Foundations, Decline and Future Prospects of the
Swedish Welfare Model: From the 1950s to the 1990s and Beyond
Jason Coronel
DePaul University
Jcoronel@aol.com
Spring 2002
Abstract
From the 1950s until the early 1970s, the Swedish social democratic model
managed to successfully deliver on its promises of low unemployment, low
inflation, and a relatively egalitarian distribution of wealth. But during the
course of the past 25 years, the Swedish model has seemed to be headed along a
path of slow disintegration, culminating in the disastrous economic recession of
the early 1990s. This paper defines and discusses the peculiarities of the
Swedish model and identifies the central elements that explain its early
success. I then proceed to consider the causes of its troubled performance over
the past three decades, identifying both exogenous and endogenous causal
variables. Specifically, regarding exogenous causes, I consider the impact of
both the internationalization of businesses and financial markets and membership
in the European Union. Regarding endogenous causes, I consider the impact of
both the breakdown of the traditional collective bargaining institutions and the
deregulation of capital markets. In this context, I will pay particular
attention to the economic recession of the 1990s and the model’s viability for
the future.
Prepared for presentation at the Tenth Annual Illinois Conference for Students
of Political Science, Illinois State University, Normal, Illinois, April 4,
2002.
Introduction
The result of almost uninterrupted social democratic rule
in Sweden throughout most of this century, the Swedish social democratic welfare
model has arguably been one of the most successful realizations of social
democratic values through macroeconomic experimentation. After the Second World
War, Sweden was a laboratory in which macroeconomic experiments were conducted
to realize social democratic ideology. The result of social democracy’s
experiment is what is now referred to as the ‘Swedish welfare model’.
How exactly does one define the Swedish welfare model? It is perhaps best
described as the attempt to create equality and economic growth through the
combination of solidarity union wage policy and interventionist government
policies in both the labor and capital markets (Lindbeck 1997: 1292). From the
1950s until the early 1970s, the Swedish welfare model managed to successfully
deliver on its promises of low unemployment, low inflation, and a relatively
egalitarian distribution of wealth while working within the confines of a
capitalist economic structure. However, during the course of the past 25 years,
the Swedish model has seemed to be headed along a path of slow disintegration,
culminating in the disastrous economic recession of the early 1990s.
The collapse of the Swedish model is but a part of a much larger
trend in the recent decline of social democracy throughout much of Western
Europe. As an epitome of social democratic values realized within a national
macroeconomic regime, the destruction of the Swedish model represents an
excellent case study to gauge the main causes for social democracy’s decline and
its future viability within a seemingly globalized world driven by neo-liberal
ideology.
This paper defines and discusses the peculiarities of the Swedish
model, focusing upon, respectively, the central defining elements which account
for its early success, the causes of its troubled performance over the past
three decades, and its future viability in the twenty-first century. Following
this introduction, Section 2 gives an overview of the theoretical and practical
foundations of the Swedish model and an historical outline of its early
success. I use Ernst Wigforss’ ideology as a representation of social
democratic values after Word War II. I then use the ‘Rhen-Meidner Model’ as a
practical example of social democratic values translated into economic
policies. Lastly, I give a brief historical summary of the Swedish model’s
performance from the 1950s to the early 1970s. Section 3 identifies both
exogenous and endogenous causal variables that are the main sources of the
model’s decline over the past three decades. Specifically, regarding exogenous
causes, I consider the impact of both the internationalization of businesses and
financial markets and Sweden’s entrance into and membership in the European
Union. Regarding endogenous causes, I consider the impact of both the breakdown
of the traditional collective bargaining institutions and the deregulation of
capital markets. Section 4 discusses the model’s current state, specifically
after the early ‘90s recession, and the Swedish model’s viability in the
future. Section 5 presents my conclusions.
Foundations of the Swedish Welfare Model: Theory and Practice
Ernst Wigforss: Values of Swedish Social Democracy
Ernst Wigforss was
perhaps the most influential social democratic theorist who emerged from Sweden
in the twentieth century. Serving as Sweden’s finance minister from 1932 to
1949, Wigforss’ ideas would form the basis for Swedish social democratic
policies after World War II (Milner 1989). A closer look at Wigforss’ ideology
is therefore essential if one is to gain a better understanding of the
theoretical foundations of the Swedish welfare model and post-WWII social
democratic theory. In this section, Wigforss’ ideology is examined as a
combination of three critical factors: revisionist Marxism, social democratic
ideals, and theories to achieve social democratic aims through the use of state
mechanisms.
