A Cohesive Market Economy after the Crisis


The Global Financial Crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. Events of 2008 – 2009 saw the collapse of large and globally connected financial institutions, the public bailout of national institutions including banks, a liquidity crunch and stock market chaos. The effect on the general public – unemployment, loss of savings and a housing market crisis – cemented a question in many minds: what does capitalism have left to offer society? Is it possible to reform capitalism to make it work better for its stakeholders? Can business be trusted with this task?

Sven Otto Littorin’s timely reflections on the market economy, industrial policy and labour market relations will be hosted by the Henry Jackson Initiative, a new centre within the Henry Jackson Society think tank dedicated to research and policy recommendations on capitalism. The HJI’s inaugural Program for ‘Inclusive Capitalism’ will be launched in early May.

By kind invitation of Damian Collins MP, The Henry Jackson Society was pleased to host a meeting with Sven Littorin, Former Minister of Employment at the Government of Sweden. Mr Littorin’s great expertise and practical knowledge promise to extend the public society debate around the financial crisis by offering a unique insight into ‘responsible business’: what it means, how we as a society can achieve it, and why we need it. Please join us for what promises to be an inspiring and astute analysis of the business environment in 2012.


Sven Otto Littorin is an Independent Advisor at Gibran Associates, United Kingdom since September 2011; an entrepreneur in business and politics advising British, US and Scandinavian clients as well as the European Commission on change management, policy reform and related issues. He has over 20 years of experience in politics, labour and finance industry.

Mr. Littorin is the Former Minister of Employment at the Government of Sweden; between 2006 and 2010, he was in charge of USD 14bn of the government budget; the second largest part of public spending, covering areas such as the unemployment insurance system, active labour market programs and nine government agencies, including the Swedish Public Employment Service, the Work Environment Authority and the Labor Court.

During the Swedish presidency of the EU, he was also President of the European Council of Ministers and as such he oversaw European Union response to labour market effects caused by the financial crisis of 2008-09. In 1991-93 had an intrinsic role in establishing the crisis package that saved the Swedish financial system and its institutions from near certain bankruptcy.

Sven has also been the Secretary General for Moderaterna (the leading centre-right party), Founding Partner at venture capital company Momentor, and Senior Vice President at Kreab.


MP: Good evening ladies and gentlemen. Thank you for joining us here this evening. It is my pleasure to introduce our guest Sven Littorin. Welcome here, speaker, this evening. Thank you as well for using the Historic Wilson room, which is the scene-  from my memory – of the Rupert Murdoch hearings in July last year. I am a member of that committee, so this room is burnt in my memory from that time. If you have got any baked goods or any other missile, could you please leave them at the door, we would be extremely grateful. Mr. Littorin is currently a supervisor of Gibran Associates, but also a former minister of employment for the Swedish government and chaired the Swedish presidency in the Council of Europe four years ago. His work experience on employment and labour issues in the government of Sweden is well known It is a pleasure to have him come and speak to us this evening.

