Competition and free trade key to prosperity

THE Swedish economy has often been compared with a bumblebee, whose ability to fly can only be explained by its ignorance of aerodynamics and physics. Proponents of the Swedish model claim Sweden is proof that, counter to conventional wisdom, big government and economic growth can peacefully coexist.

Though there certainly are positive as well as negative lessons to be learned from Sweden, one should be wary of those who claim causal relationships between Sweden's welfare state and its historic economic achievements. The parts of the welfare state that work the best today are the parts that have been reformed, where competition and private alternatives are allowed.

School vouchers, for example, were introduced more than 15 years ago in Sweden. This reform has allowed children to choose a privately run school if they want to, paid for by taxes. Recent research shows not only that independent schools produce the best results but that school choice andthe existence of independent schools has improved overall efficiency and effectiveness in the entire school system.

American documentary filmmaker Michael Moore praises the Swedish healthcare system in his movie Sicko. But he is worried that the new Swedish Government will destroy this paragon of public health funding, as he sees it, by letting in private alternatives. In fact, Sweden has had private alternatives within the healthcare system for 15 to 20 years. That is no big deal for Swedes, at least not as long as the private alternatives don't constitute too large a share of the market. The debate is on the financial side. Should people be empowered to buy private insurance?

There is also a debate whether big emergency hospitals should be allowed to be run privately (still with funding from the government) and if private hospitals should be allowed to make a profit. Hardly anyone other than Moore is totally against privately run health care.
While the quality of healthcare services is pretty good in Sweden, productivity is extremely low because there is too little competition. In 1975 an average doctor met nine patients a day. Today it is down to four. People have to wait for months or years to get basic surgery, with huge human and economic costs as a result. What kind of welfare is that?

When voters ousted the Social Democrats in 2006 for the first time in 12 years, those who had touted Sweden as a welfare paradise on earth were inconsolable. Guardian columnist Polly Toynbee, who once lauded Sweden as the best country in the world, wrote two days after the election: "How can a good government lose power when the country is flourishing? With a rising growth rate of 5.6per cent, low interest rates, thriving manufacturing and exports, Sweden's welfare system is the envy of the world."

Perhaps, but that doesn't mean it works properly, and the Swedish system's welfare weaknesses have become more apparent with globalisation. Sweden, like other European countries with rigid labour markets and bloated public sectors, has created social and economic exclusion. More than half of Sweden's 50 largest companies were founded before World War I; only two after 1970. Of five million working-age adults, one million remain outside the workforce, even though few are officially unemployed. The rest are either in various state-run job-training programs, on long-term sick leave, or receiving early retirement or disability pensions from the state.

The Centre-Right government that took power 18 months ago has begun to address this issue. It has attempted to increase the labour supply by introducing tax reforms to make it more profitable to work. It has also introduced limited and reduced unemployment benefits and new-start jobs by reducing taxes and social security fees for employers who hire the long-term unemployed.

Sweden is not rich because of the welfare state. On the contrary, it is rich despite the welfare state. Sweden has a proud tradition of free-market institutions, and it was market reforms in the late 19th century as well as in the last reform period in the 1990s that explain the country's economic development.

In the late 19th century successive liberal governments introduced free establishment in different trades, abolished guilds and stripped the upper classes of economic privileges that bled the economy dry.

It was during this time that free trade was a badge of honour, and immigration and emigration were free for all. Sweden's most prosperous companies were born during this era: SKF, Electrolux and Assa (later Assa Abloy). In 1970, Sweden was the world's fourth richest country; today it is No14.

Europe has contributed historically with great inventions and institutions. Europe was also the first part of the world to become prosperous. But that doesn't mean the future is footloose and fancy-free. Competition, the No1 wealth creator, is under attack in Europe. If protectionist ideas manage to get inside European institutions, Europeans should worry.

If Europe is to remain the focal point of Western prosperity, it has to accept what most Swedish governments for more than a century have held true: that free trade is the source of wealth and that it is the vent of fresh air that oxygen-starved countries in the developing world need. While the European Union spends $110 billion a year on farming subsidies and $9.3billion on development aid, it would be far better for starving nations if subsidies were abolished.

There are certainly lessons to be learned from Sweden. But expanding government and limiting competition is definitely not one of them. Instead, interested countries and people should seek inspiration in the market liberal reforms that have been undertaken by Social Democrats as well as by Centre-Right parties.

Maria Rankka is president of Timbro, a Swedish free-market think tank. She has written books on the emerging European tigers Estonia and Ireland, and on the social dimensions and effects of high taxation on individuals. She was earlier a partner in a public relations firm, and before that she worked for the Moderate Party, which is now in government.