Sweden's English Disease

Bumping into potholes on the road to utopia

Once, its very name was synonymous with the good life. No longer. Today Sweden, the postwar living example of the affluent materialistic paradise, is caught in a raging economic crisis, the like of which few industrial countries have seen since the 1930s. Workers who used to boast of their high living standards and womb-to-tomb social welfare system nowadays demonstrate in the streets to demand speedy government action to stop soaring prices and booming unemployment.

"We have caught the English disease," admits one economic ministry official. "It has been a numbing, demoralizing experience." Adds Swedish Nobel-prizewinning Economist Gunnar Myrdal: "We are at the end of a very long development. We live in a dangerous time. It is possible that everything will go to hell."

Last year, according to bank estimates, Sweden was one of the three Western European countries to suffer a fall in gross national product (the others: Britain and Finland), and its drop of 2.5% was the largest. At the same time, it suffered a balance of payments deficit of $3.4 billion, industrial output fell more than 4%, inflation roared along at 16% and real unemployment hit 11%.*

The outlook for 1978 is not much better, despite government moves to salvage basic industries through nationalization, heavy subsidies and blatant protectionism against highly competitive imports. "The best that this will do is allow us to tread water," says Sven Grassman of Stockholm University's Institute of International Economic Studies. Other economists, including some in the government, reject as "rosy" and "naive" official forecasts of positive G.N.P. growth, 10% inflation and at least unchanged unemployment this year.

The malaise has its roots in the worldwide recession of 1974 and 1975. At first Sweden seemed to have found its own unique answer to the slump: ignore it so as to be ready for the expected global economic upturn. While other countries struggled with recession and layoffs, the Socialist government of Prime Minister Olof Palme simply subsidized industry. Companies were paid to maintain full production and full employment, even when they could not sell and had to stockpile their goods in anticipation of a surge in demand. The immediate result was a flush of apparent prosperity, which allowed militant unions to get wage increases of 40% in the two-year period.

When the Socialists were defeated by a moderate coalition in the 1976 elections, for the first time in more than four decades, Palme boasted that he was leaving "a well-laid table" for his successor. In truth, Prime Minister Thorbjoern Faelldin's inheritance looks more like an empty kitchen. Palme had grossly miscalculated the timing and strength of the world economic recovery. When this finally became apparent, Faelldin compounded the original error by failing to warn of the danger and take immediate strong action.

The result was national complacency and a continued boom in wage demands and wage settlements. Now Sweden is paying the price: total hourly labor costs have almost doubled since 1973 to 45 kroner ($9.60), pricing Swedish exports out of world markets. Many basic industries from steel to textiles face tough competition from cheap imports: indeed, Sweden's entire industrial structure has been pushed off balance so far that rapid recovery may be impossible.

At the same time, the country's envied but extravagant social benefits have also distended the economy. The oppressive personal taxes needed to fund the welfare state have impeded incentives while the steep cost of employee benefits has also hurt company profits and raised export prices. Prices were so high that even Sweden's state-owned steel company, NJA, last year chose to buy new ships from West Germany rather than from Sweden's state-owned shipyard, Svenska Varv AB.

The Faelldin government seems unsure about what to do, preferring step-by-step moves rather than any confidence-restoring comprehensive package. Last year three of the nation's four largest shipbuilders were nationalized and merged. This streamlining, plus $700 million in initial aid, did not prevent the new state-owned company, once a key basic industry, from needing and getting still further funds to avert bankruptcy. The government also merged the country's three largest steelmakers, NJA and two others, and took a 50% controlling stake in the new company. Similar moves are planned for the hard-hit electronics and textile industries. Import quotas on foreign textiles have also been imposed. To aid small businesses, $211 million was provided by the government, while inheritance taxes were halved and the ceiling on direct loans was raised.

Economists advocate hefty cuts in corporate and personal income taxes (which reach 85% when salaries rise to $34,000) and a long dose of austerity. Myrdal, a socialist, insists that the most important task is to "stop this hellish wage-price spiral." But the government's freedom of action is severely curtailed by its refusal to confront the powerful unions and its unwillingness to dismantle or cut its expensive social benefits. Says Bert Lundin, head of the influential metalworkers union: "We will not swallow low wage increases as the medicine for the country's economic ills."

In March, two of the largest unions representing blue-and white-collar workers gave the government an apparent victory when they accepted increases averaging just under 5%. But the contract accorded them the right to renegotiate if 1978 inflation rises above 7.25%, a virtual certainty. If this is the sort of victory the government wants and is willing to accept, it could signal the disintegration of the famed "mixed" economy and the end of the Swedish dream.

* Officially the Swedish government admits to only 2.2% unemployment. But this does not count unemployed people being retrained at government expense for jobs that are not available.

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