Comment

The Rise and Fallof the

Swedish ModelRUDOLF MEIDNER

The term 'Swedish Model' has been used mostly out-side Sweden. Swedes themselves have generallybeen unaware of their social and economic policy

as a model which is fundamentally different from those ofother highly developed welfare states. To them, Swedishsociety is the result of the country's history and traditions,a welfare state which has been considerably influenced bya strong and, for many decades, dominant labour movement.

In 1985, however, Erik Lundberg, a leading Swedish eco-nomist, published a brilliant article • "The rise and fall ofthe Swedish model" • where he acknowledged the achieve-ments of the Swedish welfare state but listed a number ofweak points which, in his opinion, were bound to lead tothe model's ultimate collapse. In recent years Lundberg hasgained many followers. Critical voices now outweigh thepositive ones, and it has become the fashion among ob-servers of the Swedish scene to declare the Swedish Modeldead. The 1991 defeat of the Social-Democratic Party hasbeen presented as the last nail in the model's coffin.

My reflections on "the rise and fall of the Swedish Model"begin with an attempt to spell out the model's goals, pre-requisites and instruments. I will then report on its achieve-ments, analyze its weak points and assess the risk of itsdecline. I shall conclude with some thoughts on the restruc-turing of the model and its chances of surviving as part ofa broader European community.

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The Model • Definitions, Foundations and PrerequisitesThere exist a large variety of interpretations of the term'Swedish Model'. To mention a few:

1. In the 1930s, an enthusiastic American journalist, MarquisChilds, was impressed by the way in which Sweden hadmanaged to combine the best of two systems: capitalismand socialism; private ownership and public welfare; theprinciples of a market economy and elements of planning.To Childs, Sweden was the country of "The Middle Way,"which had found rational and human solutions to problemsthat are inherent in modern societies. In his footsteps fol-lowed many visitors who appreciated the mixture ofSwedish welfare ideology and rational piece-meal engineer-ing.

2. A more concrete. but also narrower interpretation of themodel focuses on the early compromise between capital andlabour which constituted the basis for the development ofstrong unions and employer associations. The SaltsjobadenAgreement of 1938 came to symbolize the cooperative spiritbetween the social partners, and central wage negotiationsafter the war made Sweden known as the country of socialpeace. To many observers central negotiations are the mostimportant feature of the Swedish Model and, consequently,the change of the bargaining system in the 1980s indicatesthe end of the model.

3. In a purely economic sense, the Swedish Model is amodel for avoiding inflation in a full employment economy,developed by myself and Gosta Rehn as union economistsin the early 1950s. Our analysis asserted the compatibilityof full employment and economic stability if the governmentfollowed a restrictive fiscal and monetary policy, keepingprofits and demand for labour low enough to limit wageincreases, but, at the same time, avoiding unemploymentby active labour market policy measures. By the end of the1950s and in the 1960s, this model became a guideline forSwedish governments who built up a comprehensive ap-paratus for pursuing such a policy.

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The Swedish Model can obviously be interpreted in verydifferent ways and every definition can be justified. Noneof the definitions, however, covers all aspects of the model:its ideological basis, its preconditions and restrictions andits policy instruments. It seems necessary to proceed in amore systematic way - to start from the goals of the model,then to identify the prerequisites and restrictions and finally,to specify the instruments used to achieve the goals.

The model's central goals reflect the traditional prioritiesof the Swedish labour movement, which has dominated thedevelopment of the Swedish welfare state. Full employmentand equality are the goals that determine the rest of themodel, both of them deeply rooted in the history of thelabour movement and documented in numerous programsand statements. I am eager to underline the character ofthese goals as values and commitments of a political move-ment that was destined to play an important, in fact adominant, role during a long period of Sweden's develop-ment into a modern welfare state.

The prerequisites of the model are of a more generalcharacter and need hardly any comments. Political demo-cracy is taken for granted, and so is freedom of association.Sweden is a market economy, with only 10 percent of allproductive capital owned by national or local government.Nationalizing industries has not been on the agenda of Swedishlabour governments. Free trade, finally, is an important pre-requisite for an export-oriented economy like Sweden's.

