Sweden: the economic watchwords are fiscal restraint and austerity until the wheels of industry begin to pick up speed again - includes related articles - Business Outlook Abroad

Business America, July 27, 1992

Sweden's small economy was doubly sick in the opening months of 1992. Adversely affected by the international downturn, the country's wheels of industry are being further slowed by a belated deflationary process, and unemployment is rising toward an unprecedented 4-5 percent of the workforce. Little improvement in business activity is expected before 1993. Although the immediate future for the economy is bleak, the ground has been prepared for improving the general business climate and attracting foreign investment. This process was begun by the former Social Democratic government. The general elections of September 1991 brought a right-center coalition government to power in Sweden. It is continuing along the path of European integration staked out by the Social Democrats, but budgetary constraints are governing the speed with and extent to which some of the programs can be implemented. Until the economy again begins to pick up momentum, the watchwords are fiscal restraint and continued public sector austerity. The U. S. Embassy in Stockholm reports that lower valuation of the dollar has led to an improvement in the price competitiveness of U.S. products and has spurred interest in the United States as a potential supplier of price-sensitive products, in addition to the high-tech products which Sweden has been buying from the United States in recent years. Sweden should remain an attractive market for U.S. exporters over the coming years.

Sweden is an advanced, industrialized country with a high standard of living and an extensive social services system. Situated in northwestern Europe with a climate like that of Minnesota, this constitutional monarchy is slightly larger in area than California but with a population of only some 8.6 million. This represents 0.16 percent of the world population, but economically Sweden is much larger, accounting for roughly 2 percent of global gross production. As a small trading nation, Sweden is dependent on world economic developments, and must adjust to them.

Sweden has a modern distribution system, excellent internal and external communications, plus a skilled and educated workforce. The traditional resource base of the economy lies in timber and hydroelectric power. Almost one-third of gross domestic product is exported; consequently Sweden is a strong supporter of liberal trading practices. Trade in industrial products between Sweden and the EC and EFTA (European Free Trade Area) countries is not subject to customs duty, nor is a significant portion of Sweden's imports from developing countries. Import duties are among the lowest in the world, averaging less than 5 percent ad valorem on finished goods and around 3 percent on semi-manufactures. Most raw materials are imported duty free.

New Directions

A series of recent economic policy decisions designed to place a greater reliance on market forces, and to harmonize Swedish laws and practices with those of the European Community, provide the foundations for a new economic era in Sweden. Initiatives by the previous Social Democratic government, which began the process of change, included abolishing nearly all foreign exchange controls; a broad tax reform; agreement not to proceed with early dismantling of nuclear power plants; applying for membership in the European Community (EC); pegging the krona to the European Currency Unit (ECU); and dismantling the agricultural price regulation system.

With the advent, in October 1991, of a new coalition government, headed by Moderate (conservative) Party Prime Minister Carl Bildt, came emphasis on the need for a clear "New Start" for Sweden. The government promises reduction in government expenditures, a continued lowering of taxes, further deregulation, privatization of government-owned corporations, and increased priority on infrastructure investment, education, and research as steps to reverse the recent trend of economic decline. The main thrust of the changes during the government's first six months in office was directed toward improving the general business climate, particularly that for small businesses. The government is also determined to open up the economy, through changes that affect both local and prospective foreign participants, in the belief that a more liberal climate will stimulate business investment and, ultimately, lead to renewed economic growth.

Sweden is currently negotiating, together with its EFTA partners, an agreement with the European Community on the formation of a European Economic Area (EEA). Viewed in Sweden as an interim step before full EC membership can occur (target date: January 1995), the EEA will allow the free movement of goods, services, capital, and persons among its member countries. In the meantime, Sweden is well along on the way toward unilaterally harmonizing its laws and regulations to conform with those now in place in the Community.

The Goal of Economic Policy

Due in large part to the international downturn, but also because of internal structural problems and a belated deflationary process, overall economic activity in Sweden declined in 1991 by more than 1 percent. Investments and industrial production are flagging. Open unemployment, despite the injection of large sums in labor market programs, passed the 3 percent-mark by the end of last year. (The numbers of unemployed, at worrying levels for Sweden, are expected to continue growing through 1992 and into 1993 before any improvement is seen.) Other areas of concern are falling property values and significant credit losses by the banks. Swedish GDP is expected to decline again in 1992, though not by as much as in 1991. However, some forecasters are beginning to predict that the economy may take an even worse turn than the already-pessimistic official forecasts indicate. All observers agree that general economic recovery will not begin before 1993. The immediate goal of Swedish economic policy thus becomes one of sustaining the current low level of inflation while at the same time restoring conditions under which the economy can begin to grow.