Bad news for social democrats – the “Swedish model” doesn’t work

Classical liberals can point to numerous examples of robust economic growth coinciding with low taxes and light-touch regulation: Britain in the 18th and 19th centuries; the US before the 1930s; and more recently Hong Kong since the 1960s. Of course, it must be conceeded that these examples were far from night-watchman states and the role of government remained significant in certain areas. But the general hypothesis that economic liberalisation aids the production of wealth receives further empirical support from the large number of countries that have experienced rapid growth after adopting free-market oriented reforms – from China in the late 1970s to some of the ex-communist nations of central and eastern Europe in the 1990s.

The history and geography of wealth creation is far more problematic for supporters of big government. Yet they often claim empirical support from the economic success of Scandinavia and Sweden in particular. The latter is said to combine a very large state with high levels of prosperity. But unfortunately for social democrats, the economic history of Sweden appears to be far more consistent with the classical liberal analysis than their interpretation.

For illustrative purposes, the graph below compares GDP per capita (adjusted for purchasing power) in Sweden and the UK between 1900 and 2008 (Maddison). (Incidentally, the increased gradient of the lines is the result of compounding rather than faster growth).

GDP per capita in Sweden and Britain, 1900-2008 (1990 International Geary-Khamis dollars)

Sweden enjoyed significant relative economic success in the first half of the 20th century. In this period, Sweden had a very small state by modern standards. In 1937, for example, state spending in Sweden constituted just 16.5% of GDP (see Crafts, 2002), lower than China today, while in the UK it was far higher at 30%. Even in 1960 – just after Sweden had overtaken the UK in GDP per head - state spending in Sweden was still only 31% of GDP - lower than in Britain. 

In relative terms, economic growth has been sluggish in Sweden since the early 1970s, since the size of government there had become really huge. For example, per capita GDP in Sweden was 16% higher than the UK in 1980 (and public spending accounted for a mammoth 60% of GDP), but only 3% higher in 2008. Indeed, Sweden suffered a severe fiscal crisis in the early 1990s, so high was the level of state spending, and radical reforms had to be introduced in an attempt to curb the growth of government.

While one should be cautious about drawing too many conclusions from growth statistics, Sweden’s economic record certainly fails to falsify classical liberal theories on the relationship between government intervention and economic prosperity. People often confuse levels with changes in levels. Sweden has a high level of national income - similar to Britain's - in an economy in which the government currently spends not much more than in Britain. In many respects it has a more liberal regulatory environment. However, the growth in Swedish national income was most rapid when the proportion of state spending was relatively low. High state spending almost brought the country to its knees.