Wigforss was a Marxist revisionist in that unlike classical
Marxists, he rejected the theory of eventual capitalist collapse and the
inevitable transformation of society to socialism (Tilton 1979). Wigforss
criticized Marxism as neither a science nor a valid ethical system (Tilton
1979). To him, the idea of a set future was one that could not be known;
socialism was an ideal that had to be implemented.
Transformation into a classless society was to be achieved therefore not by
revolution but by gradual and peaceful means through the democratic process.
The rejection of revolutionary means as a method of societal transformation
entailed the caveat of working within the capitalist system to achieve social
democratic aims. Such has been the method used by social democratic parties in
power throughout much of Western Europe. But Wigforss perhaps gave his best
contribution to social democratic theory by injecting the ideology with guiding
morals and values. By rejecting the notion of an eventual capitalist collapse,
Wigforss had to identify core socialist values such as equality, cooperation,
and solidarity as factors that elevated socialism at a morally superior level to
that of capitalist society.
Values such as “equality, freedom, democracy, security, efficiency,
and solidarity” were to Wigforss, ways by which to construct a just society and
compensate for the dire inequalities that capitalism tended to produce.
But among all social democratic values, the notion of equality took center stage
(Tilton 1979). The desire for equality,
as one will see, will serve as the foundation for most of Swedish economic
policy-making immediately after the post-war period.
The last critical factor that constituted Wigforss’ ideology
comprised his theories of using the state to achieve social democratic aims.
The methods articulated by Wigforss that are of particular importance for
understanding the foundations of the Swedish model include the social control of
investment and the maintenance of a welfare state. In Wigforss’ view,
investment was concentrated in too few private hands. Wigforss was a proponent
of controlling private investment. Wigforss advocated the use of the state to
prevent investment by private industry abroad, a policy that Sweden would in
fact implement in the future to stimulate investment into domestic industry.
Lastly, Wigforss emphasized the importance of the welfare state. The welfare
state in combination with a progressive tax policy and an active labor market
would not only ensure a social safety net to prevent Swedish citizens from
falling into dire poverty, but it would also promote full employment and a
national redistribution of resources (Tilton 1979). It is through these state
interventionist methods in society that Wigforss hoped social democracy would
achieve its aims.
Ernst Wigforss’ ideology serves as a representation of post-war
Swedish social democratic philosophy. The revisionist Marxist concept of
peacefully reforming capitalism into socialism, the social democratic value of
equality and solidarity, and the theories of using the state to pursue welfare,
labor and capital market policies are essential for understanding the main
theoretical foundations of the Swedish welfare model. A few years after the end
of Wigforss’ tenure as finance minister in 1949, social democratic values would
be successfully translated into viable economic policies.
The Rhen-Meidner Model: Application of Social Democratic values
Swedish social democracy by the end of World War II followed the
Marxist revisionist path of reforming capitalism into an egalitarian system.
But by accepting and choosing to work within the confines of the capitalist
system, Swedish social democrats had to face the dilemma of fighting inflation
and unemployment, two potentially destructive forces that are arguably inherent
characteristics of the capitalist system. By the end of the 1940s, Swedish
social democrats had abandoned the defunct methods of nationalizing private
industry and the use of wage freezes to combat unemployment and inflation
respectively (Silverman 1998). Swedish social democracy was in search of a new
economic strategy.
In 1951 two economists, Gösta Rhen and Rudolf Meidner from the
Swedish Confederation of Trade Unions (LO) ended that search. In a paper titled
Trade Unions and Full Employment presented at the LO Congress, Rhen and
Meidner laid out what was to be Sweden’s post-war strategic management of the
capitalist economy (Sassoon 1996). The Rhen-Meidner model, one of the central
elements of the Swedish model, formulated the strategy of combating unemployment
and inflation.
