''What other nation with only 8 1/2 million people,'' the Western diplomat remarked, ''builds two of the world's best automobiles, its own jet-fighter aircraft, and outsells the Americans in America itself with a high-technology item such as the new cellular (cordless) telephones?''
The diplomat paused. ''These Swedes,'' he said at length, ''do good work. . . . And they work hard.''
We had started to talk about topic No. 1 all over Sweden these days - Soviet submarines appearing with disturbing frequency in shallow waters along the eastern shoreline - and our conversation had moved onto the nature of Sweden itself.
The diplomat had a point: Swedish industry indeed has a worldwide reputation for top-notch products with Volvo and Saab automobiles, the Viggen fighter aircraft and the new Gripen version, and with the L.M. Ericsson electronics giant and its range of advanced products, including the cordless telephone.
And to the visitor, this strategically located, historically neutral country (its last war was against Norway in 1814) presents an outward air of attractive prosperity.
Scattered on Stockholm's 14 islands and between its 60 bridges are waterfront views, colorful store-window diplays, plenty of late-model cars, good clothes, new apartments, staid rows of respectable, matronly 17th- and 18th-century buildings in the old city, corporate limousines outside the Grand Hotel near the National Museum and the bulky Royal Palace. (The latter is closed to visitors while rooms are dusted and flowers arranged for the official visit of Britain's Queen Elizabeth II at the end of this month.)
I had only to take a taxi ride in Stockholm to come face to face with one new example of Swedish innovation.
Young, blond driver Lennart Andersson no longer listens to his dispatcher's voice on a two-way radio. Instead, a computer on the dashboard of his Mercedes taxi prints out messages on a roll of paper about the width of a bus ticket. Andersson ''talks'' back to his headquarters via a mini-keyboard of numbers and letters.
''I don't have to memorize addresses anymore,'' he said. ''I can listen to my ordinary radio uninterrupted. What's really good is that it also prints out where the police have radar speed traps.''
Messages include the time, clients' names and addresses, and sometimes grid references to a city street map.
''When I finish a job, I punch in my own grid reference on the keyboard, see?'' Mr. Andersson said. ''The computer sorts through the orders and sends me the nearest one. I punch this button to accept the job, this one to refuse. This button is to say I am out of the cab. And this one is a good one: It looks for a job in the direction of my garage at the end of the shift.''
Andersson had been using the computer for only five days. All Stockholm taxis were getting it, he said. It had been developed jointly by - who else? - Volvo and L.M. Ericsson.
Yet this verve and outward prosperity - the average blue-collar worker earned between $10,000 and $11,100 last year - fails to tell the whole story.
Volvo, Saab, and Ericsson are the high spots. The international economic recession and high oil prices have hit the rest of the country hard. (Sweden, like Japan, has no oil of its own.)
The question now is to find the best road back. Can Sweden again demonstrate a unique middle way? Politicians, industry, and unions are deeply divided.
Sweden flourished in the 1950s and '60s by a unique blend of capitalism and socialism. Industry was private and innovative and took risks, while an advanced welfare state distributed income in ways that narrowed income gaps.
But the Swedish model developed cracks in the 1970s as energy prices shot up, and the government spent millions to prevent unemployment.
Among the results: an enormous budget deficit - 14 to 16 percent of gross domestic product (GDP) in 1982-83; and an even larger national debt - a full 50 percent of GDP. In addition, the country's balance-of-payments deficit is at 3.7 percent of GDP. The country grew more slowly in the early 1970s than any major country in the Organization for Economic Cooperation and Development (OECD) except Luxembourg.
After six years of Conservative rule (which ended 44 years of Social Democratic rule), the voters returned Social Democrat Olof Palme to power last October. Now a tug of war is under way.
Conservative, center, and liberal parties campaign for an enhanced free-market economy with flexibility, risk-taking, and reward. The trade unions, on the other hand, are pressing Mr. Palme to introduce a highly controversial plan - collective employee investment funds. This plan is intended to allow employees to buy shares in their companies.
Mr. Palme seems in no hurry to push the plan through, however. In an interview he stressed that he was not about to ram any radical ideas down business throats. He wanted to decrease state power, not increase it - a remark that supported the view of Western diplomats here that Palme has moderated some of his old Socialist fire.
''We don't like the Reaganite and Thatcherite policies of allowing high unemployment . . . to bring down inflation,'' he said. But we've decided not to do what France did either and go expansionist. We want to find a third way, if that doesn't sound too pretentious - to expand production and investment, to keep public spending down, and to keep employment high.''
Lower oil prices will help. Mr. Palme has also helped business by devaluing the kroner an unexpectedly large 16 percent. The price he pays, however, is higher inflation this year as imports become more costly.
He knows wage costs must not rise much, and so to help persuade workers to show restraint, he has increased wealth, inheritance, gift, and payroll taxes. He wants corporations to pay 20 percent of profits into the Bank of Sweden.
As for the new wage-earner funds, he seems to be saying, ''Give me time.'' His actual aim, it is widely thought, is to keep on delaying them in the face of business opposition.