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The Third Way is the Wrong Way!

by on September 14, 2012

Photograhy: Magnetic Lobster

With a split election result after which both the state economy labour party (PvdA) and the free market liberal party (VVD) are likely to become bedfellows in the next coalition. My worry is the attempt to find a “Third Way” on economic policy. For this third way many look to Sweden. This was not a success.

A popular notion is that Sweden has defied standard economic logic, by managing to grow rich in spite of high taxes and state involvement in the economy. Yet as Swedish writer Nima Sanandaji explains in his recent publication “The surprising ingredients of Swedish success – free markets and social cohesion.” The Swedish experience should be used to argue for the benefits of free-market oriented policies, warn against the economic and social problems that can arise when government involvement in society becomes too large.

Sweden did not become wealthy through social democracy, big government and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. As late as 1950, Swedish tax revenues were still only around 21 per cent of GDP. The policy shift towards a big state and higher taxes occurred mainly during the next thirty years, as taxes increased by almost one per cent of GDP annually economic performance declined. The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden’s relative economic performance. In 1975, Sweden was the 4th richest industrialised country in terms of GDP per head. By 1993, it had fallen to 14th. Government intervention had a devastating impact on entrepreneurship. After 1970, the establishment of new firms dropped significantly. Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.

Since the economic crisis of the early 1990s, Swedish governments have rolled back the state and introduced market reforms in sectors such as education, health and pensions. These are exactly those areas which are particulary stagnant in The Netherlands.  Economic freedom has increased in Sweden while it has declined in the UK, The Netherlands and the USA. Sweden’s relative economic performance has improved according

Both Rutte and Samson, know that they are dependent on a good economic performance. They too should learn Sweden’s lessons and reform the Dutch economy. This should include pro-market reforms which increase economic freedom.

The text was modified and taken from:

 Nima Sanandaji (2012) “The surprising ingredients of Swedish success – free markets and social cohesion.” IEA Discussion Paper No. 41

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