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How Sweden created a model economy

The Swedish economy is performing well in comparison with other Western nations. Before, the country’s economy was sometimes dismissed as ‘socialist’, but now it is held up as an example of capitalism done right. How does Sweden do it?

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New Swedish banknotes that will be released in 2015.

Photo: Riksbanken

Stability through reform

Sweden has among the EU’s lowest levels of national debt, low and stable inflation and a healthy banking system. But this wasn’t always the case. The Swedish economy used to suffer from low growth and high inflation, and the Swedish krona was repeatedly devalued. Sweden was also hit by a deep financial crisis in the early 1990s. Banks became unstable and two were nationalised, unemployment rose rapidly, government spending got out of control, and so did Sweden’s national debt.

The road back to stability and success was not easy for Sweden. But by pursuing inventive and courageous reforms and sticking to them, Sweden has transformed its economy and stayed strong in the face of the new global recession.

A balanced budget

Since the crisis of the 1990s, successive Swedish governments have been balancing the budget for over a decade, and have continued to do so even in the wake of the 2007–2008 global financial crisis. How is this possible?

Sweden reinvented its economic governance with a series of innovative regulations. First, in 1996 a ceiling for government expenditures (utgiftstak) was introduced. This was accompanied by the addition of the ‘surplus goal’ (överskottsmålet) for the government budget. These reforms have met with broad support from across the political spectrum in Sweden. They help ensure that high debt doesn’t accumulate and that debt isn’t passed on to future generations.

Additionally, in 2007 the Swedish Fiscal Policy Council (Finanspolitiska rådet) was established. This committee of experts audits the government’s policy decisions regarding public finances and aims to ensure that they remain consistent with the goals of growth, employment and long-term financial sustainability. The Swedish government’s credible management of the public finances has meant that Sweden remains in the top league of fiscally responsible countries in Europe.

While governments with large budget deficits carry out austerity measures by increasing taxes and cutting public spending, Sweden has avoided these difficulties. In fact, taxes in Sweden have actually been lowered since the crisis began. Sweden has also continued to invest in areas like healthcare, education and research, instead of having to cut heavily in these areas like in some countries.

Perhaps inspired by success stories like Skype, many start-ups choose Stockholm. British Wired magazine has named the Swedish capital one of the hottest start-up cities in Europe.

Photo: Lena Granefelt/imagebank.sweden.se

A dynamic economy

Sweden today has a diverse, highly competitive and successful economy. The World Economic Forum ranks Sweden the sixth most competitive country in the world. Sweden is also the sixth easiest country in the world to trade with, according to the World Bank. This is unsurprising, since a key feature of the Swedish economy is its openness and liberal approach to trade. Sweden is an export-orientated nation that has a large trade surplus and exports a variety of goods.

In addition to maintaining competitiveness in goods and manufacturing, growth in modern service sectors such as information and communication technology has been strong in Sweden. Internet calling service Skype and online music streaming service Spotify are two examples, but Swedes haven’t stopped there. Since 2008 the ICT sector has grown by 16 per cent and now employs over 4 per cent of the Swedish workforce. The sector is characterised by its many new and small businesses, and Stockholm has become known as one of Europe’s hottest start-up cities for ICT companies.

Although Stockholm is the hub of Swedish economic activity, it is far from being the only successful region. In fact, wealth in Sweden is more evenly distributed across regions than anywhere else in the EU. Remarkably, Sweden is the only EU country where each and every region has a higher GDP per capita than the EU average. So dynamic economies and high standards of living are found across the country.

Sweden’s present economic and social prosperity was built on the lessons learned from the financial crisis in the early 1990s. Governments pursued reforms and fiscal sustainability became institutionalised. Stable economic policies combine with competitiveness, innovation and an open approach to trade to make Sweden a model for economic success.

Last updated: 25 March 2014

Scott Sutherland

Scott Sutherland

Scott Sutherland is from Glasgow, Scotland, and is currently studying Economics at Lund University in Sweden.