TITLE: SWEDEN ECONOMIC POLICY AND TRADE PRACTICES DATE: FEBRUARY 1994 AUTHOR: U.S. DEPARTMENT OF STATE SWEDEN Key Economic Indicators (Billions of Swedish kronor (SEK) unless otherwise noted) 1991 1992 1993(e) Income, Production, and Employment Real GDP (1985 prices) 954.1 938.0 912.1 Real GDP Growth (pct.) -1.7 -1.7 -2.8 GDP (current prices ) 1,438.2 1,436.5 1,431.7 GDP by Sector (value added, 1985 prices): Agriculture & Fishing 14.8 13.9 14.9 Forestry 14.1 14.7 14.7 Energy & Water 25.4 25.2 25.2 Mining & Manufacturing 194.3 188.5 190.4 Construction 57.0 52.6 48.4 Bank & Insurance Services 41.8 41.7 39.8 Other Services 327.5 325.3 313.8 Net Exports of Goods & Services -3.5 -0.5 31.1 Real Per Capita GDP (SEK) 110,700 108,200 104,700 Labor Force (000's) 4,516 4,429 4,305 Unemployment Rate (pct.) 2.9 5.3 8.0 Money and Prices Money Supply (M3) /1 661.8 682.8 673.6 Base Interest Rate (3-month STIBOR) 13.69 11.87 7.95 Personal Saving Rate (pct.) 3.4 8.1 9.9 Producer Prices (pct. chg.) 4.5 1.0 2.2 Consumer Prices (pct. chg.) 9.4 2.3 4.6 Exchange Rate (SEK/$1.00) 6.05 5.81 7.75 Balance of Payments and Trade Total Exports (FOB) 332.8 326.0 380.9 Exports to U.S. /2 30.9 29.2 30.3 Total Imports (CIF) 300.9 290.4 321.0 Imports from U.S. /2 25.9 28.0 30.2 Aid from U.S. 0 0 0 Aid from Other Countries 0 0 0 External Public Debt /1 59.0 243.5 359.2 Debt Service Payments /3 22.1 17.5 55.4 Gold & FOREX Reserves /1 99.7 163.6 177.2 Balance on Current Account -20.3 -29.0 0.0 Notes: 1/ Year-end and 09/30/93. 2/ Annualized 1993 figure based on first half-year data. 3/ Interest and amortizations on central government external funded debt. For 1993, first half year. 1. General Policy Framework Sweden is an advanced, industrialized country with a high standard of living, extensive social services, a modern distribution system, excellent internal and external communications, plus a skilled and educated work force. The traditional resource base of the economy lies in timber and hydroelectric power, but the economy is now based increasingly on high-technology goods and services. Between one-quarter and one-third of GDP is exported; consequently Sweden is a strong supporter of liberal trading practices. Sweden applied for membership in the European Union (EU) in 1991. Until it becomes a member of the Community, which the government hopes can occur in 1995, Sweden's relations with the EU will be governed by an interim arrangement, the European Economic Area (EEA) agreement, when ratified by all signatories. Most Swedish regulations have already been modified to harmonize with EU practices. Instruments used to achieve economic policy goals are the traditional monetary and fiscal ones, including an active labor market retraining policy. The Swedish Central Bank exercises considerable autonomy in the realm of monetary policy, chiefly by adjusting the overnight lending rate it charges commercial banks in order to influence levels of liquidity in the economy. On the fiscal policy side, a determination to lower tax rates, combined with the maintenance of expensive government social programs, has led to a swelling of the government budget deficit. Some of this is financed by foreign loans, but the bulk is covered by government bonds, treasury notes, a national savings scheme, and so forth. As 1993 came to a close, Sweden was just beginning to pull out of the worst and most protracted recession experienced since the 1930's (GDP declined by some 6 percent in the three-year period 1991-93). The government estimates that open unemployment in 1993 will be eight percent of the work force, an unprecedentedly high level for Sweden. "Hidden" unemployed, like those in government training and work programs, add another three to four percent to that figure. Interest rates remained very high in the wake of general unrest in European financial markets, hastening bankruptcies and hampering investment, but have since fallen back to levels slightly above those of Germany. This development helped ease the ongoing financial crisis somewhat. Although Sweden defended the krona's fixed exchange rate through several waves of speculation in late 1992, the government was forced to allow the krona to float freely against European currencies as of November 19 of that year. Although the immediate future for the non-exporting part of the economy is bleak, the ground has been prepared for improving the general business climate and attracting foreign investment. This process was begun by the former Social Democratic government, which deregulated the credit market; removed foreign exchange controls; introduced a broad tax reform; won consensus on nuclear power policy; abolished foreign investment barriers; applied for EU membership; and pegged the krona to the