We are still flying, so well that many envy us for it today. Many mainstream economists have been predicting the demise of the Swedish model of social democratic capitalism for decades.
Sweden's Welfare State
But the Swedish welfare state, while slightly smaller in scope than it once was, is still largely intact. So the question arises, why is the Swedish bumblebee still flying?
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Indeed, why is it soaring despite the opinions of so many observers that it is doomed to fail? The argument that the Swedish model was doomed to failure rested on two ideological artifices.
The first was a simplistic application of the theory of comparative advantage. This theory implies that exogenously determined resource endowments and factor costs are the primary determinants of trade flows and the location of production. Second, critics tended to assume that government intervention is inherently inefficient relative to the wonders of the market system, and in an era of globalization, countries must reduce the size and scope of government to compete internationally. The Swedish resurgence in the last decade indicates that there are serious flaws with this analysis.
A more sophisticated explanation of the forces determining the location of production can be provided by the theory of comparative institutional advantage.
The Crumbling Swedish Welfare State
This theory seeks to go beyond standard analysis to consider the institutional factors that better explain trade patterns. Part of this explanation includes the fact that efficient government intervention and welfare state institutions can contribute to the attraction of particular industries to a specific location. This paper lays out the key aspects of the theory of comparative institutional advantage as they apply to the resurgence of the Swedish economy.
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The dramatic reversal of fortunes of the Swedish economy demonstrates the extent to which countries can affect the location of production using non-market institutions, and the extent to which certain welfare state institutions can support high wage industries. The security and stability engendered by Sweden's extensive welfare state encouraged workers and entrepreneurs to take risks and provided a safe environment for long term investment.
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To its advocates, the Swedish welfare state builds on a strong social consensus favoring extensive state intervention to ensure a high quality of life for all Swedes. To its critics, the Swedish system is marked by excessive government intervention and attendant inefficiencies.
With its overly heavy body and little wings, supposedly it should not be able to fly--but it does. This book draws on many years of IMF surveillance and policy advice to explain how it has done so, to assess the challenges that the Swedish model faces in the new century, to propose a strategy for dealing with those challenges, and to draw lessons for the many other countries that face similar challenges from globalization and demographics.
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