INTERVIEW WITH JOHNNY MUNKHAMMAR

In your newest book called "Guide to Reform" you emphasized the significant importance of economic and structural reforms to pursue flexibility, prosperity and change. What is, in your opinion, the main task of economic reforms?

I attempted to define reform as a political decision which aims at removing obstacles to change, progress and wealth creation. It is a fairly wide definition, which means that it should be evident that it is in everyone’s interest to support such reforms. This means that the purpose of economic reforms should be to make it possible for society to develop and improve instead of suffering from stagnation and problems.

In the abovementioned you have enlisted a great amount of empirical evidence that supports the need to implement economic reforms. How do you see the role of strong leadership, commitment to change and strategy in the process of reform implementation?

I have participated in numerous economic discussions that end in relative unity among economists about what should be done – and then, everyone agree that it will not happen because of political obstacles, such as lack of leadership. That is where my book starts. I think that there is a need to analyze how reforms can actually take place, which conditions that should be in place for politicians to actually go from knowledge to action. Indeed, I think that is of great importance. But I do conclude that you don’t have to be Superman to reform; it is all about following the right strategy.

Competitive strategy, vision, well-defined mission and cutting-edge management are crucial determinants of successful promotion and implementation of structural reform. Madsen Pirie, the president of the Adam Smith Institute, described the reform agenda as the main policy asset in the future. How do you think the awareness and vital importance of structural change can receive attention in policy issues?

I think that good policy is unfortunately not always good politics. It is not enough to have the best analyses and proposals, though that is crucial too. You also have to have an agenda and a strategy about how to do it – from asking the voters for a mandate to reform all the way to implementation and winning the story about reforms afterwards. Indeed, Dr Pirie has a relevant point about that being an asset, both in terms of getting elected and in pursuing real reforms.

Numerous European politicians have not shown any initiative to reform the structural backlash of the politico-economic system in European countries. Significant amount of literature and empirical evidence has confirmed that the European corporativist model of government intervention and stakeholder protection is the main obstacle to more innovative economy and higher economic growth. What is your own opinion about the corporativist model in continental Europe?

There is indeed substantial evidence that the powers and influence on politics from special interests is harming society in economic and social terms as well as creating obstacles to important reforms. The more powerful the special interests are, the worse it gets. They all want privileges from the state, paid for by everyone else. They have to be confronted and reform governments have to launch reforms anyway. This might be easy to say, but it has happened. In Britain, Margaret Thatcher implemented reforms despite very tough resistance, and nobody today wants to go back. And sometimes, it is enough for one special interest to change position to change the entire structure and open up for change.

One of your main areas of research is the field of labor market. The deregulation of the labor code is strongly unpopular in countries such as France, Germany, Slovenia and Italy. What are, in your opinion, the consequences of regulated and rigid labor market?

If there are many and substantial interventions by the state in the labour market – such as taxes on labour, hiring and firing regulations, public monopolies, mandatory social insurance systems, etc – there will be more problems. Low employment levels, high and long-lasting unemployment, social exclusion of certain groups like the young and immigrants – those are all effects of state interventions. This is quite ironical, since the interventions are often motivated by social concerns.

In Slovenia, the concentration of the monopoly power of trade union is huge, resulting in a two-sector employment model and widespread rent-seeking at the expense of productivity growth. How to demolish the monopoly power of trade unions through a reform process and why do trade union leaders oppose labor market reform by all availible means?

I am not an expert in the particulars of the Slovenian labour market and its trade unions, but I could comment in general terms. Trade unions often – but not always – oppose reforms because they have been granted privileges from the state. They may have the right to demand that everyone should sign collective wage agreements, or provide state-funded unemployment benefits, etc. And those are all in the way of important reforms to increase flexibility. They want to keep their privileges as organizations as long as possible.

Your books are very well embraced by the readers from all over the world. In your book called "European Dawn" you analyzed Western-European countries and concluded that radical reforms are only the question of time. Western Europe is faced by a bulk of structural problems. Economic growth is quite low, welfare dependency is growing and welfare state is not suitable for demographic and ageing problems that Western Europe will face in the years to come. In your opinion, where are the reasons for Western European stagnation in terms of low growth, high unemployment and high taxes?

