In terms of area (450,000 km2 = 174,000 sq. mi.) Sweden is one of the largest countries in Europe, but in terms of population (9 million) it is a relatively small country. The Swedish economy is characterized by high internationalization, a broad business sector and a large element of public sector activity, especially in the service sector.
From poor agrarian country to leading industrial country
In the mid-1850s, Sweden was a poor agrarian country on the periphery of Europe. During the period from 1850 to 1970 the Swedish economy was the fastest growing in the world – along with Japan – and in 1970 Sweden was the world’s third richest country measured in Gross Domestic Product (GDP) per capita. A number of factors explain this leap, but among the most important were:
• Exports of such commodities as iron ore and timber products to Britain and the European continent
• Educational investments – by introducing public schools in 1842, Sweden achieved a broad, high knowledge level, sharing the top of the knowledge table with the United States during the second half of the 19th century
• Free enterprise – numerous entrepreneurs dared to take risks, especially due to the introduction of limited liability companies around the turn of the 20th century, which made it possible to start up businesses with a reasonable level of risk
• Expansion of infrastructure – notably rail roads – using foreign capital
• Liberalization measures – the entire guild system was scrapped in 1846
• Modern democracy – the parliament of four estates (nobility, clergy, burghers and peasants) ceased to exist in 1866
• An efficient, non-corrupt bureaucracy
The Swedish business sector was thus based on the commodities (plus the old metal-working and foundry village environments) that existed in the country. By the late 19th century, these materials were being turned into increasingly advanced products, laying the groundwork for a broad manufacturing sector that even today largely forms the foundation of the business sector and the economy. Demand from industry, together with household consumption, created a base for the private service sector. Rapid economic growth, very strong public finances and the growing welfare and re-distributive policy ambitions of Swedish governments after World War II led to rapid public sector growth starting in the mid-1960s.
At a very early stage, Sweden’s manufacturing sector became internationalized. This began with commodity exports, but due to the small size of the domestic market, industrial companies generally established operations abroad early. Even before World War I, for example, Ericsson had more than half of its employees abroad.
Internationalization regained momentum after World War II as trade was liberalized, while demand for Swedish goods rose sharply as Europe was being rebuilt.
A third wave of internationalizations occurred in the 1970s and 1980s, when Swedish industrial companies made very extensive direct investments, first in the U.S. and later the European Union (EU).
A fourth wave of internationalizations began somewhat later when a number of service industries (primarily in financial and business services) as well as the construction sector established operations abroad. On the whole, the Swedish business sector became among the most internationalized in the world. Until the 1990s, there was a major imbalance between extensive Swedish ownership abroad and generally low foreign ownership in Sweden.
Growth, deregulation, economic crises and bubbles – the economy after 1970
Starting in the mid-1970s, growth fell in Sweden as it did in many other Western European countries. The problems included tougher competition from other regions of the world, dysfunctional wage formation leading to inflation problems, high taxes and what many entrepreneurs perceived as an inhospitable corporate climate. High cost increases and fading competitiveness forced several devaluations of the Swedish krona during the 1970s and 1980s. These restored the short-term competitiveness of companies but worsened long-term inflation problems in the economy.
To improve the functioning of the economy, during the 1980s Sweden initiated the deregulation of many sectors. This began with the financial service market but continued with most transportation markets, the electricity market etc.. In portions of what was previously a public sector monopoly (for example schools and health-care), there are now some opportunities for private or cooperative activities. Other important structural reforms include stricter competition rules, an expenditure ceiling for the public sector, an independent Riksbank (Swedish central bank) plus of course Sweden’s membership first in the European Economic Area (EEA) and then from 1995 in the EU. In a 2003 referendum, however, the Swedes chose to say no to the Euro common currency.
During the mid-1980s economic growth again rose, driven by good exports. Overall, however, growth in the 1980s, as during the 1970s, was slower than the EU average. The deregulation of the credit market contributed to a very rapid increase in lending, largely focusing on the real estate sector. Sweden developed a banking and financial service bubble, which burst in the early 1990s in conjunction with an international economic slowdown and a restructuring of the Swedish tax system. As in most other countries, economic policy was restructured in order to prioritize low inflation. The economy entered its deepest crisis since the 1930s. Between 1990 and 1993, GDP fell by 5%, while employment declined by nearly 10%.
Falling GDP and lower employment resulted in a sharp deterioration in public sector finances. In 1994, the central government budget deficit exceeded 15% of GDP. Due to the combination of low growth during two decades and the severe economic crisis, Sweden fell from third place in the prosperity league (measured as GDP per capita adjusted for purchasing power) in 1970 to ninth place in 1990. During its crisis, Sweden slid further to 16th place but later bounced back a bit in the rankings and stood at 13th place by 2004.
The crisis led to a battery of reforms and austerity measures but also to investments for the future, especially in universities and colleges. Combined with favourable international economic conditions and very rapid growth in the information technology (IT) sector, Sweden emerged from the crisis. After 1993, Swedish economic growth was well in line with that of the average for countries belonging to the Organization for Economic Cooperation and Development (OECD). However, the growth of the IT sector together with unrealistic valuations of IT shares on the stock market led to an IT bubble. When the bubble burst early in the 21st century, the result was a new economic slowdown and declining employment in the Telecom, IT and financial service sectors. Compared to the downturn of a decade earlier, however, this crisis was mild.
