San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economy and the
Economic History of Sweden

The Economic History of Sweden

Although Sweden is a relatively small country in terms of population it is economically quite significant and extremely important as a test of an alternative economic system. The precise nature of that economic system is in dispute. It is definitely not socialism of the Stalinist variety. Ninety percent of production is in the private sector, yet the state controls about fifty percent of the disposition of national income. The export industries necessarily have to be free to maintain efficiency and international competitiveness. Some characterize the Swedish system as Welfare State Socialism but a more accurate characterization would be Welfare State Corporatism. The benevolent corporatist society is one in which decisions are made through negotiated compromise among the organized interest groups. Compromise has been a prominent feature of Swedish political history since 1932. And a notable feature of Swedish life is the plentitude of organizations that Swedes can and do belong to. Swedes are not only organized, they are organizationalized.

The Industrial Revolution in Sweden

Although Sweden did not posess the coal deposits of Britain and Belgium she did have ores of iron and other metals. The iron ore was of very high quality. The extensive forests of Sweden provided the charcoal used for smelting iron before the days of the coke furnaces of the industrial revolution.

When Britain industrialized she looked to Sweden for raw materials, particularly forest products, for her industrial machine. The commercial relations between the Brits and the Swedes were not always the smoothest and Swedes were left with an image of the market economy being one of exploitation.

Through most of the recent history up to the middle of the twentieth century Sweden was a poor agricultural country, oriented more toward eastern than western Europe. In about 1870 its economic development process started.

(To be continued.)

The Creation of Modern Sweden

During World War I there was the rise in Sweden, as in other European countries, of socialist parties. In 1917 there was a Liberal-Socialist coalition which formed the government. (In Sweden and almost everywhere outside of the United States liberal means what conservative means in the U.S. What is called liberal in the U.S. is what the rest of the world calls social democratic.) The most prominent socialist of that time was Hjalmar Branting and he was included in that government. In 1920 the socialists got enough electoral support for Branting to form a Social Democratic Party government. There was a minor setback for Branting and then after new elections in 1921 he formed a new Social Democrat government which remained in power until 1923. Various liberal-conservative governments held power until 1932 when the Liberal Party leader had to resign as a result of his involvement with Ivar Kreuger and his financial scandals.

In the early 1930's the economic depression that developed in the United States spread around the world. Market demand collapsed, particularly export demand. Businesses faced with declining sales laid off workers. To survive against the lower prices in their markets businesses tried to cut wage rates. Workers reacted by going on strike. Governments sent in soldiers to try to maintain order in the labor disputes. In Sweden in 1931 the workers in a sawmill in Åden were on strike. Soldiers confronting them fired into the crowd killing several. The public reaction to those deaths contributed to the electoral victory of the Social Democratic Party in 1932.

There was thus in the early 1930's a definite shift in political sentiment and the governing ideology in Sweden. The Social Democratic Party that came to power in 1932 had represented the labor movement and had, at one time, advocated socialism. It had, again at one time, been officially Marxist, just had been the Labour Party in Britain. What materialized under Swedish Social Democratic Party rule was not Marxist socialism but a democratic social welfare state. This means that the production sector remained predominantly (90%) private but the government through regulation, taxes, price controls, and social programs determines what is produces and who it goes to.

Labor unions are a relatively more important institution in the Sweden than in the U.S. Also consumer cooperatives handle a substantial share of the retailing in Sweden.

The Social Democrats in 1932 needed the cooperation of another smaller political party, the Agrarian Party, to form a government. The Agrarian Party moderated the policies of the Social Democrats, to the benefit of the Social Democrats and Sweden. In power, the Social Democrats were pragmatic. Very quickly they forgot about doctrinaire socialism and focused upon the immediate issue of reducing unemployment.

It was probably instinctive to the hard-working Swedes that if workers were not gainfully employed in private industry they should be put to work building public works projects. Later the writings of the British economist John Maynard Keynes provided an argument for solving the depression unemployment by public investment projects financed by government borrowing.

Later, in 1938, the Swedes developed some institutions which they felt would help the market economy function better. A provision in the tax code allowed Swedish businesses to gain tax deductions for placing up to one half of their profits in the Central Bank. This placed a substantial amount of funds at the disposal of the government to use in stabilizing employment and carrying out a regional policy for equalizing incomes throughout the country.

