Examining Swedish models

Economics professor Assar Lindbeck wrote an interesting column about the three different Swedish economic models. (Link spotted at bookforum.com.) It should appeal to the sort of people who like to argue that the welfare state stifles economic growth.

According to Lindbeck, 1870-1960 was a "liberal" period. The government provided market-supporting legislation, education, health care, and infrastructure, but government spending and income distribution were similar to the United States. During this period Sweden "moved from being one of the poorest western countries to being the third richest country in terms of GDP per capita."

1960-1985 saw the system that is usually called the Swedish model. The free trade of the liberal period remained, but job security was improved and generous welfare policies were implemented. Government spending as a percentage of GDP doubled and marginal tax rates went up. Sweden's GPD growth lagged behind the rich OECD countries and it dropped from third to approximately 17th in GDP per capita.

In the third period, 1985 to date, marginal tax rates were cut, capital market regulations and foreign-exchange controls were removed, and several product markets were deregulated. Sweden's growth rate picked up again and it has recovered some of the ground it lost to other rich countries in 1960-1985.

One reservation I had about Lindbeck's use of statistics is that the first liberal period also coincided with Sweden missing a couple of big wars in which many other rich countries fought. It would be interesting to know how much that helped in moving up the GDP-per-capita list. Also, presumably Sweden would have industrialized around that time in just about any case, so a rather large part of the growth can't be attributed to the government's approach to spending and income distribution.

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