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Thursday, September 21, 2006

Willing to learn

Interesting post over at tcsdaily.

The centre-right four-party Alliance won the elections in Sweden this Sunday, ending 12 years of Social Democrat rule. The Alliance promised to do stepwise market-oriented reforms, as opposed to the Social Democrats promise to do nothing.

In sum, Sweden became internationally known as the country that went from rags to riches with the second highest growth rate in the world between 1890 and 1950. Then, economic policy took a more socialist turn and it became a prime example of a society with a big state taking care of people from the cradle to the grave - using their own money. And in the 1990s, there was quite a lot of attention around the Swedish market-oriented reforms.

The summary of Swedish success and failure is a story of markets against the state. Every time Sweden has taken a step towards freer markets, it has been very successful. And every time it has increased the size and power of the state, success has sooner or later faded away.

In fact, the tax pressure rose only from 10 to 20 per cent of GDP between 1890 and 1950.

This seems to be a workable tax take most places around the world.

During the socialist phase, however, the size of the state exploded. The tax pressure increased to 50 per cent of GDP during the three decades up to 1980. Many companies were socialised by the state. The state interference in markets grew and the ultimate aim was a more centrally planned economy.

This tends to result in stagnation eventually...

Where does that put Sweden today? A neo-liberal country that became socialist and then embarked on market-oriented reforms in several areas. Today, Sweden contains both socialism and free markets. But the same truth as before applies: where there has been free-market reform, there is success, and where there is socialism, there are problems.

The labour market is probably the best example of Sweden's problems. McKinsey estimated the total unemployment rate to be 15 per cent. Sweden has decreased the size of the labour force more than any other European country during the last 15 years, shuffling away hundreds of thousands of people from being called "unemployed" to "early retired". In EU-15, between 1995 and 2003, employment grew more in 11 countries than in Sweden. Youth unemployment is 22 per cent, the fifth highest in EU-25, and the number of people under the age of 30 that are "early retired" has increased from 13, 000 to 22,000 during the last six years.

Again, hard to prove things in social science, but there seem to be some general patterns.

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