DP901 | Economic Growth and the Swedish Model

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We examine the growth performance of Sweden in the post-World War II period, focusing on explaining the relative decline of economic growth in Sweden since the early 1970's. The hypothesis that the relative decline is a consequence of productivity catch-up is rejected. A number of potential `ultimate' causes behind the slowdown are explored. An increasingly inefficient process of capital formation; a shrinking share of the economy being exposed to international competition; long-run negative effects of activist stabilization policies; rapid growth of the public sector; deteriorating incentives for human capital formation; and weak incentives for implementing the results of R&D efforts are all part of the story. The evidence suggests that the incentive structure created by `the Swedish model' made Sweden less successful in adapting to the shocks of the 1970's and 1980's than other OECD countries.