US and Norway. As a result, Sweden spends a greater share of GDP on welfare than any other OECD country, yet achieves only near-average per capita transfers.

In Sweden, the growing tax burden and expanding welfare assistance have created powerful disincentives to work, especially for the poor. Throughout the 1980s, long-term unemployment grew and more people found themselves in the welfare trap - unable to lead productive and fulfilling lives.

Currently, more than half of Swedish welfare recipients enjoy compensation levels of around 90 per cent of their disposable income. As a result - even after the reforms of the 1990s - a whopping 35 per cent of Swedish able-bodied adults remain outside employment. Domestic employment in Swedish companies declined from over 747,000 in 1987 to 503,000 in 2003, while their employment from abroad went from 487,000 to over 956,000.

During the 1980s, higher marginal taxes on labour income have led to declining investment in education, despite the fact that Sweden leads the EU 25 in education and research and development spending. Sweden ranks 7th in the OECD in the proportion of population with at least upper secondary school education and over 75 per cent of its R&D takes place outside the country.

High taxes also imply a lower quality of life. Adding together time spent working at home and at work, Swedes work 4.5 hours more per week than their American counterparts - largely due to lower utilisation of professional services. This is not surprising, given that in Sweden for each € 1 collected by a contractor for services rendered, Swedish consumers are forced to pay € 11.76 in costs and taxes.

By the late 1980s, the economic slowdown and changing demographics exerted unsustainable pressures on the welfare state. Between 1989 and 1994, unemployment climbed from 2.6 per cent to 12.6 per cent, spending skyrocketed and the public debt exploded.

In 1992 the National Bank of Sweden was forced to raise interest rates to 500 per cent in the hope of averting a currency crisis. All of this illustrates that rather than acting as stabilisers, socialist policies exacerbate recessions in mature welfare states.

Prior to the crisis, the majority of Swedes believed that the welfare state would guarantee high levels of income and services. Overnight, as the need for protection increased, the state defaulted on its obligations. In addition, popular resentment of state monopoly on services and the resulting low quality and lack of choices escalated.

Starting in 1991, Sweden began to reform the welfare state. Between 1993 and 2001 public spending decreased from 70 per cent to 54 per cent of GDP. Since 1995, top marginal income and payroll tax rates declined from 86 per cent to 68 per cent, while transfers and subsidies fell from 30 per cent to 22.7 per cent of GDP.

One of the most dramatic reforms was undertaken in healthcare, where a growing private sector is directly competing with reformed and scaled-down public enterprises. The majority of the latter operate as independent companies.

Dr Constantin Gurdgiev is a lecturer in economics at University College, Dublin, and is also editor designate of Business&Finance magazine