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Sweden’s Swing toward a Free Market

Wednesday, January 29, 2014

Startups and regulatory restraint have fueled Swedish economic growth.

STOCKHOLM — With only about six hours of sunlight in mid-winter, young, tech-savvy Swedes have long sought to liven up their dreary winters with gaming and other inventions — and they’re reviving their stagnant, statist economy too.

The emergence of a startup nation has fueled recent Swedish economic growth, as has a spirit of regulatory restraint animating policymakers.

Technology companies have led the charge, as digital-friendly cities like Stockholm, Malmo, and Gothenburg have evolved into video-gaming hubs, spawning popular titles like Candy Crush (King), Battlefield (Digital Illusions Creative Entertainment, now a division of gaming giant EA), Need for Speed (Ghost Games), and Minecraft (Mojang).

Swedes have converted their bland, statist childhoods into a source of inspiration. “There was no cable,” DICE engineer Patrick Bach told the New York Times. “It was state television only, which meant socialist children’s programming. Things like Chinese shadow theater. Hungarian reruns. Horrible, horrible things. Our core tastes were founded in a void.”

It wasn’t just statist television that mired Sweden in doldrums for decades. Until 1991, the highest marginal tax rates surpassed 90 percent, and, as of 1993, tax revenues represented 67 percent of GDP. Nationalized health-care and cradle-to-grave welfare characterized the “Swedish model” that served as a social democratic playbook — both in the United States and Europe — for generations. By 1993, the budget deficit amounted to 13 percent of GDP, while total government debt approached 71 percent of national output.

Swedes have converted their bland, statist childhoods into a source of inspiration.

“Entrepreneurs were pariahs” in the 1970s, said the founder of a Stockholm-based language school network, “so lots of entrepreneurs left. The government’s view was, let them go, we don’t need them here.”

Yet the Swedish pendulum began to swing back toward free markets in the 1990s, when Swedes elected their first post-World War II conservative government, which promptly slashed taxes on income, corporations, and capital gains. GDP growth from 1993 to 2010 exceeded Europe-wide growth by nearly a full percentage point.

That trend accelerated in the 2000s, and has intensified further in the past few years. Public debt in 2010 fell to 37 percent of GDP, and the annual budget deficit more or less disappeared; the same remained true in 2012 and 2013. Corporate tax rates in Sweden have been cut down to 22 percent (compared to 35 percent in the United States).

The country has also transitioned its government pension system from a defined-benefit to a defined-contribution system. And in 2007, the government established the Swedish Fiscal Policy Council, which “provide[s] an independent evaluation of the government’s fiscal policy” and, in its 2013 report, praised a recent “proposal on raising the retirement age” that “should help strengthen long-term sustainability in the public finances.” As an early 2013 Economist article put it, “the streets of Stockholm are awash with the blood of sacred cows.”

A Swedish court ruling in mid-December on the tax treatment of carried interest was a win for private equity firms, and Nordic Capital was spared a retroactive $100 million tax bill. The ruling is expected to save nearly half a billion dollars for the Swedish private equity sector as a whole, which commands more deal flow per capita than almost any other European country.  Before the decision, some executives had threatened to quit Sweden altogether, citing unfavorable tax treatment. “This issue has created great uncertainty and taken a great deal of resources for the entire industry,” one Swedish financier told the FT. Fortunately, the Stockholm court has dispelled much of that uncertainty, and for the good.

The Swedish pendulum began to swing back toward free markets in the 1990s, when Swedes elected their first post-World War II conservative government.

These developments have unleashed an entrepreneurial spirit that extends far beyond gaming. Spotify, a leading music streaming company that was recently valued at more than $4 billion, and Skype, the voice-over-IP service acquired by Microsoft in 2010 for $8.5 billion, originated in Sweden and aim to become the country’s next success stories on the scale of Saab or Ericsson.

In a lengthy December New York Times video story, “Stockholm: Europe’s Start-Up Superstar,” Erik Olsen reported that over the last ten years, Sweden has received one of the highest levels of venture capital per capita anywhere in Europe. “The opportunities exist,” Martin Kallstrom, the CEO of Narrative, a photo startup, said. “The funding is here, the people, the great engineers are here.”

Indeed they are, and young Swedes hungrily aspire to establish a Silicon Fjord on the Baltic shore. “The ambition level of [my] company is to go global,” Niklas Adalberth, co-founder of Klarna, a billion-dollar local rival of PayPal, told the Times. “It is just a matter of time.”

Local entrepreneurs are flourishing. At a co-working space in central Stockholm, engineers from various startups can hobnob and compare notes. The energy on the streets during morning and evening commutes, and during the busy lunch hour, is palpable, and far greater than when I visited two years ago.   

Meanwhile, the Swedes, not known for their aviation prowess, outdueled Boeing, BAE, and France’s Dassault in landing a massive $4.5 billion fighter jet contract from Brazil for Saab’s Gripen plane, long derided as the Fiat Punto of the skies. The Brazil sale comes on the heels of a smaller victory over the Eurofighter Typhoon Saab in a sale to the Swiss. In both instances, Saab labored to compete on price with multiple aerospace companies, each dozens of times larger than it.

Saab offered the Gripen at an affordable price that overcame the advantages of massive legacy defense contractors largely by avoiding their exorbitant legacy costs, including pension and health-care spending.

GDP growth from 1993 to 2010 exceeded Europe-wide growth by nearly a full percentage point.

And elsewhere in Scandinaviation, SAS announced its first profit in six years, albeit a narrow $27 million on $6 billion-plus in revenue. The leading Scandinavian air carrier had neared bankruptcy late last year before negotiating with pilots and cabin crew to curb pay (by as much as 15 percent) and retirement benefits.

At the time, the head of the chief Swedish trade union labeled the deal “a crime against all the Swedish model stands for,” and the country braced for a labor backlash that would have spelled work stoppages and slowdowns in the air.

Yet this Armageddon never materialized, and instead, in shedding the hidebound “Swedish model,” SAS preserved thousands of jobs and positioned the company for future success.   

Need further evidence that Sweden has embraced markets? Just listen to liberal academics pining for the old days. “To speak of Sweden as socialist today is pretty far off the mark,” Brian Palmer, an anthropology professor at Sweden’s Uppsala University, told the Christian Science Monitor in 2009. “Neoliberal reforms have gone much further here in some sectors than in the U.S. Sweden has become a sort of laboratory for privatization in a way that the Heritage Foundation or the American Enterprise Institute could only dream of.”

So while it’s too early to tell whether Sweden has slipped the surly bonds of its socialist past, it’s making steady progress.

Michael M. Rosen, a regular contributor to The American, is an attorney and writer in San Diego. Reach him at michaelmrosen@yahoo.com.    

FURTHER READING: Rosen also writesHow to Clean Up the Senate’s Nuclear Fallout ,” “RX for R&D: Repealing the Medical Device Tax,” and “The Right Way to Combat Patent Trolls.” Desmond Lachlan reveals “Europe’s Outlook in 2014.” Dane Stangler predicts “Europe’s Hope: Entrepreneurs.”

Image by Dianna Ingram / Bergman Group

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