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How Sweden Tweaked the Washington Consensus by Daniel Brook

Living last fall in Sweden, I often felt as if I were in the richest country in the world. In my two months there, I never saw a boarded-up window or dilapidated house. Cell phones were ubiquitous, carried by everyone from children to seniors. In small Swedish towns, I saw the trappings of upper-middle-class American life-travel agencies, chic cafés, and such Swedish chain stores as H&M and Ikea, whose aesthetic quality limits their range in the United States to a handful of sophisticated metropolitan areas. The general outlook of Swedes in all but the most remote parts of the country was like that of America's upscale, educated, urban elite. The nation still reflected Susan Sontag's 1969 observation that "the ideas and attitudes of, say, The Village Voice, are 'establishment' opinions" in Sweden.

As I chose among the eight varieties of pickled herring in a Stockholm supermarket, I heard Bob Dylan's "Subterranean Homesick Blues" pumped in over the sound system. In provincial train station newsstands, I saw an array of books like that in small, independent bookstores in Berkeley or Cambridge. Barbara Ehrenreich's Nickel and Dimed was prominently displayed in English, and Eric Schlosser's Fast Food Nation was available in Swedish. The Parliament (Riksdag) had long-ago enshrined gay civil unions and outlawed spanking one's own children. A sex education magazine for teenagers put out by the Swedish National Institute of Public Health seemed concerned not merely that teens were having safe sex, but that they were enjoying it. The lead article included an excerpt from the Kama Sutra detailing a rather acrobatic sexual position and informed its teenage readership, "The clitoris is for enjoyment. It is in just the right place for fondling." A government-funded publication of this sort would be almost unthinkable in the United States.

And yet, Sweden is not the richest country in the world. It is not even close. It is far poorer than the United States. Current statistics put it in the low teens internationally, just below Italy (by contrast, in 1970, Sweden ranked fourth). Frederick Bergstrom, a neoliberal Stockholm economist I interviewed, recently put out a study comparing Sweden to the fifty American states. He found that in terms of gross domestic product per capita, Sweden is poorer than all but West Virginia and Mississippi. Yet Sweden ranks high on broader indexes of societal health as well as economic competitiveness. Sweden topped University of Pennsylvania professor Richard Estes's "weighted index of social progress" in 2003, a ranking of nations based on a slew of social indicators including life expectancy, infant mortality, and literacy. In Foreign Policy magazine's annual globalization index, which tracks global integration of money, people, and information, ultra-wired Sweden has ranked as high as number three in recent years.

So why does Sweden, although poorer in per capita GDP than Alabama, top the United States in virtually every social indicator and hold its own in economic competitiveness as well? The keys to Sweden's success lie in the social and economic system it has developed since the Great Depression, sometimes called the "Swedish model," which has created a stunning degree of equality among its citizens and a physical infrastructure that is the envy of richer countries.

Yet today the Swedish system is being challenged by a number of economic tendencies and forces commonly understood under the rubric of "globalization." According to New York Times columnist Thomas Friedman, the pressures to compete in the global economy bind every nation in what he has dubbed "the Golden Straitjacket," a set of policies that must be adopted to encourage growth often at the expense of equality. According to this thinking, countries must embrace the "Washington consensus," the International Monetary Fund-backed policies of free trade, privatization, and lower taxes and public spending, in order to keep up with lean, mean developed countries such as the United States and rapidly growing economies such as China's.

Although Sweden has modified its economic arrangements, it has kept many features intact in defiance of the Washington consensus. More than half of GDP goes to the government as taxes (versus one-third in the United States). The extremely high level of taxation in Sweden funds a large public sector and an ambitious redistributive program. Sweden is committed to remaining one of the most egalitarian countries in the world in terms of after-tax income distribution (Denmark is currently number one, Sweden number two). Nevertheless, policymakers are mindful that economic growth must be maintained as well. If it isn't, the nation will be unable to provide for its citizens as it has in the past-its national health system, for example, will have trouble buying state-of-the-art medical technology on the global market.