All prerequisites are obviously present in Sweden, butthere exist important restrictions for a model that has fullemployment and equality as its main goals. Full employmentmust not conflict with price stability. Full employment with-out inflation is the difficult task few governments have mas-tered. Equality, on the other hand, must not conflict withefficiency. Both inflation and lack of efficiency are seriousthreats to the competitiveness of the Swedish economy. Tomake full employment compatible with price stability, andequality with efficiency have been the crucial challengesof the Swedish Model.

Given these prerequisites and restrictions, what are theinstruments and objectives used to achieve the model's

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goals? It is the answer to this question that reveals thespecifically Swedish features of the model.

To create and maintain full employment is the respon-sibility of the government. For many years Swedish govern-ments have pursued what could be called a "modifiedKeynesian policy," i.e. a policy which keeps total demandslightly below an equilibrium level and compensates deficitof demand in some branches, regions, or categories of em-ployees by a selective labour market policy. In the SwedishModel, labour market policy has a central strategic role instabilization. It is "active" in the sense that the unemployedare retrained, employed in public works, etc., rather thanfinancially compensated for income losses. Sweden spendsnearly seven percent of its national budget (or three percentof its GOP) on labour market policy - an exceptionally highfigure compared to other western countries.

Equality is the second goal, common to labour govern-ments and the unions. The government's instrument is ageneral welfare policy, i.e., the government offers free edu-cation, health services, care of children and the elderly toall without a means test. As a result of this commitment,the public sector in Sweden is relatively large, and oneSwede out of three is a public employee. Swedish taxesare high - together with the costs for transfer paymentsmore than 50 percent of GOP.

The union movement also has a role to play in achievingequality. The confederation of blue collar workers (La) hasas its ideological basis the wage policy of solidarity. Thenorm is the same pay for the same kind of work regardlessof the profitability of the firm. La's solidaristic wage policyhas two consequences: first, it tends to create employmentproblems in unprofitable firms with insufficient ability topay normal wages. In extreme cases such firms can besqueezed out from the market. The government is supposedto take care of the unemployed, in other words, to accom-modate the unions and their wage policy of solidarity.

The second problem resulting from the wage policy ofsolidarity is that firms with high profitability make "excessprofits" since their capacity to pay higher wages is not fullyused - a consequence of modest wage claims. The union

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proposal to introduce collective wage-earner funds was in-tended to solve part of this problem. These, and other kindsof funds developed in the 1970s and 1980s - for instance,for educational purposes and for work solidarity improve-ment - were aimed at supporting the wage policy ofsolidarity.

The fact that the unions expect a friendly governmentto give support to the wage policy of solidarity, by under-taking labour market measures in favour of "victims" ofthe solidaristic wage policy, and by taxing away part of theexcess profits of firms with modest wage claims, illustratesthe close cooperation between the unions and the labourgovernment. Such cooperation forms a necessary part ofthe model, for the unions simply cannot carry out their wagepolicy of solidarity without the government's support. Atthe same time the government supports a wage policy thathas positive structural effects on the Swedish economy.

The way in which I have defined and presented the SwedishModel includes all the main components: its ideological basis,preconditions and restrictions, and instruments, notably ac-tive labour market policy and the wage policy of solidarity.It also shows how the different parts of the model are in-terrelated and consistent. Although such coherence reflectsthe labour movement's conscious effort to develop an ef-fective strategy in the early postwar years, the model wasnot formed overnight but was improved on a step by stepbasis. It has also become clearer that there are close con-nections between different parts of the model that supportand complete each other. Such internal coherence is satis-factory from a purely intellectual view but makes the modelvulnerable since weaknesses in one component jeopardizethe model as a whole.

The next question is whether the model has worked ina satisfactory way. Have the goals - full employment andequality - been achieved?

The 1950s and 1960s have rightly been labelled "TheGolden Years of the Swedish Model." Unemployment waslow, labour force participation rates rose considerably, main-ly as a result of a large influx of female labour. The machineryof active labour market policy was improved and refined.

