Immediate responsiveness

Overview of Swedish development till 1985

The main story about the Swedish way to success starts in the first part of the 20th century. During the both First and Second World Wars Sweden was a neutral country and did not participate in any military operations. This fact allowed Sweden to increase its exports to war devastated countries. In others words, foreign demand for domestic goods increased significantly, which led to output increase, higher GDP, disposable income, consumption and higher tax revenue. It is very important to notice that both World Wars gave a boost to the Swedish economy and allowed to anchor as an industrial country in the world’s economic map. In the 1930s, this helped Sweden to achieve one of the highest living standards in the whole Europe.

In the beginning of the 1980’s, Sweden had a relatively small, closed economy with a rich welfare, low unemployment, high tax rate and large public sector.

On the threshold of 90’s crisis

After the government elections in 1985, the board of Riksbank abolished quantitative control of lending by commercial banks. This liberalization had a significant, or even more unexpected, effect on all macro variables and huge economy’s boost. Demand for loans increased because there were no barriers to borrow. In other words, it was situation of self-fulfilling expectations, when people were able to borrow unlimited amounts of money and from that create an untrue demand for property and financial equity. At the highest point of the boom, economy was stimulated by extremely high private consumption level. Therefore, people spent more than their disposable income was at that moment. Speaking about increase in domestic consumption, it should be mentioned that in 1985 due to decrease in marginal propensity to consume, oil prices fell, which made the nominal price level decrease. This led to an increase in the purchasing power and the psychological belief that society is better off.

Looking back in time, some important factors should be observed, which lead to such a severe crisis. Both politicians and ordinary people lacked experience and economic knowledge. Speculations and uncontrolled cash flow in financial markets brings a lot of unpredictable consequences and it was the case in Sweden(Lars Jonung, 2009).

Fiscal Policy during the 1990’s crisis

Government budget

During the 1980’s Sweden was a country with a different economic model than the rest of Europe. There was large government revue, which resulted in the government having tax revenues amounting up to 60% of GDP(World Economic Outlook, 2012). It gives Swedish government the power to control the most of its country's spending. It includes high unemployment benefits, pensions and health care. Sweden is famous for its democracy and virtually no corruption. It led Swedish people to trust their government and accept paying huge taxes. But the demand for real estate grew larger as the amount of loans given out by banks increased by 31% in the 1988 and continued to rise (Westerlund, 2008). Later in that decade, there was a slowdown in the world’s economy, plus the collapse of the real estate bubble led the 90’s crisis. The government faced serious problems with inflation and unemployment, as unemployment skyrocketed from the very start of 1990’s and GDP growth rate became negative.

The government went into a huge budget deficit of 12% of GDP in 1993 (IMF, 1997), mainly because of the unemployment benefits they had to pay out for the huge masses of people who lost their jobs. Change in fiscal policy was needed desperately, to stabilize the financial situation in Sweden. In 1990 Sweden had the largest expenditures on health services.

Country acquired a huge credibility gains from foreign countries, which later in 1997 was accompanied with the depreciation of krona. This led to increase in exports, which helped Sweden to improve its trade balance. They increased it even more by buying goods from countries where it is relatively cheaper to do so.

Swedish model

The way how Sweden got through the crisis of the 90’s with the use of right policies can be described in 7 main operations and conditions, which are: political solidarity, blanket guarantee, immediate responsiveness, Bank Support Authority with open-ended funding, access to information, prevention of moral hazard and different approaches to banks and the right use of macroeconomic policies. All of these fractions can be also called The Swedish model.

Immediate responsiveness

Right at the time when it was conducted that the crisis was in the formation, the competent institutions (government, parliament, Riksbank) started to act to strengthen the faithfulness of depositors and other parties of Swedish financial system. With this kind of strategy Sweden made its recovery from crisis more stable.

Date: 2015-12-17; view: 816