Today Sweden is testing the limits of the Golden Straitjacket, seeing just how much wiggle room it allows. Preliminary results suggest it allows a lot. Despite its high taxes and government intervention in free market outcomes, Sweden benefited more than most European countries from the tech boom of the late 1990s, as foreign investment soared. Greater Stockholm, with its burgeoning telecom and biotech sectors, became "the California of Europe," a Silicon Valley with snow. During this period, Sweden experienced its fastest growth in decades. Even after the bubble burst, the Swedish economy continued to post higher growth and lower unemployment than most other West European countries and tech-heavy American states like California.

From "Swedish Model" to "Swedish Disease"
"The Viking Age was an extreme class society," reads the awkward English translation at an exhibit in Stockholm's Museum of National Antiquities. The statement illustrates the Swedish notion that economic equality is a defining feature of modernity. As the ethnologist Ake Daun, known as the guru of Swedish character, put it, "In our way of defining modernity, it's very old-fashioned to have gaps between social classes."

Sweden industrialized relatively late for a West European country but developed extraordinarily rapidly. The swift industrialization created Sweden's leading business conglomerates and spawned a staggering class divide and a powerful labor movement. Under the so-called "Basic Agreement" signed in 1936, the labor unions and the employers' confederation agreed to settle their disputes at the bargaining table, ushering in decades of labor peace. Employers retained the right to manage the workplace in exchange for accepting the unions' right to represent the workforce.

With unionized workers as its base, the Social Democratic Party was elected to power in 1933. Except for two brief interludes, it has ruled ever since, gradually building a massive welfare state that includes not merely the standard West European guarantees of health care, higher education, and generous paid vacations, but universal day care, paid family leave for new parents, and state-owned housing distributed according to need (40 percent of all apartment units).

Sweden's welfare benefits, few of which are means tested, were put in place in the economically robust decades following the Second World War. Sweden had been neutral in the conflict and emerged from the war in a position to benefit from rebuilding its European neighbors. The Swedish economy boomed for years on end, making Sweden by the 1960s one of the richest countries in the world in per capita GDP. In the late 1960s, the Swedish government and unions, prodded by the nation's radical youth, pushed for even greater class equality. Wage differentials were decreased through government policy and collective bargaining.

Swedes, in their quiet way, felt themselves to be in the vanguard of humanity, steering a path between the political tyranny of the Soviet Union and the market tyranny of the United States. As Susan Sontag observed in her 1969 essay, Swedes were not "disposed by temperament to export aggressively what they practice. . . but confidently await the inevitable movements of history that will lead other nations to imitate them."

However, history's movements are never inevitable. Just a decade later, led by Margaret Thatcher and Ronald Reagan, much of the West turned away from the path of ever higher tax rates and ever greater social benefits. Many observers thought that Sweden, once confident that it was winning a race to the top, would find itself losing globalization's race to the bottom.

As the economy slowed, the Social Democrats tried to institute reforms to make Sweden more competitive. They succeeded in initiating Sweden's entry to the European Union, but fissures within the left produced a conservative government in 1991. With the right in power, Sweden experienced its worst recession since the Great Depression and fell far from the top of international GDP rankings. The budget deficit soared to nearly 15 percent of GDP. In a nation once famous for its full-employment economy, unemployment quadrupled from 2 percent in 1990 to 8 percent in 1993. (If those enrolled in government retraining programs are included, the rate topped out at 13 percent.) A report by the libertarian Cato Institute in Washington wrote Sweden's epitaph: "Sweden seemed to present an intellectual challenge to those who argued that high tax rates and extensive state intervention would hamper economic growth….Few would now consider the Swedish system worthy of emulation." The popular press joined in on the Sweden smackdown, publishing articles like "Swedish-Made Economic Model May Be Running on Empty" (Washington Post) and "The Swedish Disease" (Forbes).

Reports of Sweden's death were greatly exaggerated. The economic crisis of the early 1990s, coupled with the graying of Sweden's population (more than 20 percent of the population is now over sixty-five) convinced leaders that changes had to be made if the nation was to compete in the global economy. Sweden had long embraced Washington consensus policies on bureaucratic transparency, low regulation of business, and free trade, but now tried to reduce the tax burden on capital to international levels. Capital gains and dividend taxes were cut while taxes on labor income and accumulated wealth remained high; sickness insurance levels were reduced slightly, the pension system was trimmed, and certain state-run sectors of the economy were privatized. Although Sweden embraced certain aspects of the Washington consensus in order to create wealth, it continued to redistribute wealth once it was created. The most far-reaching of the conservative proposals, like a two-year limit on retraining programs for the long-term unemployed, were rejected, and the Social Democrats were returned to power in 1994.

