Front Matter
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

Sweden's economy in the early 1990s has been characterized by a deep recession, high unemployment, a ballooning public sector budgete deficit, and a decline in the value of the currency- developments that have raised questions about the country's capacity to sustain its comprehensive welfare state. This study provides an analysis of recent economic developments in a longer-term context and assesses their implications for future policies.

© 1995 International Monetary Fund

Library of Congress Cataloging-in-Publication Data

Challenges to the Swedish welfare state / Desmond Lachman . . . [et al.].

p. cm. —(Occasional Paper, ISSN 0251-6365 ; no. 130)

Includes bibliographical references.

ISBN 1-55775-486-1

1. Public welfare—Sweden. 2. Sweden—Economic conditions. 3. Sweden—Social policy. I. Lachman, Desmond. II. Series: Occasional paper (International Monetary Fund) ; no. 130.

HV388.C449 1995

361.6’5’09485—dc20

95-40487

CIP

Price: US$15.00

(US$12.00 to full-time faculty members and students at universities and colleges)

Please send orders to:

International Monetary Fund, Publication Services

700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

Tel: (202) 623-7430 Telefax: (202) 623-7201

Internet: publications@imf.org

Contents

  • Preface

    • I. Overview

      • Desmond Lachman

  • II. Recession and Recovery in the 1990s

    • Ramana Ramaswamy and John H. Green

    • Proximate Causes of the Recession

    • Causes of Demand Shocks

      • Consumption

      • Investment

    • Selected Features of the Recession

    • Comparing Economic Recoveries

    • A Vector Autoregression Analysis

  • III. The Swedish Labor Market

    • Ramana Ramaswamy

    • Recent Trends in the Labor Market

    • Labor Markets Programs

      • Unemployment Insurance

      • Active Labor Market Programs

    • Wage Bargaining System

      • Main Institutional Features

      • Implications for Wage Inflation

      • Implications for Productivity

    • Labor Contracts and Flexibility

  • IV. Public Finances, Adjustment Programs, and Debt Dynamics

    • John H. Green

    • Recent Fiscal Developments

      • General Government

      • Central Government

      • Local Authorities and the Social Security Sector

    • Adjustment Policies

      • Budget Savings Policies, 1992-94

      • Budget Savings Policies, November 1994—April 1995

    • Public Sector Debt and Debt Dynamics

      • Measurement and Historical Background

      • The Debt Equation: Historical Illustration

      • Official Debt Projections

      • The Impact of Lower Growth and Higher Interest Rates on Public Finances

  • V. Social Security in Sweden

    • Robert Hagemann

    • Historical and International Perspectives

      • Growth of General Government Spending

      • Social Spending in Sweden and the European Union

    • Social Security and Benefit Dependence

      • Overview

      • Nonpension Benefits

      • Budgetary Impacts of Reforms

    • Public Pensions

      • The Current System

      • Problems with Existing System

      • The Pension Reform

    • Concluding Remarks

  • VI. Generational Accounts for Sweden

    • Robert Hagemann

    • Generational Accounting in Brief

    • Application to Sweden

      • Definitions and Assumptions Underlying the Estimates

      • Results

  • VII. External Trade and the Aftermath of the 1992 Devaluation

    • Adam Bennett

    • Overview of External Trade Developments

      • Exports and Export Competitiveness

      • Imports and Import-Weighted Domestic Demand

      • Comparison with the 1981-82 Devaluation

      • International Comparisons

    • Recent Econometric Relationships for Trade Volumes

      • Export Volumes

      • Import Volumes

    • The Determination of Export and Import Prices

    • Concluding Remarks

  • Bibliography

  • Tables

    • 2-1. VAR Shocks (Cumulated from 1990:Q2)

    • 3-1. Expenditures on Labor Market Programs

    • 3-2. Breakdown of Labor Market Programs

    • 3-3. Estimates of a Labor Adjustment Equation

    • 4-1. General Government Accounts

    • 4-2. Central Government Accounts

    • 4-3. Budget Measures. 1992-94

    • 4-4. Payroll Taxes

    • 4-5. Budget Measures, November 1994-April 1995

    • 4-6. General Government Assets and Liabilities, End-1993

    • 4-7. Central Government Debt Dynamics

    • 4-8. Official Fiscal Adjustment Scenario

    • 4-9. Alternative Public Sector Scenarios

    • 5-1. Selected European Union Countries: Expenditure on Social Protection

    • 5-2. Selected European Union Countries: Social Protection Spending by Category, 1991