The model itself had two main goals: the primary goal was that of achieving
full employment, the second was that of equality (Silverman 1998). The
Rhen-Meidner model’s objectives of achieving full employment, combating
inflation and promoting a relatively egalitarian society required the use of
polices that are the very definition of the Swedish model itself: restrictive
fiscal and monetary demand policies in combination with a wage policy based on
worker’s centralized bargaining (Miles 1997; Silverman 1998). The Rhen-Meidner
model approached unemployment, inflation, and the promotion of equality in the
following ways:
1 Full employment would be achieved largely through the
mechanisms of the welfare state. The Rhen-Meidner model called for the
government to introduce an active labor market policy. Not only would the
public sector be the largest employer,
the government would also be involved in employment mobility services (Miles
1997). The Swedish government would establish retraining programs, unemployment
compensation, and geographical mobility allowances (Miles 1997; Silverman
1998). But full employment carries with it a dilemma explicitly stated by the
Phillips curve, how does one maintain a high degree of employment while at the
same time combat inflation?
2 The Rhen-Meidner model sought to combat inflation in two
ways. The first was to tax the purchasing power of both consumers and private
industry with the hopes of dampening down demand (Sassoon 1998). The
second was through a national collective bargaining system carried out by the LO
and private industry. Under this centralized collective bargaining system, the
LO would negotiate uniform wage increases throughout the country. The tradeoff
to private industry in agreeing to participate in collective bargaining was the
guarantee that wage increases were to be below relative increases in
productivity and inflation (Moene & Wallerstein 1997). The national wage
increase, restricted by inflationary and productivity levels, ensured the
prevention of sector wide competition from driving wages beyond levels of
productivity and sparking inflationary pressures.
3 The social democratic value of equality was achieved
throughout the Rhen-Meidner model through the public sector in which citizens
were to be provided a social safety net and ensured government service during
periods of unemployment. The collective bargaining system also promoted
equality in that the wage increases were predicated on the policy that workers
performing the same work, regardless of firm size or profitability, received a
similar wage increase (Silverman 1998). The system also subscribed to a policy
that rewarded less skilled and lower paid workers with higher wage increases
relative to their counterparts (Silverman 1998). Equality in the Rhen-Meidner
plan was given the status of economic policy goal.
The Rhen-Meidner model served as the primary guide of Swedish social
democracy in reforming capitalism through much of the post-war era. Its
significance lies in that the model established the roles of government, labor
unions, and private industry in the grand scheme of Swedish political and
economic life. Having turned social democratic values and vision into a viable
economic strategy, Swedish social democracy had finally realized the ‘Swedish
model’. From the 1950s until the 1970s, the Swedish model would usher in a
golden age for Swedish social democracy.
The Golden Age of the Swedish welfare model
For the first two decades after the 1950s, Swedish social democrats,
the LO, and Swedish private industry all worked in unison to carry out the
Swedish social democratic vision of a highly dynamic and prosperous economy in
combination with a relatively egalitarian society. The Swedish welfare model, a
model predicated on social democratic values and viable economic policies (the
Rhen-Meidner plan), served as the script for the three aforementioned Swedish
actors to turn Sweden into the epitome of social democratic values realized
through macroeconomic experimentation. From the 1950s until the 1970s, Sweden
flourished both in terms of its economy and the expansion of economic equality.
The Rhen-Meidner plan of an active labor market policy and a
collective bargaining system was a success in terms of dealing with unemployment
and inflation. During the 1950s and ‘60s, Sweden was able to hold unemployment
under two percent, a number very rarely seen in any capitalist economy (Lewin
1994). Productivity growth was also among the fastest in the world, reaching
4.20 percent compared to 4.46 percent for the whole OECD (Lindbeck 1997: 1283).
GNP growth rate in Sweden was also higher than most industrialized Western
countries. Real GNP growth rate was 3.3 percent in 1951 to 1954, 3.4 percent
from 1956 to 1960, 5.2 percent from 1961 to 1965 and 4.1 percent from 1966 to
1970 (Magnusson 2000: 200). The industrial sector saw a large expansion,
creating 200,000 jobs between 1945 and 1965 and employing over a million workers
by 1965 (Magnusson 2000: 204). The Swedish standard of living was among the
highest in the world. The golden age of the Swedish welfare model not only
brought about the achievement of economic prosperity, but also of social
democratic values as well.
The slogan of “equal pay for equal work” was effectively realized
when comparing the wages of men and women (Lindbeck 1997: 1282). In 1960, the
wage gap between men and women was at 25 percent, by 1965, the gap was
eliminated (Silverman 1998). Spending in the public sector also ranged from 30
to 45 percent of GDP during the 1950s and ‘60s, evidence of Sweden’s commitment
to its welfare state (Lindbeck 1997). Social democratic dedication to the
working class was also reflected in a series of legislative initiates that
included: annual leave, national basic pension for all, comprehensive health
insurance, parental leave, etc. (Magnusson 2000: 243; 244). Equality and
dedication to workers were all being realized within the context of a healthy
and dynamic economy.