Forging a Stockholm Consensus
Prime Minister Olof Palme, who was assassinated in 1986, was the last great defender of the full-blown Swedish welfare state, the folkshemmet ("People's Home"). Born into a well-to-do conservative family, Palme credited his college road trip through the segregated American South for his political turn to the left. Today, Palme's son, Marten, an economist at Stockholm University, studies how sickness-benefit levels affect worker behavior. According to his research, the higher the sick pay a worker receives, the more likely that worker is to call in sick. Only in Sweden, where moral rectitude is so widely assumed that a high government official was forced to resign after charging a bar of Toblerone chocolate on her government credit card, would this surprise anyone. Astoundingly, before the reforms of the 1990s, there were cases in which workers were paid more to call in sick than to work. Marten Palme, like most Swedes today, believes that the task is to provide adequate benefits for those who truly are sick without encouraging people to miss work unnecessarily. Sick-leave benefits remain high by international, and even Scandinavian, standards. In contemporary Sweden, there is a broad-based consensus for a scaled-back folkshemmet that takes into account the laws of economics. Unlike the view from Washington, which sees high public spending as a drag on the economy, the Swedish consensus is that only unwise public spending hinders economic growth.

Still, the new focus on economic growth is an important development for Sweden. In the recent past, as veteran newspaper columnist Anders Isaksson put it, "[W]elfare was a condition for growth, but now…growth is a condition for welfare." The Swedish system has always been based on taxing a profitable private sector-that was the essential compromise in Swedish society between capital and labor-but in the booming postwar years, the Social Democrats began taking growth for granted.

That is why Frederick Bergstrom chose to compare Sweden to the American states in his study. "It has shock value," he said, since the American political economy has long been reviled in Swedish public opinion for its class hierarchies and militarism. Under Richard Nixon, the United States essentially cut off diplomatic ties with Sweden over Prime Minister Palme's criticism of the Vietnam War. Although relations have not degraded to that point over Iraq, the war and occupation are exceedingly unpopular in Sweden, as is George W. Bush himself. (On the other hand, American popular culture is widely accepted, with none of the resistance seen elsewhere in Western Europe.)

"You can think whatever you want about the United States, but they create resources," Bergstrom said. "And in the long run, it is very important to design an economic system so that it doesn't hinder economic growth." Essentially Bergstrom's message is that Swedes shouldn't oppose the Washington consensus just because it comes out of Washington. To a limited extent, he's being heeded. As Mikael Damberg, a thirty-one-year-old Member of Parliament and rising star in the Social Democratic Party, explained to me in his modest Riksdag office, "The government has said, we're willing to discuss with both employers and the right-wing [parties] which taxation problems you really have, which rules are a hindrance for you, what else can we do to promote growth in Sweden." Still, he maintained, supply-side "'voodoo economics' is not an option for us."

Although the Swedish system was built on the Social Democratic slogan "Capitalism without capitalists," no one has figured out how to have "Entrepreneurship without entrepreneurs." The goal for the governing Social Democrats is to balance the need for entrepreneurship with the egalitarian system they have built. Despite many capital-friendly reforms, Sweden maintains a wealth tax that whittles away at even small amounts of accumulated assets. This has led a few wealthy Swedes to leave the country for tax reasons, but has not caused anything like a mass exodus. The view among Social Democrats is that educated professionals will leave Sweden if they can't find a job, but will not leave over high taxes or low salaries. Some even argue that the strong social safety net adds incentives for would-be entrepreneurs to strike out on their own.

A more serious problem is that some Swedish multinationals are relocating key offices abroad in order to recruit international executives without subjecting them to Sweden's income taxes. Although Ericsson remains a Swedish company, it opened an executive office in London in 1999. At the less exalted end of the labor market, there is also the problem of those who stay in Sweden physically but hide from the tax system by doing business off the books. Some economists estimate that the underground economy makes up as much as 20 percent of Sweden's GDP.