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The mild recessions of these decades were met, not by thetraditional Keynesian methods of increasing total demand,but by using active and selective labour market measures.The second goal - equality - was also successfully met inthese decades. the general welfare system expanded and anumber of social reforms were introduced. At the same timethe unions' solidaristic wages policy made remarkable pro-gress in equalizing the wage structure. The combination ofcentral wage negotiations, which favoured the low-paidgroups, and subsequent local negotiations were a pragmaticand practical way to damp tensions between different groupsand to keep the labour market peaceful.

Both foreign observers and many Swedes concluded thatthe country had developed a model for solving the centralproblems of modern industrial societies: full employment,economic growth, social security and industrial peace. Therewas, however, a weak point in Swedish economic policy,which eventually became a serious threat to the model asa whole. The advocates of the model had made it very clearthat the goal was full employment without inflation. Ananalysis of the Swedish economic policy reveals thatgovernments followed the model in times of recession (i.e.,they used supply-side labour market policy instead of ex-pansive measures), but it also shows that they were unwill-ing or politically unable to pursue restrictive policies inbooming times. This negligence of a central part of themodel resulted in cost inflation and the deterioration of in-ternational competitiveness. Both social democratic and non-socialist governments tried to neutralize cost inflation byrepeated devaluations, the last time in 1982 when the socialdemocrats returned to power and initiated their "Third Way"policy by announcing a 16 percent devaluation to stimulateSwedish exports.

The 1980s were characterized by exceptionally high profits,overheated labour markets, high wage drift, cost inflationand industrial conflict. Desperate attempts to control thewage formation process by incomes policy measures andgovernment intervention reflected the disintegration of theSwedish Model, which had the autonomy of the socialpartners as a central component. The employers' decision

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to refrain from central negotiations in 1990 constituted whatseemed to be the final blow to the model. The defeat ofthe Social Democratic Party in the general elections in Sep-tember 1991 could be seen as the political confirmation ofthe fact that an epoch had come to its end.

The Challenge: Dissolution or Renewal There are, how-ever, good reasons to challenge this conclusion. If we recallthat full employment and equality have been the main goalsof the model, we will find that no fundamental change hastaken place. Apart from a few liberal economists, no groupor political party in Sweden questions the high priority offull employment as a goal. The non-socialist parties maderising unemployment an issue in the election campaign andblamed the labour government for inadequate action. NoSwedish government has ever deliberately used unemploy-ment as an instrument of economic policy, and my guessis that no government will dare to do so in the future. InSweden mass unemployment is considered a social evil anda waste of human and economic resources. Governmentsthat tolerate unemployment will soon lose the voters' sup-port.

Nor is equality abandoned as a goal of high priority.True, the public sector is attacked for alleged inefficiencyand bureaucracy, but, thus far, freedom of choice withinthe framework of the public sector seems to be the preferredoption, not privatization. Privatization of state-owned in-dustries and monopolies is on the agenda but, in my opinion,this is compatible with the principles of the Swedish Model.Social democratic governments have, moreover, paved theway through "commercialization" of state monopolies whichalready act as profit-maximizing companies.

My own conclusion is that Sweden will retain a largepublic sector as the basis of general welfare in the areasof health care and education on all levels. The system oftransfer payments, the second pillar of the welfare state(including pensions, child allowances, financial compensa-tion for sickness and unemployment, etc.) is, of course, sub-ject to continuous adjustments, but the system as a whole

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is intact. Sweden will for a long time remain the countrywith the world's highest taxes.

The wage policy of solidarity is the unions' instrumentfor equalization and has for decades played this role withconsiderable success. Since the late 1970s, however, theprocess of equalization has stagnated. Since then, low-paidgroups have received limited support in the national agree-ments while the growing importance of local wage drift hasfavoured the better paid groups. There are several reasonsfor the enfeeblement of the wage policy of solidarity:

1. I have already mentioned the Swedish government's in-ability to combine full employment and price stability. Thekey point of the model was neglected while responsibilityfor economic stability was forced on the unions by variousforms of incomes policies.

