Sunday, January 13, 2013

The Swedish model

The McKinsey Global Institute (MGI) has released a new report on Sweden's economy worth highlighting. Particularly interesting is its description of some of the key factors which drove the country's economic turnaround in the mid-1990s:
Deregulation and increased competition  
One of the key driving forces behind the increased productivity is the increased competitive intensity. From 1993 to 2010, competition in many areas of the Swedish economy intensified, mainly driven by the deregulations in the 1980s and 1990s, notably in the telecom, electricity, gas, postal, retail and banking sectors. Competition laws were also strengthened through the introduction of clearer laws against cartel formation and exploitation of a dominant market position.  
Following the creation of the World Trade Organization (WTO) in 1995, customs duties for industrial goods were lowered by an average of 40 per cent in the industrialised nations. Sweden also joined the EU in 1995, which facilitated free movement and international trade in several areas. These changes encouraged an increase in productivity. A study published by the OECD suggests that reduced barriers to market entry added about 0.4 percentage points to annual productivity growth over the period 1994-2003. 
A stronger economic and political framework  
During and after the crisis in the 1990s, a number of key reforms were implemented through cross-party decisions. These laid the foundation for a stable macroeconomic framework. Even before the crisis, in 1991, an extensive tax reform (the “tax reform of the century”) was implemented, resulting in lower rates of marginal income tax, lower rates of corporate tax, a broader tax base and more uniform taxation of different types of income.  
In the mid-1990s, a pension reform was implemented, which introduced self-funding and linked the size of pensions to economic performance. This created a more robust pension system and strengthened incentives to continue working in old age. In the second half of the 1990s, new budget rules were also introduced: a process for budget decisions in which the Swedish parliament is required in a single context to decide on total government expenditure, a surplus target for public finances and a government expenditure ceiling. 
To review:
  • Sweden has reformed its public pension system, including a partial privatization by which workers can place 2.5 percent of earnings in private accounts. In contrast, the US has done exactly nothing to change its Social Security system. Indeed, a proposal by President George W. Bush to allow workers to contribute a mere 2 percent of taxable wages to a private account was fiercely resisted by Congressional Democrats. Prospects for reform going forward continue to be dim, with top Democrats in such denial regarding the program that they insist the program is not adding to US deficit woes, even though the truth is the opposite.
  • While Sweden moved to lower marginal tax rates, the US has pursued the opposite approach, with President Obama recently signing a tax increase on top income earners into law. The US corporate tax rate, meanwhile, remains the highest in the industrialized world, and despite much talk the Obama administration has yet to move forward on any kind of tax reform. Indeed, rather than expand the tax base the administration insisted in the recent fiscal cliff deal that tax breaks for various special interests be maintained.
  • Sweden has reformed its postal system -- including ending the monopoly enjoyed by state-owned Sweden Post. The US, meanwhile, has not even entertained the possibility of ending the USPS monopoly or otherwise reforming it even while the organization hemorrhages money. More generally, movement in Washington has been towards greater regulation of the economy as deregulation has become a dirty word.
  • While a key factor in Sweden's turnaround was its embrace of free trade and lowered trade barriers, the Obama administration has not come up with a single new trade initiative during its four years of existence. Indeed, each one of its pursuits on the trade front has been a holdover from the Bush administration, whether it is the free trade deals with Colombia, Panama and South Korea (which were re-negotiated by the administration to make them more protectionist) or the Trans-Pacific Partnership.
It's curious that the American left, which so often likes to point to Sweden as an example of good public policy, has pursued in so many ways the exact opposite of the policies that have been praised by the MGI as playing a key role in that country's turnaround.

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