Sweden did not participate in either the First or the Second World War. Therefore, Sweden was in a good position to partake in the rebuilding of a war-torn Europe. The first half of the 20th century was however lined with political problems, high inflation, unemployment and economic recovering. But this was also the era when a new trademark for the Swedish economy was introduced, the Swedish model.
Sweden could take advantage of the increase in foreign demand caused by the First World War. After the war the economy grew fast but it was not based on new and better production methods. Instead it depended on pure speculation. The shortage of different necessary goods such as fuel and shortage of labour made the inflation rise dramatically.
An economic crisis
The end of the war meant drastic changes for the Swedish economy. With the removal the trade barriers caused by the war, goods could be traded more freely as before the war. This meant that shortages were turned into surpluses which led to a rapid downturn in prices and consequently firms’ profits.
With the removal the trade barriers caused by the war, goods could be traded more freely as before the war.
A large number of companies went into liquidation, the overall production fell 25 percent and unemployment rose to approximately 30 percent. The economic crisis of 1921-22 became the toughest challenge for the Swedish industry so far and it took several years before the economy started to grow again.
The Years of Depression
The Great Depression started in the US in October 1929 and struck the Swedish economy in 1930-31. In 1932 the unemployment went up to about 25 percent and the Swedish exports fell drastically due to the belief that protectionism and currency regulation would be the medicine to overcome the problems.
Sweden came out of the depression slightly better than countries such as Germany and the US. This was partly a result of an export-boosting 30 percent devaluation of the Swedish krona against the dollar in 1931. The export oriented forestry and mining industries took full advantage of this 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 of 1932 was also a breaking point for in Swedish economic and political history. The new political ministry wanted the state to take a greater social responsibility. Fighting and controlling unemployment became the first priority. From now on the economy and its business cycle swings, would be controlled by the government. The first step towards “the Swedish model” and Keynesianism had been taken.
The rebuilding of war-torn Europe favored Swedish industry, since it had an intact labor force and undamaged production facilities.
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 favored Swedish industry, since it had an intact labor force and undamaged production facilities.
A combination of all the abovementioned measures contributed to, at the end of the decade, that Sweden even 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 from being a poor country to becoming one of the worlds wealthiest.
The Swedish Model
The central feature of the so-called “Swedish model” was the historical compromise between a social democratic ruled state and a widespread privately owned industrial sector. The compromise was some sort of middle way between unlimited private capitalism and socialist planned economy. The ownership of most of the large companies, except for the state owned monopolies, stayed private and expanded at the same time as the public sector expanded.
The "Swedish model "can be summarized as
- a large, privately owned industrial sector
- a large public sector financed by taxes
- a large trade union movement
- the state playing an active role in labour market policies
- ambitions to achieve an even distribution of income and wealth
The terms “The Middle Way” and “The Swedish model” became well known trademarks for the Swedish economy the next three decades.
From the beginning, the “Swedish model” seemed to be working very well. From the early 50s to the late 60s, the entire world economy grew by 4 to 5 percent each year, 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 percent and productivity growth average of 5.6 percent 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 went down just after the war and was extraordinary low, around 2 percent, during the 50s and 60s.
The Swedish labour market saw a major change 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 60s and 70s.
The flip side to the government’s ambitious social welfare and redistribution policy was the very heavy tax burden. Even today Sweden has the highest taxes in the world, with a tax burden equivalent to 50 percent of GDP.