In brief terms, many of the problems can be said to stem from the very idea that the state should intervene in many parts of society. Very high taxes do lead to lower economic growth rates, labour market interventions do lead to unemployment, having welfare services in public monopolies do create waiting lists, etc. This very harmful idea is a remnant from the decades after World War II when many people believed in the centrally planned economy. But today we know better.

Nearly a year ago, at the CATO Institute conference entitled "Should the United States be more like Scandinavia" you succinctly explained the so-called Scandinavian model. As we know, Sweden walked out from the agricultural bastion of Western Europe, and became the wealthiest European country in terms of GDP per capita in 1950. What happened in Sweden from 1890 to 1950? What were the driving forces of Sweden's path to prosperity?

Those decades were a fantastic success story. The foundation for Swedish success was laid already in the 1850s and 1860s by a series of reforms. Foreign trade was liberalized, freedom to start businesses and compete was introduced, the infrastructure was improved by railways, the education system expanded and financial markets were opened up. Sweden had, during all those years, lower taxes than the European average and lower than the United States. Still, in 1950, the total tax pressure as a share of GDP was 21 per cent.

After 1970, none of top 10 Swedish companies listed on stock market was established. Also, Sweden is known for 60 years of an uninterrupted social democratic rule. Olof Palme's economic policy attempted to restore Swedish competitiveness by the devaluation of the Swedish krona what later resulted in an inflationary spiral. What brought Sweden to fading competitiveness and extraordinary economic problems in early 1990s such as high unemployment, public indebtedness and inflation?

Sweden experienced severe and returning economic and social problems during the 1970s, 1980s and early 1990s. This was due to the economic policies during the decades preceding the crises – policies of raising taxes, socializing companies, Keynesian economic policies, regulations in the labour market, etc. During the past 15 years, the situation has improved, due to a series of reforms, mainly in the late 1980s and early 1990s.

Aftermath, Swedish policymakers launched several pro-growth reforms that restored growth potential and productivity performance. What have been the main reform steps?

Sweden has been one of the most liberalizing countries in the Western World, rising from number 40 to number 20 in the Economic Freedom of the World index, from 1985 to 2007. We de-regulated many product markets, made the Central Bank independent, got inflation down, decreased marginal tax rates, introduced choice in welfare services, joined the EU and did a pensions reform.

A growing list of nations adopted non-discriminatory flat tax rates on productive behavior, namely on labor supply. Also, tax rates on corporate income have been lower dramatically, showing the Laffer curve effect. Flat tax revolution and pro-growth tax and economic policy installed "Eastern European Tigers" such as Latvia and Estonia. In 1991, Estonia pioneered the introduction of flat-rated tax on personal income. What is your view on taxation?

Taxes should be made flatter, simpler and lower. The flat and quite low tax rates of several countries in Eastern and Central Europe have achieved several such aims. We know that tax bases are getting more mobile, and that low and simple taxes are a competitive advantage. It is essential that countries can continue to compete with taxes.

Which countries, in particular, have been highly successful in the implementation of economic reforms? Can you list a few examples?

Almost all industrialized countries – the 30 OECD countries – have reformed in trade, some product markets and macroeconomic frameworks. But several countries have done much more than that, in somewhat different areas. I would say that Australia, New Zealand, Estonia, Slovakia, Sweden, Ireland and Iceland are very good examples.

What are the main obstacles to economic reforms and how can leaders and individuals fight the status quo properly to avoid stagnation and low growth epidemics?

One obstacle is risk aversion among voters, another is special interests, a third is the political system and a fourth is the media. A reform government will have to realize that these will oppose reforms all the way, and be prepared for that, but also remember that in every reform country, people have approved of the reforms later on. Politicians cannot just follow current opinion polls, they have to focus on the longer term, endure opposition and then get re-elected. Almost all reform governments have actually been re-elected – and they have a better record in the history books. We can also, as individuals and private organizations, act to support reforms and promote new ideas.

In your opinion, which country reformed the most and achieved incredible outcomes?

I think it is hard to say that one single country is the winner, because countries have reformed somewhat different areas and they may all be important. But I think that the countries that have done the most remarkable transformation would be in Eastern and Central Europe. Perhaps I would say Estonia because of its great success from tough starting-points and also because it was one of the first real reformers in the area.