Jan Lundahl, one of Sweden's leading biotech venture capitalists had a different take on the plight of Swedish entrepreneurs. "My personal perception is that [high income taxes] are not the real issue," he explained. Rather, he said, the part of the Swedish system that discourages entrepreneurship is "the social costs that you have," the government-guaranteed benefits that are largely funded by employers. "You're paying somewhere between 32 and 50 percent of the wages in social costs." This becomes a disincentive for a company to add workers and contributes to Sweden's "wine-glass economy," with many large conglomerates at the top and small businesses at the bottom but very little in between.

Social costs are high, but many of the programs funded by the public sector make Sweden more globally competitive, not less so. Even right-leaning economist Lars Calmfors acknowledged that high public expenditure can spur growth "if you spend [the money] on good infrastructure [or] human capital formation"-two things Sweden does well. The clearest example of human capital investment in Sweden is the education system. Almost everyone in Sweden speaks English, the global tongue. At the top end of the educational scale, the high level of scientific research in Sweden's public universities is a key reason the country has become such a biotech and telecom hotspot. In 1998, when the Swedish pharmaceutical giant Astra AB was acquired by Zeneca, a British firm, the merged company located its corporate headquarters in London and its research headquarters in Stockholm-a clear illustration of the respective strengths and weaknesses of the low-tax, Anglo-American model and the high-human-capital Nordic model.

Not surprisingly, considering the differences between Swedes and Americans on political economy generally, the one aspect of neoliberalism that the Swedes wholeheartedly embrace is the aspect Americans are most ambivalent about: free trade. The fondness of Swedes for condemning America's religiosity, racism, state-sponsored executions, and extreme inequality is surpassed only by their glee in pointing out how much better they are at following Washington-consensus policies on free trade than the current administration in Washington (or the Democrats vying to replace it). Many Swedes on both the left and right brought up George W. Bush's hypocrisy in preaching free trade and at the same time defending steel tariffs and farm subsidies.

It is no surprise that the libertarian right in Sweden backs free trade. What is surprising is the support on the left; the near-universal unionization rates in Sweden make the country's trade policy less protectionist, not more. In the United States, it is often labor unions that call for tariffs and subsidies to protect unionized industries. Not so in Sweden. "We don't want to sell T-shirts made in Sweden because people can't live on those wages. It's good that those industries have moved away," explained Social Democratic Parliament member Mikael Damberg, sounding very unlike an American congressmember of either party.
In Sweden, where equitable distribution of corporate profits is assumed, the focus can be on growing those profits even if it means economic dislocation for some in the short-run.

McDonald's Without McJobs
Other aspects of globalization also present challenges to Sweden's heterodox political-economic arrangements. Pursuing policies that open the country up to global culture, international investment, and immigration, while maintaining its egalitarianism, is a difficult balancing act. In the last generation, Swedish television has gone from a BBC-style choice of Sveriges Television 1 and Sveriges Television 2 to the same array of cable channels available throughout the West, exposing young Swedes to a global, largely American culture that celebrates individualism and instant wealth. Openness to "New Swedes," foreign-born immigrants and their children, has transformed Sweden in a generation from one of the most homogeneous countries in the world to one of the most diverse. Today the nation has roughly the same proportion of foreign-born residents as the United States. Sweden remains one of the only European countries not to have spawned a powerful anti-immigrant political party (the New Democracy Party of the early 1990s was short-lived), but the country's newfound diversity has created pressures against the welfare state-which offers the same benefits to newcomers and to native-born Swedes.

By opening itself up to international investment, the nation has also exposed itself to a global business culture hostile to Swedish egalitarianism. Wage compression-the lack of vast differences between the best- and worst-paid employees-has long been accepted within Swedish businesses, but multinational businesses base their wages on their home country's scale. Stockholm University labor historian Klas Amark cited the American-based database giant Oracle. "If you look at Oracle, for example, and what they pay young people, it's not in accordance with Swedish ideas about wages. Those people are earning a lot of money and they can buy expensive cars and big flats in Stockholm." He argued that this has wider macroeconomic implications. "This pressure upwards [affects] the public sector because the government as an employer wants to hire competent people and then they have to pay them based on what they would be paid in the private market."

