The consequences of state welfare: lessons from the Swedish experience

SA is slowly embarking on the road to providing state directed welfare for its citizens. As this will have very serious implications for the growth of the economy and the real long-term welfare of all the country’s people we should consider the implications of this policy option with great care. Implementing taxpayer-provided welfare has got wealthy countries into trouble. The consequences for a relatively poor SA could be dire.

Sweden has for many decades been held up as a model of the modern welfare state and the Swedish experience could thus prove useful in evaluating possible welfare initiatives. An examination of the history of the Swedish economy, euphemistically also known as the third way, a mixed economy, or a social market economy, is insightful. One of its outstanding characteristics is that the economic infrastructure has always reflected many of the crucial aspects of a free market, including private ownership and control of the means of production, adherence to the rule of law, freedom of exchange, and the allocation of resources through competition. Swedish governments imposed high taxes but interfered minimally in the functioning of the economy, leaving firms free to operate without a heavy bureaucratic burden.

Peter Stein, reveals in his seminal paper Sweden: failure of the Welfare State, that between 1870 and 1913, the annual per capita economic growth of Sweden was 2.3%, the USA 2.2 %, Germany 1.8% and UK 1.3%. Only Japan surpassed Sweden’s per capita economic growth rate during the period following WWII. Swedish citizens therefore grew relatively wealthier than those of other countries over a long period of time.

Sweden in the 1870s was an underdeveloped country, but over the next hundred years it was transformed, eventually boasting one of the highest per capita incomes in the world. Within this same period the country progressed from being largely oriented towards the export of raw materials to being a producer and exporter of high quality manufactured products. Stein places the free market period in Swedish economic history between 1890 and 1930. Other characteristics of the Swedish economy during these years were limited interference from government, free trade and free enterprise.

The implementation of a general old age pension bill in 1913 was the first step in what became the inexorable drift towards a comprehensive welfare system, the effects of which were dramatic: by 1996 total government outlays as a percentage of GDP amounted to 66.1%: the comparable figure for Germany was 56% and that for the USA 34.6%. This high level of government expenditure was not surprising, given the fact that the state provided substantial funds to maintain state enterprises that charged low or zero fees, including education and healthcare, and for subsidies to support unprofitable enterprises. Private healthcare services, schools and day care centres were virtually legislated out of existence.

Taxes that are redistributed to others through the agency of the state are not utilised in productive enterprises but are consumed. Such long-run high taxation has de-motivated the Swedish people and caused capital flight with a resultant shrinkage of the GDP.

In recent years, the negative results of state welfare policies have given rise to vociferous calls for the outright dismantling of the system and in some cases half-hearted measures have been introduced to ameliorate some of its more glaringly detrimental consequences. However, when politicians create beneficiaries through transfers from one set of citizens to another, they find it virtually impossible to remove the transfers once the consequences become apparent.

The SA government is under immense pressure to provide cradle-to-grave welfare for those citizens who cannot fend for themselves. However, if it succumbs to the pressure the price could be heavy. Even with the use of some form of means test, it is difficult for governments to identify legitimate welfare recipients. They can never be fully acquainted with the personal circumstances of individuals. By contrast, material assistance provided by family members, neighbours, friends, private clubs and private charitable institutions is more likely to be accurately targeted because it is informed by local knowledge and close relationships with individuals.

It was recently reported in the media that scores of pregnant Zimbabwean women have been streaming into SA in order to give birth in this country so that they can access child maintenance grants. Subsidies for single mothers, on the other hand, have the unintended consequence of encouraging teenage pregnancies. So calculation of the potential cost of subsidies will inevitably fail to take account of incentives to manipulate the welfare system.

The extension of a system of social grants brings with it moral as well as economic consequences. When the government encroaches on the sphere of the family and to some extent usurps its functions, duties and responsibilities, there are bound to be serious repercussions. Such intrusions undermine the role of the family as a custodian of the moral conduct of its members. Within the family there are rules that govern the conduct of its members. The children are subject to those rules and the parents lead by example and inspire adherence to and respect for those rules. Falling foul of the rules leads to wise words of admonition and strict sanctions. The nurturing of values such as personal responsibility and honesty is and should be anchored in the family.

The external environment, including the churches, can only complement the role of the family in inculcating moral values. While the welfare system continues to undermine authority within the family, talk by public officials of moral regeneration is essentially an exercise in futility. Provision of the child grant for single mothers has been shown to lead to an increase in teenage pregnancies and goes against the parents’ teachings that young people should not have children until they are ready for the responsibilities of raising them. The basic income grant for unemployed people for which some pressure groups are clamouring, will result in a culture of entitlement. If a family member is not interested in finding employment, there are sanctions within the family to deal with the situation but the income grant will weaken that influence.

SA will not be exempted from the ills that have afflicted Sweden as a result of its welfare policies. If anything, the consequences will be even harsher, given the fact that ours is still a relatively poor and developing economy, which unlike Sweden, does not have the economic resources to absorb or mitigate these consequences. A country has to start off wealthy in order to afford the cost and growth-reducing disincentives of implementing a welfare state. SA is not wealthy and consequently cannot afford welfare-state policies.

Author: Temba A Nolutshungu is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article / 18 July 2006 - Policy Bulletin / 15 September 2009