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Growth and renewal in the Swedish economy

By Tomas Nauclér, Magnus Tyreman and Charles Roxburgh

Sweden's economy is faring better than many of its peers, but to compete in the long term, the nation must address five key issues.

Sweden’s economy is faring better than that of many of its peers: the nation has low public debt and a current-account surplus, and since the early 1990s its growth rate has outpaced that of other members of the EU-151 and the United States.

But the 2012 McKinsey Global Institute report Growth and renewal in the Swedish economy shows that the nation can’t afford to coast on its achievements. Sweden’s economic growth mainly reflects productivity gains in the areas most exposed to international competition: manufacturing and business and financial services, which together account for only about one-third of the nation’s economy. In its two other main components—the public sector and local services—economic growth has been much slower, at a pace comparable to that of the rest of the EU-15.

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Further complicating the economic outlook, Sweden’s population is aging, the quality of its education system is declining, and international competition, particularly from developing economies, is accelerating.

Many countries must focus on addressing their acute short-term financial problems. Sweden, however, can think over the long term about how to maintain or even exceed its strong historical growth rate. Our research suggests that the nation should focus on five issues that collectively address both productivity and competitiveness:

1. Increase productivity in the public sector. With an ambitious approach, its productivity could increase by 25 to 30 percent over the next ten years, while maintaining the same level of quality. Key elements include more ambitious targets, more transparent results, consolidation of the structure of Sweden’s public administration, and a national center of excellence for public procurement.

2. Improve growth in the local-services sector through deregulation and regulatory reform. Sweden used these tools successfully in the 1980s and ’90s, but many areas remain to be addressed. The nation should consider systematically eliminating growth-inhibiting regulations, industry by industry, through a joint effort by politicians, employers, and trade unions.

3. Sustain high growth in the international sector through increased innovation productivity. Competition from companies in emerging markets is increasing rapidly. So is the pace of innovation: the number of engineers in the world, for instance, more than doubled from 1998 to 2008 and increased by a factor of four in China during that period. To maximize returns on R&D investments, Sweden should strive to become a leader in innovation productivity—innovation achieved per unit of investment in innovation—much as it has, in many industries, become a leader in production efficiency.

4. Make Sweden a world leader in education. Previous research has shown that to reverse the trend of failing schools, the skills of teachers and school leaders must improve significantly. Sweden should consider establishing teacher-coaching programs and explore ways to make the profession more attractive to highly skilled talent.

5. Increase the share of the population that’s employed. Sweden must address the high rate of unemployment among the young and the foreign born—for instance, by exploring an apprenticeship model. To adjust to a world in which people live longer, the country might also consider following the Danish practice of linking retirement age to life expectancy.

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