The Oracle example illustrates the tension between growth and equality. Should Sweden's growth in the late 1990s be interpreted as a vindication of the Swedish model or a challenge to it? Limits on top salaries may be coming off, but the wage floor is holding. The country has no minimum wage but near-universal unionization, and the level of social benefits for the unemployed create an extraordinarily high wage floor. Sweden's labor regulations mean that the country has McDonald's without McJobs. The de facto minimum wage in Sweden is more than twice the legal minimum wage in the United States, which is why there are no working poor in Sweden. It is also the main reason why so many low-skill immigrants are kept outside the workforce, collecting social benefits and taking classes in Swedish.

Even without a new class of working poor in Sweden, Amark sees problems arising from the growth in wages at the top. "As long as the wage differences are small, the tax system and the social insurances will retain their redistributive character. But the more wage differences increase, the less of a redistributive effect you will have."

The distribution of income in Sweden may not be as egalitarian as it once was, yet it remains among the most egalitarian in the world. This contrasts starkly with the last thirty years in the United States in which wealth distribution has reverted to Gatsby-era levels. Swedish equality is evident in everyday life, not just in economic data. At a party in Stockholm, I met a MBA student-postal worker couple; in the United States, it would be inconceivable to meet a Wharton student dating his/her West Philadelphia letter carrier. Yet the forces of globalization clearly make it harder for Sweden to maintain its egalitarianism. Can Sweden succeed by opening the country to investment and global culture while maintaining its current policies on taxation, public spending, and redistribution?

Of Prices and Values
No longer a homogeneous, economically anomalous nation at the edge of Europe, Sweden is now just another modern, diverse country participating in the global economy. Yet it does so with an expansive welfare state and a high rate of unionization-things any developed free-market democracy could adopt. For the outside observer, this is where the case gets interesting. Although the world paid little attention to the Swedish experience of the past hundred years, it should watch closely what will take place there in the coming decades.

If both the American and Swedish models are viable in a globalized world, if there is enough wiggle room within the Golden Straitjacket to pursue the Swedish egalitarian system, what is needed is a debate about values- call it the $3 cup of coffee debate. One of the most striking things for foreigners about Sweden is the high price of consumer goods. A simple cup of coffee at a café in Stockholm costs nearly $3. The main reason a cup of coffee in Sweden costs two to three times what it costs in the United States is the labor costs in the café. Pouring coffee is a minimum wage job the world over, but in Sweden the lowest wage is much higher than in the United States, and the employer is responsible for more social benefits. On top of that, a 25 percent value-added tax is paid by the consumer. I would gladly have paid $1.25 for a cup of coffee in Sweden, but…consider what my $3 bought. The added cost made sure that the person who poured my coffee lived in decent housing, enjoyed health care coverage, and could send her kids to college if they could get in. Swedish society had decided that coffee would cost more than anywhere else in the world in exchange for these public goods. Weren't they worth the money?

When I offered this analysis to Mauricio Rojas, a libertarian Member of Parliament, originally from Chile, he pointed to the other side of the coin. "When you pay your $3, you are paying for the black market, you are paying for exclusion [of low-skill immigrants from the workforce]. You know that."

Choosing between the American and Swedish systems is a matter of choosing one's problems. Is it better to have higher rewards for those at the top or free higher education available to all? Is it better to ensure that no one who works full time lives in poverty or that every immigrant who is willing to work hard at a low-skill job can find one? Should the government be more concerned that its citizens can raise healthy families or build healthy companies? There are trade-offs between equality and economic growth, and each society must strike its own balance. Sweden's continuing social experiment shows that there is consensus only on certain parts of the Washington consensus. For all the talk of "the end of history" and Golden Straitjackets, there are still important choices to be made, important things to discuss over a cup of coffee. What the coffee should cost is a good place to start.

Daniel Brook is a Philadelphia-based freelance journalist whose work has appeared in Harper's and Mother Jones among other publications. Brook traveled to Sweden through the generosity of the Franklin S. Forsberg Fund in the Field of Communication, which is named after the late former U.S. ambassador to Sweden.


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