Sat, Dec 13, 2008 page9

• In a time of adversity comes a new framework for prosperity

  • By Leif Pagrotsky
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  The looming global recession has brought government intervention that saves failing companies to the forefront of economic policy. In a speech just prior to the recent G-20 summit, British Prime Minister Gordon Brown warned US president-elect Barack Obama against bailing out the US’ struggling Big Three automakers, arguing that global competition had made their decline irreversible. A bailout, then, would simply delay the inevitable at a huge cost to taxpayers.

  Such advice is always tough to sell — all the more so in the face of the worst economic outlook in 70 years. After all, according to conventional wisdom, global competition moves jobs to low-cost countries and puts downward pressure on wages everywhere else. As globalization intensifies and accelerates economic change, it affects the lives of ordinary citizens like never before, stoking popular fear. Little wonder, then, that French President Nicolas Sarkozy succumbed to the allure of protectionism during last year’s election campaign, as did both presidential candidates in the US.

  But protectionism need not be the only alternative to fear of global competition. In the Scandinavian countries, as in the US, foreign competition has intensified sharply over the past decade. China and India gained considerable economic power, and close neighbors in previously isolated communist states were rapidly integrated in the European economy.

  However, surveys by Pew Research show that in Sweden, 85 percent of the population agree that trade is good for their country, compared with only 59 percent of Americans. Among Swedish industrial workers, the figure is 75 percent in favor. How can that be?

  By designing educational and social protection policies that strengthen the individual, Scandinavian politicians have sought to promote change rather than prevent it. The positive public opinion in Sweden is not a symptom of brainwashing but a rational response to people’s experience during the last decade.

  As competition intensified and production started moving to the Baltic States and Eastern Europe, Sweden’s policy response was to upgrade the skills of the workforce. As a result, from 1997 to last year, Swedish exports nearly doubled and industrial production grew by 36 percent, with manufacturing companies achieving record-high productivity growth.

  Indeed, while annual US output per hour grew by 6.2 percent during this period, Swedish productivity rose by 8 percent. Sweden accumulated a current-account surplus of 53 percent of GDP, in contrast to the US’ 48 percent-of-GDP deficit. Employment rose by 11 percent and blue-collar worker wages increased by 24 percent, fueling a more than 30 percent surge in private consumption.

  In short, even as globalization progressed, Swedish wage earners enjoyed a substantial improvement in living standards. While some jobs moved abroad, the net effect remained greatly positive.

  The secret behind Sweden’s successful development, and hence people’s attitudes, is how the costs of change were distributed. Official policy aims to reduce the cost of globalization for individuals, but never for companies. Entrepreneurs need to face competition in order to develop, whereas individuals who are laid off may have difficulties getting back into productive work.

  As trade minister of Sweden for most of this period, I never hindered or postponed import competition. In the EU, Sweden voted against almost all anti-dumping and other protectionist proposals. This never met any criticism from my voters, because educational policy and the social safety net were designed to lower workers’ risk aversion.

  Broad educational policies equip an increasing share of Sweden’s population with basic education, thereby enhancing their employability. Higher education is free of charge and accessible in all parts of the country. But reaching one cohort per year is too little to meet demands in a fast-changing economy. Therefore, on top of this, large resources are spent on modernizing the skills of those already in the workforce.

  Social protection also has a broad, general nature. In the Scandinavian countries, as opposed to, say, Germany and the US, the government, not individual companies, are responsible for most social benefits. That way, economically irrational lock-in effects, whereby workers simply cannot afford to change jobs, are avoided.

  Furthermore, benefits are generous enough to ensure that short periods of unemployment don’t force workers to sell their homes — or even their cars. The system protects not only the unemployed, who can continue to pay their mortgages and interest, but also indirectly the banks, because their loans to households are repaid even in times of recession. And, instead of solving all sorts of economically induced private problems, retrenched workers can concentrate on finding new and more future-oriented jobs.

  No doubt, these policies are expensive. But they pay for themselves by producing growth and revenue. As the past decade shows, they have served the Scandinavian countries well during a period of extreme internationalization. Instead of giving in to conventional wisdom, we have exploited the possibilities that globalization and technological change offer.

  Could the Scandinavian model work for others?

  At the very least, the Scandinavian example shows that politicians have more than one option to choose from when considering how to handle globalization. Intense foreign competition and rapid technological change does not have to be a race to the bottom.

  On the contrary, it can be compatible with rapidly rising real income and more and better jobs.

  Leif Pagrotsky, a Swedish member of parliament and vice chairman of Riksbank, the Swedish central bank, was a member of the Swedish Cabinet for 10 years, mainly as minister for industry and trade.

  Copyright: Project Syndicate
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