The golden age of the Swedish welfare model presented the world with
a society able to achieve a growing and efficient economy while maintaining a
significantly large welfare state. The Swedish model during this period offered
a viable alternative between that of command economies and neo-liberal
free-market regimes. It seemed as if Swedish social democracy, by working
within the capitalist system and through the democratic process, had finally
succeeded in achieving its goal of peacefully reforming a capitalist society
into an egalitarian system.
Deterioration in the ‘70s and ‘80s, Disaster
during the 90s: Causes of the Swedish Welfare Model’s collapse
Introduction
The Swedish
welfare model worked within a domestic framework wherein collective bargaining
and restrictive government monetary and fiscal policies managed to successfully
achieve low levels of unemployment and keep inflation in check. Over the next
two decades after 1970, the foundational structures largely attributed to the
Swedish model’s success would deteriorate and ultimately collapse by the 1980s.
Collective bargaining and government restrictions on the capital markets would
be dead by 1985. In addition, the Swedish welfare model existed within an
international framework wherein financial markets and Swedish firms were not
subjected to the relatively increased global internationalization of the past
two decades. Economic integration with the European Union was not a factor in
the model’s structural plan. The collapse of both collective bargaining and
capital control in addition to pressures from internationalization and the
‘convergence criteria’ from the EU are ultimately the main reasons for the
Swedish model’s slow deterioration and eventual destruction.
Breakdown of Collective
Bargaining
Once the
centerpiece of the Swedish welfare model, the collective bargaining system,
began to deteriorate by the mid-1970s. Long-term structural problems surfaced
as international competition and Sweden’s shift from an industrial to a service
oriented economy changed the dynamics of worker composition and bargaining
throughout the country. Social democratic values of worker solidarity and
equality were also being challenged by neo-liberal alternatives of
decentralization and market competition. These aforementioned phenomena in
Swedish social and economic life are reflected in the three main reasons
attributed to collective bargaining’s decline and eventual disintegration: union
deviation from the Swedish social democratic plan, competition from white-collar
unions, and internal struggles within the LO itself.
Beginning in the
mid 1970s, collective bargaining began to deviate from the role assigned by the
Swedish social democratic model. Collective bargaining was to ensure that wage
increases were below relative levels of productivity growth. This method would
allow firms to remain internationally competitive and consequently be in an
economic position to retain or hire more employees. The model results in a
beneficial situation for both parties. But despite its high level of
centralization, the collective bargaining system lacked any kind of
self-regulating mechanism that kept wage growth in line with levels of
productivity (Moene and Wallerstein 1993). By the mid 70s, wage increases
became higher than what the rates of productivity growth were capable of
supporting (Miles 1997). The disproportionately high wage increases became the
primary reason for Sweden’s high levels of inflation during the late ‘70s and
early ‘80s (Miles 1997). Not only was there inflationary pressure, but
international competitiveness
was damaged throughout the late ‘70s and ‘80s.
The transition of
Sweden from an industrial to a service based economy was accompanied by a growth
of white-collar unions. At its peak, the primarily blue-collar LO had 80 to 90
percent of the labor force as its members (Moene and Wallerstein 1993: 394). In
more recent decades, the number has dwindled to just over 60 percent of the
workforce (Moene and Wallerstein 1993: 394). The fast growing white-collar
unions, which exist outside the umbrella of LO, have been a constant challenge
to the centrality of the LO’s wage negotiations (Miles 1997; Moene and
Wallerstein 1993). The consequential competition from white-collar unions is one
of the primary reasons wages have increased faster than levels of productivity.
On an ideological level, the resulting plurality of competing actors has created
an environment based not on social democratic values of worker solidarity and
wage equality but on the neo-liberal framework of competition and market
solutions.
Internal
struggles within the LO ultimately dealt the final blow to centralized
bargaining’s demise. The composition of LO membership has seen a shift in the
‘70s and ‘80s from predominantly private sector employees to public sector
workers (Moene and Wallerstein 1993). The LO policies of wage restraint and
wage equalization became an ever increasingly harder policy to pursue within the
context of highly skilled employees whose wages were constrained by relatively
low-paid public sector workers (Moene and Wallerstein 1993; Pontusson 1991). In
1983, twenty-seven years of collective bargaining came to an end when the metal
working sector signed a separate wage agreement (Moene and Wallerstein 1995).