European Currency Unit. The right-center coalition government which came to power after the 1991 elections is moving rapidly down the path of European integration staked out by the Social Democrats. The new government has also achieved some tax reduction, begun the privatization of government-owned corporations, stepped up investment in infrastructure, and increased investment in education and research, and changes are under way to improve the business climate for small and medium-sized firms. Budgetary constraints are governing the speed with and extent to which some of the government's programs can be implemented. Until the economy again begins to pick up momentum, the watchwords are fiscal restraint and continued public sector austerity. In the fall of 1992, the government and opposition Social Democrats reached two broad compromise packages which postponed tax reductions and reduced social benefits. Despite the very shaky condition of the economy, it does not seem that any further broad political compromises can be reached before the general elections scheduled for September 1994. 2. Exchange Rate Policies Between 1977 and 1991, the Swedish krona was pegged to a trade-weighted "basket" of foreign currencies in which the U.S. dollar was accorded double weight. During that period there were, nonetheless, two devaluations of the krona in the early 1980s, of 10 and 16 percent. As a step on the road to eventual membership in the EU, Sweden unhooked from the dollar-heavy "basket" and pegged the krona unilaterally to the European Currency Unit (ECU) in mid-1991. After defending the krona during turbulence on European foreign exchange markets in late 1992, which for a brief period sent overnight interest rates rocketing into three digits, the government was eventually forced to float the krona. The currency has since depreciated by around 30 percent of its value against the U.S. dollar, the deutschmark, and the pound sterling, and by more than 50 percent against the yen. The stated monetary policy of the Central Bank is to see that the depreciation of the krona does not result in an increase in the underlying inflation rate (i.e., when the effects of changes in indirect taxes and the depreciation are excluded). Inflation is to be held close to 2 percent beginning in 1995, once the immediate effects of the float plus various indirect tax increases have worked through the system. Sweden applied a battery of foreign exchange controls until the international deregulation process, particularly that occurring in the EU, forced it to follow suit in the latter half of the 1980s. The only remaining restriction of this legacy comprises routine Central Bank screening for statistical purposes of both incoming and outgoing direct investment. 3. Structural Policies The Swedish tax burden is the heaviest in the OECD, equivalent to around 50 percent of GDP. Current central government expenditure during the severe recession is running at almost 75 percent of GDP, versus an average for OECD Europe of under 50 percent. The stated policy of the government is to lower tax rates to bring them in closer harmony with levels in the EU, but economic constraints are hampering such a move. A broad tax reform in 1990-91 reduced the marginal income tax rate on individuals to a maximum of around 50 percent. On the corporate side, effective taxes are comparatively low and depreciation allowances on plant and equipment are generous, though social security contributions for the work force add a further one-third or so to employers' wage bills. Swedish value-added tax is two-tiered, with a general rate standing in late 1993 at an effective 25 percent of retail price and a lower rate at 21 percent for food, domestic transportation, and tourist-related services. Trade in industrial products between Sweden, the EU and EFTA partners is not subject to customs duty, nor is a significant proportion of Sweden's imports from developing countries. Import duties are among the lowest in the world, averaging less than five percent ad valorem on finished goods and around three percent on semi-manufactures. (Swedish tariffs, on average, would increase slightly were the country to become a member of the EU.) Most raw materials are imported duty free. There is very little regulation of exports apart from control of arms exports and a law governing the export and reexport of certain high technology products. Sweden implemented a new food and agricultural policy in mid-1991 aimed at deregulating its complicated postwar system of agricultural price regulation. Shortly thereafter, however, Sweden applied for EU membership, which will mean that the country, if and when membership is achieved, will have to adhere to the EU's Common Agricultural Policy and apply its regulations. 