Nima Sanandaji, The ebb and flow of free-market policies in Sweden

Throughout most of its modern history Sweden has had a favourable business environment. The period characterised by the most extensive welfare state policies (around 1970–95), when the country clearly deviated from market policies, is an exception. As it happens, this period was associated with stagnant economic development, in terms of GDP growth as well as job creation and entrepreneurship. The history of the other Nordic nations parallels that of Sweden in this regard.

It is true that Nordic nations maintain a high standard of living, despite steep taxes. But it is wrong to see this as proof that high taxes do not affect the economy. Except for the short and unsuccessful period mentioned above, Nordic nations have tended to combine high taxes with an environment of business freedom and free trade. Indeed, studies show that high taxes significantly hinder economic development in Scandinavian countries. While affluent, the Nordic nations could have been even more affluent with lower tax rates. It is true that the welfare services that are supported by high taxes provide various benefits.

At the same time, many of the favourable social outcomes in these societies were evident before the creation of extensive welfare states. Indeed, generous welfare policies have created new social problems, though with a substantial time lag as might be expected. The combination of high taxes, generous government benefits and a rigid labour market has led to dependency on government handouts among large subsections of the population. Families have thus become trapped in poverty. The policies have, in particular, limited the ability of the societies to integrate immigrants into their labour markets.

Today the Nordic economies are again growing, following a return to broadly free-market policies that served them well before policies changed during the 1960s and 1970s. The countries are changing in the face of serious long-term problems that have developed over the last 30 years. oil-rich Norway has implemented modest changes, and is also facing serious challenges, including a deteriorating work ethic among its youth. Finland, Sweden and Denmark have on the other hand introduced far-reaching market reforms. These changes include greater openness to trade, clear reductions in the tax burden, private provision of welfare services, the introduction of personal retirement accounts and, in Denmark, even a shift towards a liberal labour market.

A key lesson from the success of Nordic society is that what can broadly be defined as ‘culture’ matters. We should not be surprised that it is these nations, with their historically strong work ethic and community-based social institutions, that have had fewer adverse effects from welfare states and are therefore used as the poster child for those wishing to extol the benefits of active welfare policies. on the other hand, southern European countries with similar sized welfare states and size of government have had less favourable outcomes.

Lastly, it should be emphasised that descendants of Scandinavians who migrated to the US in the 19th century are still characterised by favourable social outcomes, such as a low poverty rate and high employment. This is an important point that the left in countries such as the UK and the US should note. There are similar outcomes for Scandinavian people in different policy environments: in other words, there is nothing exceptional about Scandinavians living in Scandinavia. Furthermore, the normal economic laws prevail: a good cultural background leads to good economic outcomes; and high taxes and a large welfare state ultimately undermine both the culture and the economy. In this respect, Scandinavia is entirely unexceptional. Deeper social factors such as culture and non-governmental social institutions have played, and continue to play, an important role in Nordic success.

This book explores the ideas stated above in greater detail. The starting point is how Nordic culture paved the way for phenomenal wealth creation. This occurred when industrialisation and free-market systems were introduced into previously poor agrarian societies.