Options for Economic and Political Reform in Sweden

Abstract

Sweden Assar Lindbeck, Per Molander, Torsten Persson, Olof Peterson, Agnar Sandmo, Birgitta Swedenborg and Niels Thygesen This paper summarizes an official report to the Swedish government (and general public). The economic crisis in Sweden is explained by both system failures and specific policy mistakes. The system failures include distorted incentives and markets, and inappropriate and outdated institutions. The deep recession and extraordinary rise in unemployment started as a collision between inflationary wage development and attempts to pursue a hard-currency policy. The resulting loss of international competitiveness in the tradable sector was accompanied by increased real interest rates, collapsing real estate prices and a related financial crisis. Following the floating of the Swedish krona in November 1992, the main problem became a domestic demand collapse, which has been accentuated by a spectacular rise in the household saving rate. The report emphasizes that good policy advice is not enough; it is also necessary to analyse and reform the institutions which continually produce undesired outcomes, with respect not only to macroeconomic stability but also economic efficiency and growth. The proposed institutional reforms are designed to restore a highly competitive market system and to facilitate a responsible fiscal stabilization programme. This would also enhance the medium-run credibility of government policies and provide scope for a more expansionary policy in the short run.

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