SL: Thank you so much for coming and thanks for inviting me. I was asked to speak for about 20 minutes. In my old line of business that is a mere sight to be honest. I remember a couple of years back when I was giving a speech on a topic that was really engaging to me. I sort of came in for landing after 2 and a half hours and my press secretary at the time looked at me and she said “oh my God, you’re Sweden’s mini Castro.” I will try not to do that today. If I was to sum up the content of the speech in four words it would be: fairness, ownership, hope and education. I will try to explain why based on some of the experiences that we’ve had in Sweden. This financial crisis that we’ve all seen over the past few years was Sweden’s seventh financial crisis since 1880. We survived the other six and we are going to survive this one too. But, of course there are some experiences that can be drawn from these events, and I will try to talk about them. As you heard in the introduction, I am a recovering politician. In 1991 I was appointed as the head of staff of the minister of fiscal and financial affairs in Sweden. I thought that was hilarious from the start, and it was for the first four days. Day number five, one of our major banks called and said “money is out. Tomorrow, we go belly up.” We had, to be frank, no idea of what to do. I can say that now, 20 years later, but really we didn’t have a clue what to do then. What happened? We were thrown into this very deep recession, caused by this bubble that burst, something that is quite similar to what we see now in many countries around Europe. Well, in Sweden at the time, we had the credit market irregulation in the middle of the 80s – 1985 – but we didn’t demolish our foreign exchange controls until 1989. The same time towards 1989-90, we had a major tax reform which drastically reduced reduction of interest rates, and at the same time we had a fixed exchange rate, which closed the door to devaluations, a door that had been too open in the 70s and 80s. What we had, coming into this crisis, was basically a couple of decades of rather high inflation, generous reduction for interest rate payments and of course, the foreign exchange controls, which made it very abundant to everyone, except for the government at the time, because money was basically free. There were no costs to borrowing money and money was readily available and it couldn’t pass our borders. We had a real bubble being pumped up over a couple of years and as this tax reform was being introduced as foreign exchange mechanisms were opened up, basically the bubble burst very rapidly as you have seen in other countries in the last couple of years. We rapidly then got into a debt deflation scenario where households and banks and companies were trying to clean up their balance sheets quite dramatically, and you will see then asset prices going down rapidly forcing more foreclosures, forcing more banks to try to get back as much as possible of their money, forcing more people to try to clean up their own balance sheets. It was a really difficult downwards spiral. This was obviously enhanced by the fixed exchange rates that we had at the time, where the Central bank of Sweden saw it necessary to raise their short term interest rate quite dramatically to save the currency that was pegged against the basket of other currencies. At one point towards the end of 1992, we had a 500% interest rate for a couple of days, and you can imagine what that does to the business environment, to the willingness to invest, to basically run companies. It was absolutely horrible. I remember I was in New Zealand at the time studying the New Zealand independent central bank act. It is a pretty long flight from Sweden to New Zealand and when I got there I had a message from the foreign ministry saying “500% interest rate.” I said that these guys at the foreign office were not very good at math, they don’t understand this. It turned out to be true and I had to explain it to the New Zealand guys and it was quite interesting. Now, this financial crisis and the bubble that burst quite rapidly sort of transferred into the real economy, we lost over 500,000 jobs in two years that is roughly about 12% of our labour force that was laid off in a really short time. We reached a 12% budget deficit very quickly, we had a rapid increase in the public debt and the foreign debt. We had a record of three years in a row of decrease in GDP. The economy was shrinking, everything was coming to a halt, and we had no idea what to do. We had to go down to the basement of the Ministry of Finance and look at old articles. I remember we found an article from Econometrica from 1943 talking about how to get out of a debt deflation scenario because there were no books or answers really and no one in the civilized world who have gone through something similar. The pace of which all of these things occurred was absolutely astronomically quick, everything at once. What are the principles we have to abide by when we try to find a solution to this problem? Well one of the first principles is that the financial system is the blood vessel of the economy: if the financial system grinds to a halt then everything else grinds to a halt in the economy. If you have to pay all of your mortgages at once, it is just mayhem, it can’t happen. We have to have a financial system in a functioning economy. Secondly, we have to figure out a way of safeguarding regular people’s savings.  At the time, we didn’t have any savings guarantee at all, which means we were afraid that people would run to the bank getting the few savings they had left, out, and moving it into another country. That was a real issue and danger we had.  On top of that, we had a political dilemma as we had seen lots of countries going through a situation where you have to save the banks at the same time that hundreds of thousands of people are losing their job. That’s politically a difficult situation that needs to be handled. To give you some sense of what we are talking about, the banks in Sweden saw credit losses between 1990 and 1993 of a 179 billion Kroners, which is £17bn. At the time, 20 years ago, it was a lot of money! It was, now we say afterwards, paid in 3 portions: tax payers covered about 65 billion (36%), owners of the banks paid 50 billion (28%), and the rest was paid through widening interest rates spreads that followed this situation. What we did was an interesting thing for an old socialist government at the time: we nationalized one of the banks that was about to go under and that bank in turn bought another different bank and we were then stuck with bad assets and bad loans, which was an interesting thing. The old owners, I might add, were not compensated. The political trick was to make sure these market economy principles were working. That is why we did not compensate the old wonders because in the market economy, a limited corporation, the reason it is limited is that people take the risk with a limited amount of money, the equity they put in a company. That was why we thought that this was a wise way to do it. What we did then, was to split the bank in two: one healthy part with a clean balance sheet and then the unhealthy part