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Should Ireland pursue a ‘Swedish model’ for development?
Open Republic: January/ February/ March 2006

	In this issue
			Debt Cancellation: A Wrong Remedy for the Wrong Illness Dr. Constantin Gurdgiev, University College, Dublin, Director, Open Republic Institute, Dublin Ireland's problem with U.S. foreign policy George T. Dempsey A changing geopolitical landscape: informal institutions and democratization Faye Donnelly, University of St. Andrews Constantin Gurdgiev, University College Dublin, Director, Open Republic Institute Kim Philby Was Here Richard Carlson & Buckley Carlson www.internet.eu Waldemar Ingdahl Belgian Export: suicide bombers Paul Belien Should Ireland pursue a ‘Swedish model’ for development? Constantin Gurdgiev, University College Dublin, Director, Open Republic Institute

Dr. Constantin Gurdgiev

A shorter version of this article appeared in The Irish Times, December 19, 2005.

In the world of ideological battles, Sweden occupies a unique place as a perennial favourite of the proponents of socialism. Yet, as Ireland’s social engineers drum the beat of the Swedish model, the Nordic spirit of egalitarianism is, itself, increasingly turning away from state interferences in the lives of its citizens. While Sweden embarks on the path travelled by this country in the 1990s, the question that remains unanswered is why the Irish left can’t come to grips with the fact that Socialism never works?

IGNORING HISTORY

The origin of the Swedish welfare state lie in the free-market declaration of free commerce in 1864, which laid economic foundations for the establishment of the social democratic system in 1932. The fundamental lesson of Sweden’s past and present is that social welfare is not possible without decades-long accumulation of wealth – the ingredient still lacking in Ireland today.

Another misperception concerning the Swedish model is that the welfare state’s main objective is to improve the lives of the poor. From 1932 through 1990, the State systematically stifled all independent initiatives, monopolising demand, supply, financing and regulation of all social services. Over the years, this led to the emergence of an exclusive, anti-pluralist society that has worked relatively well in the context of a homogeneous population.

The result was a large, highly politicized and immune to external influences welfare sector. Consumer preferences were ignored. Grossly inefficient spending was financed by ever escalating taxation, just as in Ireland during the 1980s.

WELFARE-STATE CRISIS — SWEDISH STYLE

The obvious casualties of the Swedish Welfare State were income and employment. Between 1950 and 1989, the public sector accounted for all net job creation. In the last 30 years, Swedish employment has grown by just 9.3% – half of the EU15 average and 8 times less than the US.

Swedish GDP per capita declined from world’s fifth highest in 1970 to 14th in 2003 – an abysmal record unmatched by any other OECD country. Today, the country GDP per capita is half that of Luxembourg and a third lower than in the US and Norway. As a result, Sweden spends a greater share of GDP on welfare than any other OECD country, yet achieves only a near-average per capita transfers.

In Sweden, the growing tax burden and expanding welfare assistance have created powerful disincentives to work, especially for the poor. Throughout the 1980s, long-term unemployment grew and more people found themselves in the welfare trap – unable to lead productive and fulfilling lives. Alcoholism, drug abuse and suicide rates escalated. Families declined – out of wedlock births reached stratospheric heights, overall birth rates collapsed, marriage rates plummeted to the second lowest in the EU25, while confidence in, and satisfaction with, the welfare state deteriorated.

Currently, more than half of Swedish welfare recipients enjoy compensation levels of around 90% of their disposable income. As the result – even after the reforms of the 1990s – whooping 35% of Swedish able-bodied adults remain outside employment. Domestic employment in Swedish companies declined from over 747,000 in 1987 to 503,000 in 2003, while their employment abroad went from 487,000 to over 956,000.

During the 1980s, higher marginal taxes on labour income have led to declining investment in education, despite the fact that Sweden leads the EU25 in education and R&D spending. Sweden ranks 7th in the OECD in the proportion of population with at least upper secondary school education and over 75% of its R&D takes place outside the country.

High taxes also imply a lower quality of life. Adding together time spent working at home and at work, Swedes labour 4.5 hours more per week than their American counterparts – largely due to lower utilisation of professional services. This is not surprising, given that in Sweden for each €1 collected by a contractor for services rendered, Swedish consumers are forced to pay €11.76 in costs and taxes.

GETTING OUT OF THE SOCIALIST TRAP

By the late 1980s, the economic slowdown and changing demographics exerted unsustainable pressures on the Welfare State. Between 1989 and 1994 unemployment climbed from 2.6% to 12.6%, spending skyrocketed and the public debt exploded. In 1992 the National Bank of Sweden was forced to raise interest rates to 500% in a hope of averting currency crisis. All of this illustrates that rather than acting as stabilizers, socialist policies exacerbate recessions in mature Welfare States.

Prior to the crisis, the majority of Swedes believed that the Welfare State would guarantee high levels of income and services. Overnight, as the need for protection increased, the state defaulted on its obligations. In addition, popular resentment of state monopoly on services and the resulting low quality and lack of choices escalated. Diversification of the previously homogeneous population has shown the complete inability of the Welfare State to integrate ethnic minorities.

Starting in 1991, Sweden began to reform the Welfare State. Between 1993 and 2001 public spending decreased from 70% to 54% of GDP. Since 1995, top marginal income and payroll tax rates declined from 86% to 68%, while transfers and subsidies fell from 30% to 22.7% of GDP.

Cuts in social benefits and public jobs, restructuring, outsourcing and privatisation of state services took place on unprecedented scale. Today, Sweden has the most radical voucher-based system of primary and secondary education system in the OECD, with private and state schools forced to directly compete for students. An increasing number of Swedish municipalities use a voucher system in combination with private outsourcing to deliver services.

One of the most dramatic reforms was undertaken in healthcare, where a growing private sector is directly competing with reformed and scaled down public enterprises. Majority of the latter operate as independent companies.

In the late 1990s, Sweden introduced significant pensions reforms, rolling back its pay-as-you-go system of retirement benefits. Today, each Swede can partially opt out of the state pensions and invest up to 2.5% of salary in their own choice of funds.