Thursday, March 08, 2007

ON SWEDISH MODEL

Sunset over Lake Vänern, Southwestern Sweden
Left leaning newspapers such as British Guardian often stress that Sweden has been the most successful society the world has ever known. This largely mystified statement is spread all across European field of academics, politics and even in the field of economic policy. There have been rare experts and skilled economic analysts who truly understand recent macroeconomic trends and economic situation in Sweden, not least the economic history of Sweden. From the public choice viewpoint, it is highly appropriate for politicians to interpret Sweden as the role model in economic, social and tax policy. Political support given to politicians can largely be exercised through the introduction of rent-seeking which is very costly to economic growth. Giving power to special interest groups such as trade unions entails the status quo as well as widespread government spending. Sweden is known for high and steeply progressive tax rates on individual income and productive behavior coupled with massive welfare spending and high level of social security and other kinds of government protection.
Sweden is a country that went from rags to riches. It went from a poor agrarian economy to 4th the richest nation in the world in 1970. Between 1850 and 1970, Sweden had had, after Japan, the highest economic growth rate in the world. It began in 1846 when a group of liberal reformers imposed boosting features which gave Sweden free trade laws, religious liberty and a low level of government intervention. For decades, the government spending had never exceeded 10 percent of the GDP. This period was equipped with dynamic entrepreneurial development based on human capital creation and substantial benefits from industrial revolution. Swedish economy boomed as well as investment and standards of living quickly grew. Large corporations were established and the business environment absorbed the innovation capacity. The industrial development was aided by Sweden's rich natural resources. The development of infrastructure yielded significant results. Railroad development was, for example, financed largely through foreign investment. One of the reasons why Swedish economy boomed is also that Sweden was not engaged in neither of both World Wars in the 20th century. The period of peace and strongly dynamic export activity additionally contributed to economic growth and structural advancement. Following the periods after the WW2, the government intervention grew significantly. Between 1960 and 1970, the economic growth rate was above 5 percent and so was the growth of productivity. After that, the government involvement skyrocketed as the taxation of individual and corporate income reached astronomic rates. 65 years of Social Democratic rule left behind a meaningful experience for the 3rd largest country in Europe. Trade unions gained discretionary power over the labor market. Consequently, wage formation was getting more and more dysfunctional and rigid. Increased incentives to demand resulted in ever greater public debt which reached its peak in 1998 when it stopped at 80 percent of the GDP. Following the oil price crisis in 1973-74, the international business activity of Swedish export companies turned down drastically. Between 1983 and 1990 several strategic deregulations were conducted in the financial sector. It boosted extensive lending, largely focusing on the real estate sector. The regulations of the financial market were one of the foremost reasons for risky credit lending. Due to the currency devaluation, the export sector was given a monetary surplus but there was the problem of liquidity still ahead. Its problem was solved by the stock market and real estate investment which contributed to a rapid growth in overall asset prices. The bubble bursts geared banking and financial crisis in the early 1990s. Both sectors nearly collapsed, resulting from the overall crisis and liquidity absence. An international economic slowdown affected the Swedish economy too. The currency crisis was solved by the abandonment of fixed exchange rate regime and tax reductions. Abandoning the fixed exchange rate regime subsequently boosted the export sector as the currency devaluated. High export growth was still not enough to cover the GDP losses. The situation of the black hole resulted in accelerating unemployment. Falling GDP and rising unemployment resulted in a sharp deterioration of public finances. The national debt sparked. In 1994, the budget deficit was above 15 percent of the GDP. The stabilization policies were exercised through inflation targeting framework set by the central bank, namely Riksbank. Public expenditures were cut and budget policy turned toward the golden surplus rule which reduced the risk pressure on public finances. A commitment of the central bank to inflation targeting searched a nominal anchor which greatly supported the stabilization policy and the immediate recovery of the financial and banking sector.
If Sweden were integrated in the United States it would be one of the poorest countries. Using fixed prices and purchasing power parities adjusted data, median income per capita of Sweden is $26,800 USD compared to $39,400 USD in the United States. Recent economic trends in Sweden are favorable. Export companies such as Volvo, SAAB and Ericsson are breaking export records. Thanks to decreased regulation of the business sector, the economic growth streamed temporarily higher though the recovery of the economy was converged at the average of 2,2 percent of economic growth in 10 years. Tax burden, measured in the percentage of the GDP is still the highest in the OECD group. Official statistics show the unemployment rate surprisingly low while there are many methodologically misguided definitions through which the real unemployment rate is shadowed. In Sweden, there are extensive labor training programs whose participants are not actually working but they're somehow educated how to find a job in the market. Then there are still numerous government support programs given to unemployed. Economically, the greater the size of public entitlement programs, the smaller the incentives for job searching in the labor market. Public sector is widespread and largely inefficient according to sterilized adjusted recent data. Input efficiency is low as well as the quality of serviced performed by the public sector. If the public sector in Sweden were as efficient as in Ireland and Great Britain, then roughly one third of total expenditures could have been cut to have the same service.