    • 5-3. Main Benefits of Social Insurance

    • 5-4. Financial Operations of the Principal Social Insurance Programs, 1992

    • 5-5. Before-Tax Market Income Required to Exceed Social Assistance Threshold, 1994 Rules

    • 5-6. Selected Countries: Increase in Disposable Income Owing to Family Allowances, 1992

    • 5-7. Examples of Savings in the Income Transfer Systems

    • 5-8. Old-Age Pension Outlays Under Existing System: Alternative Indexation Policies

    • 6-1. Generational Accounts Under the Base Case Scenario

    • 6-2. Selected Countries: Generational Accounts

    • 6-3. Generational Accounts of Males Under Alternative Productivity Growth and Discount Rates

    • 6-4. Generational Accounts Under the Policy Scenario, Including Impact of Pension Reform

    • 7-1. Exports by Commodity

    • 7-2. Exports by Destination

    • 7-3. Imports by Commodity

  • Charts

    • 2-1. Grass Domestic Product

    • 2-2. Policy Stance

    • 2-3. Aggregate Demand Indicators

    • 2-4. Household Sector Saving. Debt, and Wealth

    • 2-5. Domestic Spending

    • 2-6. Wages and Prices

    • 2-7. Output, Hours Worked, and Productivity

    • 2-8. Comparison of 1980-81 and 1990-93 Recessions

    • 2-9. Employment and Unemployment During Recessions

    • 3-1. Labor Market Indicators

    • 3-2. Public Sector Employment and Hours Worked

    • 3-3. Re-Employment After Training

    • 3-4. Wage Earnings

    • 3-5. Competitiveness, Import Penetration and Export Market Share

    • 3-6. Output and Productivity Trends in Sweden and European Union

    • 4-1. Public Sector Debt in Sweden and OECD Countries

    • 5-1. General Government Spending in Sweden and Selected OECD Countries

    • 5-2. Transfers to Households

    • 5-3. Income as a Percent of Social Assistance Threshold, 1991

    • 5-4. Sick Leave and Disability

    • 5-5. Old Age Dependency Rates in Selected Industrial Countries

    • 5-6. Old Age Pension Costs Under Existing and Reformed Schemes

    • 6-1. Impact of Consolidation Measures on Generational Accounts

    • 7-1. Export Competitiveness. Demand, and Capacity

    • 7-2. Import Competitiveness, Demand, and End-Use

    • 7-3. Comparison with the 1981-82 Devaluation

    • 7-4. External Trade Performance

    • 7-5. Sweden. Italy, Spain, and United Kingdom: Export Prices, Import Prices and Exchange Rates

    • 7-6. Sweden, Italy, Spain, and United Kingdom: Export and Import Volumes

The following symbols have been used throughout this paper:

  • … to indicate that data are not available;

  • —to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

  • –between years or months (e.g., 1991-92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Preface

This Occasional Paper is based on background papers prepared by the Fund staff for the 1994 Article IV consultation with Sweden. While the papers focus mainly on developments in recent years, these developments are reviewed in a longer-term perspective, and provide an overview of the main challenges confronting the welfare state in Sweden. The papers in this volume have benefited substantially from extensive discussions held with Swedish officials of both the central bank and the Ministry of Finance. Their assistance in providing data and background material were crucial inputs for the papers.

A number of individuals assisted in the production of this Occasional Paper. The authors would particularly like to single out Fritz Pierre-Louis, whose excellent research assistance proved invaluable in producing this document. The authors would also like to thank Carole Dunne and Jean Curtis for secretarial assistance in preparing the manuscript for publication. Esha Ray of the External Relations Department edited the paper for publication and coordinated its production.

The views expressed here, as well as any errors, are the sole responsibility of the authors, and do not reflect the opinions of the Swedish Government, the Executive Directors of the IMF, or other members of the IMF staff.

The papers mainly reflect information available through December 1994. However, in light of recent fiscal policy developments, the section on public finances has been updated to reflect the April 1995 Supplementary Budget and the convergence plan presented to the European Union in June 1995.

Cited By

  • Abraham, K.G., and S. Houseman, Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France and Belgium,” W.E. Upjohn Institute Working Paper 93-16 (Kalamazoo, Michigan: W.E. Upjohn Institute for Employment Research, May 1993).

    • Search Google Scholar
    • Export Citation
  • Alexius, Annika, in Monetary Policy Indicators (Stockholm: Sveriges Rikshauk, June 1993), pp. 6576.

  • Auerbach, Alan J., Jagadeesh Gokhale, and Laurence J. Kotlikoff, Generational Accounts: A Meaningful Alternative to Deficit Accountingin Tax Policy and the Economy, Vol. 5, David Bradford (Cambridge, Massachusetts: MIT Press, 1991).

