Sweden: From Welfare Paradise to Capitalism

Sweden, known as a welfare paradise, is also facing social problems tied to immigration. In particular, gangs formed among immigrants have been active, and in a small country of 10 million people, there have been more than 1,300 explosive attacks in a single year. This has deepened social division, resulting in a clear separation of living areas between affluent neighborhoods and immigrant neighborhoods.

Privatization has progressed in health care and education too: half of primary care clinics and a quarter of upper secondary schools are now privately run. The country has also fully abolished wealth and inheritance taxes to attract capital.

Sweden's corporate tax rate is 20.6%, lower than that of the United States or South Korea. Market competition has been allowed in most areas once monopolized by the state, including health care, education, and infrastructure, and public spending has been adjusted for efficiency. As a result, public social spending stands at about 24% of GDP, approaching the OECD average. This is the outcome of opening areas once monopolized by the state to the market to raise efficiency.

Sweden's image as a high-tax country comes from its high income tax. In the past, it did not tax capital and assets heavily either, in order to prevent capital flight. Swedes showed relatively little resistance to taxes despite high income tax rates, because they expected the taxes to lead to redistribution in the future. This income-tax-centered approach helped fund welfare while restraining capital flight.

At the time, 80% of the population worked in agriculture, and many people struggled in poverty, surviving on little more than bread and milk. Extreme poverty triggered mass emigration: from 1850 until just before World War I, about 1.25 million people left. About 200,000 of them later returned, but roughly 1 million never came back. Considering that Sweden's total population was 5 million at the time, one-fifth of the population had left for abroad.

Influenced by the French economist Frédéric Bastiat, Gripenstedt abolished the guilds, guaranteed freedom of occupational choice, and broadly allowed freedom of business, introducing market-friendly policies. These reforms became a turning point that fundamentally changed the structure of the Swedish economy.

Concluding that a small population limited growth from domestic demand alone, Sweden shifted to an export-oriented economic strategy. Through liberal reforms, it removed tariff barriers and actively concluded trade agreements, making imports and exports freer. It also simplified entry procedures to make it easier to attract foreign labor, laying the groundwork for an export economy through external opening.

Sweden successfully concluded free trade agreements with European countries, expanding its export markets. However, continued population outflow led to a serious labor shortage. Because Sweden's national wealth was still low, it found it difficult to actively import outside labor, and this became another obstacle to growth.

In 1932, the Social Democratic Party led by Per Albin Hansson took control of the government. In his famous "folkhemmet" speech, Hansson described the nation not as class struggle but as an integrated, non-discriminatory society, a "people's home," and set out the direction for the Social Democratic Party. It showed his firm commitment to building a country where all citizens prosper together.

Sweden's politicians, regardless of left or right ideology, clearly recognized that the nation's wealth and growth originate from private enterprise. Because Sweden is a country that lives by exporting, a shared consensus firmly took root: under a capitalist system, companies must earn money and export before welfare can be distributed. This consensus led to a pragmatic policy line that did not make businesses enemies and prioritized growth.

The Swedish government pursued strongly pro-business policies toward the companies and capital that create wealth, providing exceptional benefits. This was a strategy to sustain the engine of growth. In particular, it offered tax exemptions for companies that reinvested and set up investment funds, among other measures, bringing the effective corporate tax rate close to virtually zero. These policies played a major role in encouraging corporate investment and driving economic growth.

First, companies had to keep earning and growing through exports. Second, the social consensus to protect business had to remain unshaken. However, starting in the 1970s, these two preconditions began to waver, marking the end of the Swedish welfare model's heyday and the arrival of crisis.

In the 1980s, Sweden's public spending exceeded 60% of GDP, and by the early 1990s it neared 70%. As welfare costs soared, the government imposed enormous taxes to fund them. Low- and middle-income earners were not greatly affected, but high earners faced a serious burden. The top income tax rate climbed to 87%, and tax resistance intensified.

This created an absurd situation in which earning 1 million won meant paying 1.02 million won in taxes. Such heavy tax burdens triggered a mass exodus of entrepreneurs and celebrities. Combined with Astrid Lindgren's tax-critical fable and policies such as the wage earner funds that threatened corporate ownership, many talented people went into exile abroad, including IKEA founder Ingvar Kamprad and tennis star Björn Borg.

In 1990, Sweden faced a severe economic crisis, with 12% inflation and a collapse in housing prices. From 1991 for three years, economic growth recorded -1.5%, and total GDP fell 5.1%. The unemployment rate jumped from 2% to 10%, and in 1992 an average of 61 companies went bankrupt each day. Government debt also surged to 75% by 1995, leaving the national economy on the verge of collapse.

It ended the education monopoly, allowed for-profit companies to run schools, and opened the education market. The income tax rate was cut sharply from 80% to 50%, and corporate tax was also lowered significantly. In 2004 it fully abolished inheritance and gift taxes, and in 2007 it abolished the wealth tax. The pension system shifted to a model where people receive benefits in proportion to their contributions, introducing market principles into the welfare system.

After the sweeping market-oriented reforms, Sweden experienced the return of entrepreneurs and capital that had left. Many wealthy people, including IKEA's founder, returned to Sweden, and this led to the revitalization of the business ecosystem. Innovative startups such as Skype, Spotify, and Minecraft emerged and succeeded, and in the past decade the number of startup IPOs surpassed 500, filling the economy with energy.

Sweden is regarded not as having dismantled its welfare state, but as a case of evolving its welfare system within economic openness and capitalist institutions.