Sweden's Socialist Economy Due for a Major Overhaul

High unemployment may bring free-market reforms

FOR most of the post World War II period, Sweden was the shining example of socialism that worked. From 1945 until 1989, its unemployment rate never moved above 4 percent, and its manufactured goods became synonymous with quality.

But the new world order that came with the collapse of Soviet communism and a rejuggling of economic relationships has shaken Sweden and its Scandanavian neighbors only slightly less than the countries of Eastern Europe, which had been tethered to Moscow.

Finland, for instance, felt the change quickly, since much of its commerce had been tied to the Soviets. Unemployment there rapidly shot from 2 percent to 10 percent.

Sweden's jobless rate now hovers at about 9 percent, a state of affairs that has forced the Stockholm government to weigh what it considers drastic measures, including free-market reforms and deep cuts in social programs.

At present, a three-man commission of foreign economists, set up by an act of the Swedish parliament, is in the final stages of assessing the country's labor market. It is scheduled to issue its report in January. One member of that panel, David Blanchflower, an economics professor at Dartmouth College in Hanover, N.H., says the unemployment problem is probably even worse than official data show.

Figuring in government training and make-work projects called ``active labor market programs,'' the jobless rate may be as high as 15 percent, Mr. Blanchflower says. And the government is hard pressed to expand such programs since it is in the throes of a fiscal crisis that could result in sharp cuts in social spending.

The political implications of this situation were demonstrated in late September when voters ousted the conservative coalition of former Prime Minister Carl Bildt. Mr. Bildt had pushed a program of privatization, deregulation, and the introduction of competition in education and health services - much of which is likely to stay in place. Swedes balked, however, at the prospect of threatened reductions in unemployment and health benefits.

But even incoming Social Democratic Prime Minister Ingvar Carlsson has publicly admitted that he can't rule out deep cuts in social programs.

The choices facing Swedes are fairly stark, Blanchflower says. Unemployment benefits have traditionally been very high, creating a disincentive to work, he says. That, together with generous paid-leave policies and an average work year (1,400 hours) that is considerably shorter than in the US (1,800 hours), doesn't give much hope of reviving a stalled economy.

Swedish labor policies have been ``hugely generous,'' Blanchflower says, ``but now the country can't afford it.''

The Dartmouth professor, whose fellow commission members are Richard Jackman of the London School of Economics and Giles St. Paul, a Paris-based economist, says he can't divulge what their recommendations to the Swedish government will be. But he says the tone isn't likely to diverge much from an earlier report by a panel led by Swedish economist Assar Lindbeck. Mr. Lindbeck's report, published this year by MIT Press under the title, ``Turning Sweden Around,'' strongly recommended a turn toward a free-market system closer to the United States model.

That's a bitter pill for many Swedes, but an economic restructuring is inevitable, Blanchflower says. If you look at the neighborhood around Sweden - including the Baltic nations and much of Eastern Europe - he says, you see a host of economies trying to modernize. They're going to create a whole new competitive environment, and Sweden will find it ``very hard to stand aside'' as it has in the past, pursuing its own economic agenda.

A major test of the country's willingness to reset its economic compass will come in November when Swedes go to the polls again, this time to decide on membership in the European Union.

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