    • Search Google Scholar
    • Export Citation
  • Auerbach, Alan J., Jagadeesh Gokhale, and Laurence J. Kotlikoff, Generational Accounting: A New Approach to Understanding the Effects of Fiscal Policy on Saving,” Scandinavian Journal of Economics. Vol, 94, No. 2 (1992), pp. 30318.

    • Search Google Scholar
    • Export Citation
  • Auerbach, Alan J., Jagadeesh Gokhale, and Laurence J. Kotlikoff, Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy,” Journal of Economic Perspectives, Vol. 8 (Winter 1994), pp. 7394.

    • Search Google Scholar
    • Export Citation
  • Berg, Lennart,Household Savings and Debts: The Experience of the Nordic Countries.Oxford Review of Economic Policy, Vol. 10, No. 2 (Summer 1994), pp. 4253.

    • Search Google Scholar
    • Export Citation
  • Burtless, Gary,Taxes, Transfers, and Swedish Labor Supply,” in The Swedish Economy, Barry P. Bosworth Alice M. Rivlin (Washington: Brookings Institution, 1987).

    • Search Google Scholar
    • Export Citation
  • Calmfors, Lars (1993a), Centralization of Wage Bargaining and Macroeconomic Performance: A Survey, Seminar Paper No. 536 (Stockholm: Institute for International Economic Studies, 1993).

    • Search Google Scholar
    • Export Citation
  • Calmfors, Lars (1993b), “Lessons from the Macroeconomic Experience of Sweden.European Journal of Political Economy, Vol. 9 (March 1993), pp. 2572.

    • Search Google Scholar
    • Export Citation
  • Catāo, Luis, and Ramana Ramaswamy, Recession and Recovery in the United Kingdom in the 1990s: A Vector Autoregression Approach”, IMF Working Paper No. 95/40 (Washington: International Monetary Fund, April 1995).

    • Search Google Scholar
    • Export Citation
  • Eliasson, Gunnar, and others, The Knowledge Based Information Economy (Stockholm: Industrial Institute for Economic and Social Research, 1990).

    • Search Google Scholar
    • Export Citation
  • EUROSTAT (Statistical Office of the European Communities), Social Protection Expenditure and Receipts, 1980-1992 (Luxembourg, 1994).

  • Expert Group on Public Finance (ESO), Social Security in Sweden—How to Reform the System (Stockholm: Ministry of Finance, 1994).

  • Franco, D., J. Gokhale, L. Guiso, L.J. Kotlikoff, and N. Sailor, General Accounting: The Case of Italy.Temi di Discussione 171 (Rome: Bank of Italy, 1992).

    • Search Google Scholar
    • Export Citation
  • Goldstein, Morris, and Mohsin S. Khan, Income and Price Effects in Foreign Trade,” Handbook of international Economics, Vol. 2, ed. by Ronald W. Jones and Peter B. Kenen (Amsterdam: North-Holland, 1985).

    • Search Google Scholar
    • Export Citation
  • Gustafsson, Björn, and N. Anders Klevmarken, Taxes and Transfers in Sweden: Incentive Effects on Labor Supply”, in Welfare and Work Incentives. A North European Perspective, ed. by A.B. Atkinson and Gunnar Viby Mogeuses (Oxford: Clarendon Press, 1993).

    • Search Google Scholar
    • Export Citation
  • Hagemann, Robert P., and Giuseppe Nicoletti,Ageing Populations: Economic Effects and Implications for Public Finance”, Organization for Economic Cooperation and Development. Department of Economics and Statistics. Working Paper No. 61 (Paris, 1989).

    • Search Google Scholar
    • Export Citation
  • Hagemann, Robert P., and Christopher John, Fiscal Policy in Sweden: A Generational Perspective.IMF Working Paper (Washington: International Monetary Fund, forthcoming, 1995).

    • Search Google Scholar
    • Export Citation
  • Hansen, HansSocial Security in Sweden and Four Other European Countries,” in Social Security in Sweden and other European Countries—Three Essays (Stockholm: Finansdeparttnentet, 1994).

    • Search Google Scholar
    • Export Citation
  • Hansen, Hans Henrekson, MagnusA New Framework for Testing the Effect of Government Spending on Growth and Productivity.Public Choice, Vol. 81 (December 1994), pp. 381401.

    • Search Google Scholar
    • Export Citation
  • Hansen, Hans, “Catching up in Industrialized Countries: A Desegregated Study.Journal of International Trade and Economic Development (forthcoming).