The break served as a catalyst as other sectors followed suit and centralized
wage bargaining policy was primarily replaced by bargaining at the sectoral and
firm level (Golden and Wallerstein 1995; Miles 1997).
The resulting sectoral and firm competition resulted in further wage drift
and inflationary pressures on Sweden’s economy.
One of the
defining aspects of the Swedish model is dead. Once a method of combating
inflation, the collapse of centralized bargaining created inflationary pressure
on Sweden’s economy throughout the 1970s and 1980s. The original model was
based on the dominance of the LO and not on a framework in which the LO was in
competition with other actors such as white-collar unions. Social democratic
ideals of worker solidarity and equality seemed to have been replaced by
neo-liberal individualism.
Capital Deregulation
Control over the timing, quantity, and sectoral allocation of
investment is arguably one of the most fundamental ways social democracies can
maintain equality and security (Moene and Wallerstein 1993). John Maynard Keynes
argued that control over the flow of money across the national boundaries was a
prerequisite for an effective macroeconomic policy-making (Silverman 1998). In
line with the theories of Ernst Wigforss, Sweden maintained, from the onset of
Word War II until the mid 70s, maintained relatively strict financial
regulations over capital. The Swedish Central Bank (Riksbank) administered
financial regulatory matters that included: lending ceilings, liquidity ratios,
investment rations, bond issues, and interest rate control (Bieler 2000: 41).
Strict foreign exchange controls prevented firms from shifting investment
capital abroad. But over the course of the past two decades, Sweden has begun a
process of deregulation in both the domestic and foreign capital markets. This
section highlights the deregulation of Sweden’s domestic market through the
disastrous deregulation of Sweden’s banking industry. This section will also
discuss how Sweden’s deregulation of its foreign capital market resulted in
massive capital flight away from Swedish domestic industry. The resulting
deregulation in the domestic capital market would by the early 1990s result in
disaster and plunge Sweden into one of the worst economic periods of its
history.
From the mid ‘70s forward, Sweden embarked on a deregulation process
that phased out most of its financial regulatory rules that had been in place
since the decade after World War II. The reason for financial deregulation was
due to the government’s continuously increasing budget deficits that required
financing and the need to attract foreign private investment (Arter 1999; Bieler
2000). In 1985, the deregulation binge resulted in the removal of lending
ceilings by banks (Bieler 2000). The resulting credit-led expansion boom caused
by deregulation dramatically increased private sector borrowing and caused a
speculative spree within the housing sector (Canova 1994; Moene and Wallerstein
1995). Real estate speculation led to inflated values for assets and property
and increased domestic consumption. When the speculative boom ended in the
early ‘90s, the massive decline in the value of property and assets triggered a
sharp decline in private domestic consumption (Moene and Wallerstein 1995;
Ramaswamy 1994). The resulting decline in aggregate demand in combination with a
global economic contraction plunged Sweden into one of its worst economic
downturns in history (Moene and Wallerstein 1995; Pontusson 1992). Unemployment
from 1990 to 1993 was around 8 percent as Sweden suffered one of its worst
economic periods since the Great Depression (Miles 1997). On top of the severe
economic recession was a banking crisis in which the government was forced to
save the banking industry from insolvency. The resulting demand for greater
welfare provisions, in accordance with the government’s bailout of the banking
sector
created massive government deficits equaling to about 17 percent of GDP by 1994
(Miles 1997). The end result of domestic capital deregulation during this
period was a catastrophe in two ways: capital deregulation was one of the main
reasons for the calamitous early ‘90s recession and investment capital was
wasted on unproductive property speculation and consumption (Hubers and Stephens
1998).
Full capital deregulation was completed with the abolishment of all
exchange controls in 1989 (Bieler 2000). Swedish firms, fearing that closer
integration with the European Community
would lead to higher trade barriers against outsiders, rushed to protect
themselves by buying plants within the EC (Iversen 1996). The resulting capital
flight into the EC member countries was the main reason the social democratic
government decided to apply for EU membership (Iversen 1996). The outward flow
of capital from Sweden between 1980 and 1990 increased by a factor of 20, a
factor exacerbated by the elimination of exchange controls (Iversen 1996). With
the breakdown of the centralized bargaining system resulting in ever increasing
wage increases, it is no surprise that Swedish firms chose to move investment
capital abroad.
