"The New Swedish Model: A Reform Agenda for Growth and the Environment"

Mr Fredrik Reinfeldt, Prime Minister of Sweden,
The London School of Economics and Political Science
February 26, 2008

Check against delivery.

It is a pleasure to be here at LSE. Anybody who wants to study globalisation should start at this institution. I believe you have the highest proportion of international students in the world.

And you are smart.

I am told that you borrow four times as many books as the average UK student. Obviously you do not spend too much time on

Facebook
YouTube
MySpace

***

'The new Swedish model', says the title. In that case, what is the old Swedish model? It has been described as a middle way between the Anglo-Saxon and the Continental European countries' ways of organising their economies and social systems.

As you know, Sweden is a geographically extensive but sparsely populated country in the northern part of Europe. It is a country that has combined sustained and high rates of growth with ambitious goals for its social systems and welfare services.

The population of Sweden - just over 9 million - is well educated, works hard and has strong beliefs in equal rights for men and women.

Sweden is also the home of several large and world-renowned companies in areas like telecommunications, pharmaceutics and commercial transport solutions. Companies that stand tall in global competition. Ericsson, H&M, IKEA and Volvo, to name just a few.

This, in short, is Sweden, but is it the Swedish model? You could argue there has in fact never been any such thing as a Swedish model. And even if there were aspirations of a modelling kind at earlier stages - they are hard to apply on the world of today.

Today, in the age of globalisation, open economies and growing interdependence between companies and nations, it's more correct to point out distinctive features and experiences. Institutional features that need some historical knowledge to understand.
Let me just state a few factors that will allow you to better understand the historical context.

The institutions of free enterprise, the market economy, a well functioning legal system, a modern banking system, well defined property rights and an open attitude towards international competition.

An agreement between the social partners that lays the ground for lasting and stable relationships on the labour market.

Welfare services that focus on labour force participation and knowledge.

A clear work-first principle in labour market policy and social insurance.

Then, of course, the obvious point - the fact that Sweden was never directly involved in the Second World War.

All these fields together added up to form the framework of the old Swedish model. And the outcome speaks for itself.

From 1950 to 1973 annual GDP growth in Sweden averaged 3.7 per cent.

Unemployment varied between 1.5 and 2.0 per cent, which was lower than the European average and much lower than in the United States.

At the beginning of the 1970s Sweden also had the fourth highest GDP per capita measured in purchasing power parity.

Sweden was blooming.

***

Then came Sweden's mad quarter of a century.

Growth fell off. Unemployment rose. The quality of welfare declined. What, then, were the factors that made the Swedish model stop working?

The economic downturn that followed the two oil crises in the 1970s of course had a negative impact on Sweden. Also, the financial crises and macroeconomic shocks of the early 1990s had substantial consequences for the Swedish economy.

But these shocks also affected other industrial countries. And it is difficult to argue that Sweden was particularly vulnerable to the international business cycle.

This alone cannot explain why Sweden fell from fourth place in the OECD's ranking of member countries by GDP per capita around 1970, to eighteenth place in 1997.

Instead, I would argue that the explanation lies in other factors.

The vital balance between the institutions in the model disappeared and socialism swept over Swedish society.

We saw budget deficits and high inflation undermine macroeconomic stability. In many respects this was the result of irresponsible and short-sighted political actions.

We saw a sharp rise in taxes, especially on labour, together with an expansion of benefit systems that undermined the work-first principle and made it less worthwhile to work.

The education system was distorted and Swedish schools focused less on knowledge.

Changes in international competition were met with subsidies rather than reforms. Free enterprise was not encouraged; instead it was questioned.

We saw a rise in unemployment and the percentage of working-age people supported by various social benefits and subsidies rose from 10 per cent in 1970 to about 20 per cent in the present decade.

What took a hundred years to build was nearly dismantled in twenty five years.

***

The crises during the 1990s opened a window of opportunity to carry out a number of reforms that solved some of Sweden's most acute problems. A consensus developed on the need to improve the framework and goals of economic policy.