4. Debt Management Policies Sweden's traditional external debt policy, dating back to the mid-1980s, was to incur no net foreign borrowing by central government for the purpose of financing budget deficits. When the policy was introduced, central government external debt amounted to roughly one-quarter of the national debt. However, a heavy drain on foreign exchange reserves in conjunction with the turbulence in European financial markets in the fall of 1992 ended the policy. The Central Bank and National Debt Office have since borrowed heavily in foreign currencies, increasing the central government's external debt fivefold virtually overnight to the equivalent of approaching one-third of the national debt. The new guidelines for central government borrowing in foreign currencies state that the lion's share of the national debt should continue to be in Swedish kronor; that the borrowing should be predictable in the short term yet flexible in the medium term; that the government shall direct the extent of the borrowing; and that it shall report each year on developments to the Parliament. Management of the increased debt level is as yet posing no problems to the country, but interest payments on the burgeoning national debt as a whole are growing rapidly. 5. Significant Barriers to U.S. Exports and Investment To help ensure free Swedish access to foreign markets, Sweden has opened its own markets to imports and foreign investments, and campaigns vigorously for free trade in GATT and elsewhere. Import licenses are not required in Sweden, except for items such as munitions, hazardous substances, certain agricultural commodities, fiberboard, ferroalloys, some semi-manufactures of iron and steel, etc. Sweden enjoys licensing benefits under Section 5 (k) of the U.S. Export Administration Act. Sweden makes wide use of EU and international standards, labeling, and customs documents, in order to facilitate its own exports. Having adjusted its laws and regulations to EU practices in preparation for eventual membership of the Community, the country is now open to virtually all foreign investment and allows 100-percent foreign ownership except in areas of air transportation, maritime transportation, and the manufacture of war material. In recent years the Swedish government has done away with laws governing foreign acquisitions of firms and has relinquished all controls over foreign purchases of real estate for business purposes. Any shares listed on the Stockholm Stock Exchange may now be acquired by Swedes and foreigners alike. However, corporate shares in Sweden can still have differing voting strengths. Sweden does not offer special tax or other inducements to attract foreign capital. Foreign-owned companies enjoy the same access as Swedish-owned enterprises to the country's credit market and government-sponsored incentives to business. Government procurement is usually open to foreign suppliers, and the Swedish government has no official policy of imposing countertrade requirements. Sweden participates in all relevant GATT codes concerned with government procurement, standards, etc. Public procurement regulations have been harmonized to EU directives in light of Swedish obligations under the EEA Agreement. The new regulations, which apply to central and local government purchases in excess of ECU 400,000, now cover procurement by entities in previously excluded sectors, i.e., the water, energy, transportation, and telecommunications sectors. When the EEA Agreement eventually enters into effect, Sweden will be required to publish all government procurement opportunities in the European Union Official Journal. 6. Export Subsidies Policies The Swedish government provides basic export promotion support through its financing, jointly with Swedish industry, of the Swedish Trade Council. The Swedish government and Swedish industry also jointly finance the Swedish Export Credit Corporation, which grants medium and long-term credits to finance exports of capital goods and large-scale service projects. Working with the Swedish Agency for Technical and Economic Cooperation, the Export Credit Corporation also provides developing countries with concessionary trade financing. At year end 1993, Swedish farmers were still receiving government support for exports of surplus grain and meat production, although these subsidies are being phased out. The government recently instituted new export subsidies for some processed foods, among them hard cheeses. If and when Sweden becomes a member of the EU, its agricultural support policies will have to be adjusted to comply with the EU's Common Agricultural Policy, including intervention buying, production quotas, and increased export subsidies. In Sweden there