On May 15, you intend to come to Slovenia where you will present your newest book "Guide to Reform" and have a lecture about change, progress and the need to reform. As a post-communist country, how do you think Slovenia can, restore its competitive advantage and hopefully becomes a perspective success story such as Switzerland, Iceland, Ireland or New Zealand after these countries implemented pro-growth reforms?

Of course Slovenia has come far too during the past 15 years, and what is important is to keep reforming. There are still problems and the world is changing faster than ever. Focusing on areas such as taxes, labour market and public sector would probably be important. Of course Slovenia could become one of the wealthiest countries in the world in a few decades. But it takes a political leadership that wants to make it happen.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

THE MIRAGE OF SWEDEN'S WELFARE STATE

Today's edition of the Wall Street Journal includes an opinion (link) where the author describes how the costs of social engineering are strongly underestimated in Sweden which is considered a paradise and haven of the welfare state. Throughout the content of the article, several examples are cited to show how immigration benefits the well-being and how welfare state eroded wealth creation and stimulated the decline of entrepreneurship and growth.

The set of arguments for the welfare state often includes egalitarian reasoning that has hardly anything to do with economics except for the famous Lorenz curve, showing the size of the distribution of income and wealth across population quantiles whereby the empirical outcome represents the Gini index of inequality. However, there could hardly be found sufficient arguments in favor of welfare egalitarianism exercised by high tax rates on personal and corporate income and other notable sources of productive behavior.

REFORMS AND GROWTH: THE NEW SWEDISH MODEL

Fredrik Reinfeldt, Sweden's prime minister delivered a lecture at London School of Economics and Political Science where he defined how the new Swedish model is looking to implement pro-growth and labor market reforms (link).

SWEDEN, FREE-MARKET ECONOMY AND WELFARE STATE

At LewRockwell.com, Nima Sanandaji wrote an article about the well-known Swedish system (link). The author emphasized Sweden's unparalelled increase in prosperity between 1890 and 1970 and a lingering economic performance from 1970s onwards. In 1970, Sweden was the fourth wealthiest country in the world. After 1970, the Swedish system turned into troubles, having left a painful effect which ended in early 1990s when Swedish economy slid into a disastrous recession.

To browse the posts on this blog about Sweden, click here.

SWEDISH LESSONS ON SCHOOL CHOICE

Marek Hlavac, a visiting fellow at the Adam Smith Institute proposes that if British prime minister Gordon Brown really wants to enforce a legislation that would improve standards in the UK's quality-falling school system, then he should consider the Swedish-styled reform choice from 1992:

"Affluent parents can afford to send their children to a private school, or move into the catchment area of a good state school. The disadvantaged, however, often have no choice but to have their children assigned to a state school, often of low quality, by their Local Education Authority. The widespread application of the surplus places policy, furthermore, prevents good state schools from expanding and rules out the establishment of a new school, if there are spare places in an existing state school nearby. That's like the state banning a busy restaurant from laying extra tables because there are spare places in an unpopular one next-door – absurd."

Source: Marek Hlavac, A Lesson from Sweden (link)

In 1992, Swedish government, under the chairmanship of Carl Bildt, introduced voucher in the education system by allowing parents to send their children to any school they choose, whether it be municipal, independent or religious.

15 years after the implementation of education reform, the sector of the independent schools has grown rapidly (link). And the outcomes improved as well. For example, in 1992 Sweden spent $7,000 USD per pupil, while the outcome resulted in falling middling scores on international tests despite the fact that Sweden's spending per pupil was more than in any other country in the world.

Distorting inefficiencies of government-owned education system are perhaps the most powerful practical evidence of the inefficiency of monopoly structures in the market. Higher price at a fixed supply of education products combined with comparatively lower quality trippled by the lack of choice in satisfying consumer's utility of education surely evinces a measure-based indicatior of the inferiority of government-run education system.

The essence of education reform based on voucher-type financing is that a certain amount of money for covering the costs of education is not transfered to schools, but instead contributed to individuals while having a competition among schools, competing to attract new students through the channels of innovation, choice, perspective and a rock-bottom incentive to deliver the best quality under the lowest possible price - the way the competitive forces of supply and demand work in product markets.

In fact, education is a product purchased by the consumer (student) at a certain price compensated by the quality which a student receives after he pays the product price of education.