The removal of both domestic and capital controls signaled a
neo-liberal shift in social democratic policy. By removing capital regulatory
controls, the government has allowed market forces to dictate its policies
instead of government dictating to capital, as Wigforss originally would have
hoped. In combination with the breakdown of collective bargaining, deregulation
of finance has destroyed one of the Swedish model’s central designs: the ability
to exert control over labor and the capital markets.
Internationalization of Business and Financial Markets
‘Globalization’ is arguably a relatively new phenomenon in the
global economic landscape. Globalization in this section will be defined as the
increased internationalization of firms—the multi-nationalization of
corporations—and the integration and internationalization of the world financial
markets (Giddens 1998). With its supposed ability to erode at state sovereignty
with regards to pursing nationally independent macroeconomic polices,
globalization presents one of the greatest challenges to social democracy in
this century (Giddens 1998). This section will highlight the impact of
globalization on the Swedish welfare model. In particular, the
internationalization of business will delve into the issue of industry
trans-nationalization—the decision by Swedish firms to move investment outside
domestic territory. The internationalization of markets will emphasize the
Swedish currency crisis in the early ‘90s as an example of the challenges
brought on by the global financial market on the Swedish model.
Although Sweden has always had an export industry exposed to
international competition since the 1950s, the trans-nationalization of industry
increased dramatically over the period 1980 to 1990. It is perhaps of no
coincidence that Swedish multi-national corporations invested heavily overseas
at a point when collective bargaining was in decline or had already collapsed.
In 1989, when foreign exchange controls were abolished, Swedish industries for
the first time invested greater amounts of capital abroad than at home (Bieler
2000). In 1965, Swedish multinational corporations employed approximately 33.9
percent of their employees abroad. By 1990, the number had almost doubled to 60
percent of multinationals’ workforce (Bieler 2000: 42). The implications for
the Swedish model can only be that of further demise to the Swedish social
democratic plan. Trans-nationalization contributes to weakening of unions at
home, resulting in the further erosion of Swedish social democracy’s traditional
base of support. Trans-nationalization also acts against the Swedish model’s
goal of achieving full-employment. The movement of jobs and investment into the
international arena outside of Sweden represents jobs lost in the domestic
economy.
In 1992, Sweden for the first time faced the wrath of the
international financial market. With the Swedish economy in severe recession,
international currency speculators moved against the Swedish crown in the summer
and fall of 1992 (Canova 1994). Without foreign exchange controls to stop
the crown’s hemorrhaging, the Riksbank was forced to raise inter-marginal
interest rates by five hundred percent to protect the currency (Hinnfors and
Pierre 1998). At the end of that year, the Riksbank was forced to surrender its
fixed exchange rate regime by letting the currency float in the international
currency market (Hinnfors and Pierre 1998). The end result was a twenty percent
depreciation of the crown at the time of the float and the obliteration of 95
billion crowns from the national budget due to speculation (Hinnfors and Pierre
1998).
The currency crisis mentioned above highlights the challenges
presented by the internationalization of financial markets to the Swedish
model. Actions by governments are now under the scrutiny of the global
financial market. Economic policy decisions made by the state must take into
account the reaction of markets. The currency speculators represent exogenous
actors not factored into the original inception of the Swedish model. As
Sweden’s currency crisis has shown, the financial actors within the global
market are potentially destructive and deadly forces in a social democratic
regime.
The internationalization of firms and financial markets represents
the current global economic order under which the Swedish model is operating.
Both are main factors contributing to the Swedish model’s recent decline as they
represent exogenous changes to the global environment. Both factors exert
tremendous domestic social and economic implications on social democratic
societies. While the former erodes the power of social democracy’s traditional
base of support and acts against its full employment aims, the latter erodes the
ability of national governments to pursue policies without the scrutiny of
global international financiers.
Integration with the European Union
Integration with the European Union presents more of a future
challenge for the Swedish model as Sweden tries its hand at economic
assimilation with Europe. Although Sweden is a member of the EU, it has decided
to postpone joining its monetary union—the Euro.
The main challenge encountered so far to the integrity of the Swedish model was
fulfilling the following ‘convergence criteria’ for EU membership:
1.
