Scandinavia

Scandinavia, historically Scandia, part of northern Europe, is generally held to consist of the two countries of the Scandinavian Peninsula, Norway and Sweden, with the addition of Denmark. Some authorities argue for the inclusion of Finland on geologic and economic grounds and of Iceland and the Faroe Islands on the grounds that their inhabitants speak North Germanic (or Scandinavian) languages related to those of Norway and Sweden.

The term Norden has also come into use to denote Denmark, Finland, Iceland, Norway, and Sweden, a group of countries having affinities with one another and a distinctness from the rest of continental Europe. Among their distinguishing characteristics are thinly populated northern regions, a relative wealth of fish resources, long life expectancies, and high levels of literacy.

Scandinavia and the Social State

Despite of a large welfare state and high taxes, the Scandinavian countries are considered to have strong economies.

The main characteristics of this "Nordic model" include:

• a comprehensive welfare state with an emphasis on transfers to households and publicly provided social services financed by taxes, which are high notably for wage income and consumption;
• a lot of public and/or private spending on investment in human capital, including child care and education as well as research and development (R&D); and
• a set of labour market institutions that include strong labour unions and employer associations, significant elements of wage coordination, relatively generous unemployment benefits and a prominent role for active labour market policies.

Scandinavian countries are also highly ranked in the Index of Economic Freedom. Although the United States ranks higher than these nations, they are more free in several decisive areas. Denmark has greater business freedom, investment freedom, financial freedom, property rights, and freedom from corruption, while having comparable monetary freedom, and trade freedom scores to the U.S. Sweden has greater business freedom, investment freedom, financial freedom, property rights, and freedom from corruption, while having comparable trade freedom, and monetary freedom, to the United States. Finland has greater business freedom, financial freedom, property right enforcement, and freedom from corruption than the United States, while having comparable monetary freedom, investment freedom, and trade freedom. Norway, the least successful Scandinavian nation, has greater freedom from corruption and property right enforcement than the United States while having comparable business freedom and trade freedom. Iceland has greater fiscal freedom, investment freedom property right enforcement, and freedom from corruption, while having comparable business freedom, and trade freedom.

Sweden

Until the second half of the 19th century, Sweden was fairly poor. But far-reaching free market reforms in the 1860s allowed Sweden to benefit from the spreading Industrial Revolution. And so, during the late 19th and early 20th centuries, Sweden saw its economy rapidly industrializing, driven by the many Swedish inventors and entrepreneurs.

Another factor which continued Swedish prosperity was the fact that Sweden was able to stay out of all wars, including both World Wars. Sweden is the country with the longest consecutive period of peace since 1809, when Sweden was invaded by Russia, losing Finland in the process. As a result of its free market policies, the resourcefulness of its people, and its successful avoidance of war, Sweden had the highest per-capita income growth in the world between 1870 and 1950, by which time Sweden had become one of the world's richest countries, behind only the United States and Switzerland, and Denmark (who have since also fallen behind because of high taxes).

In 1932, the Social Democrats rose to power in the face of the Great Depression. Until 1932, government spending had been kept below 10% of GDP in Sweden, but the Social Democrats, under their leader Per Albin Hansson, wanted to change this and remake Sweden into a "folkhem" ("people's home"), a term Swedish Social Democrats adopted from the Fascists in Italy.

Even in the early 1950s, Sweden was still one of the freest economies in the world, and government spending relative to GDP was in fact below the American level. But between 1950 and 1976, Sweden experienced an expansion in government spending unprecedented during a period of peace, with government spending to GDP rising from about 20% in 1950 to more than 50% in 1975. Virtually every year, taxes were increased while the welfare state expanded, both in the form of a sharp increase in the number of government employees and ever more transfer payment benefits.

During the first 20 years, this relentless government expansion took place seemingly without ill effect, as Sweden benefited from rapid global growth — although Sweden's growth had already started to slip in relative terms, from well above average to just average. This changed in the 1970s after Olof Palme, from the left wing of the Social Democratic party became Prime Minister. Palme stepped up the socialist transformation in Sweden, rapidly increasing anti-business regulations and sharply increased payroll taxes.

The payroll-tax increases, along with increasing wage demands from unions, made Swedish businesses highly uncompetitive on the global markets, something which was to be solved by devaluing the Swedish krona. As a result, price inflation rose sharply, leading to repeated devaluations.

After Palme was killed by an unknown assassin in February 1986, pragmatist Ingvar Carlsson became prime minister. Worried that Swedish growth had trailed most other countries, Carlsson's government implemented a number of free-market reforms. Among these were the lifting of all currency controls in 1989 and a tax reform that dramatically reduced marginal tax rates. Although these reforms have arguably contributed to improving the long-term economic performance of Sweden, they would contribute to precipitating the deep economic downturn in the early 1990s.

Meanwhile, as the economy started slowing significantly in 1990 after a series of tightening measures, consumer price inflation slowed. With the combination of continued high nominal interest rates, reduced capital gains taxation (and with that, reduced deductions for interest payments) and falling price inflation, real interest rates started rising significantly, helping to end the asset price bubbles. On top of all of this came the oil price shock following Saddam Hussein's invasion of Kuwait and an economic downturn in key trading partners such as the United States, the United Kingdom, and Finland. The end result was that Sweden slipped into a recession in late 1990.

In the collapse in November 1992, the dramatic increase in interest rates and the deep recession had at the same time created a large amount of bad loans, making almost all major banks in effect bankrupt. Only after the Swedish government pledged they would bail out the banks with whatever money they needed was a widespread banking collapse averted.

The recession became Sweden's deepest by far since the Great Depression, with GDP in 1993 being 5% lower than in 1990, with employment falling more than 10%, and the budget deficit rising to more than 10% of GDP. By then Sweden had fallen to between 15th and 20th place in international income comparisons, a decline from which it has never since recovered. After this deep downturn, a number of free market reforms and budget cuts were implemented and Sweden underwent a recovery.

External links

• Scandinavia on Wikipedia