Also in 1938 an agreement was reached between labor and management for facilitating collective bargaining and moderating disputes. The agreement was between the Swedish Trade Union Confederation (LO), representing the workers, and the Swedish Employers' Confederation (SAF). They agreed to give each other advanced warning of any significant action and thus allow for negotiation and even mediation. The agreement was perhaps motivated by a fear that both labor and management would lose out to government authority if they did not reduce the labor disputes taking place in the country. The agreement was signed at the sea resort of Saltsjöbaden, near Stockholm and was thus known as the Saltsjöbaden Agreement. It brought labor/management peace to Sweden.

The process of consultation and negotiation of the Saltsjöbaden Agreement has been expanded to include government as well. The process called remiss involves the creation of a Commission of Inquiry whenever any major change in a law or policy is being considered.

The weakness of the Social Welfare State is that a large share of people's income must be taken in taxes to pay for the social services the state provides. This leaves people with the necessities taken care of but with a yearning for more income to spend at their discretion. Many Swedes have coped with this need for discretionary income by working two jobs. The main job's income is largely taken in taxes to pay for the social services. The second job's income become their real income, the income they have to spend.

In recent decades some issues have emerged with the Swedish system. The harmony between the blue-collar industrial workers and the white-collar services is not complete. Likewise there are differences in the private industry workers and the public service workers. It shows up in the lesser loyalty the public service workers have to their employers and the greater number of strikes by these workers.

In the 1970's labor unions began to ask for union representation on the boards of directors of private companies. This was not a threat to company ownership. Such union representatives were better able to convey the needs of the company and the constraints it faced to the workforce that the management would have been able to. Later unions tried to have funds created which would enable unions to purchase control of the companies. This policy was strongly resisted and only about one percent of the value of Swedish companies have been acquired through these funds.

From 1976 to 1982 the Social Democrati Party lost control of the Swedish government to opposition parties. The Social Democratic Party returned to power in 1982. In 2006 the Social Democrats lost to the Moderate Party and its political allies. The Social Democratic Party received only 35 percent of the vote, down almost 5 percent from its 2002 showing. This was the lowest percentage for the Social Democratic Party since universal suffrage was introduced in 1921. The Communist Party of Sweden, now called the Left Party, got only 5.85 percent of the vote, down 2.54 percent from its 2002 showing. (Parties that get less than 4 percent of the vote do not get representation in the national legislature.) The parties of the left did not do well in the election of 2006.

The Evaluation of the Performance of the
Welfare Stateof the Social Democratic Party

This is the most important issue in political economy. If the Welfare State has functioned to the satisfaction of the Swedish people then it is a system worthy of consideration by other industrialized countries. On the other hand, if it was serious flaws then these should be noted. While the Swedish system might be a suitable model for industrialized countries it is probably not affordable as a system for developing countries.

The long tenure of the Social Democratic Party led to a mentality of its leaders that they knew better than the people what was best for them. For example, Sweden had initially adopted the left side traffic system of Britain. When other countries adopted the right side system of France more and more problems were arising. The government called for a referendum on the issue. The Swedish public decisively voted agains the change. Nevertheless the government mandated the change and at a designated time Swedish drivers were required to cross over into the opposite lanes. The change was however accepted. But the notion of the Social Democrats that they and they alone know what is best for Sweden can be irritating. The danger is that the Social Democrats will become an elite much like the aristocracy of old.

Swedish industry must compete in international markets. This limited the restraints that the Welfare State could impose on Swedish industry. Swedish industry has successfully competed despite the rise in wage rates, the shorter workday and increasing vacation time mandated for Swedish labor. The unemployment rate has been kept low.

(To be continued.)

The Regional Economy of Sweden

Regional Development Policies and Programs of Sweden

The regional problem is the relative high growth of the Stockholm area and the relatively lower economic opportunities in the northern and forested areas. The imbalance of Stockholm is not only in terms of the distribution of population but also the even greater imbalance in income and production.

In 1870 seven percent of the population lived in the Stockholm area but by 1970 this share had risen to 18 percent. Stockholm accounted for about 24 percent of output.

There has been a conscious attempt to bring about an equality of standards of living in the rural areas, but this has not accomplished much. There has also been government efforts to promote the mobility of labor both to reduce unemployment in problem regions and to provide labor in tight labor market areas.

There is a principle of Swedish governmental policy, known as the "solidarity principle," that says wages should be equal throughout the country.

Prior to 1965, the goal was "men to jobs," but after 1965 it changed to "jobs to men." County and municipal governments are relatively important in Sweden. They levy an income tax and account for a major share of government spending. Efforts to stimulate lagging economies often take the form of grants from the national government to the county and municipal governments.

(To be continued.)

Real GDP of Sweden 1968-2006,

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