Sweden’s Long Climb

How did Sweden develop from an economic backwater into a powerhouse?

September 13, 2004

How did Sweden develop from an economic backwater into a powerhouse?

In the Middle Ages, as its great economic historian Eli Heckscher showed, Sweden was far less developed than most European countries.

During that time, Sweden took little part in the continent’s system of trade. It remained essentially medieval into the 16th century.

Even in the 18th century, agriculture was still medieval in techniques and organization.

Then, land redistribution destroyed the old system of agriculture and village life — and relentless population growth led to the increase of a landless rural proletariat.

Sweden’s road to industrialization came through the export of iron and timber — then iron ore and wood pulp. In the 19th century, the economy profited mightily from increasing European literacy, which brought about the rise of the daily press — and the depletion of forests elsewhere in Europe.

High-quality iron — produced with charcoal from the forests — was a specialty that the government sought to foster and control. Export of iron ore was prohibited until the 1850s, and made a slow start until railway extensions made it economic.

Then, the country developed engineering industries that came to absorb a greater proportion of iron production. The country desperately needed railways to transport heavy produce, but they came slowly.

Joint companies were legalized in 1848. Industrial expansion was largely financed out of corporate profits and not through bank loans or bonds.

In fact, banks did not become a main source of working capital until quite late — after a private bank — Stockholms Enskilda Bank — was founded in 1856 by André Oscar Wallenberg.

The country remained very poor, unable to support itself and living conditions were wretched. One emigrant recalled his apprenticeship, saying, “I have seen slaves since in Africa and Australia — and they were treated better.”

Between 1820 and 1930, 1.25 million Swedes emigrated to the United States. That is a greater number than from any other nation, save Norway and Ireland.

Because it industrialized late, Sweden became a capital importer — drawing on funds from Germany, Britain and France. They funded government railway construction and private expansion of the timber and iron industries.

Now came the clue to Sweden’s economic development. Rather like the Japanese a little later, having imported innovations, the Swedes began to produce their own.

Lars Magnus Ericsson invented the first table telephone. Sven Wingquist perfected the modern ball bearing. Alexander Lagerman constructed a machine for mass production of matches. Alfred Nobel patented dynamite. Baltzar von Platen invented the gas-powered refrigerator. And Gustaf de Laval developed the milk separator.

While primary production from mines and forests remained significant, the Swedish economy climbed progressively up the value-added curve.

Swedes began manufacturing increasingly sophisticated engineering equipment, such as office machines, steam turbines, automobiles, ships, medical equipment and supplies, textiles, plastics, telecommunications equipment and furniture.

Sweden had some built-in advantages in achieving this late — but dramatic — industrialization.

There was its long tradition of decentralized rural industry around the iron mines, the consequent lack of an urban industrial proletariat and a tradition of industrial cooperation and freedom from labor disputes — until the rise of organized labor at the end of the 19th century.

Sweden also had an adaptable and hard working workforce — and, above all, a capacity for innovation fostered by a good educational system.

Finally, there was one feature that was perhaps more significant of all. Though this was a capitalist economy, it was one in which government intervened to promote business.

From the reign of Gustav Vasa in the 16th century until the heyday of 19th-century laissez-faire, it was always a “mixed economy.” In the early stages of development, government played an active role.

Near-universal literacy — the product of a Protestant Church — also was an important factor in developing advanced industries.

The key thinkers behind Sweden’s modern economic system were Gunnar and Alva Myrdal. In the 1930s they developed the notion — then revolutionary, now commonplace — that expenditure on children’s education and health represented investment in human capital.

The first basic idea was that democracy should be extended from the political to the socio-economic sphere. There was no contradiction between socio-economic equality and economic efficiency. On the contrary, they could be made to reinforce each other.

Still, the unique nature of Swedish Social Democratic economic policy has seldom been fully understood outside its homeland.

Extracts from “Cities in Civilization” by Peter Hall (Copyright © Peter Hall 1998) are reproduced by permission of PFD (www.pfd.co.uk) on behalf of the author.