Marcus Zackrisson is senior innovation advisor at the Nordic Innovation Centre (NICe). Prior to that he was a Swedish Science Attaché to California. He holds a Ph.D. in Innovation Studies from the University of Linköping, Sweden.
It’s part of my job as innovation advisor to dig up facts about international rankings. One striking fact is that Sweden almost always shows up at the top. Take for example the World Competitiveness ranking, which was published by the World Economic Forum earlier this year: Sweden was here ranked as the second most competitive economy in the world, ahead of the U.S.
It may come as a surprise to you that Sweden is richer than the U.S. if we compare per capita, but this is what the latest numbers from the International Monetary Fund tell us. It’s not a huge difference, but still interesting for me as an economist. How is it possible that the average Swede is richer than the average American? We know that the U.S. has better universities than Sweden has, and that they attract the best and brightest students from all over the world. America’s universities are leaders in research, which is evident from the complete U.S. dominance when it comes to scientists awarded the Nobel Prize. Excellent universities in combination with the entrepreneurial spirit, and large sums of venture capital are constantly producing new world class companies. A Swedish company that has any ambitions to grow must enter the international market, while a U.S. company has a vast domestic market to grow on. Moreover, the Fortune 500-list of the biggest companies in the world shows an overrepresentation of U.S. companies, and most of the world’s best managed and efficient companies are in the U.S. Plus the fact that English is the lingua franca of the international market. Sweden also has high taxes and a regulated economy, while America is the home of the free economy. It seems that the cards are stacked in favor of the U.S., but Sweden still has a higher income per capita than the U.S. Weird, isn’t it?
Either is this statistics wrong (which it may be, but it could as well be in Sweden’s favor) or we have to come up with an explanation why. Here is my take:
1. High taxes doesn’t matter all that much
Sweden’s high taxes are often said to slow economic growth and they do – sometimes. However, much of what is paid trough taxes in Sweden, is in the U.S. paid via insurance (e. g. health care) or out-of-pocket expenses (e.g. higher education). High taxes are only bad for economic growth if the service they provide is less efficient than the service that private providers could supply. For example, the U.S. spends almost 17 percent of GDP to provide health care for its citizens, while Sweden spends only 9 percent. And the U.S. quality of the health care is hardly twice as high as in Sweden.
2. Public sector efficiency
Swedes love to complain about public sector bureaucracy and inefficiencies. I don’t think that is true, based on my experience of have lived in several countries, including the U.S. Although there are much room for improvement in Sweden’s public sector, it holds upp pretty good compared to other countries. Both Sweden and the U.S. struggle with low performing public school systems, but the U.S. spends a lot more per capita for their schools than Sweden. And anyone who has dealt with the U.S. tax system knows that it is a complicated and bureaucratic mess. It is true that the taxes are lower in the U.S., but the cost of paying and collecting them are far higher than Sweden.
3. Deregulated economy
It is a myth that Sweden is an overregulated “socialist” economy. It was probably true in the 1970s, but the economy has since been deregulated. This is beautifully described by the Swedish economist Andreas Bergh in his book The Capitalist Welfare State (not yet available in English). Most of the economy has today been deregulated, something that happened without any big political controversies. Sweden today is very much a free market economy, certainly when compared to the rest of western Europe. Sweden’s school system is less regulated than the American system, and it is also a strong proponent for free trade, more so than the U.S.
Explaining why some countries become rich is a research discipline by itself, but my theory is that the three factors I mentioned initially. Many Swedish policymakers (but far from all) are painfully aware about the disadvantages, and if we are to grow even richer, we need to acquire some of the U.S. entrepreneurial spirit and innovativeness. The good news here is that the entrepreneurial spirit is catching on in Sweden. The Swedish music streaming company Spotify and VoIP provider Skype are good examples of how young Swedes succeed when they focus on starting and growing new companies. Over the past few years, Sweden climbed from the bottom in international comparisons of entrepreneurial activity (the Global Entrepreneurship Monitor).
The author is senior innovation advisor at the Nordic Innovation Centre (NICe). Prior to that he was a Swedish Science Attaché to California. He holds a Ph.D. in Innovation Studies from the University of Linköping, Sweden. The center (NICe) belongs to the Nordic Council of Ministers, and is tasked to facilitate sustainable growth in the Nordic economies.
