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Economy of Sweden

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Sweden is a competitive open mixed economy. There is a strong welfare state, with public-sector spending accounting up to three-fifths of GDP. In 2014, the percent of national wealth owned by the government was 24%.

Due to Sweden being one of the neutral powers during World War II, it did not have to rebuild its economic base, the banking system, and country as a whole, as did many other European countries. Sweden has achieved a high standard of living under a mixed system of high-tech capitalism and extensive welfare benefits. Sweden has the second highest total tax revenue as a share of GDP, behind only Denmark. As of 2012, the total tax revenue was 44.2% of GDP, down from 48.3% in 2006.

In 2014 the National Institute of Economic research predicted GDP growth of 1.8%, 3.1% and 3.4% in 2014, 2015 and 2016 respectively. A comparison of upcoming economic growth rates of European Union countries revealed that the Baltic states, Poland, and Slovakia are the only countries that are expected to keep comparable or higher growth rates.

History

In the 19th century Sweden evolved from a largely agricultural economy into the beginnings of an industrialized, urbanized country. Poverty remained widespread, prompting a large portion of the country to emigrate, mainly to the United States. Economic reforms and the creation of a modern economic system, banks and corporations were enacted during the later half of the 19th century. During that time Sweden was in a way the "powerhouse" of the Scandinavian region with a strong industrialization process commencing in the 1860s. Moreover, the Swedish Riksdag had developed into a very active Parliament already during the Age of Liberty (1719–72), and this tradition continued into the nineteenth century, laying the basis for the transition towards modern democracy at the end of said century. Apart from relatively high levels of human capital formation, the result of the Reformation and related government policies, such local democratic traditions were the other asset that made the "catching up" of the Scandinavian countries, including Sweden, possible and this economic rise was probably the most remarkable phenomenon in that region during the nineteenth century.

By the 1930s, Sweden had what Life magazine called in 1938 the "world's highest standard of living". Sweden declared itself neutral during both world wars, thereby avoiding much physical destruction and instead, especially after the First World War, profiting from the new circumstances – such as booming demand for raw materials and foodstuffs and the disappearance of international competition for its exports. The postwar boom, that was the continuation of strong inflationary tendencies during the war itself, propelled Sweden to greater economic prosperity. Beginning in the 1970s and culminating with the deep recession of the early 1990s, Swedish standards of living developed less favorably than many other industrialized countries. Since the mid-1990s, the economic performance has improved.

In 2009, Sweden had the world's tenth highest GDP per capita in nominal terms and the fourteenth highest by purchasing power parity.

Crisis of the 1990s

Sweden has had an economic model in the post-World War II era characterized by close cooperation between the government, labour unions, and corporations. The Swedish economy has extensive and universal social benefits funded by high taxes, close to 50% of GDP. In the 1980s, a real estate and financial bubble formed, driven by a rapid increase in lending. A restructuring of the tax system, in order to emphasize low inflation combined with an international economic slowdown in the early 1990s, caused the bubble to burst. Between 1990 and 1993 GDP went down by 5% and unemployment skyrocketed, causing the worst economic crisis in Sweden since the 1930s. According to an analysis published in Computer Sweden in 1992, the investment level decreased drastically for information technology and computing equipment, except in the financial and banking sector, the part of the industry that created the crisis. The investment levels for IT and computers were restored as early as 1993. In 1992 there was a run on the currency, the central bank briefly jacking up interest to 500% in an unsuccessful effort to defend the currency's fixed exchange rate. Total employment fell by almost 10% during the crisis.

A real estate boom ended in a bust. The government took over nearly a quarter of banking assets at a cost of about 4% of the nation's GDP. This was known colloquially as the "Stockholm Solution". In 2007, the United States Federal Reserve noted, "In the early 1970s, Sweden had one of the highest income levels in Europe; today, its lead has all but disappeared...So, even well-managed financial crises don't really have a happy ending".

The welfare system that had been growing rapidly since the 1970s could not be sustained with a falling GDP, lower employment and larger welfare payments. In 1994 the government budget deficit exceeded 15% of GDP. The response of the government was to cut spending and institute a multitude of reforms to improve Sweden's competitiveness. When the international economic outlook improved combined with a rapid growth in the IT sector, which Sweden was well positioned to capitalize on, the country was able to emerge from the crisis.

The crisis of the 1990s was by some viewed as the end of the much buzzed welfare model called "Svenska modellen", literally "The Swedish Model", as it proved that governmental spending at the levels previously experienced in Sweden was not long-term sustainable in a global open economy. Much of the Swedish Model's acclaimed advantages actually had to be viewed as a result of the post WWII special situation, which left Sweden untouched when competitors' economies were comparatively weak.

However, the reforms enacted during the 1990s seem to have created a model in which extensive welfare benefits can be maintained in a global economy.

In recent years, the Swedish welfare state model has been weakened. Massive privatizations have been carried out since the 1990s, including in public services such as health and education. Inequality has risen sharply, in particular because of a tax system that does not tax wealth and inheritance.

Great Recession

Sweden entered recession after a two consecutive quarter of economic contraction. Sweden's economy showed zero growth in the second quarter of 2008. The Swedish GDP contracted by 0,1% during both the second and third quarters of 2008. Sweden's economy sank into recession in the third quarter of 2008. In October retail sales dropped 0.6 percent in the month, and household consumption fell 0.2 percent in the third quarter. The Riksbank offered 60 billion kronor ($7.71 billion) in loans to financial firms at an auction, after having opened credit facilities to maintain the liquidity in the banking sector. At the beginning of December, the government launched a financial stability package to rev up the economy, while the central bank, urged by the OECD, cut down its interest rates to 2%

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