Foreign sector and welfare state in Sweden: From complementarity to tensions

https://doi.org/10.1016/j.strueco.2022.10.005Get rights and content

Highlights

  • The crisis in the 1990s in Sweden involved a change in the accumulation pattern.

  • The Swedish path to financialization, although moderate, involves higher inequality.

  • The synergies between the welfare state and the foreign sector became problematic.

  • Sweden's foreign sector shifted from the compensation to the efficiency thesis.

Abstract

In this article, we analyse the relationship between the foreign sector and the ‘Swedish model’ of welfare state since the 1960s. The initial hypothesis is that the old relationship between the foreign sector and the Swedish welfare state during the expansion phase of the latter was mainly complementary, almost symbiotic, thus adhering to the compensation thesis. We ascertain that the different reforming waves of the late twentieth century transformed this relationship into one where the foreign sector became a source of distress, creating certain incomplementarities in the model. After reviewing the historical links between both, we examine their evolution over recent decades, paying special attention to transformations prompted by the process of globalisation. We conclude that the efficiency thesis best explains the current links between the foreign sector and the welfare state in Sweden.

Introduction

Since the appearance of relevant works by Garrett (1998) and Swank (2002), the debate around the effects of international economic relations on welfare states has gained certain prominence. Coming close to the argument of Katzenstein (1985), Swank argued that there was no evidence of retrenchment of the welfare system due to capital mobility finding that ‘trade openness is positively associated with total social welfare effort and the public provision of health care’ (Swank, 2002: 120). Prior to this, Garrett (1998) had already ascertained that social protection was a good source of insurance in a context of international distress. This is known as the ‘compensation theory’, according to which highly open economies have larger welfare states as a result of the demand for compensatory social policies (Busemeyer and Garritzmann, 2018; Rodrik, 1998).1 In a contrary argument, the so-called ‘efficiency thesis’ establishes that competition among countries to attract mobile capital reduces the capacity of governments to increase taxes and thereby to finance social protection (see also Ha et al. 2014, and the survey from Schulze and Ursprung 1999).

The application of this debate to the Nordic countries is relevant, given that these are all small countries that have maintained a high degree of trade openness for several decades. During the 1970s, confronted with the dilemma of reducing taxes (and thus social protection) or containing wages in order to become more competitive, they adopted a strategy of wage restraint (along with currency devaluations) so that growth and employment could be sustained (Chang, 1994; Pontusson, 1992; Swank, 2002). This illustrates the dilemma between the above-mentioned compensation and efficiency arguments. Interestingly, Busemeyer and Garritzmann (2018) argue that Nordic countries represent paradigms of the compensation theory.

Among the Nordic nations, the specific case of the Swedish welfare state is of special interest. Like its neighbours, Sweden is a small country in which the foreign sector has played a key role (Benner, 1997; Garrett, 1998; Pontusson, 1992).2 Not only did Sweden rely on exports for its growth strategy after World War II, but its foreign specialisation was essential to the production changes that took place in the 1970s.

Some debate persists around how Sweden was affected by increased competition from emerging economies and, more generally, by globalisation, which we define – following Schulze and Ursprung (1999) and Potrafke (2015) – as the increase in economic interaction between countries as a result of a reduction of arbitrage costs, an increase of trade liberalisation, elimination of capital controls, and boosts in technological development. Pontusson (1992) argued that firms’ internationalisation strategies prevented them from reinvesting their growing profits into efficiency gains, and this contributed to the productivity problems experienced by Sweden during the 1980s. Benner (1997) added that the country failed in its search for a new economic structure and so retained its prior specialisation.

The specialisation of a country as open as Sweden is key to the maintenance of the welfare state. In this regard, Swank (2002: 139-142 and 278) explains that the impact of ‘the political logic of globalisation’ on Sweden has been ‘limited’, but that the ‘confluence of conditions’ in the early 1990s (namely, capital mobility and international investors expecting higher inflation and higher taxes in the country, and thus departing) led to welfare state reforms. That said, there is consensus on the idea that the changes in this country resulting from globalisation have been remarkable.

The purpose of this paper is to focus on the articulation between the so-called ‘Swedish model’ of institutional framework and the country's foreign sector. In this sense, we draw from a large literature on Varieties of Capitalism that identifies different types of ‘institutional complementarity’ between countries and derives specific growth models (see also Andersson and Lindvall 2003, Bahr et al. 2007, Belfrage and Ryner 2009, Garrett 1998, Hall and Soskice 2001, Pagano 2010).

Unlike Liberal and Mediterranean Market economies (LMEs and MMEs) in Coordinated Market Economies (CMEs) such as Sweden, coordination between institutions is achieved through nonmarket relationships (Hall and Soskice, 2001: 6-8). This latter group is characterised by mechanisms for wage coordination between employers and unions, vocational training systems, and the implementation of inter-firm research collaboration programs with which to promote high value-added exports. The combination of intra- and inter-industrial relationships is reinforced through non-accommodating economic policies that encourage unions and employers in the pursuit of wage contention (Hall, 2018; Hall and Franzese, 2003; Hope and Soskice, 2016; Iversen et al., 2000; Iversen and Soskice, 2012; Soskice, 2008)

Our goal is to demonstrate a change of paradigm in the relationship between the Swedish welfare state and its foreign sector across recent decades, resulting from an alteration in the accumulation regime following the structural changes taking place since the 1980s (and especially since the 1990s). A shift has occurred from a scenario consistent with the theory of compensation to one more typical of the theory of efficiency, where the foreign sector has been developing new complementarities with both old and new institutions – including public institutions – while at the same time limiting the capacity to develop policies typical of a powerful welfare state.

The research is structured to illustrate this paradigm shift. In the next section, we describe the complementarity that existed (especially until the 1970s) between the welfare state and the external sector in a particular historical and institutional framework generally referred to as the ‘Swedish model’. In the third section, we identify the major changes in accumulation patterns observed in the country since the 1980s in order to later consider how these affected the relationship between the welfare state and the foreign sector. The final section offers our conclusions.

Section snippets

The historical-theoretical importance of the nexus between the foreign sector and the ‘Swedish model’

The interest in examining the foreign sector as a cornerstone of recent changes in the welfare state lies in the traditional virtuous relation between the two. In this section, we describe those links (following Diagram 1, below) and explain how the welfare state and the foreign sector fed each other, also examining the extent to which the intervention of different actors made this possible. Following Buendía and Palazuelos (2014), we define the welfare state as an institutional framework which

Foreign sector and welfare state under the new accumulation dynamics

The virtuous links at the base of the traditional configuration began to experience some difficulties in the 1970s and 1980s, exactly when the competition from other countries (particularly from Asia) were becoming obvious and the economy was showing initial signs of deceleration. The government first reacted to the slowdown by implementing expansionary policies, which helped expand the Swedish welfare state (Andersson and Lindvall, 2003) but also contributed to increasing nominal costs in the

Conclusions

In this research, we have attempted to analyse how the foreign sector has articulated with the so-called ‘Swedish model’ since the 1960s. We have detailed the synergic relation built between the Swedish welfare state and the foreign sector through the implementation of the Rehn-Meidner model, its implications concerning international competitiveness, and its alignment with welfare state objectives. We have also described the attempts to reform that relationship through the EFO model, as well as

Acknowledgements

We would like to credit the language revision assistance from Teresa Muñoz Sebastian and Joseph Candora, and two anonymous reviewers. The usual disclaimer applies.

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