STOCKHOLM: During the last two decades, Sweden lost its place among the world's rich countries. Swedish competitiveness eroded and income growth slowed to a crawl. To reverse this trend, Sweden needs radical reforms, with lower income taxes and opportunities for small companies to grow.
Sweden is not the first welfare state to collapse of its generousity. At the beginning of this century Uruguay was the "Sweden of Latin America" -- introducing the 8 hour work day in 1915, free high schools in 1916, and state pensions in 1919. It was one of the richest countries in the world. Uruguay's downfall began after World War II. Growth decreased and then it stopped. In the mid-1980s, income per capita (in fixed prices) was the same as it had been in 1955. By that time, Uruguay had slipped to number 43 on the list of the world's richest countries.
What does this have to do with Sweden? Not much, you might say, because Sweden is still rich and developed. But Sweden, too, is on its way down the income list. At its highpoint in 1975 Swedish per capita income was eleven per cent above the OECD average, and only slightly behind the Americans, the Swiss, and the Canadians. Now Swedes are no longer among the top ten countries, but are six per cent below the average OECD income.
One similarity between Sweden and Uruguay is that neither believed free markets could create the development they desired. By distorting incentives through taxes, regulations, and a runaway welfare state, both countries discouraged growth in their most productive sectors. In Uruguay, agriculture was the leading sector; in Sweden, it was manufacturing.