which was Main Securum, a brilliant name we thought, with the mission to try to retrieve as much as possible of these bad assets over time, and that succeeded quite well. In 1996 Securum was decommissioned, put to sleep, and most of the money had been retrieved. At the end of the day when we summed it all up, the tax payer did not lose money on the saving of the financial system, they came out of it untouched or unharmed. But the effects of the real economy that was something we had to deal with for decades to follow. The rest of the 1990s saw a permanently higher unemployment rate than we saw a tough tightening of the belt. It took a long time to get out of public debt and to get the debt situation under control. I have to give the Social Democrats who took over in 1994 some good remarks in that respect because they were quite good at fulfilling ways to balance the economy over time. We did lose the fixed exchange rate in 1992. This was an exciting period, as I mentioned I had just been to New Zealand and when I got home one night I got a phone call around midnight from our embassy in New Zealand saying they stopped exchanging Swedish Currency. What was I to say? “There are no problems, the government has it all under control?” Yeah right! I called my state secretary, we met up and we had a third crisis package, as an internal evaluation, trying to get costs down internally by cutting pay roll taxes and things. We did get a frail majority in parliament for that agreement that we reached over night. But at 2 o’clock, Swedish time, the currency market in New York opened and it exactly took 38 seconds until it was all lost. Our currency was floating or sinking. To be perfectly honest, that was something that was not too bad, which means that in the long run we have some competitive advantages. The reason for having a fixed currency at the time, was that we had a long history of getting out of our domestic problems by devaluation. We had a problem with credibility when it comes to managing our own affairs in the 1970s and 80s. This was the momentum of having a fixed currency. After that the economy picked up rather quickly and it happened after that, the economy picked up rather quickly, we had  a fantastic productivity roof towards the end of the 1990s and early 2000. In all areas but one, the labour market was absolutely still. We had jobless growth for years. Over half a million people left the labour market, never to return. The former social democratic government put them under disabilities schemes and pension schemes to try to get them off the statistics. But basically what happened was that these people of which 60% claim they have working capability left and want to be a part of the labour market when asked, were given a message from the government ‘you are not wanted’ ‘we can’t help you’ ‘stay out’. This was the issue in the 2006 election and the one I tried to work on after that from 2006 -2010 as the minister of employment trying to get people back to work. That was the main focus we needed to work with.  Why? Well 3 very good reasons:  It is very costly to have a large portion of your citizens out of work. Second, the alternative is much better: citizens as taxpayers rather than recipients of benefits. Third, it makes sense. At the time, in 2006, we had one out of 5 Swedes in the active market age outside of the regular labour market,  either openly unemployed on labour market programs or on moderated pensions or on long term sick leave. Basically not participating. If you have a fifth of your population not participating in the economy, it is an ethical problem more than anything else because that is where you find hopelessness, crime, Xenophobia, all these things that we are not very happy about. We really needed a policy to bring people back to work. Basically, what we did in 2006 was embark on policies to try to increase labour supply by introducing more tax credits, which we didn’t have before, geared towards the low and medium income owners. We changed our employment benefit system to make it more worthwhile to work. We changed our sickness benefit system, disabilities benefit system, basically introducing both financial incentives to move back, but also trying to dismantle the obstacles for people. If you were on the disabilities pension, you were not allowed to register as unemployed at the public employment service. That’s ridiculous. If you got a job anyway, say you have been out on the disabilities pension for 10 years and got a job, the entire risk was put on the individual. He or she would lose their disability pension, and you never know if you have been out for 7 years for instance, who knows if you are capable of actually getting back to work. If you failed you are out of means of support. It is ridiculous. Instead we introduced a dropping scale where you could keep 25% of your disability pension for a period as you try to get back into the labour market, basically alleviating the financial risk for individuals trying to get back to the financial market by financial incentives as well as by changing some of the regulations involved. We were happy about this because in 2008 we had the fastest falling unemployment rate in the entire OECD area. I still remember the blue holder trade unionist closely linked to the Social Democrats. They had their own paper and it was a cover and a whole spread where it said new records for the Swedish government. I was very happy about that. Three weeks later, Lehman brothers collapsed. One year later, Swedish exports, which are half of our economy, shrunk by 13% which is obviously a big blow. 13% is quite a bit considering it is half of our economy. It was a hard blow, especially hard on our exporting industries, car manufacturers, the steel industry and the heavy backbone of the economy. Luckily, we were in a much better position politically and economically. Economically, we did have a surplus and we still have a surplus in public finances. Since 2006 our public debt has decreased by 10% of GDP, which is quite a bit. We still have economic growth; we have 200 000 more jobs today than we did in 2006. We are in a good shape in that respect. I would say that is due to a combination of experiences from earlier financial crises and some fiscal prudency and the fact that we had policies to get people back to work. That is so crucial both in times of crisis but also on the long term demographic challenges that we have. It was clear to us that in most of our countries we need every single hand on deck to be able to manage pensions, schools, hospitals, and what have you in the future. We cannot afford having a large portion of our society left behind. That is not possible. What can we learn from these crises? Well, I would say that some would argue, beyond the streets’ Occupy movement, we need more regulation. I will not agree on that. I think that one lesson is that we had the subprime crisis in the US, which basically started the whole thing and forced the banks by regulation to take unnecessary and stupid risks. They would lend people money to buy a house, and they were not allowed to ask people if they had any capability of repaying the loans. What you ask for is what you get, isn’t it! In