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From War to the Swedish Model

Sweden participated neither in the First World War nor in the Second. Therefore, Sweden was in a good position to partake in the rebuilding of a war-torn Europe. Although the first half of the 20th century was lined with political problems, high inflation rate and unemployment, and need for economic recovery, it was also the era in which a new trademark for the Swedish economy was introduced: the Swedish model.

 

Sweden was in a position to take advantage of the increase in foreign demand after the First World War and the country’s economy grew fast although this growth was not based on new and better production methods. Instead, it depended purely on speculation. The shortage of different essential goods, such as fuel, and labour caused soaring inflation rates.

An economic crisis

The end of the war meant drastic changes for the Swedish economy. With the removal of the trade barriers erected by the war, goods could be traded more freely than had been possible before the war. This meant that shortages were turned into surpluses, which in turn led to a rapid downturn in prices and, consequently, decreasing profit margins.

With the removal of the trade barriers erected by the war, goods could be traded more freely than had been possible before the war.

A large number of companies went into liquidation, overall production fell by 25 per cent and the unemployment rate rose to approximately 30 per cent. The economic crisis of 1921-22 became the toughest challenge the Swedish industry had faced so far and it took several years for the economy to recover and begin to grow again.

The Years of Depression

The Great Depression started in the USA in October 1929 and struck the Swedish economy in 1930-31. In 1932, the unemployment rate went up to about 25 per cent and Swedish exports fell drastically due to the belief that protectionism and currency regulation was the medicine to overcome the problems.

Sweden came out of the depression slightly better than countries such as Germany and the USA. This was partly a result of an export-boosting 30 per cent devaluation of the Swedish Krona against the dollar in 1931. The export oriented forestry and mining industries took full advantage of this devaluation and grew rapidly.

Furthermore, since the crisis in the 1920s, the Swedish industrial sector had developed new and refined production and distribution methods. As a result of these technical improvements, production increased rapidly and so did the quality of manufactured goods. Among the most successful industrial products of this time were textiles, pulp and steel.

A recovering economy

The year 1932 also became a breaking point for Swedish economic and political history. The new political ministry wanted the state to take greater social responsibility. Fighting and controlling unemployment became the first priority. From now on, the economy and the swings of the business cycle would be controlled by the government. The first step toward “the Swedish model” and Keynesianism had been taken.  

The rebuilding of war-torn Europe favoured the Swedish industry, because the Swedish labour force was intact and Swedish production facilities were undamaged.

The Second World War was followed by an economic boom. Sweden, having managed once again to stay out of the war, had a better starting position than most of its competitors. The rebuilding of war-torn Europe favoured the Swedish industry, because the Swedish labour force was intact and Swedish production facilities were undamaged.

At the end of the decade, the combination of all the measures mentioned above contributed to a situation where Sweden saw some growth of the national economy in a time of world-wide economic stagnation. During the great wars and the inter-war period, Sweden took a substantial step toward becoming one of the wealthiest nations in the world.

The Swedish Model

The central feature of the so-called “Swedish model” was the historical compromise between a social democratic ruled state and a privately owned industrial sector. The compromise constituted a middle way between unrestricted capitalism and a centrally planned economy. The ownership of most of the large companies, except for the state owned monopolies, stayed private and expanded side by side with the public sector.

The "Swedish model "can be summarized as follows:

  • a large, privately owned industrial sector,
  • a large public sector financed by taxes,
  • a large trade union movement,
  • the state plays an active role in labour market policies, and
  • the ambition is to achieve an even distribution of income and wealth.

Over the next three decades, the terms “The Middle Way” and “The Swedish model” came to be well-known trademarks for the Swedish economy.    

In the beginning, the “Swedish model” appeared to work very well. From the early 1950s to the late 1960s, the annual growth of the entire world economy was between four and five per cent and Sweden was one of the most successful Western nations of this era. Between 1960 and 1965, the economy reached its peak with a yearly GPD growth average of 5.3 per cent and a productivity growth average of 5.6 per cent per year.

Structural change in the labour market

Although the native textile industry suffered heavily from increased international competition, the engineering and rubber industries expanded as a result of an increased demand for motor vehicles. The unemployment rate went down just after the war and was extraordinary low, around two per cent, during the 1950s and 1960s.

The Swedish labour market saw major changes in the 1960s. While the number of people employed in the service sector increased, there was a drop in the number of industrial workers, especially in the textile and leather sectors. The social welfare systems expanded substantially and the number of people employed in the public sector increased considerably during the 1960s and 1970s.

The flip side to the government’s ambitious social welfare and redistribution policy was a heavy tax burden. Even today, Sweden has among the highest tax levels in the world, with total tax revenue equivalent to 50 per cent of GDP.