The budget process was reformed. Clear targets for inflation and the public finances brought greater stability to the Swedish economy and helped balance public finances.

The credibility of monetary policy was also strengthened when the Riksbank (the Swedish Central Bank) was guaranteed independence in 1999.

The pension system was reformed and a tax reform carried out that amended the worst parts of the Swedish tax system.

Government electoral periods were increased from three to four years and Sweden became a member of the European Union. The latter was important for access to the important European markets.

The government in the beginning of the 1990s also ran a privatisation program and deregulated important markets in Sweden.

In the early 1990s Sweden had three very serious economic problems to solve: first, to balance public finances and reduce indebtedness; second, to reach a new, higher growth path; and third, to restore full employment.

The structural and fiscal policy reforms implemented have helped overcome the first two of these problems.

In macroeconomic terms, the Swedish economy was in better shape at the end of the 1990s than it was at the beginning of the decade.

The public finances had been consolidated and were among the strongest in the OECD area. The inflation rate had shifted to a much lower level and is below the level in other EU countries. Growth over the past ten years has been very good.

***

However, the microeconomic situation had not improved. The problems on the labour market remained unsolved. A large number of people continued to be excluded from the labour market.

In spite of strong growth there was mass unemployment. Sweden was a rich country - but had a poor and excluded population.

This was the situation when my government was elected in 2006. In that year over one million people in Sweden depended on social benefits and over 1.5 million were excluded from the labour market or worked less than they wished.

This, of course, was a great personal tragedy for those forced into social exclusion - but it also meant that a large part of public spending was used to finance benefit systems instead of welfare services such as schools, healthcare or fighting crime.

In 2006 the people of Sweden paid the highest taxes in the world. But not for high quality welfare services. A larger and larger amount of public spending was used to pay for benefits. To pay people of working age for not doing what they were able to do.

Social exclusion was slowly undermining public finances and the quality of welfare. This meant that one of the fundamental pillars of the Swedish model was crumbling. A serious fact, indeed.

The opportunity to work also has a value in a broader sense. For the individual and for welfare at large, the value of work is fundamental. The personal loss of social exclusion is a loss for the whole of society.

No employment - no opportunity for people to obtain a livelihood for themselves and their families. No employment - no progress. No employment - no welfare services - no schools, no childcare and no elderly care.

If this were the case, what would be left of what we call the Swedish model? A policy for increased employment and less exclusion is thus a moral imperative and not just a financial necessity.

***

Alliance for Sweden - my political alternative in the 2006 general election - represented a clear and comprehensive strategy for taking on Sweden's remaining major structural problems - the weak growth in employment in the private sector and the high level of exclusion.

Our message was that the model needed to develop. If Sweden was to regain its strength, the institutional features had to improve and the balance to be restored.

Our ambition was for more people to have a job, for more entrepreneurs to want to create new jobs, for individual people and families to have more control over their own lives and for more people to benefit from the opportunity to acquire knowledge.

We wanted to build what we may call a new Swedish model. We were elected to do the job of putting Sweden back to work.

The Government's strategy rests on four pillars.

First: Make work pay.

There is a direct connection between participation in the labour market and the difference in income from work or benefits. We are therefore consistently implementing a major in-work tax credit for low and medium earners.

In total we have lowered income taxes by approximately SEK 55 billion. That means that income taxes have been lowered by 2 per cent of GDP in just a little more than a year.

We are also step by step revitalising the work-first principles in the benefit systems by reducing benefit levels and changing the rules of unemployment insurance. We have also changed the rules in the sickness insurance system.

These changes in the benefit systems are not popular in the short term, I will admit that. But they are vital if we want to make it clear that work should pay and that work should always be people's first choice.

The objective is obvious: to give more people an opportunity to support themselves on their own earnings and make more people feel that it actually pays to work. In this way we are revitalising the work-first principle - one of the main institutions in the Swedish model.

Second: Make it more worthwhile and easier to hire staff.