Richard, great stuff - you are spot on with this. For those who want an academic account to support the conclusion of your post they could do no better than this paper by Assar Lindbeck - he was a member of the Social Democratic party and was a former advisor to Olaf Palme the premier most responsible for the surge in state spending in Sweden - yet he confirms your view. Lindbeck, A. (1997) The Swedish Economic Experiment, Journal of Economic Literature, 35: 1273-1319. It is also worth pointing out that in the early 1960's income inequality as measured by the gini-coefficient was higher in Sweden than in the United States - it is only since the 1970s that Sweden has become much more egalitarian than comparable developed nations. Thus, the period of rapid growth occured during a period of high income inequality, whereas the tailing off of Swedish performance has gone hand in hand with a reduction of inequality.
There's a nice, succinct video by CFP here: http://www.freedomandprosperity.org/econ101/sweden/sweden.shtml which makes a similar set of points (although not comparative to the UK) and refers to a few articles including Lindbeck's. It also has an attractive blonde for good measure!
The data and graph that you show above do not really demonstrate the argument made at all. The explanation for the varying rates of growth is probably a lot more prosaic than that stated. You are probably right to urge caution in reading too much into the analysis. You have suggested that "growth in Sweden has been relatively sluggish" (compared to the UK, understood), "since the early 1970s". Between 1970 and 1975 (oil price supply shock - no domestic production, available unlike UK), Swedish growth was at a faster pace than in the UK, according to the graph above. Between 1995 and 2008 it has almost exactly corrolated with the UK rate of growth. Please advise which statistical analysis tool you have used to arrive at this "relatively sluggish" conclusion, as based upon the graph above the statement cannot be said to hold up to any level of significance for all but approximately 10 of the 38 years cited. Sweden started from a lower base as regards per capita GDP growth, from the beginning of the 1900s. As a trading nation, its GDP was likely to increase, benefitting from arbitrage until the 1960s, at least, when its growth began to exceed UK per capita GDP. As regards the 1990 adjustment, there was a global recession at that time too, it seems that Sweden was more seriously affected in per Capita GDP Growth than the UK at that time. This could well be explained by the fact that the Swedish industrial economy had been less significantly disembowled by the 1980s' recession compared to the UK; less reliance on coal and steel, shipbuilding and more value-added industrial products; cars, aircraft, telecommunications, etc; the latter of which were more directly affected during the 1990s.. The above article does no more to convince the impartial that the relative economic performance and per Capita GDP growth rate of Sweden has more to do with the value of exports generated by companies such as the popular music group Abba, alongside its global industrial brands, than with the relative proportion of GDP from government spending since the 1960s or any specific governments or political philosophy. How do the relative and absolute rates in growth and decline of unemployment in the UK and Sweden compare during the 1980s and 1990s recessions? What allowances or explanations have been given for any data collection or measurement discrepancies between countries. The European System of Accounts for GDP came into effect in 1995, it predecessor existed from 1970, the European System of Integrated Accounts. How reliably comparable is the GDP data before this? How comparable were Swedish and UK GDP before their staggered accessions to the EU?
@Jonathan Harris - I accept many of your points. Clearly there are numerous factors that affect rates of GDP growth - hence the caveats in the post. For me, the most important lesson from the data is that the empirical evidence appears not to support the 'social democrat' interpretation. And I think you may be expecting too detailed an analysis from a short blog article... @Mark and @Whig - Thank you for supplying additional evidence to support my argument.
Richard The title to your Blog post boldly claims that "the Swedish Model doesn't work". It also claims that non-Social Democrat governments have generated the best growth to the Swedish economy throughout the 20th Century. Whilst I would not necessarily expect you to have included all the background research on the blog post itself, it is not unreasonable for the assertions made to have been tested with some background analysis, perhaps written up in a paper, which could be relied upon. I understand that you have used Maddison & Crafts' research as the basis for your assertions. Others have added small addenda to this. I would be interested to hear if they believe that interpretation and the extent of assertions you have made can reasonably be from the data or their papers. Apart from failing to mention the level of employment in Sweden in comparison to the UK, or under the comparative political regimes in Sweden, there is no detail on the precise relevant political periods for the different Swedish governments. Presumably the Social Democrats did not rule Sweden from 1900 until 2000? - I understand that they did not hold sway before 1932 and that Centre Right governments were present after the following elections: 1976, 1979, 1991, 2006 and 2010. A more accurate reading of the intersection of the political electoral data, with the economic; as GDP growth was that growth stagnated during Centre Right governments in 1976 and 1979. It plummeted during the Centre Right government of the early 1990s. Growth since the 1990s has been closely correlated between UK and Sweden, regardless of government on either side of the North Sea. It took off in 1995, at the time when a Social Democrat government was in power. Mark Pennington's reference to Lindberg does not highlight the extent to which US economic policy could have contributed more to their relative increase in income inequality compared to a relative reduction in Sweden. It may be that government debt and spending was generally higher after SDP governments than their Centre Right opponents, but that is hardly the most startling of economic or political revelations. I am really sorry, but in short, the data, particularly the graph above do not support the interpretation that you have put on them.