Deficits cannot exceed 3% of GDP;
2.
The national debt cannot be greater than 60% of GDP;
3.
Inflation cannot be higher than 1.5% of the average inflation rates of
the three EU members with the lowest level of inflation;
4.
Long-term interest rates cannot be more than 2% higher than that achieved
by the three nations with the lowest inflation rates;
5.
Exchange rates must fall within the exchange rate mechanism.
In order to meet the requirements for integration under the Maastricht treaty,
Sweden was forced to pursue tight fiscal and monetary policies (Olsen 1999).
Convinced by the neo-liberal notion that some of Sweden’s economic problems were
largely due to its budget deficits, its large national debt (85% of GDP—above EU
threshold requirement), and an unsustainable welfare state, Sweden resorted to
cutbacks in welfare state spending (Arter 1999; Olson 1999). The restrictive EU
convergence requirements are but another exogenous umbrella preventing Sweden
from pursuing fully independent macroeconomic policies. If monetary convergence
does become a reality in the near future, Sweden will be forced to completely
surrender its powers of discretionary monetary policies (Moene and Wallerstein
1993). In the end, full EU membership further erodes Swedish control over
domestic economic issues and creates an environment under which the Swedish
model was not intended to operate.
Conclusion
The nation that never had an unemployment rate above two percent had
eight percent unemployment by 1993. The early ‘90s were a seemingly polar
opposite of what Sweden was thirty years before. The domestic and international
framework that existed during the golden age of the Swedish model was gone.
Endogenously, the destruction of collective bargaining and the deregulation of
the capital markets meant that Sweden no longer had the ability to exert control
over full employment, inflation and investment as it once had. Exogenous
factors, largely the result of globalization, have placed Sweden in an
international framework for which the Swedish model was not originally
designed. The model was predicated on the ability by the government to make
macroeconomic fiscal and monetary decisions to stabilize the economy. The EU
central bank and the global financial market are now the primary determinants of
Sweden’s fiscal and monetary policies. The trans-nationalization of Swedish
industries continues to be a factor against Sweden’s full employment policies.
Meant as a middle-way between socialism and capitalism, the Swedish model’s
decline and eventual collapse can be seen as the momentary triumph of
neo-liberalism over that of social democracy.
The Swedish Welfare Model: Post-‘90s Recession and Future
Viability
Structure and Performance after the early 90s recession
Contemporary economic and policy developments can be outlined as
follows:
Future Viability
The Swedish welfare model is dead. Almost all of the
foundational structures that can be attributed to the model’s early success have
been effectively destroyed. Although there still exist high-quality public
services, a large welfare state, and active labor market policies, the main
structural framework of the model – collective wage bargaining and
interventionist government policies in the labor and capital markets – have been
effectively demolished over the past three decades (Silverman 1998).
Globalization, which seems to be the future course of human history, renders the
final blow to the Swedish welfare model. As Rudolf Meidner, one of the chief
architects of the Rhen-Meidner model, said: “The model was designed for a
national economy under conditions that made it possible for the national
government to make final decisions about stabilization and distributional
policies. We are now part of an international economy…Everything we do is
immediately followed by reaction in the financial markets. We no longer
determine our own interest and currency rates….Internationalization…is enough to
make the Swedish model a little antiquated” (quoted in Silverman 1998).
Conclusion
The Swedish social
democratic welfare model has arguably been the greatest realization of social
democratic values realized via the coordination of a macroeconomic and political
regime. The model proved to be a huge success for the first 20 years of its
full implementation and proved effective for ensuring low inflation, a high
degree of employment, and a relatively egalitarian distribution of wealth.
This paper identified the main reasons for the model’s early
success: the combination of solidarity union wage policy and interventionist
government policies in both the labor and capital markets. I then proceeded to
identify four endogenous and exogenous variables that have eroded the structure
and performance of the Swedish model over the past three decades: the collapse
of centralized bargaining, deregulation of the capital markets,
internationalization of business and financial markets (globalization), and
integration with the European Union. Lastly, I argued that the current domestic
and international framework renders the Swedish model obsolete.
Appendix
Swedish Political
Structure
Sweden is a Constitutional
Monarchy. The chief of state is the monarch (presently King Carl XVI Gustaf).
