DataDrivenInvestor
Oct 2
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Sweden has ranked as one of the most advanced economies in the world. Its citizens enjoy a high standard of living. Sweden is ranked 11th on the economic freedom index.
It is also one of the equal income countries on earth. Most of its citizens have slightly higher or lower incomes than their peers. But huge income gaps like in America and other advanced countries don’t exist in Sweden.
Sweden’s GDP per capita is 60k USD, one of the highest in the world.
Unlike its neighbor Norway, Sweden does not have large amounts of oil and gas, which can make them rich. Despite not having these natural resources, it still has the same standard of living as Norway.
Sveriges Riksbank, Sweden’s central bank founded in 1668 is the oldest central bank in the world.
So how did this tiny country like Sweden, with a population of merely 10 million people get so rich?
Sweden was neutral in both world wars and profited handsomely from the distraction caused by the war in other countries.
As many countries destroyed their factories and infrastructure during world wars, it eliminated the competition for swedes export on the global level, and Swedish export began to increase substantially, which improved economic growth in the country.
One of the worst enemies of economic development is wars which can destroy a nation’s economy. Unlike most countries, Sweden avoided and remained neutral during both world wars, which played a significant role in its economic growth during the 1950s and 1960s.
Sweden pursued an economic policy consisting of a capitalist economy mixed with a quality welfare system.
Sweden is a blend of the free market and an extensive welfare system which few countries have been able to achieve.
Sweden remains out of the eurozone out of concern that joining the European economic and monetary union would diminish the country’s sovereignty over its quality welfare system.
The Gini index for income is used to estimate the inequality of income between people in the country.
It can be measured with a scale of 0 to 1 or 0 to 100. Typically the higher the number, the more unequal the country is.
In 2019, the United States Gini index was 41.5, measured on a scale of 0 to 100. This number was slightly higher than the average among countries, meaning the USA was somewhat more unequal than other developed countries.
But Sweden has a Gini index of only 29.3, one of the lowest in the world, meaning it is one of the equal countries in terms of income allocation.
It is due to good education, healthcare, and child care available to all citizens and financed by high taxation.
Sweden has one of the highest personal income taxes amounting to 52% income tax compared to only 37% in the United States.
Most Swedes are willing to pay half of their income to the government for a welfare system that provides them with quality healthcare and education in Sweden.
In the United States, the top marginal tax applied to people with an income of more than 500k USD a year, which is only 1% of the population.
But in Sweden, you have to pay the top marginal tax when people start earning 1.5 times more than the average national income.
In Sweden, more people are paying higher taxes to support their welfare system and provide good education and healthcare to all swedes to improve their standard of living.
Providing good education and healthcare services to all its people, Made Sweden among the healthiest and most educated countries in Europe.
Sweden’s export mainly includes high-end finished products like Vehicles, telecommunication, and pharmaceutical products.
Sweden’s economy has long been dependent on its exports because of its small domestic market.
Sweden mainly exports to countries such as Germany, Norway, the United States, Denmark, and Finland.
According to professor Richard Florida from the University of Toronto, Sweden is home to the most creative and entrepreneurial people on earth.
Most countries lower their corporate taxes to encourage people to start companies and innovate which improves economic growth.
But it doesn’t encourage most people to start new companies. If you get a billion-dollar business idea, you won’t be disappointed if the taxes in your country are 25%, not 15%.
The main reason that is stopping most people from starting a new company is the worry that if they leave their high-paying job, then they couldn’t be able to afford good healthcare and education for themselves and their children.
But in Sweden, education, and healthcare is free of cost, which encourages most swedes to take the risk and start companies that may not turn a profit for some years. They could still get the same healthcare and education benefits without having a high-paying job.
That is why some of the most well-known multinational companies are founded in Sweden, for example, IKEA, Volvo, and Spotify.
Earlier, we looked at the Gini coefficient in terms of income inequality among swedes which was lower than average in developed countries, which means Sweden was one of the equal income countries in the world.
But its wealth Gini index measuring wealth distribution among the citizens was 0.86 as measured by 0 to 1. Sweden is surprisingly one of the unequal countries in wealth distribution.
So how can a country be equal in income among its citizens but unequal in wealth allocation?
The entrepreneur who starts their ventures, if that gets successful and the company is growing its profit, the owner of the business will increase their wealth.
But it will not be taxed because this is not their income but their assets like stock, bonds, or real estate, which would be taxed only when they get sold.
That is why Sweden has high wealth inequality, not income inequality among its people.
Typically most countries get rich by lowering their tax rate, having a large population, or being blessed with natural resources. But Sweden had neither of them, yet Sweden is so rich.
Sweden’s GDP per capita had gone from just 2k USD in 1960 to 60k USD in 2021, one of the highest in the world.
Sweden is one of the few countries that has become rich without having any natural resources and keeping taxes high.
Sweden’s welfare system is one of the best in the world. Its free-of-cost education system allowed all the citizens in the country to get advanced education and then build innovative businesses like IKEA, Volvo, and Spotify, which changed the world.
The entrepreneurial spirit amongst swedes, combined with a quality welfare system that allows citizens to take risks and start their companies without worrying about their college fees or healthcare cost, has played a crucial role in making Sweden so rich.
Sources
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