It is a long experience that the actors in the labour marketbehave like other actors in the market economy; if labouris in great demand employers are willing to offer higherwages, regardless of agreements concluded on the centrallevel. If such agreements are not in congruence with themarket situation, higher wage drift will follow and the unionswill lose control over the process of wage setting. Worseyet, they will lose the confidence of their members, whowill come to regard the unions more as instruments of govern-ment policy than as representing their interests as wage earners.

The wage policy of solidarity is based on confidenceand authority. Both are undermined when the union leader-ship becomes involved in corporatist arrangements that con-flict with market conditions.

2. A second reason for the weakening of solidaristic wagepolicy is the rapid expansion of white collar unions lesscommitted to the egalitarian philosophy dominant in theLO. The Swedish labour market lost its homogeneity, withtwo strong central organizations of workers and employersand tensions arose between blue and white collar groups,as well as between public and private employees. To pursuethe wage policy of solidarity became an increasingly com-plicated task.

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3. Further, since 1983 the employers' confederation, SAF,began to pursue a new strategy for decentralizing wagepolicies. LO lost its counterpart and with it, much of itsability to co-ordinate wage negotiations and thus fulfil itsegalitarian goals.

4. Finally, the unions have not been able to find norms forwage differentiation (in accordance with the principle thatonly differences in the kind of work constitute the basisfor acceptable wage differentials). All attempts to constructjob evaluation systems that could be applied as generalnorms for the whole labour market have failed. The wagepolicy of solidarity focused on equalization of the wagestructure but neglected the problems of wage differentialswhich exist - and must exist - in a dynamic economy.

I have mentioned some weak points in the way in whichthe Swedish Model has been practised but the weakest pointhas been the government's economic policy which has notprevented overheating and cost inflation.

My conclusion is that the model is obsolete only in thesense that the Swedish labour movement has been enticedby earlier successes to rely on well-tried instruments insteadof adjusting them to new conditions. The principal goalsof the Swedish Model have not changed but the instrumentshave to be modified and modernized. In some areas, theprocess of renewal has already begun. A thorough-goingreform of the large public sector, aimed at decentralization,debureaucratization and improved efficiency, has been in-itiated.

The threat posed by the erosion of solidaristic wagesbargaining is serious indeed but there are signs that theunions are developing an innovative response. The reportpresented to the 1991 LO congress aims to broaden soli-daristic wage policy into a policy of "solidaristic work or-ganization." Here, the LO remains committed to the principlesof solidaristic wage policy but is trying to find a balancebetween the needs of local adjustment and the legitimaterole of central union organizations. Thus wage policy is tobe coupled with a policy for improving work organization

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which assigns greater influence to the local unions. Theidea of a central job evaluation scheme is to be abandonedand replaced by systems adjusted to local conditions. Thefuture of the wage policy of solidarity, and thus of theunions, depends on their ability to make these ideas prac-ticable.

A last question remains to be raised: What will be thefate of the Swedish Model if the country is forced to adjustits policy to EC conditions and politics? We can observealready that there is no scope for an independent nationalmonetary policy. The capital market has been deregulated.Swedish industries will move abroad and the industrial basisof the country will shrink. Sweden, as a country with power-ful unions, low unemployment and high taxes is not attrac-tive for foreign investment.

Are there any realistic chances for a country of less than9 million, integrated into a bloc with more than 300 millionpeople, to preserve the features of a specific economic andsocial model? There are many enthusiasts in Sweden whowant to see Sweden as an integrated part of Europe, butwe have had very little debate on the price we may haveto pay. Can we keep our commitment to full employmentin a group of countries which tolerate mass unemployment?Do we have to reduce our taxes and cut down our publicwelfare? Must we give up the wage policy of solidaritywhich is a strange philosophy in the eyes of the unions inWestern Europe?

Since we have had no serious discussion of these ques-tions, there are no clear answers. The experts tell us thatthere are no EC rules which forbid full employment or hightaxes. Each member country is free to model its own welfaresystem. Wage policy is the responsibility of the social part-ners, and no EC authority will intervene in their business.It seems that we are free to fight for our model if we havethe courage to do so.