are no tax or duty exemptions on imported inputs; no resource discounts to producers; and no preferential exchange rate schemes. Sweden is a signatory to the GATT Subsidies Code. 7. Protection of U.S. Intellectual Property Sweden strongly protects intellectual property rights having to do with patents, trademarks, copyrights, and new technologies. The laws are adequate and clear, enforcement is good, and the courts are efficient and honest. Sweden supports efforts to strengthen international protection of intellectual property rights, often sharing U.S. positions on these questions. Sweden is a member of the World Intellectual Property Organization and is a party to the Bern Copyright and Universal Copyright Conventions and to the Paris Convention for the Protection of Industrial Property, as well as to the Patent Cooperation Treaty. As a signatory to the EEA Agreement, Sweden has undertaken to adhere to a series of other multilateral conventions dealing with intellectual property rights. Swedish intellectual property practices have no adverse impact on U.S. trade. 8. Worker Rights a. Right of Association Swedish workers have the right to associate freely and to strike. Unions conduct their activities with complete independence from the government and political parties, although the Confederation of Labor Unions, the largest federation, has been allied for many years with the Social Democratic Party. Swedish trade unions are free to affiliate internationally and are active in a broad range of international trade union organizations. b. Right to Organize and Bargain Collectively Workers are free to organize and bargain collectively. Collective bargaining is carried out in the form of national framework agreements between central organizations of workers and employers, followed by industry and plant-level agreements on details. In 1993, after a two-year wage stabilization agreement expired, a new national agreement with small wage increases was signed for the manufacturing industry. As structured, the settlement represents a step toward the decentralization of the wage formation process favored by business. Swedish law fully protects workers from anti-union discrimination and provides sophisticated and effective mechanisms for resolving disputes and complaints. c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor is prohibited by law and does not exist. d. Minimum Age of Employment of Children Compulsory nine-year education ends at age 16, and full employment is normally permitted at that age under supervision of local municipal or community authorities. Those under age 18 may work only during daytime and under a foreman's supervision. Violations are few, and enforcement--by police and public prosecutors, with the assistance of the unions-- is considered good. e. Acceptable Conditions of Work There is no national minimum wage law. Wages are set by collective bargaining contracts, which typically have been observed even at nonunion establishments. There is substantial assistance available from social welfare entitlements to supplement those with low wages. The standard legal work week is 40 hours or less. The amount of permissible overtime is also regulated, as are rest periods. Since 1991, Sweden's vacation law guarantees all employees a minimum of 5 weeks plus 2 days of paid annual leave, and many labor contracts provide more. During 1993, however, it was made possible to reduce the minimum leave by two days through negotiations with the unions. Occupational health and safety rules, set by the government-appointed National Board of Occupational Health and Safety in consultation with employer and union representatives, are closely observed. Trained trade union stewards and/or safety ombudsmen monitor observance of regulations governing working conditions. Safety ombudsmen have the authority to stop life-threatening activity immediately and to call for a labor inspector. The courts have upheld this authority. f. Rights in Sectors with U.S. Investment The five worker-right conditions addressed above obtain in all firms, Swedish or foreign, throughout all sectors of the Swedish economy. Extent of U.S. Investment in Selected Industries U.S. Direct Investment Position Abroad on an Historical Cost Basis - 1992 (Millions of U.S. dollars) Category Amount Petroleum 38 Total Manufacturing 1,289 Food & Kindred Products D Chemicals and Allied Products 90 Metals, Primary & Fabricated 22 Machinery, except Electrical 861 Electric & Electronic Equipment 30 Transportation Equipment D Other Manufacturing 228 Wholesale Trade 450 Banking D Finance and Insurance 136 Services 89 Other Industries D TOTAL ALL INDUSTRIES 2,033 (D)-Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Bureau of Economic Analysis. (###)