New York Times - October 8, 1999
REBOUNDING SWEDEN DEFIES THE LAWS OF ECONOMIC GRAVITY By Edmund L. Andrews
STOCKHOLM -- At a time when world leaders are fascinated by the United States' economic success and its credo of less government and low taxes, Sweden seems to be defying gravity.
This is still, after all, a country where government consumes nearly 60 percent of the national economy, far above the 32 percent share in the United States. Taxes and wages are among the highest in the world. Dismissing a sluggish worker is, in nearly all cases, legally impossible.
And the Swedes are proud of it. When Prime Minister Goran Persson introduced his budget plans in mid-September, he promised that "Sweden will consolidate its position as a leading welfare nation." He even pledged to create another entitlement: the right of every person who turns 65 to retain a personal assistant.
Yet this largely unreconstructed welfare state is one of Europe's most vibrant economies. And after nearly three decades of sluggishness in which the output per person slumped from the third-highest in the world to 18th, just behind Italy, the Swedish economy is in the midst of a powerful transformation.
Sweden's recent boom is in part a cyclical recovery from back-to-back recessions. But it also reflects a wider pattern in Europe and a particularly nuanced reaction to the robust United States economy of the 90's. For even as Sweden, like many countries in Western Europe, is continuing to preserve traditional European social programs, it has also been embracing entrepreneurship and unrestricted competition.
While the Government continues to finance health care, education and many social services, Sweden has deregulated industries from telecommunications to airlines and banking.
As a result, new companies and high technology have flourished. Indeed, much of the growth here is coming from businesses that did not exist 10 years ago. Information technology and service companies have eclipsed traditional manufacturers as the main source of new jobs.
"It is mostly a cyclical upswing, but it is more than that," said Anne Wibble, chief economist at the Swedish Federation of Industry. "It is also a breakthrough of the private service sector -- the new networked economy."
Growth for 1999 is now projected at 3.8 percent, far faster than Europe as a whole and close to the recent growth rate in the United States. Foreign corporations from Ford to Microsoft are pumping billions of dollars into the country. The Government, which five years ago carried a deficit equivalent to 11 percent of the gross domestic product, now has a budget surplus.
Unemployment has declined from 8.2 percent in 1993 to 6.1 percent recently, and there are estimates for the year as low as 5.3 percent. The Stockholm area has shortages of computer specialists, sales representatives, teachers, even caterers.
Sweden is not the only country to challenge some central tenets of the current American-British model. France, where the Socialist Cabinet has mandated that the workweek will fall to 35 hours, is growing by nearly 3 percent and its double-digit jobless rate is coming down. Finland has high personal taxes and rigid job rules, yet it has become a world leader in the mobile phone industry. The Netherlands still has generous welfare programs, but offers the industrialist or entrepreneur low corporate taxes and flexible labor rules.
For all the talk of "Euro-sclerosis," Europe is a continent today of budget-cutting, negligible inflation and, most important, increasingly brutal market competition.
Sweden's boom is arguably the most unusual. Besides clinging to a cradle-to-grave system of security, Sweden was one of just a few countries refusing to join with 11 European nations in adopting the euro as a common currency.
Yet Sweden is growing faster than most of its euro zone neighbors. Germany, which accounts for one-third of the euro zone's total economy, is expected to grow less than 2 percent this year.
To be sure, no one here is yet talking about a new "Swedish model" for growth. But a few years ago, this country was a textbook illustration of how good intentions can lead to disastrous results. In 1970, Sweden's economic output per person was the third highest in the world, behind only Switzerland and the United States. With its wealth and a culture of high-minded homogeneity, Sweden built up one of the world's legendary welfare states. But as the public sector ballooned, swelling from one-third to more than half the economy, business and productivity lagged behind the world as a whole. Unsurprisingly, job creation stagnated. And today, despite the recent upswing, Sweden still employs slightly fewer people than it did in 1970.
So what lies behind the current rebound? One major change is that Swedish political leaders have finally put the budget in order. After running up staggering deficits in the mid-1990's, at one point as high as 13 percent of output, the Social Democratic Government, while rejecting most demands to cut back the welfare state, raised personal taxes and imposed tough spending limits.
The measures were painful, but they steadily reduced the deficit and gave corporations some room to breathe.
But that was only part of the story. Like Finland and Britain, Sweden moved much more quickly than most other European countries to deregulate its markets and foster a more entrepreneurial culture. It opened its telephone and electricity markets to competition in the mid-90's. It jumped into the vanguard of mobile telephones, as Ericsson emerged as one of the world's biggest producers of wireless phones and networking equipment.
