Reforming the Welfare State
NBER volume on the post-crisis reforms that restored Swedish growth.
Summary
Richard Freeman, Birgitta Swedenborg and Robert Topel edited this volume of economic research on Sweden's response to its 1990s crisis. It follows an earlier collection the same editors produced in the 1990s, which had examined the problems, and assesses what the reforms achieved.
The Swedish crisis of 1991 to 1993 involved a banking collapse, a currency crisis after the failed defence of the krona peg, and unemployment rising from around two per cent to above eight. The reforms that followed included a new fiscal framework with expenditure ceilings and a surplus target, central bank independence with an inflation target, a pension reform introducing notional defined contribution accounts with an automatic balancing mechanism, tax changes, and the introduction of school vouchers and competition in publicly funded services.
The contributors examine each area empirically. The general finding is that the reforms restored macroeconomic stability and fiscal sustainability while leaving the size of the welfare state broadly intact, which the editors treat as the interesting result: Sweden reformed the mechanisms rather than reducing the commitments. The chapters on the pension reform and on the fiscal framework are the most cited. The book is academic and assumes an economics readership. It was published in 2010 and does not cover the subsequent debates about the effects of school choice on segregation and results, which have become the most contested part of the Swedish reform record.
Key takeaways 7
- Sweden restored fiscal sustainability by changing the mechanisms of its welfare state rather than by reducing its commitments.
- The notional defined contribution pension system adjusts benefits automatically to demographic and economic conditions, which removes the need for repeated political reform.
- Expenditure ceilings combined with a surplus target produced fiscal discipline that discretionary commitments had failed to deliver.
- The 1991 to 1993 crisis was a banking and currency crisis rather than a welfare state crisis, though it forced reform of the latter.
- Sweden introduced competition and choice into publicly funded services while retaining public financing.
- Unemployment after the crisis remained above its pre-crisis level for many years, which the contributors attribute partly to labour market institutions.
- The contributors argue that a large welfare state is compatible with fiscal sustainability provided the automatic adjustment mechanisms are built in.
Who should read it
Policy analysts and investors interested in fiscal frameworks and pension design who want the empirical assessment of the most-cited welfare state reform.
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