Can Sweden's welfare state rise to the challenges of the twenty-first century?

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What should be the role of the state in economic affairs? This long-standing question has assumed greater prominence as countries have tried to adjust to the forces of globalization and aging populations.

The experience of Sweden, which for many years has maintained one of the most extensive welfare states, is of particular interest not only to other industrial countries but also to emerging market and developing countries. The authors of Sweden's Welfare State: Can the Bumblebee Keep Flying? Michael Keen, Subhash Thakur, Valerie Cerra, and Balázs Horváth, met with the IMF Survey to discuss how Sweden has managed to sustain a welfare state for so long and the challenges it now faces.

IMF SURVEY:What was your motivation for studying Sweden's welfare state at this juncture?

THAKUR: IMF surveillance in advanced European economies, as elsewhere, has increasingly extended beyond its traditional macroeconomic focus. During the Swedish consultation, we set out to look at the broader picture of Sweden's welfare state and to assess its achievements and prospects. Sweden's experience has been extensively studied as a model of the social democratic welfare state, and so, to draw on as broad a spectrum of views as possible, we widened our discussions beyond the official and semiofficial circles to include a range of observers--for example, academics at the Stockholm School of Economics and Uppsala University, and various research institutions.

You could say that our study, which has evolved over a period of almost two years, is, in a sense, the IMF's attempt to understand what is so special about the Swedish model, why many have regarded it as successful, what its costs are, and what challenges it is likely to face in the future. In our view, the two key forces that the Swedish model will need to confront if it is to remain viable are globalization, which potentially undermines the welfare state's fiscal basis, and the demographic transition.

IMF SURVEY: There has been considerable debate about the benefit of a welfare state like Sweden's, with its critics saying it hampers growth and its advocates saying it ensures high living standards for all Swedish citizens. Hasn't the welfare state begun to have a negative effect on economic growth?

CERRA: Indeed, Swedish scholar Assar Lindbeck observed that Sweden slipped from having the thirdhighest per capita income among OECD countries in 1970 to ranking fourteenth in 1991. But a careful study of the trends in relative incomes shows that Sweden managed to maintain its per capita income at a roughly constant margin above the OECD average until its banking crisis in the early 1990s. The recession that began in 1991 led to an abrupt and permanent decline in output and per capita income.

In short, Sweden lost its high ranking very suddenly at the onset of the banking crisis and has not been able to regain it. Looking at other measures --such as GNP rather than GDP, per capita income of the working-age population rather than the total population, or ones based on different exchange rates for international comparisons--leads to the same conclusion. Thus, it can be argued that the slippage in Sweden's living standards measured by per capita income was not a gradual sclerosis necessarily caused by the welfare state but rather a sharp onetime drop in income triggered by avoidable macroeconomic policy mistakes that was not recouped later. But Sweden ranks high on many other measures of living standards, such as educational attainment, health care, and environmental quality.

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The literature on how the welfare state affects growth is also relevant. A lot of academic studies sug-Page 230gest that a number of different taxes distort labor supply decisions, the incentive to save, and so forth.

The extent of that...