Challenges to the Swedish Welfare State

Desmond Lachman, Ramana Ramaswamy, J. Green, Robert Hagemann, and Adam Bennett

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1995
• ISBN:
  9781557754868

NONE

Contents

Preface

I. Overview

Desmond Lachman

II. Recession and Recovery in the 1990s

Ramana Ramaswamy and John H. Green

Proximate Causes of the Recession

Causes of Demand Shocks

Consumption

Investment

Selected Features of the Recession

Comparing Economic Recoveries

A Vector Autoregression Analysis

III. The Swedish Labor Market

Ramana Ramaswamy

Recent Trends in the Labor Market

Labor Markets Programs

Unemployment Insurance

Active Labor Market Programs

Wage Bargaining System

Main Institutional Features

Implications for Wage Inflation

Implications for Productivity

Labor Contracts and Flexibility

IV. Public Finances, Adjustment Programs, and Debt Dynamics

John H. Green

Recent Fiscal Developments

General Government

Central Government

Local Authorities and the Social Security Sector

Adjustment Policies

Budget Savings Policies, 1992-94

Budget Savings Policies, November 1994—April 1995

Public Sector Debt and Debt Dynamics

Measurement and Historical Background

The Debt Equation: Historical Illustration

Official Debt Projections

The Impact of Lower Growth and Higher Interest Rates on Public Finances

V. Social Security in Sweden

Robert Hagemann

Historical and International Perspectives

Growth of General Government Spending

Social Spending in Sweden and the European Union

Social Security and Benefit Dependence

Overview

Nonpension Benefits

Budgetary Impacts of Reforms

Public Pensions

The Current System

Problems with Existing System

The Pension Reform

Concluding Remarks

VI. Generational Accounts for Sweden

Robert Hagemann

Generational Accounting in Brief

Application to Sweden

Definitions and Assumptions Underlying the Estimates

Results

VII. External Trade and the Aftermath of the 1992 Devaluation

Adam Bennett

Overview of External Trade Developments

Exports and Export Competitiveness

Imports and Import-Weighted Domestic Demand

Comparison with the 1981-82 Devaluation

International Comparisons

Recent Econometric Relationships for Trade Volumes

Export Volumes

Import Volumes

The Determination of Export and Import Prices

Concluding Remarks

Bibliography

Tables

2-1. VAR Shocks (Cumulated from 1990:Q2)

3-1. Expenditures on Labor Market Programs

3-2. Breakdown of Labor Market Programs

3-3. Estimates of a Labor Adjustment Equation

4-1. General Government Accounts

4-2. Central Government Accounts

4-3. Budget Measures. 1992-94

4-4. Payroll Taxes

4-5. Budget Measures, November 1994-April 1995

4-6. General Government Assets and Liabilities, End-1993

4-7. Central Government Debt Dynamics

4-8. Official Fiscal Adjustment Scenario

4-9. Alternative Public Sector Scenarios

5-1. Selected European Union Countries: Expenditure on Social Protection

5-2. Selected European Union Countries: Social Protection Spending by Category, 1991

5-3. Main Benefits of Social Insurance

5-4. Financial Operations of the Principal Social Insurance Programs, 1992

5-5. Before-Tax Market Income Required to Exceed Social Assistance Threshold, 1994 Rules

5-6. Selected Countries: Increase in Disposable Income Owing to Family Allowances, 1992

5-7. Examples of Savings in the Income Transfer Systems

5-8. Old-Age Pension Outlays Under Existing System: Alternative Indexation Policies

6-1. Generational Accounts Under the Base Case Scenario

6-2. Selected Countries: Generational Accounts

6-3. Generational Accounts of Males Under Alternative Productivity Growth and Discount Rates

6-4. Generational Accounts Under the Policy Scenario, Including Impact of Pension Reform

7-1. Exports by Commodity

7-2. Exports by Destination

7-3. Imports by Commodity

Charts

2-1. Grass Domestic Product

2-2. Policy Stance

2-3. Aggregate Demand Indicators

2-4. Household Sector Saving. Debt, and Wealth

2-5. Domestic Spending

2-6. Wages and Prices

2-7. Output, Hours Worked, and Productivity

2-8. Comparison of 1980-81 and 1990-93 Recessions

2-9. Employment and Unemployment During Recessions

3-1. Labor Market Indicators

3-2. Public Sector Employment and Hours Worked

3-3. Re-Employment After Training

3-4. Wage Earnings

3-5. Competitiveness, Import Penetration and Export Market Share

3-6. Output and Productivity Trends in Sweden and European Union

4-1. Public Sector Debt in Sweden and OECD Countries

5-1. General Government Spending in Sweden and Selected OECD Countries

5-2. Transfers to Households

5-3. Income as a Percent of Social Assistance Threshold, 1991

5-4. Sick Leave and Disability

5-5. Old Age Dependency Rates in Selected Industrial Countries

5-6. Old Age Pension Costs Under Existing and Reformed Schemes

6-1. Impact of Consolidation Measures on Generational Accounts

7-1. Export Competitiveness. Demand, and Capacity

7-2. Import Competitiveness, Demand, and End-Use

7-3. Comparison with the 1981-82 Devaluation

7-4. External Trade Performance

7-5. Sweden. Italy, Spain, and United Kingdom: Export Prices, Import Prices and Exchange Rates

7-6. Sweden, Italy, Spain, and United Kingdom: Export and Import Volumes

The following symbols have been used throughout this paper:

… to indicate that data are not available;

—to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

–between years or months (e.g., 1991-92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

II Recession and Recovery in the 1990s

Ramana Ramaswamy and John H. Green

After almost a decade of expansion in the 1980s, the Swedish economy entered into a deep recession beginning in the first quarter of 1990. The cumulative decline in output during this recession, which lasted a full three years, was around 7 ½ percent. This makes the recent recession the longest and deepest since the 1930s. Moreover, it contrasts sharply with the previous recession of 1980-81, which lasted barely one year and during which output declined by only about 2 ¾ percent (Chart 2-1). Since the second quarter of 1993, a significant, albeit unbalanced, recovery has been under way, driven in the initial stages primarily by a major strengthening of the external sector.

Chart 2-1. Gross Domestic Product

(In billions of 1985 honor)

Source: Statistika Centralbyran, National Accounts.

This section examines the proximate causes of the recession of the 1990s, the reasons for its long duration, and the impact that it had on the economy. The section then compares the recovery that is currently under way with the recovery in the early 1980s. Finally, a vector autoregression analysis provides a more rigorous underpinning to the analysis of the recession and recovery in the 1990s. The analysis indicates that the proximate cause of the recession in the 1990s can be ascribed in large measure to demand shocks—particularly shocks to private consumption and residential investment.

Proximate Causes of the Recession

The proximate (or immediate) cause of the recession in 1990 could have come from any of a variety of sources. Among the more likely candidates are (1) changes in the stance of fiscal policy; (2) shocks from the external sector; (3) the stance of monetary policy preceding the recession; and (4) shocks to the individual components of demand.

As can be seen from Chart 2-2, which presents a measure of the fiscal impulse over the past decade, fiscal policy was expansionary when the economy went into recession.¹ Indeed, the fiscal impulse measure was posi...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I. Overview
• II. Recession and Recovery in the 1990s
• III. The Swedish Labor Market
• IV. Public Finances, Adjustment Programs, and Debt Dynamics
• V. Social Security in Sweden
• VI. Generational Accounts for Sweden
• VII. External Trade and the Aftermath of the 1992 Devaluation
• Bibliography
• Tables
• Footnotes