Swedes show the way to reform

azzuri · Swedes show the way to reform

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Swedes show the way to reform

THE partial climb-down by the French government over its youth employment contract is the worst thing that could have happened to the economic reform process. The French are squandering enormous political capital on a reform that, in its new guise, will have virtually no impact on the labour market. The conclusion French and other European politicians will draw from this mess is that economic reforms should be avoided in future.

Amid the insanity, however, it is worth remembering that there are countries where economic reforms have worked — and even proved popular. One is Sweden, which succeeded by defying conventional wisdom and adopting a tailor-made approach.

The Swedish government flouts much of the advice it receives from the Organisation for Economic Co-operation and Development (OECD). The Swedish labour market is about as rigid as Germany’s. Sweden has one of the world’s most comprehensive tax-based welfare systems. Among the more startling OECD statistics is that the average Swede takes 17 weeks off work each year — through a combination of holidays, sickness and parental leave.

Yet Sweden’s macroeconomic performance is impressive. Between 1995 and 2004, labour productivity grew by an average annual rate of 2,5% — higher than even the US.

After a brief slowdown in 2003, gross domestic product (GDP) increased by an annual 3% in 2004 and 2005. Since 2004, annual inflation rates have fallen and remained below 1%. The Swedish government runs a structural surplus of more than 1% of GDP. No economy is perfect but in terms of macroeconomic performance, Sweden comes close.

So how could Sweden have succeeded when its policies appear so flawed? The decision to stay out of the euro is not a convincing answer.

It is not clear, either, that the success can be attributed to Sweden’s social model. It is true that the country manages to combine a high degree of social security with flexibility — characterised by welfare-to-work programmes, ambitious retraining schemes, specific programmes to integrate the disabled into the labour market and a world-class education system. Sweden produces one of the largest proportions of high school graduates in the world and is a champion of life-long learning. In Sweden, it is not the system that is flexible. It is the people.

But the Swedish model cannot explain the country’s macroecono-mic success during the past 10 years.

A more plausible explanation is Sweden’s general approach to economic reform. By embedding such reforms in a transparent economic strategy, Sweden managed to avoid the uncertainty emitted as a toxic byproduct of reform elsewhere.

In Germany, the 2003-04 welfare reforms contributed to the poor economic performance during that period, as people reacted by reining in consumption. In France, the conflict over the youth employment contract has added to the country’s general sense of malaise.

In contrast to many other European governments, the Swedes are clear about their policy goals and the instruments they will use to achieve them. They seek high levels of employment and social security, a low dispersion of wages, superior public services and a generous welfare state. In return, they accept higher taxes, tight labour market regulations, a fiscal surplus and a conservative monetary policy.

To make this work in practice, consecutive governments implemented tough reforms to welfare systems, pensions, the budget and the labour market. They also deregulated product markets to bring down inflation. Like it or not, it is a consistent strategy.

Compare this with the confused national economic thinking in Germany and France. The Germans prefer US-style income and corporate taxes and a Swedish-style public sector. The national economic strategy, if one can call it that, is full of such contradictions. In France, labour market reforms consist of a series of one-off political stunts.

Sweden also benefits from a more consensual political culture. The theological divide between antireform fundamentalists and true believers in US-style market freedoms is far less pronounced.

Swedes do not agree on everything but their debate on economic reforms is more measured. Antireform riots on the streets of Stockholm are unthinkable because policymakers know they must prepare the ground carefully and build effective coalitions.

The reason for Sweden’s economic success, therefore, is not a superior social model or a clever macroeconomic strategy. It is not the policies the country has adopted — but how it has adopted them.