The Secret of Sweden’s Success

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"The Secret of Sweden’s Success"

My rule of thumb for thinking about the global recession is that whenever you hear claims that some country has weathered it unusually well because of Favored Policy Initiative A, you ought to first ask yourself if it’s not really just an exchange rate issue. That seems to be the story of Israel’s relatively mild recession and I don’t think any effort to explain a country’s successs—especially a small country—that doesn’t take this into account isn’t very credible.

For example, Casey Mulligan seems to think that tax cuts and reductions in the size of the social safety net explain why Sweden’s unemployment rate hasn’t increased as much as Denmark’s. A different theory would note that though Denmark and Sweden are both small, open economies with generally high taxes and generous social expenditures, Sweden’s currency floats whereas the Danish Kroner is pegged to the euro. Consequently, the outbreak of the recession was associated with a substantial reduction in the price of the Swedish Kroner relative to the DKK/euro, the dollar, or the yen:

sek 1

I think this is about what you need to know about it. Running a small, open economy with a floating currency has some problems. Among other things, events totally outside your control can throw your economy into recession. But it does leave you with a convenient way to adjust to the recession via devaluation. I think that’s about all that’s really happening here.


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