The UK Prime Minister, Tony Blair, has sometimes spoken bluntly of the need to abandon the statist policies of the old left or risk losing the trust of European citizens. It has often been suggested that the Swedish economic model – previously much admired in Europe – might offer some lessons on whether a centre-left government can successfully adopt the kinds of policies which Mr Blair and New Labour have advocated. Equally, can Sweden learn anything from the labour-market reforms which have been carried out in the United Kingdom over the past 18 years?

 A recent Swedish Centre for Business and Policy Studies (SNS) report, written by a group of five international economists, set out to evaluate the Swedish economic model. Thorvaldur Gylfason (University of Iceland, SNS, Stockholm, and CEPR) outlined the report’s findings during a London meeting organized jointly by CEPR and SNS on 12 June 1997. The speaker pointed to two significant indices of serious flaws in the Swedish model. First, Sweden had seen its rate of growth slow down considerably over the past quarter-century; and second, in common with France and Germany, one-eighth of the labour force was now out of work.

Dealing first with the issue of unemployment, Gylfason argued that the main reason for the dearth of jobs had not been sluggish growth. While there was a cyclical element in total Swedish unemployment, which could be traced directly to the deep slump in economic activity in the early 1990s, there was also significant structural unemployment, which could be viewed as a belated consequence of various restrictions and rigidities that had been imposed on the Swedish labour market since the 1970s.

Because these impediments, which included centralized wage setting, had not become binding constraints in the 1970s and 1980s, they had not aroused much attention at the time. Moreover, their effect had been masked through the maintenance of full employment by, among other things, repeated devaluations of the Swedish krona and a relentless expansion of public-sector employment. In the 1990s, however, both those routes had been effectively closed, and unemployment had soared. Had they been operating in a more flexible labour market, Swedish firms would have been in a better position to weather the 1990s storm by adjusting wages and working hours rather than by cutting jobs.

On economic growth, Gylfason noted that the rate had been slow by international, as well as by Sweden’s own historical standards. There appeared to be three main reasons for this. First, as was well known, Sweden was investing too little. In 1995, only 14% of GDP was devoted to investment – the lowest percentage in the OECD. By comparison, the East Asian tigers invested between 30% and 40% of their GDP, year after year. Moreover, Sweden had far too few small- and medium-sized enterprises.

Second, Sweden exported too little. In 1994, exports were equivalent to 33% of GDP, compared with an unweighted world average of 38%. Several European countries of similar size – not to mention the East Asian tigers – exported a good deal more, relative to GDP, than Sweden, and had grown more rapidly. For these reasons, Sweden’s image as a small, open economy at the forefront of foreign trade expansion was no longer accurate.

Third, Sweden had failed to put enough emphasis on education. For example, the proportion of each age cohort of Swedes completing at least three years of post-secondary education had declined steadily in recent years. Specifically, of the cohort born just before 1950, 16% obtained such education. Since then the ratio had decreased with every cohort. Of the cohort born in 1968, only 7% had obtained three years or more of post-secondary education. Several other indicators pointed in the same direction.

Gylfason ascribed this failure in part to blunted economic incentives. People will invest in education only if the returns warrant it. Centralized wage bargaining, however, had compressed the wages of fathers and sons; for example, the wages of 18–9 year olds in Sweden had risen from 55% of those of 35–44 year olds in 1968 to 80% in 1986. With the wage ladder lying on the ground, young people had lost sight of the need for education. To this extent, it was clear that centrally planned wage formation had been dangerous not only to employment in the short run, but also to economic growth in the long run.

If these aspects of Swedish experience offered some lessons to Mr Blair’s New Labour government, the SNS report had also concluded that Sweden may have much to learn from the reforms undertaken in the United Kingdom in recent years, as well as in Central and Eastern Europe and East Asia. The evident deficiencies in the Swedish model raised the question of why so many sensible proposals for Swedish economic reform still seemed to find insufficient support in the political arena. Did radical reforms amount to political suicide for those who carried them out? The answer was no, since recent experiences elsewhere had demonstrated the danger of underestimating the electorate. Radical economic reforms could, and often did, win support among voters, provided the reforms were well-explained and well-executed. Several radical reformers had been re-elected, and some who had lost had made a comeback. Indeed, because of the potential political gains, radical reforms were often continued, and even completed, by those who inherited them from their originators. Gylfason recalled Harry Truman’s dictum that there was virtually no limit to what people could accomplish in politics as long as they did not care who got the credit. Sweden surely did not need a deeper, and even more wasteful, crisis than that of 1991–3 – when GDP had declined for three years in a row – to convince its politicians and public that something needed to be done.