We have to prove to ourselves and to other countriesthat demand management is not the only answer to unem-ployment problems. Sweden has a long experience of activelabour market policy. The main lesson to be learned fromit is that supply-side measures aimed at training people,

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assisting them financially to move to expanding parts ofthe economy, creating temporary employment in the publicsector, recruitment subsidies to firms which are willing toincrease their labour force, even employing handicappedpeople in sheltered workshops - all these activities are farbetter and far more productive than paying people for id-leness and inactivity.

In the western welfare states the choice is not betweenhigh and low expenditures for labour market policy - adecent standard of living must be guaranteed to the un-employed in any case. The choice is between activemeasures which mobilize productive resources, and passiveunemployment compensation, which, at least after lengthyperiods of unemployment, makes skills obsolete and hasdemoralizing effects on the individuals.

I am not presumptuous enough to expect that other coun-tries will follow the Swedish example in the near future. Ihave no illusions that economic models are export goods.Yet we can observe an increasing interest in active labourmarket policy outside Sweden in documents published bythe ILO and the OBCD. I strongly advocate the use of activelabour market policy as a central part of Swedish economicpolicy in the future, all the more so now that Sweden'sautonomy will be limited in many other respects.

The second area where BC membership is expected toforce adjustments upon Sweden is in our welfare and taxa-tion system. Critics of our high tax level usually say nothingabout the fact that the differences between the tax level inSweden and in other countries, to some extent, are fictitious.In Sweden social insurance contributions are paid by theemployers and are part of the taxation system. In manyother countries the employees have to pay the fees them-selves. The difference is more formal than real. In Sweden,families are supported by child allowances. In other coun-tries the corresponding assistance takes the form of tax de-ductions which yield a statistically lower taxation level. InSweden, transfer payments are to some extent subject totaxation but they are tax free in other countries. Comparisonsof the tax level in different countries are often inadequateand misleading.

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Even after corrections, however, the Swedish tax levelis exceptionally high, especially our value added tax, whichamounts to 25 percent. Here, certain adjustments may benecessary as a result of a Swedish EC membership.

Demographic factors, however, should not be overlooked.The latter will force other European countries to expandtheir public sector and hence, public expenditures, in thefuture. At present Sweden has the highest number of pen-sioners in relation to the active population (27 percent).This figure will be considerably exceeded in the next de-cades in most western countries, with Germany as an ex-treme case. Expenditures for pensioners and for the care ofthe elderly will claim an increasing share of GDP in otherEC countries in the future, while the corresponding increasein Sweden is expected to be modest.

A further area in which Sweden is leading, but will befollowed by other countries, is the high rate of female par-ticipation in the labour force. More than 80 percent ofSwedish women are actively employed; for the group 25-54years old, the figure exceeds 90 percent. The prerequisitefor such a high participation rate is an extensive networkof publicly funded childcare institutions. Most other coun-tries are behind us but are catching up rapidly. In spite ofmass unemployment, the influx of women into the labourmarket continues all over Europe. Sweden has passed throughthe period of rapid expansion of, and consequently risingcosts for, institutions which are the precondition for femalelabour force participation. Other countries will witness thesame process and their public sectors will expand.

The term most frequently used in the Swedish discussionon EC issues is "adjustment" - which reflects some resig-nation on our part. .Apparently we are prepared to give upmuch of our singularity. It is my firm belief that even asan EC member Sweden has options and can choose to pre-serve the main components of its own model. Sweden's ad-justment to the EC is used by critics of the welfare modelas a pretext for dismantling the model, but this is a questionof political choice rather than one of economic necessity.It is our own decision whether we will defend the modelthat embraces highly ambitious goals such as full employment

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and general welfare, and no less ambitious methods suchas active labour market policy and the wage policy ofsolidarity. Not the goals but some of the instruments havebeen eroded. If we are willing and able to improve andrenew these instruments, Sweden can make a valuable con-tribution to European integration, without giving up thecentral parts of the Swedish Model.

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