"Americans are debating whether to substantially expand the size of
their government. As Swedish economists who live in the developed
world's largest welfare state, we urge our friends in the New World to
look carefully before they leap" –
Street Journal
Lessons From the Swedish Welfare State

Jennifer Blanke, Head
of the Centre on Global Competitiveness
at the World Economic Forum
responds to the
Street Journal

I was surprised by the assertion by Andreas Bergh and
Magnus Henrekson that the
US has nothing to learn from the Nordic economic
model. Their argument is premised on the idea that there is a negative
correlation between government spending and growth, and that therefore by
definition, countries like
Sweden with high government spending will be less
successful. Yet this conclusion flies in the face of our own work on the
drivers of productivity and economic success.

For more than three decades, the World Economic Forum has
been undertaking the difficult task of analyzing and measuring the set of
factors, policies and institutions that determine the level of productivity of
, a phenomenon that we call competitiveness. Understanding
the efficiency by which economies transform their resources into useful outputs
is important because this efficiency determines both the material wellbeing of
their citizens and the rate of return of investments and, therefore, the potential
growth rate of incomes. Competitiveness is driven by a large number of factors
including institutions, infrastructure, macroeconomic stability, health and
primary education, higher education and training, the functioning of goods,
labor and financial markets, technological adoption, market size, business
sophistication and innovation.

The idea that large government spending can be a drag on
growth is not new. Indeed, while the authors point to their own recent work on
the topic, this was already a popular idea in the 1990s, with much research
carried out, the most prominent being a 1997 article by Robert Barro. Following
this trend at the time the World Economic Forum included a measure of
government spending in measuring national competitiveness. Yet we soon realized
that this made no sense: countries providing no public services whatsoever were
automatically placed at the top, while high spending countries were at the
bottom regardless of how the resources were spent. Yet how the resources
are spent is the key question.

The authors tout the pro-market reforms that have taken
place in
Sweden in recent years, and this is indeed important.
But they fail to mention that many of the critical factors driving productivity
and growth require investments: to build infrastructure, to develop a
well-educated workforce, to carry out research and development. The Nordic
countries do very well in our competitiveness rankings, precisely because their
exceptionally transparent and efficient governments have systematically made
such critical investments. In other words, it’s not how much you spend but
how you spend
that counts.

To support their argument, the authors note that between
1970 and 1993,
Sweden fell from being the world’s fourth richest
country to the 17th. Yet it is very important which time period is
taken into account, and which of the Nordics is taken as an example. 1993
followed a significant financial crisis in
Sweden, when one would expect an economic decline.
Sweden happens to be the “least rich” among the
Nordics. More generally, although all four Nordic countries were poor not so
long ago, today they are among the wealthiest countries in the world: While the
US is now the 9th richest country per person, Norway is ranked 2nd,
Denmark 5th, Finland 12th, and Sweden 13th.
Indeed, put together the four Nordics would rank as the world’s 10th
or 11th largest economy in absolute terms. Looked at this way it is hard to use
them as an example arguing against government spending.

The Nordic
countries are highly competitive economies that we regularly point to as
examples that others can learn from. They have many strengths and provide
strong evidence that it is not the size of government that matters but the
quality of services provided by government. Indeed, the
US and many other countries across the world would be well served by
understanding how these remarkable countries have made such impressive economic
progress over the years.