Sweden, we had this situation back in the 90s: if you regulate the credit market and then have currency exchange controls and basically an extremely high rate of deductions that you can make on your tax returns, where money is free. Of course if money is free, people are going to borrow, that is obvious. You sow what you reap. A few conclusions would be: there is no free lunch; there is no money lying around on the streets for people to pick up. Growth and prosperity comes from innovation that turns into customer value. That is true now and it was true 10 years ago and will be true in the future. There is no free lunch. Second thing I think that some countries have learnt the hard way is that, this is actually a quote from the social democrat prime minister at the time, he said “he who is in debt, is not free”. It is true: if you are in debt, you are out of options. You are at the mercy of your premises and you have to make sure you treat that the right way. There is no room for manoeuvre. The situation then as you are in a crisis or coming out of it is that people tend to have a mixed view on what reforms are. Reforms are quite different because you have on the one hand, structural reforms that are good and necessary. Then if you are in debt you have reforms that are just necessary and are well received as good reforms because it means you take away privileges that are overly familiar. How can you make sure that these can actually be handled by the public? What I mean by handled is that they won’t turn away from democracy or the market economy or a society that is going somewhere instead of having all kinds of strides and mischief going on. I think that is why the four words I started from are important: fairness, ownership, hope and education. I will be very brief about them. Well, fairness. I think that one of the experiences from these two crises that I’ve seen from the inside is that people are willing to take hard times if they think or believe that it is reasonably fairly distributed. What I mean by that is that we can see, when we did the financial savings things in the early 90s, it was obvious that we had to do something to save the financial system and it was equally obvious that we wouldn’t save the owners of the banks, but the financial system. That was something that people would ruggedly agree with, I would say. Now, the last financial crisis in 2008 and 2009, I was travelling around the country meeting people who had just been sacked and companies that had been closed down. And the interesting thing, of course, was that they asked about unemployment benefits. But equally they asked about tomorrow: what are we going to do later on? What are our children going to work with? How can we survive this period of uncertainty and bad fortune? To me, these are quite reasonable questions. You have to have some answer to that. If people do have the feeling they are treated fairly they will be more prone to join hands to solve the problems. What we did was we basically appointed, in every county, a coordinator of all available resources to handle the crisis. There were people from national, regional and local level in the room. There was business, authorities. Because our thinking was that we do have a lot of resources, but the problem is that they are not coordinated properly to deal with the crisis. We sat them all in the room. We locked the room, said “solve the problem, we won’t let you out until you are done”.  It worked out very well. It had an additional advantage: the people had a forum to get all their problems in the room sorted without going to the government to ask for tax money, which was a very good strategy. Ownership would be my second word. I see there is a metaphor or a fiscal metaphor if you like. I think everyone needs to have a stake in the economy and it is when you have a large portion of society that has no stake in the economy that you are in trouble. Owning your own house, having a pension scheme, something that binds to the rest of the economy, I think is quite crucial. I think the government here is doing a good job with the housing scheme as long as it is not a subprime scheme. Trying to get people to have a stake in the economy is quite vital or the hope of getting there, I would like everybody to become small capitalist. I think that is a good choice. It fosters responsibility and involvement rather than strife and conflict. Hope would be my third word and most important of all. If there is no hope, then there is really no hope. If you look at youth and unemployment, we have 25 million Europeans under 25 who are openly unemployed. In addition, there are a lot of others who are in programs or somewhere else in the economy. I think that is really worrisome. What you have with these young people, who have never set their foot in the labour market, is a real issue when it comes to giving up hope on the future. They are way too young to give up hope. We need them, as I said, if we are going to survive in the future and to have growth and prosperity. We need them. There has to be a lot of work done to get people back into the labour force at a young age. That is quite important. Finally, education. I do believe that education is probably the area in need of most reforms right now. That comes across in most countries. I think it demands the kind of skills that are easy to teach and easy to test. They are disappearing at a very fast rate. In addition, qualifications have a high rate of inflation. What is good to know today and what we learn today in schools would be obsolete tomorrow. We have to make sure our educational system is adapted to change rather than adapted to yesterday’s situation. I am not an education hippy, don’t mistake me for that. I do believe in tests and in curriculums and the rest of it. But most school systems are still deprived of competition, of prize mechanism, of creativity, deprived of all of that which will be necessary for students to possess when they get out of it. The old way the economy worked before, when you could go into a job and keep it for the rest of your life, those days are gone. Adaptability to change is going to be the number one criteria basically for kids in the future. I say we need a Steve Jobs in education, someone to turn it upside down and basically start over. I actually believe, also, that in a hundred years from now, people will look back and say the time the governments ran 95% of schools in Europe that was a parenthesis in the whole system. I do believe we need much more private activities in the educational world, not the least to try to get in more influences, different pathologic approaches and all of that and I also  believe in profit in education. We’ll talk about that another time. These four areas I think are necessary if we are going to get back to the situation where people actually believe that the market economy is not so bad. It is the best alternative that we have. I think it can be done. It will be done. There is simply no other alternative, but how quickly can we get there? That is up to governments and people like you in the room: if we can defend a system that has proven to be the only one that can give us prosperity and hope for the future.

