How Sweden created a model economy

The Swedish economy continues to outperform other advanced economies. In the past, the Nordic nation has been criticised over state intervention, but now it tends to be presented as an example of how to optimise market capitalism. What’s the secret?

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Photo: Riksbanken

How Sweden created a model economy

The Swedish economy continues to outperform other advanced economies. In the past, the Nordic nation has been criticised over state intervention, but now it tends to be presented as an example of how to optimise market capitalism. What’s the secret?

Stability through reform

Sweden’s gross domestic product (GDP) per capita is among the highest in the EU, it has low and stable inflation, and a healthy banking system. But this has not always been the case. Historically, the Swedish economy suffered from low growth and high inflation, and the Swedish krona was repeatedly devalued. Sweden was also hit by a severe financial crisis in the early 1990s. Banks became unstable and two were nationalised, unemployment rose sharply, government spending soared, as did national debt.

The path 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, paving the way for robust growth in the face of global economic uncertainty.

A balanced budget

According to the International Monetary Fund, Sweden’s national debt to GDP ratio fell from 80 per cent in 1995 to 41 per cent in 2017. All three leading credit agencies give Sweden an ‘AAA’ rating, which is a rare distinction, even among developed economies.

Since the crisis of the 1990s, successive Swedish governments have succeeded in maintaining control over public spending, and continued to do so even in the wake of the 2007–2008 global financial crisis. How was this achieved?

The answer lies in how Sweden reinvented its economic governance with a series of innovative regulations. First, in 1996, a ceiling for public spending (utgiftstak) was introduced. This was accompanied by the addition of the ‘surplus goal’ (överskottsmålet) for the government budget – measures that remain largely intact. These reforms were met with broad support from across the political spectrum in Sweden, where political consensus is often the norm. These measures help prevent the accumulation of debt, and ensure that the national debt is kept in check.

Sweden’s central bank, Riksbanken, is in charge of issuing banknotes and coins.
Photo: Riksbanken

Additionally, the Swedish Fiscal Policy Council (Finanspolitiska rådet) was established in 2007. 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 among the most fiscally responsible countries in Europe.

While governments with large budget deficits carry out austerity measures by increasing taxes and cutting public spending, Sweden has broadly avoided these difficulties. While Sweden remains a relatively highly taxed economy, the centre–right coalition government of 2006–2014 scrapped inheritance tax in 2005 and a wealth tax in 2007.

A dynamic economy

Today, Sweden has a diverse and highly competitive and successful economy. The World Economic Forum ranks Sweden among the top ten most competitive countries in the world. Sweden is also ranked as one of the easiest countries in the world to do business with, according to the World Bank.

A key feature of the Swedish economy is its openness and liberal approach to trade and doing business. Sweden has traditionally been an export-orientated nation, and typically maintains a trade surplus, i.e. the value of goods and services it exports is greater than the value of imports. See chart above.

In addition to maintaining competitiveness in goods and manufacturing, growth in contemporary service sectors such as information and communications technology (ICT) has been strong in Sweden. Sweden has produced a number of unicorns – start-up companies valued at more than USD 1 million – including video game developers King and Mojang, fintech company Klarna, and music streaming service Spotify, and video call platform Skype.

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: 2 November 2018

Nick Chipperfield (2018) and Scott Sutherland (2013)