Imagine the world in which Ericsson would be the only supplier of cell phones and government the only supplier of networks. In the absence of competiton in this particular product market, Ericsson's quality of cell phone supply would starting falling while prices would grow constantly and customer satisfaction with Ericsson's cell phones would quickly start to shrink and the inefficiencies would occur tremendously.

The mechanics of the government-run education system is similar. The fact is that progressive education system embrace the generalized curriculum, disregarding the education based on outcome such as the competitiveness of the future graduates in the labor market. It often happens that the guidelines of knowledge supply in the state schools is not matched by the real world.

The answerable question of how to solve the inefficiency of government-run education is to let the enforcement of competitive forces in the education sector while giving students and parents the ability to choose where and how they want to invest in education which, as Benjamin Franklin once said, always pays the best interest.

Read also:

Ron Sunseri: The Swedish Model; The Failure of Progressive Education, Wall Street Journal, Tuesday, April 7, 1992 (link)

Friedrich August von Hayek: Intellectuals and Socialism, The University of Chicago Law Review, pp. 417-420, 421-423, 425-433, Spring 1949 (link)

Staffan Waldo: School Vouchers and Public School Productivity - The Case of the Swedish Large Scale Voucher Program, SIFAE, 23 March 2006 (link)

FCPP Publications: School Vouchers in Sweden (link)

Friderik Bergstrom, Mikael Sandstrom: School Choice Works! The Case of Sweden, Vol. 1, Issue 1, Milton and Rose Friedman Foundation, December 2002 (link)

FISCAL POLICY AND STOCKHOLM SYNDROM - SWEDEN'S SLOW-MOTION SUPPLY-SIDING

Here is a cut from Greg Mankiw's Principles of Economics (chapter 8):

"In Sweden in the early 1980s, for instance, the typical worker faced a marginal tax rate of about 80 percent. Such a high tax rate provides a substantial disincentive to work. Studies have suggested that Sweden would indeed have raised more tax revenue if it had lowered its tax rates."

Source: Greg Mankiw, Principles of Economics, ch.8: Laffer Curve and Supply-Side Economics, South-Western College Pub; 4th edition (February 15, 2006) (here and here)

The American published a brief article about Sweden's slow-motioning progress in the implementation of structural and economic reforms. Among the signs of genuine reform vitality, there has been a large amount of measures aim to boost the competitiveness and labor supply incentives. Unemployment and welfare benefits were cut, property taxes were abolished, wealth tax - an uninterrupted symbol of the Sweden's socialist past - was also slashed. What about market reaction? It may take a longer period for the market to respond to such incentives. But the fact that the response dynamics is slow, should not be the basis of denying any kind of policy reform. Perhaps I'm going a little bit more normative in this respect, but in economics, experience is a huge lesson. In fact, the fact that markets respond to incentives is #4 principle of economics (link)

The question regarding Sweden's recent outlook as well as broader perspective of economic and structural policy is whether shock therapies are consistent in the long-run.

The answer is, of course, interpretative and each economic school or doctrine may endorse the answer in several different ways. The answer depends on the role and credibility of fiscal policy in response to macroeconomic shocks. Among economists, there has been a widely accepted belief that countercyclical fiscal policies have stabilizing effects on the economic performance. But, the question is whether discretionary actions assume the expectation of policy and market. In fact, analyzing the broad picture on the basis of intertemporal margins is much more efficient, since the employment change and income dynamics reflect the pure effect of fiscal policy against the cyclical trend. A very detailed study on this particular subject was written by David B. Gordon and Eric M. Leeper (link) as their findings comprehend the counter-cyclical effect of fiscal policies:

"This paper highlights these expectations effects. Connecting the theory to U.S. data we find: (1) through this expectations channel, countercyclical policies may create a business cycle when there would be no cycle in the absence of countercyclical policies; (2) nontrivial fractions of variation in investment and velocity can be explained by variation in macro policies alone - without any nonpolicy sources of fluctuation; and (3) persistence in key macro variables can arise solely from expectations of policy."

SWEDISH MODEL IS LIKE A COIN: BOTH SIDES CONSIDERED

Assar Lindbeck shows how Swedish politico-economic model has two sides of the coin.

BATTLING WELFARE LEGACY IN SWEDEN

In Wall Street Journal there is a good article outlining the implementation of economic and structural reforms on the road to recovery from a typical generous experiment of the welfare state (link).