Besides implementing reforms aimed at widening the margins for those in work, we must also do our utmost to lower the thresholds for those who are most detached from the labour market.

We are therefore encouraging more employers to take on new employees. Especially we are trying to increase the demand for labour with relatively low productivity and weak connections to the labour market.

To achieve this we have introduced reforms that involve tax relief equivalent to the full employer's social security contribution for people who have been unemployed or outside the labour market for a long time.

The 'new start jobs' are one such reform. They mean that employers who hire people who have been excluded from the labor market for an extended period are completely exempt from paying social contributions for a period lasting as long as the new employee's period of exclusion.

These kinds of relief are also given to employers hiring young people, old people and immigrants.

We are focusing especially on fighting exclusion of new arrivals in Sweden - we are focusing on employment and language skills, as well as better coordination between government agencies.

Third: Better matching in the labour market.

The former active labour market policy was designed to produce low unemployment figures by hiding away people who were able to work in programmes created to run alongside the regular labour market.

The programmes maintained high enrolment volumes and gave too much emphasis to training measures and to measures that served to reduce the labour supply.

To counter this we introduced a job and development guarantee for the long-term unemployed. The programme includes individually designed measures and has a structure that reinforces the work-first principle.

The guarantee demands a high level of activity from participants, such as job-seeking activities including coaching and work training.

We have also reduced the number of labour market policy programmes and lowered the volume of labour market policy measures to make it possible to focus more on quality.

In addition, the national Labour Market Board is being transformed into the Swedish Public Employment Service with a clearer focus on employment services. Moreover, we have strengthened checks on job-seeking activities.

Fourth: Make it more worthwhile and easier to start and run a business.

As I have said, the conditions for entrepreneurship are good in Sweden in many respects. Swedes are well educated and quick to adopt new technology. The business sector is innovative, with extensive research and development and good financial capacity.

In international rankings of competitiveness and business climate, Sweden always scores well.

But even though conditions are good in many respects, there is a need for further improvements in the climate for enterprise, not least for smaller companies.

It is also important to make continuous improvements in the overall business climate so as to maintain the strong position of Swedish business in the increasingly integrated world economy.

Sweden must therefore be a country that better accommodates those who dare to take risks, develop their ideas and spread their wings to become self-employed.

A comprehensive review is underway, looking at the social security system for the self-employed and business tax rules; a number of concrete reforms have, however, already been implemented.

We have abolished the wealth tax. We have improved the VAT system to better fit the needs of smaller companies. We have given the bankruptcy and insolvency laws an overhaul. We have opened up welfare service production, especially the healthcare sector, for entrepreneurship. And we are in the process of cutting red tape by twenty-five per cent.

Even though many strong measures are being implemented, it is difficult at this point to judge how effective the reforms will be in the long run. The Government has been in office for just one-and-a-half years, but we can see some clear signs that we are on the right track.

Exclusion is falling. Last year one Swedish citizen went from welfare to work every four minutes. The will to hire staff is growing and so is the will to start a business.

And the good news is that this trend is growing stronger. The trend in the Swedish labour market has not been this good for almost twenty years.

We also see that the figures are looking extremely good for young people, older people, women and immigrants - people who historically have had a weak connection to the labour market.

The Government's overall objective is to create conditions for more jobs in more and growing businesses - and by this means to break the pattern of social exclusion.

Our focus on reform measures for more jobs, higher employment and lower unemployment is of course important. Less unemployment and less exclusion will lead to increased welfare. It will lead to greater resources with which to finance important welfare services in the long term.

We can only help the people who need help if we focus on work for the people who can work.

This leads me to the education system. Once crucial for Swedish growth and today a cornerstone in the renewal of the model.

The education system plays a crucial role for every child's chances in life. Every child has the right to acquire the tools and values necessary to explore the world around her and to meet the demands of society.

To achieve this we are carrying out reforms in our education system that focus on knowledge and a commitment to quality.

We want the primary mission of the education system to be to convey knowledge. Every child must be given opportunities to achieve the basic goals in all subjects.