Sweden achieved tremendous success when free trade and economic liberty were introduced. In 1970, Sweden's GDP per capita (in current prices) was only behind the United States, Luxembourg and Switzerland. The Swedish model of free-market economy combined with strong socialist planning was an official trademark and a good promotion stamp for Sweden. High tax rates on productive behavior resulted in a subsequent economic crisis of the 1980s and early 1990. In addition, many successful companies were forced to leave Sweden due to punitive tax rates on corporate income. Brain drain flow increased as incentives to educate, work, save and invest were minimized. The minimization of those incentives correlated with high taxation levels. It is a matter of empirical evidence that high tax rates and strong regulation rules reduce the incentives of market stakeholders to pursue greater benefits and value-added profile. The latter is of course, a basis for productivity growth. In Sweden, strong government employment regulation has gone hand in hand with a dominant position of trade unions in terms of collective bargaining. Its effect is obvious as the unionization rate is one of the highest in the world. When the economic policy was wheeling further towards Keynesian orthodox economic practice, the unionization rate reached 83 percent of the entire labor force. It could be hardly claimed that Swedish model of strong government intervention, rigid labor market and high taxes on work, savings and investment is a successful one since the obstacles to productivity growth; job creation and capital formation deprive economic performance and put an emphasis on welfare spending and unemployment benefits.
In Slovenia, left and right leaning politicians seem to be economically falsified and completely illiterate as they aim to pursue the policies that embody copying of the problems. In this respect, Sweden is often exposed as a welfare miracle that combines economic efficiency and social justice. Friedrich August von Hayek caught the meaning of the mirage of social justice and security when he said that social justice is a Trojan horse undertaken by totalitarian governments. Numerous empirical studies and research on the components of the “Swedish model” have been conducted as they showed the very opposite facts from what political elites interpret as successful. Unemployment benefits deeply hamper the growth of jobs. Among OECD group of countries, only two have had jobless growth –Sweden and Finland. In Sweden, not a single job in the private economy has been created since 1950. On the other side, employment in the public sector grew significantly. Despite the negatively turbulent welfare spending and government intervention, there’s still much to admire in Sweden. But those admirations are not very popular among the experts and policymakers in the Continental Europe. When coming out of economic crisis and severely slumped depression, Sweden steadily liberalized the business environment and the government allowed private health care schemes and the introduction o vouchers in education. Numerous sectors were liberalized and the stock market conditions gave boost to company growth and venture capital formation. The latter grew largely but in terms of the GDP share; it is still very low compared to dynamically growing economies such as the U.S., Switzerland and Ireland.
A Nobel Laureate and the most prominent economist of the 20th century, Milton Friedman, once wrote that governments never learn; only people do. Structural pro-growth reforms in Slovenia have become a necessity while the center-right government postponed the economic reforms and got away from the ambitious reform agenda under the pressure of interest groups, mostly trade unions. First, there is no such thing as Scandinavian model. Iceland has recently adopted the flat tax on individual income and as one of the lowest corporate tax rates in Europe. It is also one of the wealthiest countries in the world. The Icelandic stock exchange ICEX shows high index growth rates. In pharmaceutical sector, Actavis achieved a tremendous success with innovative product market strategy and international market targeting. In the case of Sweden, business sector is known for a world-class “high quality” management of big companies such as Ericsson, ABB and Teila Sonera. The process of company registration is quick and it takes very little time to setup a business. According to the World Bank (http://www.doingbusiness.org/), investor protection has improved significantly. As Sweden is largely export oriented economy, access to international trade is free from government regulation and costly restrictive import and export procedures which have a very burdensome effect on international trade flows and reduce the economy’s ability to pursue propulsive export service and thus focusing on creating the value-added is postponed. The impact that follows is that international competitiveness in terms of price and product quality competition is undermined.
The reason for Swedish economic miracle was not explosive full-fledged government welfare spending. Free-trade and competitive entrepreneurial dynamism boosted Swedish economy towards the high-hitting economic growth rates. The middle way introduced at the end of 1970s shrank into such a severe economic slump that only the return to the supply-side approach was a credible insurance against further instability of the business cycles. In fact, mostly politicians, intellectuals, some academics and self-proclaimed experts don’t understand that international competitiveness is undermined as the interventionism, spending explosion and punitive tax rates are in effect.
Progressive taxation is actually the idea of Karl Marx and his ideology of Marxism. The latter went from delusion to destruction unmasked. If you are born in a society without economic liberty, private property protection and free choice, it is impossible to believe in Marxist fallacies when you see what is happening around you.

1 comment:

W2E said...

Hello and thanks for reading this post!

The issue of taxes has never been easy on mankind. As you know, the resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labor cost and other expenses incurred in complying with tax laws and rules. This has repercussions on different aspects of taxation, from personal income taxes to payroll taxes.

One of the most interesting things related to taxes are the proportional, progressive, and regressive taxation systems. This is an area where a property tax attorney would tell you that a progressive tax is a tax imposed so that the tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the tax rate is fixed as the amount to which the rate is applied increases. Progressive taxes reduce the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes. Regressive taxes reduce the tax incidence of people with higher incomes, as they shift the incidence disproportionately to those with smaller incomes.

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All Tax Questions Website