Can China Learn from Sweden?

Arne BigstenDepartment of EconomicsGöteborg University

1. Introduction Sweden took off around 1870 Sweden was still far from affluent when the

social-democratic hegemony started in 1932. Swedish real per capita income (PPP terms) was then about the same as in China at present.

Emerged into a fully-fledged welfare-state with advanced industry

Institutions for peaceful coexistence and social compassion

China has undergone dramatic changes since the Communist party took power in 1949. First traditional socialist planning strategy.

Since 1978 the country entered on a path of market reform and increasingly liberal economic policies. The growth effects and poverty reduction effects of these reforms have been spectacular. (Headcount 1$ per day - 63.8% in 1981, 16.1% in 2001)

Can China learn anything from the Swedish experience?

China below technological frontier - Right now ”catch-up growth”

Does the current institutional structure sufficient to sustain the transformation of the economy into a modern market economy?

Does the structure support innovative activity and productivity improvements?

2. Emergence of the Swedish Model 1870-1970 Sweden had the fastest growth in

the world together with Japan Natural resource base mattered but more so

technoligcally advanced manufacturing Environment for innovations Infrastructure and institutions, laws and

regulations, skills Scandinavia had the most egalitarian wage

structure of any advanced industrial society by 1970s, when economic problems started.

3. Main Strands of the Swedish Model “The social democratic model tried to

combine the socialist virtues of equality and security with the capitalist virtues of economic efficiency and technological dynamism.” Moene and Wallerstein (2004)

Is this what China wants or does it want to become more like the USA?

Liberal attitude towards business Very liberal trade policy (No Comparative

Advantage Defying policy) Some market interventions Welfare state Consensus social climate An activist stabilisation policy from 1932 Role of trade unions and employer-labour

relations (see next page)

Basic agreements between unions and employers in 1938 establishing the rules for collective bargaining. The bargaining at the industrial level was replaced by negotiations by the national associations of employers and unions. After central agreements local discussions held within the agreed framework.

The system led to the virtual elimination of industrial conflicts, allowed the export industry to determine aggregate wage growth rates, and it led to gradual wage compression. The Rehn-Meidner model meant that firms with low levels of productivity were squeezed out.

4. The Decline of the Swedish Model 4.1. Did the Welfare State Lower Economic Flexibility “The bridging policy” in the 1970s and

delayed adjustment Regulations of labour, credit, and housing

markets Very rapid wage increases – strong trade

unions Wage earners’ fund debate

4.2. Dismantling the Model or Reforming it? Devaluation 1982 Public sector cutbacks Credit market liberalised 1990 financial crisis 1992 floating of the currency 1990-91 tax reforms

1993 budget deficit 13% of GDP Rapid structural change Open unemployment 10% - employment

levels have not yet recovered Globalisation – Sweden joins the EU New inflation norm (2%) and an

independent Central Bank Moderate wage settlements

RESULTS Trade surplus Budget surplus Growth above the OECD average The system has been liberalised Adjustments in the welfare systems But still generous welfare state Continued reforms of the welfare state

likely but not its abandonment

5. Relevance of the Swedish Model to the Chinese Experience

5.1. The Importance of Economic Flexibility and Market Integration

Growth supporting institutions Outward orientation and acceptance of

structural change Institutions securing property rights

Extensive emigration Trickle-down worked The Rehn-Meidner model in the 1950s to

combine low unemployment with low inflation

Rapidly increasing real wages (until 1970)

5.2 Defining a Credible Role for the State Sweden has the highest taxes in the world

and a large public sector But it is a market economy Little nationalisation of industry

Solidaristic wage policy combined with an active labour market policy supported structural change and adjustment according to our comparative advantages.

In 1983 when the system of centralised wage bargaining collapsed the variance of log hourly wages was only about a quarter of what it had been in 1960. The dispersion then increased again.

Firms lowly taxed as long as the money stayed in the firms and was not given to the shareholders as dividends.

But this locked money in which eventually hampered reallocations and the structural changes that became necessary.

5.3. Governance Issues and the Rule of Law Democracy – pragmatic conflict solving Network of civil society organisations Consensus building before decisions are

taken Strong local institutions Close links between government, labour,

and capital (corporatism).

5.4 The Fundamentals of the Welfare State – social insurance, social inclusion, and conflict management

There has been a debate in Sweden as to whether the welfare state has hindered structural changes or whether it has facilitated them.

China cannot afford such a solid safety net as Sweden, but also in China trust in the government and confidence in the future would reasonably make it easier for labour to accept the dramatic structural changes that are ongoing. Political confidence building has to be made on the basis of the political processes, and there are certainly large differences between China and Sweden in this regard.

5.5. A Conducive Environment for Private Enterprise Development – property rights and regulatory institutions

Clearly defined property rightsThe government caters for education and health services but not industrial production.What to do with China’s state firms!

Independent judiciary to deal with inter-firm relations

Sound bankruptcy procedures How can China grow so fast with unclear

property rights? Can the existing institutional structure sustain growth in a more diversified and advanced economy?

China eventually needs to join the innovation club. This requires free flows of knowledge and information. Can China accept that?

6. Concluding Remarks Difference between Sweden and China in

income levels means that the kind of welfare state that is affordable differs.

China should initially put higher priority on the provision of public services such as helath and education plus infrastructure than on social secturity safety nets.

When Sweden took off the economic gap to the world frontier was smaller than what it is for China now. World market demand more different from domestic demand in China today then in Sweden 1870/1930.

Outward orientation of production has helped in Sweden and seems to work well also in China.

Sweden changed its capital-labour ratio by exporting its labour, while China is changing its ratio by importing capital. For this flow to continue stability is needed.

But demands for democratic reform are virtually inevitable once people get sufficiently wealthy. Therefore these pressures will surely build up in China as well, and how this is handled by the political system will be the crucial challenge in the decades to come also with regard to economic development.

When will an effective political debate and an effective opposition be accepted in China?

What make Sweden and the other Nordic countries stand out are the extent of social peace and the comprehensiveness of the welfare state that they have achieved.

The foundations of such peace are often country-specific and must evolve out of the local social setting. It is thus not obvious what China can learn from Sweden about how to replicate this important ingredient of its development in the past century.