This will require resources and well-educated teachers, but also a new education policy that respects students' differences and caters to their individual needs.

Other major tasks ahead of us are investments in infrastructure as well as research and development. In the long run these areas are vital if we want Sweden to be able to compete in our globalised world.

They are necessary for good and long-lasting growth - but to be able to finance these investments a policy for more jobs is required.

As I have said, no employment - no resources for welfare. No matter whether we are speaking of education or infrastructure.

***

If exclusion from the labour market is our national challenge, the issue of the climate and the environment is the global challenge.

Global warming is for real. It's already happening. No one these days can be left unaffected by the reports or pictures. The reports and pictures that show us the serious consequences that lie in store for our planet and for future generations, if we do not succeed better in formulating a policy for sustainable development in the long term.

Sweden has a long tradition of taking an active and assertive role where environment policy is concerned. This is a tradition that Sweden intends to live up to and to do so with renewed vigour. At the same time, we are clear about the fact that the response to climate change requires a new political impulse.

After long having allowed environmental policy to be coloured by political deals involving regulations and non-growth policies, we see it as our task to create broad agreement around a new climate policy.

An important element of this renewal is about exposing the myth that growth is the enemy of the environment. Here Sweden is living proof that the opposite is true, as our economy has grown by 44 per cent since 1990 while emissions have declined by 9 per cent.

On this basis, we are now formulating an environment policy where climate targets are linked to credible measures that do not conflict with growth and jobs.

We believe, on the contrary, that investments in research and new technology, together with fiscal and regulatory revisions, can pave the way for a development in which the environment becomes a lever for new enterprises and new jobs.

A model for climate care and growth - this will be an important ingredient in the renewal of the Swedish model.

However, an important starting point for a credible climate policy is to acknowledge that the 0.2 per cent of world emissions of greenhouse gases for which Sweden is responsible does not in itself constitute a global problem.

In practice, our national actions will have no global impact unless they are also accompanied by efforts to unite the world around joint action.

We therefore want to supplement our national actions by an endeavour to seek global solutions and international cooperation in response to the climate problems that we are seeing around the world.

An important part of this will be to attempt to get more parties on board in the negotiations that are intended to lead to a new climate regime after 2012.

It will be natural to link cooperation in the EU to this endeavour, which means the environment will become one of the main issues facing the Swedish EU Presidency in 2009.

Taking the lead in talks must go hand in hand with a willingness to take the lead in actions. And in enabling Europe to take a leading part in fighting global climate change, the decisions of the European Council in March last year were of great importance.

Even though it is not enough, it sets a very strong example that all EU Member States agreed on an independent commitment limiting our emissions of greenhouse gases - by 20 per cent by 2020, and by 30 per cent within an international agreement, as well as increasing the share of renewable energy.

I believe in showing leadership at national level by setting a good example and acting at international level to unite Europe and the world behind joint climate commitments.

Sweden might be a small country. But I am convinced that we have a lot to offer in proving that growth can be combined with fighting climate change and in seeking broad solutions to issues of great importance.

***

This brings me back to the beginning: What is the new Swedish model all about, if there is such a thing as a Swedish model?

I would argue that in our globalised world you have a choice. Spin the wheel of fortune or learn to navigate. This is what the new Swedish model is all about.

It's a question of free enterprise, the market economy and an open attitude towards international competition.

It's a question of fighting social exclusion and unemployment.

It's a question of a clear work-first principle in labour market policy and social insurance.

It's a question of welfare services that focus on knowledge, development and labour force participation.

I could put it more precisely.

Good pay for a hard day's work. Responsibility among people, businesses and organisations. Policies that encourage knowledge and entrepreneurship. A clear stand on the values of the open society and international cooperation.

These are the core values of Sweden. But are they the wheels driving a new Swedish model or principles that stand for themselves and lay the ground for progress regardless of country? No matter where you look in our globalised world?

I leave that for you to decide.

Thank you for listening.