Nima Sanandaji, Early Scandinavian success

The comparison between Ireland and Denmark clearly illustrates the benefits of combining the unique Nordic culture with free-market capitalism. Already during the latter half of the 19th century Denmark thrived through a combination of large-scale and small-scale entrepreneurship. Large successful firms competed with cooperative movements and small artisan firms (Kristensen 1989).

Denmark’s closest neighbour to the north was more of a late-bloomer. However, few other nations have demonstrated as clearly as Sweden the phenomenal economic growth that comes from adopting free-market policies.

Sweden was a poor nation before the 1870s, resulting in massive emigration to the US. As a capitalist system evolved out of the agrarian society, the country grew richer. Property rights, free markets and the rule of law combined with large numbers of well-educated engineers and entrepreneurs. These factors created an environment in which Sweden enjoyed an unprecedented period of sustained and rapid economic development.

In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth (Maddison 1982). Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes (Sanandaji 2010b).

It is sometimes claimed that Sweden’s high growth rate is a result of social democratic policies. In fact, much of the development occurred between the time when free markets developed (circa 1870) and the start of the era dominated by social democratic rule (circa 1936). Economic historian Angus Maddison’s database of estimated historic per capita GDP makes it possible to calculate growth rates for 28 oECD countries (Maddison 2010).

Between 1870 and 1936, Sweden enjoyed the highest growth rate in the industrialised world. However, between 1936 and 2008, the growth rate was only 13th out of 28 industrialised nations. It is important to realise that Sweden remained a relatively free-market-oriented nation for several decades after the beginning of the social democratic era. The policy shift occurred slowly over time. It was at the beginning of the 1970s when the fiscal burden and government spending in Sweden reached high levels relative to other industrialised countries.

During this 100-year period [1870 and 1970] Sweden was characterised by small-government policies. The country was also neutral in both world wars, avoiding much of the destruction that occurred elsewhere in Europe. This, alongside a catch-up effect, can explain why living standards in Sweden rose three times as rapidly as in the UK. In 1870 Sweden’s GDP per capita was 57 per cent lower than in the UK. In 1970 it had risen to become 21 per cent higher.

However, Sweden’s wealth creation slowed down following the transition to a high tax burden and a large public sector. From 1970 until the financial crisis of 2008, the end-point of Maddison’s Historical Statistics of the World Economy Sweden lagged behind other comparable European countries.

Denmark followed a similar pattern. The social democratic era in Denmark can be said to have begun in 1924. Between 1870 and 1924, Denmark had the 6th highest growth rate in the industrialised world. Between 1924 and 2008, however, Denmark’s growth was only ranked 16th compared with other industrialised countries during the same period. As in Sweden, the social democrats in Denmark were initially pragmatic, implementing their policies slowly. The shift from low and moderate taxation to higher levels of taxation occurred around the 1970s. Again, much like Sweden, Denmark experienced strong growth until 1970, but started to lag behind after the transition towards a large public sector.

Finland followed a different growth trajectory. The nation went from Russian rule to a bloody and failed socialist revolution. Thereafter a welfare state began forming. Finland has historically had lower tax levels than Denmark and Sweden. This also applies to Norway, which has grown rich during later decades thanks to considerable oil wealth.

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