Abram Olmstead  | March 18, 2014

Did Sweden Just Make the Case for Free Market Policies?

“Why can’t the U.S. be more like Europe?” It’s a familiar refrain among those who would prefer the federal government take on an even larger and more commanding role in providing health care and other social services.

But big government advocates should take a closer look at how several Northern European social democracies, long celebrated for their “cradle to grave” health and welfare coverage, are changing. In recent years, countries including Sweden, Finland, and Denmark have embraced a variety of privatization and free market initiatives aimed at scaling down their bloated public sectors.

The changes are driven in large part by the growing recognition that gargantuan government sectors and overgenerous entitlements are simply unsustainable. As Adrian Wooldridge notes in a 2013 article for The Economist, “they have reached the limits of big government.”

Moreover, European leaders are recognizing that to set the stage for long-term growth requires reining in the ever-growing social welfare programs that are a drag on the economy. While the Nordic states weathered the downturn of 2007-2009 better than most—certainly better than the basket-case economies of southern Europe—growth and productivity have remained sluggish.

Perhaps the most prominent example is Sweden, where a long-term project has been under way, beginning in the early 1990s, to rethink the government’s role in the economy.

Across a wide range of fiscal and policy categories, Sweden has opted for reforms, including reducing the corporate tax rate; embracing school vouchers; moving toward defined-contribution pensions; tightening eligibility for unemployment; and privatizing health care and other social services.

Swedish economist Anders Aslund writes of attending a spring 2012 conference on the Swedish economy and witnessing how far the intellectual center of gravity has shifted—and not just among traditional advocates of free markets.

“I was amazed to hear how far the consensus had moved to the free-market right, even among Social Democrats and trade-union leaders,” Aslund writes on Bloomberg.com. “The values are competition, openness, and efficiency, while social and environmental values remain—a social-welfare society without the social-welfare state. The idea is to make it more efficient through competition among private providers.”

It’s not just Sweden. In 2013, the Netherlands announced an ambitious plan to rethink the nation’s welfare state, which Dutch King Willem-Alexander described as “unsustainable.” The king emphasized moving the nation toward what he called “a participation society,” reforming overgenerous social programs and calling for greater individual responsibility to “lay the basis for creating jobs and restoring confidence.” Similar evolution can be seen in Finland and Denmark.

That is not to say, of course, that Northern Europe will evolve into a free market paradise overnight. Entrepreneurs are still stifled by high taxes, and public spending as a percentage of GDP, while improved, remains troublingly high.

And even while reining in public services, the Nordic states continue to boast comparatively large government sectors. For example, in Norway, some 30% of the workforce is in the public sector, according to data from the Organization for Economic Development and Cooperation. But even so, it’s telling that the most significant reforms have been in the direction of reducing government and allowing for more market-based influences to emerge.

In a February 2013 editorial, The Economist hailed that shift, suggesting that leaders from both the political left and right could learn from the Nordic nations’ creative and innovative approach toward making government work as an antidote to “tired orthodoxies” of the 20th century.

“You can inject market mechanisms into the welfare state to sharpen its performance,” the Economist editors conclude. “You can put entitlement programs on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and invested interests. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum.”

This is the second part in a series about free market reforms occurring in parts of Europe. Read the first piece about health care and check out more from the uschamber.com blog.