Eurosclerosis or Financial Collapse: Why Did Swedish Incomes Fall Behind?
IMF Working Papers, February 1, 2005
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- Eurosclerosis or Financial Collapse: Why Did Swedish Incomes Fall Behind?
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Bibliographic details
- Authors: Valerie Cerra, Sweta Chaman Saxena
- Published: February 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860481.001
Main findings
- Sweden is presented as an archetypal welfare state economy, with extensive government safety nets.
- Some scholars have attributed a decline in Sweden's per capita income ranking since 1970 to "eurosclerosis"—sluggish growth caused by distortionary policies.
- This paper argues that the permanent loss in output following Sweden's banking crisis in the early 1990s explains the decline in its per capita GDP ratings.
- The paper finds no macroeconomic evidence that welfare state policies have deterred growth.
- The results warn that empirical growth analyses should distinguish between trend output growth and permanent output loss associated, for example, with financial crises.
Evidence and analytical emphasis
- Emphasis on separating trend output growth from permanent output loss when analyzing growth determinants.
- Identification of Sweden's early 1990s banking crisis as the explanatory factor for the long-run per capita income decline rather than welfare-state distortionary effects.
Policy implications and recommendations
- Empirical growth analyses and policy evaluations should explicitly account for permanent output losses caused by financial crises to avoid misattributing long-run income declines to structural policy features.
- Policymakers and researchers should be cautious in linking welfare state policies to long-run growth without first controlling for the legacy effects of financial collapses.