MP: Thank you very much it was a fascinating talk, covered a lot of ground in the brief time we had. Now is a chance for questions. I see a hand already, but we’ll take questions for about half an hour and try to get everyone in. Questions!

Question: There is a book by Douglas Adams [inaudible] where his party started on the ground so popular [inaudible] so successful and so powerful they actually grew a weaponry system so that no government can actually control [inaudible] It seems to me that the financial system is somewhat similar. We have a [inaudible] How do you think that the government can start to risk that control in the financial system from this global party sort of speak?

SL: Don’t get into debt. I’m sorry that is the answer to it: “He who is in debt is not free.” We as governments gave them that power by putting ourselves in deep trouble, borrowing money over and over again. Look at Greece. They basically monetized every asset they have. They have toll roads in Greece. They have sold their rights for dividends for 50 years already. So they have nothing left. Well of course you are at the mercy of your lenders if you do that. You stay out of the problem if you don’t engage in all that much. This is a short answer, but I believe this is true.

Question: Thank you for your fascinating talk. It is interesting that you focused quite significantly on the concept of fairness and described it in very micro-terms, the individual perception, fairness that is encrypted to British politics significantly over the last three-four years. We tend in this country to define fairness as the gap between the best of the society and the less well off in society. It is [inaudible] that societies have become more unfair because this guy has become more [inaudible]. Firstly, do you feel this is an accurate or fair measure of fairness? Is it similar to the one in Sweden? If it is, have the measures that you’ve talked about succeeded in reducing this gap measure (i.e. [inaudible])or is there an [inaudible] measure, objective measures that you believe are…?

SL: If I asked the question talking about the hitchhiker’s galaxy? The answer would be 42. To be honest, I’ll take a slightly different take on that. When we started out preparing for the presidency for the European Union, we were in a trio with the French government and the Czech government. And you can probably see now we are a more ideologically diverse government than the Czech and the French. We were over there and we were trying to handle that. One concern we had and shared with the French was that the French are really good at speaking about Social Europe. What they mean by Social Europe is having the tax payer spend more money in France to appease French voters. Do we have any French people in the room? Sorry if I offended you, but I think that is quite true. Our take on that was that a Social Europe starts with a job, because the great divider in a society is between people who have a job and people who do not. Because from a job stems everything else: hope, fellow friends at work, the possibility of having a dream to fulfil. I sound like a job Lutheran and perhaps I am. But I do believe that the big divider has to do with whether you have a job or not. On top of that I would say that one thing, and this might surprise you because I am on the centre-right of politics, a free market guy and all that: in my country, Sweden, we have an 80% unionization rate. 93% covered by collective agreements. I tend to think that is quite good because it dilutes the crackpots in the trade unionists. If you have an 80% unionization rate, pretty much you have a representative gang of people doing wage negotiations and all of that. It also means, when it comes to collective agreement process, by law we have very little regulated, almost nothing when it comes to pay. We don’t have minimum pay in legislation. It means you foster a kind of cohesiveness if you like. You sit around the table, you discuss things, you certainly have different perspectives depending on who you represent, but you get there in the end. That is something, I believe, quite important when you talk about fairness that not only [inaudible] you think and feel fairly treated. That is an important component in society if you like. When it comes to distribution of money and wealth, again, I believe that a job is the best way to get somewhere, to be able to go up the ladder. Social mobility is quite important, the hope of social mobility. Now, obviously if you have too great a disparity between the two, the bottom end and the top end, there will be problems and there will be difficulties. My basic take on that is that I don’t have much of a problem with people getting very rich, but I would like to close the gap from the bottom up: get those who are deprived of things to go from being recipients or dependent on a welfare state, or anyone else for that matter, to get their own pay and move up the value chain if you like. I think that could be quite good.