Jonathan, You are right that the graph Richard uses may not be the best way of showing this. His essential point though is that claims that Sweden developed and has performed well - because of social democratic policies - simply do not hold - and I think he is right about this. The best way of looking at the question is to consider Sweden's position relative to the world as a whole. In the early 1960s Sweden had lower levels of taxation and higher levels of inequality than the United States, Britain and most European countries - and had done so for most of the post 1930s period. By 1960 Sweden ranked in the top 2 countries with respect to per capita income. In the subsequent period Sweden has become one of the most highly taxed and egalitarian societies - relative to the rest of the developed world - but its position in terms of per capita income has fallen from 2nd to somewhere between tenth and seventeenth. So, at the very least, the social democratic policies that have been pursued since the late 1960s have weakened its relative standing compared to the rest of the developed world. The recent revival of Sweden's performance has followed a concerted though at this stage fairly limited attempt to reduce taxation and spending - look at any of the academic papers by Andreas Bergh to see the evidence on this (Bergh is a supporter of the welfare state, by the way). The Social Democratic Party WAS in charge for virtually all of the period 1930 -1990 - there were very brief periods of 'moderate party' rule for a couple of years in the 1970's and early 1990's - and now there seems to have been a more serious move away from social democracy. What is key about Assar Lindbeck's paper is that he shows that although the Social Democrats were in power for the whole period between 1930 and 1975 it was only in the late 1960s that they started to implement highly redistributive policies. For most of the period in other words, they were social democrats in name alone and were pursuing an essentially liberal market model - that is the point Lindbeck is making - and as a former adviser to Olaf Palme, he is in a very good position to make that judgement. Another quick point - longitudinal analysis of Sweden's development also cuts against the arguments of the 'spirit levellers' - because Sweden had a superb record on infant mortality, social trust and all the other 'quality of life variables' in 1960 - i.e. when inequality was high and before big time redisrtibution had kicked in. Mark P.
Mark I understood that the Swedish government between 1991 and 1994 was run by Carl Bildt, a Conservative under a Centre-Right coalition, which as I explained above coincides with a period of sharply declining GDP. It seems that the Conservatives were also in various coalition governments between 1976 and 1982. It would be an underestimation to suggest that this was only a couple of years. On a more topical note, the lessons learned from the early 1990s slashing of public expenditure by the Conservatives in Sweden may have instructive lessons for the current UK coalition administration in particular with regard to impact on growth and employment.
Hello Jonathan, You are right about the Bildt administration - but the point of my post was to show that until the 1970s Swedish governments which were universally Social Democratic in name, were not in fact social democratic in practice. Until the last two election cycles, the Bildt administration is the only post-war Swedish centre right party to govern for a full term. It is worth pointing out that they came to office during a recession/debt crisis brought about by the previous administration's policies. The economic situation did indeed deteriorate for the first part of their term (just as with Mrs T here in the UK) and the Swedish voters ejected them soon after. The policies put in place though put down the foundations for a subsequent recovery. These things take time - there is always a lag between a policy change and the results (for good or ill) that change brings about. Mark
Mark The Social Democrats kept a low rate of government spending for the whole of the early part of the century. In the case of Sweden it is a not a truism to claim a post-Thatcher/Reagan "small state" "low public expenditure as a proportion of GDP" or "classical liberal theories" political philosophy as belonging only to the right, when the Swedish Social Democrats had espoused it long before them (1930s to 1960s). There is no evidence provided above to suggest any time lags between the Conservative policies of the early 1990s and the economic collapse, nor any evidence that their changes, rather than those brought in by their successors or the general increased global economic growth were responsible for the mid 1990s Swedish uptick. Economic time lags and particularly the length thereof have to be proven with evidence, based upon robust analysis. There was no time lag at all between the decision not to bail out Lehman Brothers by the US Treasury Secretary in 2008 and the credit crunch and a three month lag to global recession. Similar short lags existed to recession and spiralling unemployment after the Howe Budget. There was an instantaneous effect on Black Wednesday. Some lags take longer; such as Bank of England rate rises' impact on inflation, or unemployment decreasing to UK housing construction new starts (15 months - or at least it used to be). Another lagged effect was about six or seven years after the UK building societies demutualisation legislation to the first float, which itself had an even bigger lag c 15 years to the virtual collapse of all those institutions in 2008/9.
Jonathan, You clearly haven't read my posts - the whole point of them has been to show that the Social Democratic party followed fairly classical liberal policies for years - that one shouldn't confuse the Social Democratic Party with social democratic policies - it is the latter than I oppose. At no point did I suggest that 'small state' ideas belong to 'the right' - if I had done so, why would I quote Lindbeck in support of my view - he is most definitely not 'of the right' .If a 'conservative' party followed social democratic policies - I would oppose that too. Indeed, that is pretty much my attitude to a lot of what the current lib/con coalition is doing. Mark P.
Mark I have not had your posts drawn to my attention and you are correct I have not read them. Which one's are you referring to in particular? I did see Richard's post and have tried to keep my remarks directed towards the comments made in Richard's blog here. I think that you are over simplifying the economic policies of the left and attempting to tarnish centre left policies and mistaking Social Democrat policies with those of socialists or communists.
If you do actually read them - then you will see that I am not 'oversimplifying' the policies of the left - indeed I am quoting from a social democratic source. I would have thought it would be sensible to read what someone is saying before passing comment. I am new to the blogosphere, so perhaps my expectations concerning the level of debate are unduly high.
You have really got to look at the real reason why scandinavian countries such as Denmark and Norway can afford big governments; North Sea oil reserves. These discoveries give countries the ability to afford large budgets, Russia's remilitarization, Saudi Arabia's wars, etc.

