15 July 2019

The Turnaround of the Swedish Economy: Lessons from Large Business Sector Reforms

In a recent CESifo Working Paper, Fredrik Heyman, Pehr-Johan Norbäck, and Lars Persson study how a country can improve productivity growth in its business sector and reach its growth potential.

Key issue

Although the economic policy debate has long centered on the importance of macroeconomic policies, there is growing awareness that the microeconomic functioning of markets is vital.

In this paper, we argue that the Swedish experience in the 1970s and 1980s is an illustrative example of how a dysfunctional system of microeconomic regulations can lead to a severe macroeconomic crisis. We also show how microeconomic reforms can play an important role in turning the economy towards growth.
In response to the crises in the early 1990s, Sweden undertook a package of major structural reforms. While it is clear that macroeconomic reforms promoted a recovery, it is less known that a substantial part of the Swedish reform package was aimed at improving the microeconomic functioning of markets, which ignited a successful industrial reorganization process.

Approach and methodology

To understand the economic forces associated with the Swedish restructuring process ignited by the microeconomic reforms, we first survey the industrial restructuring literature in search of mechanisms that are important in explaining firm, employment, and productivity dynamics.

We then describe the package of structural reforms that Sweden undertook and discuss empirical results that provide indicative support for our institutional predictions. This discussion is based on detailed Swedish matched employer-employee data over the period 1996–2009.

Key findings and conclusions

The removal of barriers to growth for new and productive firms was crucial to the success of Sweden’s reforms, as were increased rewards for investment in human capital. First, there was an increase in allocative efficiency in Sweden, as measured by greater market share for the more productive firms. The relationship between firms’ productivity and wage increases was strengthened over the period studied, which suggests that productive firms and productive employees became more rewarded in the Swedish business sector. Second, there was also an increase in jobs created in small firms, while most of the productivity gains were created in large incumbent firms, suggesting that the reforms facilitated the division of labor between large incumbents and small growing firms. Our findings suggest that policy makers can learn from country case studies and that the Swedish experience can be a valuable case study for developing – as well as developed – countries that are attempting to promote growth by improving their business sectors.