Question: I just wanted to ask you about your point on ownership. It is not always for everyone, I think, because, for instance, people in North England now, when they come [inaudible], it would be much easier to move on and they can’t because they are stuck in their homes.

SL: I agree, absolutely. But there might be other ways of doing that. Ownership of your pension rights, as long as you are also economically connected to society in some way, but I agree in bad times you have this…

> it caused a lot of problems for people, they thought they had to [inaudible]

SL: I agree completely on that. This is why I said the metaphor sort of, part of it, is that the economic stake is quite important. Again, this is most of these people and that was most of their assets. My grandmother said, “Don’t put all of your eggs in one basket!” It is one way to distribute risk in ownership. Yes, I am sure it is.

Question: If I may say, wonderful speech, so much so, in fact, that some of the things you said about capitalism and where you would see the system, you would do very well in an interview if you ever wanted to join the Henry Jackson Society. We are probably on the same page on that basis. Can I ask two kinds of related questions that reveal my lack of knowledge of Sweden in that sense? If I can take you to this idea that seems to be prevalent about Sweden as the be-all-end-all wonderful social democratic state? There is a sense in the world at large that Sweden is the example held up by people as to how wonderful things work. I wonder a) if you could give us a good forward on the myth vs the reality? b) if you think there should be profit in education could you perhaps elaborate on that and visit some of our naysayers and elaborate on that? Second question is about the manufacturing base in Sweden. Some of the purchases by the Chinese and some of the unique realities that exist made it the case that you have this manufacturing base in almost an island of manufacturing. What are your thoughts on that? Where is it going? And which parts of it are interesting for the UK in terms of the experience?

SL: Let me start off with the Social Democrat state. It is true that most Swedes have higher welfare ambitions than many others, I would say. That is sort of a cultural context thing. I think it has to do, if I am going to slightly put a historical perspective on it, with the fact that we were always a country of poor, self-owning farmers in the middle of nowhere in a place which is very cold. You will find, if you go back not so very far away in time, small villages with self owning farmers [inaudible] but you knew you had to rely on your neighbour to survive, basically. I actually believe that is something that has been inherited into politics in some respect. That is why some would argue that in the Swedish political system, if you are a right wing politician, you are probably a socialist here [the UK] or at least in the US. To some extent that is true. On the other hand if you look at history, the social democrats that had power for 64 years in a row never socialized industry. They basically socialized software in society, if I may call it software: the healthcare system. Well you have it here as well. You have a more socialized system here with the NHS than we do, and free education. All of those systems that were trying to get people to move up were public and public was organized and distributed in a way that was pretty much okay in size until the early 70s when the social democrats at the time really went berserk in terms of expanding the welfare state. And that’s where you see our taxes rapidly overtaking almost every other country in the world. The fact is, right now, we do have quite high taxes, but, I spent the spring in California and if I had been a US tax resident, I would have paid higher income taxes in California than I do in Soho. Things have actually changed quite a bit. We do have the voucher system in schools and many of the schools are for profit. The interesting thing is, talking about fairness, the conception of fairness in that respect. Of course, some people in the early days of the free school systems back home had their doubts about companies running schools. It turns out that the debate on profit has been reasonable for quite some time. It’s not so much the fact that there is profit in schools that has been the problem. The thing is, after 20 years of having this choice in education, it has also led to a situation where you see a [inaudible] market where you have now venture capital-backed chains of schools. That was not seen as a big problem until it was revealed that some of these VCs took out the profits to be taxed in a tax haven somewhere else. That was a political issue. So not the profit itself, but where it was taxed, that was the real issue and the debate back home. I tend to believe that profit in education is really good. Why should profit be a bad thing in education where it is basically a good thing everywhere else? A loss in education, is that better? Of course not! Profit is the final marker of success that you are doing something good that people like.  It is also a prerequisite for investment. You need profits to invest. That again is not the problem. What you need is a quality assurance measure. You need to make sure of the quality [inaudible] until you have an educated client base. And that will come fairly quickly to tell you the truth. You need to make sure you have controls and whatever to make sure that quality concerns are taken care of. People tend to be wiser than some people believe. They vote with their feet. If it is not good enough, they put their children in another school. It is as simple as that. So to keep profits you need to deliver something that is really good. Finally, the manufacturing base in China and all the rest of it. Well, I think that we saw 10 years ago or so quite a big exodus from Sweden where people moved their factories to China, India, Baltic States, Poland, and places like that. That hasn’t really taken off. I think what happened was that it became much more important to be in charge of your own value chain, to ensure you can ensure quality in that. The quality increases in these countries that we were talking about, it costs. You have wage inflation in China now that in 15 years, regular wages will be on a par with ours. The benefits of moving production somewhere else isn’t really there. I think there is definitely a case for a manufacturing base in our countries. It might look different than it did. I’m sure it will look different than it did 10 or 15 years ago and the economy is changing. Also, the quality and workmanship that goes into what we perceive as regular industry work, if you like, has also changed. That’s where if you have a choice, do you want to become a high wage or low wage country or be on the high end of the value chain? I mean, you have to be on the high end, I think. Again, that sheds light on innovation: how do we get jobs out of innovation? and all the rest of it. That is an interesting policy and I think that is where politicians will have to move. We saw president Obama for instance speak in the State of the Union last year about the Sputnik moment. He didn’t follow through on the deliverables of that policy and that’s because it is very difficult to quantify. I mean what you do to get jobs out of innovation, frankly, we don’t know, and that is what I was looking at in Stanford.