In recent years, economic growth has again gained momentum. Since 2002, the upturn in GDP has averaged 2.5% annually. In 2005, growth reached 2.7%. The upturn was initially led by exports, which have climbed by an average of nearly 6% annually in the past four years. Due to better profitability in manufacturing and rising capacity utilization, capital spending took over as the main engine of the economy during 2004. During 2005 the labour market also began to improve, leading to rising household income and consumption. Thus private consumption is expected to serve as an economic engine in the next few years.
Forecasts for 2008–2009
The prospects for the next couple of years still look bright. Most observers foresee GDP growth of more than 3% annually. One important effect of the structural changes that have occurred is that economic productivity is rapidly rising. However, this is not leading to job creation at the same pace as during previous economic upturns. Registered unemployment is thus expected to remain above 4%. Meanwhile the rapid increase in productivity implies that wage and price pressure in the economy will remain low. Inflation is thus expected to remain at today’s low year-on-year levels of around 1–2% in the foreseeable future.
A new economy
When the stock market’s IT bubble burst, many observers spoke of the ‘‘death of the new economy.’’ The truth is the opposite, however. During the past 15–20 years, the Swedish economy and the world in which it competes have fundamentally changed. We can point to a number of far-reaching changes, of which the most important
are:
• a new basic technology – IT – which permeates the whole society
• new deregulated and global markets
• the larger role of knowledge/intellectual capital in competitiveness
• new organizational structures in companies, larger foreign ownership and less production in Sweden
• new economic policies, with a focus on stable central government finances and low inflation
One of the most important changes during the past decade is that foreign ownership in the Swedish economy has increased sharply. In the early 1990s, about 10% of employees in the business sector worked at foreign-owned companies. By 2006 this share had risen to 23%. In many industries the foreign-owned share is above 30%, and even in previously ‘‘closed’’ sectors like real estate and construction, the proportion of foreign ownership is now rising at a rapid pace. This further strengthens Sweden’s economic dependence on other countries. Also contributing to increased internationalization and tougher competition was the enlargement of the EU in May 2004. Unlike most other EU countries, Sweden chose not to introduce any transitional rules.
Taken together, the structural transformation of the economy has thus further accelerated. This is most apparent in the manufacturing sector, in which traditional production in Sweden is declining, while service content is rising. Increased mechanization is leading to rapid productivity improvement, while employment is falling. Manufacturing declined from a 30% share of all jobs in 1965 to 16% in 2004. Instead, the knowledge-intensive service sector has shown the most expansion. Employment has also increased in the traditional household service sector, especially in distributive trades (retailing/wholesaling), while large portions of this sector have otherwise been restrained by weak long-term local government finances. Looking ahead, employment growth will largely occur in the service sector, while manufacturing will continue to play a major role in exports and thus indirectly in the growth of the service sector.
Population and labour force
In 2007, Sweden’s population was a bit above 9 million. Population growth during the 1990s was relatively slow and was mainly due to immigration. In recent years, however, the birth rate has again increased. Forecasts indicate that in 2020, Sweden will have a population of about 9.7 million. However, the big demographic challenge instead lies in the fact that the number of older people is now growing at a rapid pace. By 2020, the number of individuals over age 65 is expected to grow by 500,000, while the working-age population will only grow by 200,000.
Traditionally and in terms of political orientation, Sweden has had very high labour force participation. However, labour force participation fell sharply during the economic crisis of the early 1990s and since then has not returned to the old level. In 2005, it was 77%. One of the Government’s most important economic policy targets is to achieve an employment level of 80%. Unemployment was 5.9% in 2005 and is only expected to fall slowly in the near future.
Social welfare and taxes
Compared to most other countries, Sweden is characterized by an even distribution of income and wealth. This is due to a high tax burden and a large public sector. Tax-financed consumption in 2005 was equivalent to 28% of GDP and capital spending 3%, while the public sector redistributes another 22% or so of GDP in the form of various transfer payments. The flip side of Sweden’s ambitious social welfare and re-distribution policy is the country’s very heavy tax burden. The tax burden in Sweden is equivalent to 51% of GDP, which together with Denmark is the highest in the world.
Economic policy
Sweden’s official economic policy focuses on stable central government finances and low inflation. Other defining characteristics are a far-reaching redistribution policy, large ‘‘labour market policy’’ (government-financed employment training and job) programs aimed at keeping registered unemployment down and an ambition to preserve the Swedish high-tax system. There is an election in September 2006, but even if there is a change of government from the long-ruling Social Democrats to an alliance of non-socialist parties, the main features of today’s policies are expected to survive.
The Swedish krona traditionally had a fixed exchange rate. Since 1992, however, the currency has floated. Sweden’s Riksbank is completely independent of the Government. The objective of the Riksbank monetary policy is to keep inflation around 2% (within a band between 1–3%).
Links
www.konj.se
National Institute of Economic Research
www.riksbank.com
Swedish central bank, the Riksbank
www.scb.se
Statistics Sweden
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