Despite the golden decades in the 50s and the 60s, Sweden had problems with dysfunctions within the economy. All of these problems surfaced in the mid 1970s oil crisis. During the later half of the 20th century Sweden experienced cost crisis, decreased competitiveness, deregulations and a severe economic crisis but also recovery.
The 1970s brought many changes in international trade conditions which turned out to have a negative effect on Sweden. Since the country’s domestic market is relatively small, many industries rely heavily on export.
The 1973-74 oil crises and the subsequent decline in international business activity therefore affected Sweden more drastically than many other countries. At that time, the Swedish problems also included tougher competition from other regions of the world, a dysfunctional wage formation that led to problems with high inflation and an inhospitable business climate due to high taxes.
Subsidies and devaluations
The political answer to the problems was extensive government subsidies to suffering industrial sectors, such as steel and shipbuilding. These measures were not altogether successful, however, since they kept up employment only temporarily. In addition, they preserved structural problems in the economy which were to cause inflation as well as unemployment later on.
These measures were not altogether successful, however, since they kept up employment only temporarily.
High cost increases and fading competitiveness forced several devaluations of the Swedish krona during the 1970s and 80s. The devaluations temporarily restored the short-term competitiveness within for example the chemical, plastics, electronics and car industries but worsened long-term inflation problems in the Swedish economy.
Deregulations
During the 1980s Swedish policymakers initiated deregulation in many sectors, with the intention to improve the economy’s functionality. Deregulations were launched against the monopolies within the transportation markets and electricity markets.
Between 1983 and 1990 there also were several strategic deregulations of the financial market, especially liberalisation of the loan restrictions. This deregulation contributed to a very rapid increase in lending, largely focusing on the real estate sector. In retrospect, these regulations of the financial market were the main reason for an extensive and risky credit expansion.
Deregulations were launched against the monopolies within the transportation markets and electricity markets.
Due to the devaluations, the export sector had a large monetary surplus in the end of the 1980s. This liquidity problem was solved by investing in the stock market and real estate, which contributed to a rapid growth in overall asset prices.
A bursting financial bubble
The abovementioned course of events led to a fully developed banking and financial service bubble that burst in the early 1990s. This crisis that followed the burst bubble went deep down into the very foundations of the Swedish financial system, due to massive credit losses. The bank and financial service sector nearly collapsed and could only been saved by governmental interventions to stabilize the situation.
This crisis, combined with an international economic slowdown, governmental financial crisis, the following currency crisis that eventually led to the abandonment of the fixed exchange rate and the reconstruction of the Swedish tax system, became the starting point of the deepest economic crisis since the 1930s.
Public finances under strain
The abandonment of the fixed exchange rate depreciated the Swedish krona considerably. But the positive effect for the export industry was not large enough to cover the losses in domestic demand, which in turn led to accelerating unemployment. Between 1990 and 1993, the registered unemployment increased from about 1.5 percent to 8.2 percent and GDP fell by approximately 5 percent.
The central government budget deficit exceeded 15 percent of GDP in 1994 and the national dept climbed, peaking at around 80 percent of GDP in 1998.
Falling GDP and lower employment resulted rather quickly in a sharp deterioration in public sector finances. The rising governmental expenditures, at the same time as tax receipts fell, created a great strain on public finances. The central government budget deficit exceeded 15 percent of GDP in 1994 and the national dept climbed, peaking at around 80 percent of GDP in 1998.
Due to the combination of two decades of low growth and the severe economic crisis, Sweden slid in the prosperity league, measured as GDP per capita adjusted for purchasing power, from fourth place 1970 to 16th place, lowest so far, in 1998.
Reforms and the dot-com bubble
In the aftermath of the extraordinary economic problems in the early 1990s, came a battery of structural reforms and austerity measures. Important structural governmental reforms were for example independence of the Swedish central bank, the Riksbank, from the Government, an inflation target and expenditure ceiling for the public sector. Furthermore, the membership in the European Economic Area, EEA, and from 1995 the membership in the European Union, implied stricter competition rules. The industry and business sectors in general implemented far-reaching efficiency measures.
After 1993, the Swedish economy growth rate was well in line with the average of the other countries within the OECD. After the severe economic crisis in the early 1990s the economy stabilised. The improved efficiency along with the floating of the Swedish krona laid the groundwork for the rapid recovery in the output of the export industries during the rest of the 1990s.
However, the rapid growth of the IT sector together with unrealistic prising of IT shares on the stock market created yet another bubble that burst in the early 21st century. This resulted in an economic slowdown and declining employment in the financial, telecom and IT sector. Compared to the crisis in the early 1990s, however, this downturn was mild.