Question: Thank to this, I thought to this [inaudible] wonderful speech, if you didn’t know Sweden well [inaudible]. Is this a part of [inaudible] in other venues.

SL: I’d be happy to, I live here now, I live in London. I came for the weather. You laugh, have you been to Sweden and seen the weather we have? I’d love to. It is just that you know, it is quite interesting, if you try to get some experience from all of these crises we’ve been through, it can be actually quite good. I am an extreme optimist. I think that we’ve been through all of these crises before. In 1988, Uruguay sent foreign aid to Sweden, because we were so poor when [inaudible] in the northern part of Sweden burned down, they sent foreign aid to us. That was not a long time ago. Things change quickly and if you do the right thing, it will change for the best, and if you do the wrong thing, it can go dramatically wrong in the short time, so we better do the right thing. And if we do, we will be fine.

Davis: This gentleman is offering you a speaking role. I think I wasn’t clear enough about my job offer beforehand! Did you actually have a question?

Question: [Question undeciphered]

SL: I think that pensions are actually quite important and we have three pillars in the pension system around the world. The first pillar of pensions is the state-owned and administered sort of regular pension. Then you have supplementary schemes that are either the £41k on the balance sheets of your employer or you have an independent [inaudible] pension account system. And then you have the private pensions on your account as a third pillar. I think that what we will see, since governments will be less prone to pay for more pensions in the future, will be second and third pillar pensions grow quite a bit. I tend to believe that this is quite because it means that you shift ownership of your total pension from governments who regularly have had a pay-as-you-go system, which means not pay-as-you-don’t-go, to be honest, to a system where you have control of your own pension and you can have a choice or you should have a choice of how it is going to be administered and taken care of until the day you reach your pension age. What we actually did in Sweden, to keep people in the labour market for as long as possible is if you are over 65 you have a double work tax credits and no payroll tax. We abolished payroll tax for over 65ers. In addition to the pension reform we had 10 or 15 years ago, there are extremely strong incentives for people to stay on in the labour market. From the employer’s perspective, it is much cheaper to hire someone if you don’t have to pay their payroll tax. That is one advantage of having high taxes: you can lower them and get some results. Obviously, you have the individual incentive both in the pay you get and the pension you will also get when you stay in. It is obvious that the last few years in the market really do pay, so if you retire at 67 than 65 you will be much better off. These people are quite healthy and good to participate. Maybe not 100% of their old job, but 50% of some job. That flexibility in the labour market needs to be addressed in the future.

Question: You have mentioned earlier [inaudible]. I was wondering what model [inaudible] and if you now need to move to china, for instance, which doesn’t have the same economic concerns, can we afford to step back and look for ways for this to happen by itself or do we have to [inaudible]?