The head of state is the Prime Minister (currently Goran Persson of the Social
Democrats). The Prime Minister is elected by majority vote of the Riksdag. The
Prime Minister also appoints cabinet members. The Prime Minister serves for
four-year terms. Both the cabinet members and the Prime Minister are subject to
a no-confidence vote from the Riksdag.
The legislative branch is
referred to as the Riksdag. There are 349 seats filled using proportional
representation. In order to win representation in the Riksdag one must either
win 4% of the vote within the 28 individual constituencies (310 delegates) or
12% for the remaining 39 delegates that are elected on a national basis.
Delegates of the Riksdag serve four-year terms (Hancock 1973; Miles 1994).
Swedish Political
Parties and ‘90s Election Report
The main political parties
in Sweden can be effectively divided into socialist and non-socialist factions.
The socialist camp includes the Social Democrats, the Left Party, and the
Greens. The non-socialist camp includes the Moderates, the Liberals, the Centre
Party, the Christian Democrats and New Democracy. The Green Party, the
Christian Democrats, and for a short time New Democracy, are the relative
newcomers to the Swedish political landscape during the nineties. The Green
Party is the environmentally conscious party standing for the preservation of
Sweden’s ‘green areas’, shutdown of nuclear power plants, and anti-EU membership
(Madeley 1994). The Christian Democrats desire a more moral dimension to
politics, improved social services especially to the poor, and a more generous
foreign aid policy (Sainsbury 1991). The New Democrats are perhaps the most
right-wing out of all of the aforementioned parties. The ND are generally for
stricter anti-immigration policies, tax reductions, and law and order.
(Sainsbury 1991). But ND only appeared during the ’91 election as the party
experienced internal struggles and conflict and essentially self-destructed (Madeley
1994). The Social Democrats, aside from their traditional welfare stance, have
been generally pro-EU and have taken a more environmentally conscious stance
during the 90s (Madeley 1998). The Left Party is perhaps the most left wing
party holding a seat in Sweden. Some of their stance includes, anti-EU
membership and the now defunct wage earners funds (Sainsbury 1991). The
Moderates are perhaps the largest non-socialist party in Sweden whose platform
includes tax cuts, reductions on government spending, and subsidies for
corporations (Sainsbury 1991). Lastly, the Centre Party and Liberals lie on the
left of the moderates and generally stand for tax cuts and increased spending in
the public sector (Madeley 1998).
’91 Election
1991 saw a right wing
insurgency evident with the rise of New Democracy (which controlled 0 seats in
’88 but 25 in ’91) and with the ascendancy of a non-socialist coalition composed
of the Moderates, Liberals, Centre, and the Christian Democrats with Carl Bildt
(of Moderates) as Prime Minister (Sainsbury 1991). Social Democratic electoral
support during this election was at its lowest since 1921 (Sainsbury 1991).
Already in significant economic recession, the incumbent Social Democrats
perhaps took the blame for most of Sweden’s economic woes. The economy was
certainly the number one issue in the electorate’s agenda, as the Green party
(with its more non –materialist platform) gained no seats in the Riksdag during
the ’91 election. The New Bildt government promised to revive the economy
through tax relief for businesses, tax cuts, and eliminating restrictions on
foreign investments into Sweden (Sainsbury 1991).
’94 Election
The 1994 election occurred
within the context of an economy that had 8% unemployment, a deficit equivalent
to 13% of GDP, and public debt equivalent to 100% of GDP (Madeley 1994). It is
of little wonder that the right wing coalition headed by Carl Bildt were
unceremoniously ejected out of power with the Social Democrats once again
ascending to head Sweden in coalition with the Centre Party (with Ingvar
Carlsson of SD as Prime Minister). The prevailing mood within the electorate
was that it was the Social Democrats who could maintain and revitalize the
Swedish welfare model and return the country into economic growth (Madeley
1994). New Democracy at this point has self-imploded while the Greens saw an
insurgency of environmental consciousness as the party gained seats in the
Riksdag (Madeley 1994).
’98 Election
By the 1998 election, the deficit had been eliminated, interest rates and
inflation were brought down, and GDP actually grew by 4% (Madeley 1998). The
Social Democrats once again (with Goran Persson as Prime Minister) seized power
as they merely defended their record of economic improvement and growth. Some
of the main significant issues during this election were the Moderates’ stance
against nuclear decommissioning and the movement of the Christian Democrats and
Liberals farther to the left of the Moderates (with their proposals for greater
health and education spending) (Madeley 1998).
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