From war to the Swedish model

Last updated: 2025-02-26

Sweden remained neutral during both the First and Second World Wars. As a result, Sweden was in a favorable position to contribute to the rebuilding of war-torn Europe. While the first half of the 20th century was marked by political challenges, high inflationinflation:, unemployment, and a pressing need for economic recovery, it also witnessed the emergence of a new economic framework: the Swedish model. This approach would become a defining feature of the country’s economic success in the years to come.

Sweden was in a position to take advantage of the increase in foreign demand after the First World War and the country’s economy grew fast although this growth was not based on new and better production methods. Instead, it depended purely on speculation. The shortage of different essential goods, such as fuel, and labour caused soaring inflationinflation: rates.

An economic crisis

The end of the war brought significant changes to the Swedish economy. With the removal of the trade barriers imposed during the conflict, goods could be exchanged more freely than before. This shift transformed previous shortages into surpluses, leading to a sharp decline in prices and, as a result, shrinking profit margins.

A significant number of companies went into liquidation, production dropped by 25 percent, and unemployment surged to around 30 percent. The economic crisis of 1921-22 proved to be the most severe challenge Swedish industry had ever faced. It took several years for the economy to stabilize, recover, and begin to show signs of growth once again.

The Years of Depression

The Great DepressionDepression:, which began in the United States in October 1929, hit the Swedish economy hard in 1930-31. By 1932, unemployment soared to around 25 percent, and Swedish exports plummeted, driven by the widespread belief that protectionism and currency regulation were the solutions to the crisis.

However, Sweden emerged from the depressiondepression: in a stronger position than countries like Germany and the USA. This recovery was partly due to a 30 percent devaluation of the Swedish Krona against the dollar in 1931, which gave a significant boost to exports. Sweden’s exportexport:-driven forestry and mining industries capitalized on this devaluation, experiencing rapid growth.
Additionally, since the crisis of the 1920s, Sweden’s industrial sector had refined its production and distribution methods. These technical advancements led to a sharp increase in both production volume and the quality of manufactured goods. Among the most successful products during this period were textiles, pulp, and steel.

A recovering economy

The year 1932 marked a central moment in Swedish economic and political history. The new government sought to increase the state’s role in addressing social issues, with the fight against unemployment becoming its top priority. From this point forwardforward:, the government would take a more active role in managing the economy and controlling the fluctuations of the business cycle. This shift represented the first step toward the development of ”the Swedish model” and the adoption of Keynesian economic principles.

The end of the Second World War resulted in an economic boomboom: for Sweden. Having successfully remained neutral during the conflict, Sweden was in a stronger position than many of its competitors. The reconstruction of war-torn Europe worked in Sweden’s favor, as the country’s labor force remained intact and its production facilities were unharmed, giving Swedish industries a significant advantage in meeting the growing demand for goods.

By the end of the decade, the combination of the measures mentioned above led to Sweden experiencing economic growth, even amid global economic stagnationstagnation:. During both the world wars and the interwar period, Sweden made significant strides toward becoming one of the wealthiest nations in the world.

The Swedish Model

The core of the so-called ”Swedish model” was a historic compromise between a social democratic government and a privately owned industrial sector. This compromise represented a middle ground between unregulated capitalism and a fully planned economy. While most large companies remained privately owned—apart from state-owned monopolies—the private sector grew alongside an expanding public sector, creating a balanced and unique economic framework.

The "Swedish model "can be summarized as follows:

• a large, privately owned industrial sector,
• a sizeable public sector financed by taxes,
• a strong trade union movement,
• an active state role in labor market policies, and
• a clear ambition to ensure a fair distribution of income and wealth.

Over the next three decades, the terms “The Middle Way” and “The Swedish model” came to be well-known trademarks for the Swedish economy.

In the beginning, the ”Swedish model” proved highly successful. From the early 1950s to the late 1960s, global economic growth averaged between four and five percent annually, and Sweden emerged as one of the most prosperous Western nations of the period. Between 1960 and 1965, the Swedish economy reached its peak, with an average annual GDPGDP: growth of 5.3 percent and productivity growth averaging 5.6 percent per year.

Structural change in the labour market

Although the domestic textile industry faced significant challenges due to increased international competition, the engineering and rubber industries grew as demand for motor vehicles surged. Unemployment dropped sharply after the war and remained exceptionally low, around two percent, throughout the 1950s and 1960s.

The Swedish labor market underwent major transformations during the 1960s. Employment in the service sector rose, while the number of industrial workers, particularly in textiles and leather, declined. At the same time, the social welfare system expanded significantly, and the number of public sector employees grew substantially in the 1960s and 1970s.
However, the government’s ambitious social welfare and redistribution policies came with a high tax burden. Even today, Sweden maintains some of the highest tax rates in the world, with total tax revenue amounting to around 50 percent of GDPGDP:.

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