@Terrence von Holstein - your hypothesis may apply to Norway but surely doesn't apply to the other Scandinavian countries.

@Mark Pennington - the research you refer to in your first contribution above is by Lindbeck, unles you are a co-author? The other apparently related blog article refers to another journal article, which you penned; Rescuing Social Capital from Social Democracy . I have tried to access it, but it appears to be locked in some way.
Jonathan, We are talking at cross purposes. When I said 'you have clearly not read my other posts' - I was referring to all of the posts I have put up in response to the comments against Richard's initial effort on this site. I am quite clear in these posts (see the second one) that the graph Richard puts up is not the best way to support his own argument - my subsequent comments were an attempt to show that there is in fact a better way to sustain his basic point though. I quote Lindbeck because he IS a Social Democrat -and yet makes essentially the same point as myself and Richard. His article is published in one of the most respected peer reviewed pulications in the economics profession. There is no point you reading 'Rescuing Social Capital' because it contains nothing pertinent to this discussion. Finally, to repeat - the point of my posts and Lindbeck's article is to show that for a period of roughly 35 out of 45 years in more or less continuous power the Social Democratic party in Sweden did not in fact pursue social democratic policies. You seem to have been interpreting my earlier contributions in this exchange in far too much of a 'party political' vein. Cleat now? MP.
Mark There are a number of very political points in the original article and other comments, not necessarily substantiated by the economic evidence provided. The political and economic inaccuracies, generalisations, or misconceptions, upon which they were based have been neatly exposed, without making any political points of my own at all. Surely if a "slim state" or low public spending as a proportion of GDP policy has been pursued, it belongs to the party in government at the time the policy was executed, be that of whichever political hue, especially if that party governed for several decades?
@Richard Wellings, yes my hypothesis does hold up because sweeden produces large amounts of iron and copper ore. Which can be just as valuable as oil. With 15% of Sweden's population working in an iron or copper related industry.
Jonathan, I'm clearly flogging a dead horse. If we have established that no political party 'owns' 'slim state' policies - then my mission is accomplished. If you are - at last - accepting that the Swedish Social Democratic Party - did not in fact pursue 'social democratic - i.e. big state' policies for most of its time in office, then again - mission accomplished. For the record, I think that the current Con Lib coalition is pursuing social democratic policies - although not quite to the extent as the previous administration. MP
It isn't working in Cuba either.
People, you really-really don't understand that you live great... You can't imagine how lucky you are all In Russia and in many-many other countries Sweden - is absolutely happy nation.

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