Beginning in 1993, the country also loosened up its job rules. Though full-time employees are still protected from layoffs, the Government allowed companies to hire temporary workers who could be let go at will.
The result has been a torrid expansion of temporary-employment companies. Manpower Inc., one of the world's biggest, now employs 6,000 workers in Sweden. Poolia, a temporary agency in Stockholm, has more than 1,700 workers and has nearly doubled its force of what it terms consultants in the last year alone.
But perhaps the biggest change has been the rise of new companies, many sprouting from Ericsson's roots in the telecommunications industry and many others emerging from the Nordic countries' infatuation with the Internet.
According to a recent study by the Organization for Economic Cooperation and Development, Sweden invested a larger part of its gross domestic product in "knowledge" -- research, development, training and education -- than any other country in the world.
Consider the expansion of the Kiska Science Park, an industrial park started by Ericsson and I.B.M. in the early 1970's. Situated on a former waste site, Kiska is now a sprawling complex with 600 technology companies and 27,000 workers. It has also attracted two of Sweden's important scientific institutes -- the Royal Institute of Technology and the Swedish Institute of Computer Science.
Stockholm itself has become a breeding ground for Internet companies. Johan Ihrfelt and a group of friends began Spray.se as an Internet consulting firm back in 1995. After raising about $3 million from private investors, including the huge Swedish holding company Investor AB, they opened an Internet portal and access service. Based in a renovated brick warehouse here, Spray now employs about 250 people across Europe and has 450,000 customers.
"I believe Sweden is one of the most exciting markets after the U.S., if you are looking for entrepreneurial growth," said Ihrfeldt, who is 32. "Ten years ago, it was almost nonexistent here."
Spray is hardly alone. Boxman, based in Stockholm but now operating largely from Britain, has become one of Europe's biggest providers of music over the Internet. Boo.com a Stockholm start-up whose investors include Goldman, Sachs, is gearing up to sell sports clothing on the Web.
There are a number of signs that this new generation of companies, and a new generation of entrepreneurs, has changed some of Sweden's basic chemistry. The most notable indication is that the nation kept growing this year, even when important industries began to sputter.
Much like Germany, Sweden has traditionally relied on manufactured exports for most of its growth. And much as in Germany, exports were hurt badly after the Asian and Russian markets plunged in 1997 and 1998. Yet while the German economy slowed to a standstill, Sweden's accelerated.
"When we were doing our projections exactly one year ago, we were worried the country might even slip into a recession," recalled Bjorn Oras, chief executive of the Poolia temporary worker agency. "Instead, things kept right on surging."
Government forecasters were similarly surprised. Worried that a downturn would generate new budget problems, Prime Minister Persson rejected the idea of tax cuts as recently as March. But now, with the tax coffers overflowing, he is pushing modest tax cuts as well as spending increases for health care, pensions, job training and the universities.
"In March and April, we didn't think unemployment would decrease so much," said Bosse Ringholm, Sweden's Finance Minister. "We have a new situation now."
Ms. Wibble, the industry federation's chief economist, said the explanation lay in the expansion of new service companies. "Formerly, we saw a close correspondence between economic growth and what was happening in the manufacturing industries," she said. "Now what we see is that when industry slows down, as it did earlier this year, the private service sector is still surging ahead. That is something new."
Indeed, many of Sweden's biggest employers are still struggling. Ericsson has lost a big chunk of the cellular-phone market to Nokia of Finland, which is now the world's biggest maker of mobile phones. The Scandinavian airline S.A.S. is losing millions of dollars, partly because of cut-rate competition from Finnair.
At 6.1 percent, Sweden's jobless rate is about one-third lower than the average in European Union countries. The numbers overstate the successes somewhat, because Government job creation and training programs account for a further 3.5 percent of the work force.
Yet economists say that virtually all of the increase in new jobs in the last two years has come from business rather than government.
That is apparent at the Stockholm county employment office. The office's most recent analysis shows shortages in several dozen job categories and acute shortages in many others, including car mechanics, taxi drivers and nurses.
"The information technology branch is pulling all kinds of other professions along with it -- economists, accountants and even artists," said Per Lindberg, director of the office.
"It's changing the whole structure of the labor market."
Still, many Swedes remain cautious about the future. Partly because of the strong social programs, Sweden's economy often swings from feast to famine.
When the economy is strong, government revenue rises much faster than expenses. But when conditions turn bad, the country is hit by a double punch of added social costs and shrinking capital investment.
Arvid Bohn, an economist at the Swedish Federation of Industry, has been through those big swings before. "The thing you have to remember about Sweden," he said, "is that there is no such thing as a soft landing here."