    • Search Google Scholar
    • Export Citation
  • Haveman, Robert,Should Generational Accounts Replace Public Budgets and Deficits?Journal of Economic Perspectives. Vol. 8 (Winter 1994), pp. 95111.

    • Search Google Scholar
    • Export Citation
  • Hedström. P.,Disability Pension: Welfare or Misfortune?in The Scandinavian Model: Welfare States and Welfare Research, ed. by R. Erikson and others (New York: M.E. Sharp, 1987).

    • Search Google Scholar
    • Export Citation
  • Heller, Peter S., Richard D. Haas, and Ahsan S. Mansur, A Review of the Fiscal Impulse Measure. IMF Occasional Paper No. 44 (Washington: International Monetary Fund, 1986).

    • Search Google Scholar
    • Export Citation
  • Henrekson, M., L. Jonung, and J. Stymne, Economic Growth and the Swedish Model” (unpublished, 1994).

  • Henrekson, Magnus, and others, The Crisis of the Swedish Welfare State. SNS Economic Policy Group. Occasional Paper No. 55 (Stockholm, May 1994).

    • Search Google Scholar
    • Export Citation
  • Kotlikoff, Laurence J., Generational Accounting: Knowing Who Pays, and When, for What We Spend (New York: Free Press, 1992).

  • Lindbeck, Assar, and others, The Swedish Experience, Institute for International Economic Studies, Seminar Paper No. 482 (Stockholm, 1990).

    • Search Google Scholar
    • Export Citation
  • Lindbeck, Assar, and others, Turning Sweden Around (Cambridge, Massachusetts: MIT Press, 1994).

  • Milgrom, Paul, and John Roberts, The Economics of Modern Manufacturing: Technology, Strategy, and Organisation,” American Economic Review. Vol. 80 (June 1990), pp. 51128.

    • Search Google Scholar
    • Export Citation
  • Ministry of Finance, “Complement to the Supplementary Budget Bill,” in Sweden’s Economy (Stockholm, April 25, 1994).

  • Ministry of Finance, Sweden’s Economy (Stockholm, April 1995).

  • Ministry of Health and Social Affairs, Pension Reform in Sweden, A Short Summary (Stockholm, 1994).

  • Muellbauer, John,The Assessment: Consumer Expenditure,” Oxford Review of Economic Policy, Vol. 10, No. 2, Summer 1994, pp. 141.

    • Search Google Scholar
    • Export Citation
  • Muellbauer, John,, “Comment on Auerbach, A.J. J. Gokhale, and L.J. Kotlikoff, ‘Generational Accounting: A New Approach to Understanding the Effects of Fiscal Policy on Saving,’Scandinavian Journal of Economics. Vol. 94, No. 2 (1992), pp. 31922.

    • Search Google Scholar
    • Export Citation
  • National Social Insurance Board, Sweden, Annual Report, 1992/93 (Stockholm, 1993).

  • Nilson, C., and J. Nilson, in “Monetary Policy Indicators” (Stockholm: Sveriges Riksbank, June 1993), pp. 4554.

  • Organization for Economic Cooperation and Development (1993a), OECD Economic Outlook, No. 54 (Paris, December 1993).

  • Organization for Economic Cooperation and Development (1993b), OECD Employment Outlook (Paris, 1993).

  • Organization for Economic Cooperation and Development (1994a). OECD Economic Surveys, 1993-1994; Sweden (Paris, 1994).

  • Organization for Economic Cooperation and Development (1994b), OECD Employment Outlook (Paris, 1994).

  • Olsson, Sven E., Social Policy and Welfare in Sweden (Lund: Arkiv, 1990).

  • Oxley, Howard, and John P. Martin, Controlling Government Spending and Deficits: Trends in the 1980s and Prospects for the 1990s.OECD Economic Studies. No. 17, Autumn 1991.

    • Search Google Scholar
    • Export Citation
  • Piore, Michael J., and Charles F. Sabel, The Second Industrial Divide: Possibilities for Prosperity (New York: Basic Books, 1984).

  • Ramaswamy, Ramana,The Structural Crisis in the Swedish Economy: Role of Labor Markets,” Staff Papers, International Monetary Fund, Vol. 41 (June 1994), pp. 36779.

    • Search Google Scholar
    • Export Citation
  • Sandmo, Agnar,Economists and the Welfare State,” European Economic Review, Vol. 35, 1991.

  • Sveriges Rikshank, Inflation and Inflation Expectations in Sweden (Stockholm, October 1994).

  • United Stales, Office of Management and Budget, Budget of the United States Government: Analytical Perspectives. Fiscal Year 1995 (Washington: U.S. Government Printing Office, 1994).

    • Search Google Scholar
    • Export Citation