SL: That’s a million dollar question and I will give a political answer: yes and no. I think that the track record that we have of politicians trying to be involved in innovation and innovative strategies is quite discouraging. That is really a problem because it has been cherry picking: trying to find the next big thing. You know that is not going to happen. That is a real problem. On the other hand, can we cope without the joining of hands in this respect? No, I don’t think so. I think this is the area where policy developments have to focus quite significantly over the next coming years, in addition to the educational reforms I was thinking about. Trying to find a way of alleviating some of the risks of early stage innovation and the market deployment of new products and services at the same time as not being enrolled in cherry picking at the same time as focusing on some areas where you have the lowest hanging fruits. I don’t have a good answer to that to be honest and the interesting thing is that I don’t think anyone else has either.  If you look around at most countries, there are all kinds of policies involved, but they are not very big and not very successful. I think the reason for that has to do with the fact that there is a policy lag and time lag. There are supporting vertical hierarchies working on these areas. The time lag is difficult for a politician because obviously education and investment in research and development intuitively is a good thing. If you think of things, you might be able to do things, if you don’t think then there might be nothing. So intuitively it is a good thing. If I would have come to my minister of finance and said “Hey, Andres, I need 10 billion to invest in innovative processes” he would have laughed at me and said “Are you nuts? Do you know when you will reap benefits of these investments? 20 years from now possibly and we will all be retired and recovering from something else by then.” For everything else we do at the ministries of finance around the globe, you see effects that you can calculate. If we change the unemployment benefit system and reduce payments of 10% after 200 working days, we can fairly accurately say what that does to employment and unemployment. When it comes to innovation, there are at least 3 kinds of economists around the world: those who talk about the general growth models, they are predominantly in the finance industries, those who talk about labour market issues and those who talk about innovation. They can’t talk to each other, they don’t have the same language, they don’t have the same understanding of what they are doing, and we do need to know more about this. I think that as a politician, you would demand to have some better policy answers to that question. The short answer is I have no clue, but I wish I did.

Question: If I sort of throw a follow-on question to that [inaudible] cause, do you think here is a distinction between what we used to call industrial subsidies, which in Britain is largely paying people to stay and work, paying companies to make cars so I can buy, and, if you like, a modern type thing of industrial strategy, which is looking at accelerating growth in sectors that are already competitive and instead of intervening to sustain the market, intervening to remove artificial barriers to market growth, particularly in sectors that are very international?

SL: I agree completely. We tried the subsidy thing in the 70s. We had our entire shipping industry under pressure and some 10 billion pounds were put to save those jobs, 2 years later they were all gone anyway. You could have burnt the money on the stakes instead. What we didn’t do in 2008, we did not put up government money to save Saab. We were quite clear: I am a brilliant guy, but I’m not good at selling cars. Why would I do better than the guys who are trying to sell them now? The interesting thing was the amount of mail-email contacts we had at the ministry of industry and the ministry of employment. 85% were positive. They said “good on you, don’t waste our money on trying to save something that no one will buy.” That was quite astonishing for us to be honest, but what we said was that we can’t save every single job, but we can work on the employability of the work force, and then we are back at the active labour market programs and things like that. It has to do with retraining people to get back into jobs, not putting them at the permanent parking lot in the labour market, but basically trying to get them out of there as soon as possible and get them into jobs again. Then I agree, there are obviously lots of obstacles that you can start dismantling to get people or companies to grow, absolutely. I think in most of our countries, and this is especially true in Sweden, a small country and far away, we need in Sweden to get our companies on the international arena quicker than we have today, and the good thing is that we have lots of large companies that we can sort of piggyback onto. We need to find ways to make that work. But there are so many pitfalls within your question. It is sort of easy to have that good perspective and start out with that and say we are going to help out and we are going to accelerate and all that, and then end up spending money trying to save jobs and subsidize companies that are going to die anyway. In the early stages, the risks are enormous: if you are lucky, one out of 10 companies that start out get anywhere. The rest are living deads or die.

Question: where do you draw the distinction between tax breaks and subsidy?

SL: I tend to believe that tax breaks are incentives. We stay out of collecting. And we did a lot of that to be honest. One thing that we did, just to give you an example, we had all these people that have been out or away from the market for a very long time. And the problem is that their productivity is much lower in average than those who are in the labour market. How do we get them back? We try to compensate their low productivity by basically saying that if you hadn’t been employed for a year or more, the government would not take in payroll tax for the same amount of time being away basically compensating for their lower productivity by giving their employer a tax break to hire them. Is that a subsidy? Not a subsidy directed to a company but assistance to someone who had been away for a very long time. We figured it is much better to have these people in as tax payers and getting their productivity up, so that we could reduce the subsidy if you like, later on, when they are more productive. And that was pretty good.



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