Sweden in the New Economy
|At a major conference in New York on Sweden and the IT development, I spoke about the transformation of Sweden during the last decade, and some of the issues still remaining.
Northern Light on the New Economy in Europe
Remarks at conference in New York September 28 on Sweden and the IT industries.
There is no doubt that there is a Northern Light shining over the emergence of the New Economy in Europe.
However we try to measure things, we find that the clusters of Internet-related innovation up in the northern part of Europe are stronger than in the other parts of Europe - and that these clusters in certain respects compete well with the corresponding clusters on this side of the Atlantic, or the rest of the world.
During the past year, there has emerged a consensus among economists, that something rather fundamental started to happen in the US economy in the mid-90’s, seen clearly in the rapid increase in productivity since then, linked to the strong investments in IT-technologies across the entire US economy.
Accordingly, the “speed limit” of the US economy had been adjusted upwards rather considerably. This is the “new economy”.
But this development has yet to occur across Europe. On the average, IT investments in Europe are still on a level half that of what we see in the US economy. Although growth has been picking up considerably throughout Europe during the last years, this does not seem to be linked to IT investments and increases in productivity in the same way as has been the case here in the US.
But when it starts to happen in Europe, it is safe to predict that it will appear most clearly up in the northern areas.
Recent studies by both OECD and IMF believe that they are already starting to see some of the early signs. It is primarily Finland and Sweden that are racing ahead, but with Norway and Denmark also doing substantially better than the average, and even Iceland sometimes coming out as an impressive performer.
World Economic Forum annually issues its Global Competitiveness Report to try to compare the performance of the different economies. During recent years, these studies have become increasingly sophisticated, trying to factor in not only the present and its trends, but also factors like economic creativity.
In the latest report – out just a couple of weeks ago – the performance of the Northern economies stand out very clearly. Finland emerges as a star performer, beating even the US in the current competitive index, but with Sweden following closely thereafter, and the other Nordic economies also doing well.
This is indeed an important change. If we go back a decade or so in time, the Swedish economy was a very different one. Professor Michael Porter, who is the leading international authority on the competitive advantage of nations, has written that Sweden then was “too obsessed with static, large-scale solutions and with big firms”.
How come, then, that this economy now seems to be on the verge of transforming itself into one of the pioneering economies of the New Economy in Europe?
Numerous factors come into play. There are institutional factors – but I believe there are also cultural factors. Both are part of the story of the transformation underway.
Fundamental is that the institutional framework for the Swedish economy has been transformed radically during the last decade.
Joining the European Union was a crucial step. It meant a stronger commitment to international economic and financial integration, and has also substantially contributed to a more stable and growth-friendly macroeconomic environment. A firmer commitment to budget disciple, an independent central bank and a more open and transparent financial system are all part of the developments that have been strengthened or accelerated by our joining the European Union.
And these changes in the macroeconomic framework have gone hand in hand with equally important changes in the microeconomic framework.
Professor Porter has pointed out, that while Sweden has always been strong in expenditure for research and development, in many ways it lacked the incentives and competition for these investments to really bear fruit. But during the past decade, we have seen the emergence of a far better and more dynamic environment through the deregulation of important sectors of the economy, the opening up of financial markets and a more vigorous anti-trust enforcement.
These are improvements in the general macro- and microeconomic climate for entrepreneurship and change in the Swedish economy. But to these should be added those more particular to the IT-related development.
Sweden has always been strong in telecommunications. A commitment to technology in combination with the geography of the country has ensured this throughout the entire last century.
In the early 1990’s, there occurred almost simultaneously two developments that together supercharged the Swedish move in these areas.
In 1991, the GSM European standard for digital mobile communications become operational, building on the success of the earlier analogue NMT systems in the Nordic countries.
And in 1992, Sweden undertook the most radical deregulation of the telecom market anywhere, followed very shortly afterwards by Finland. It was certainly not an uncontroversial step at the time, being label by the then opposition Social Democrats as part of a dangerous ultraliberal experiment with society.
What happened as a consequence was that everyone rushed to Sweden, and we saw strong rivalry between operators pushing rapid innovation in terms of functionality and stimulating market growth through penetration of ever growing numbers of customers. Sweden – and Finland – very rapidly become the global vanguards for broadly used mobile communications.
Based on this, it was perhaps natural that the Internet caught public attention in Sweden earlier than in most other countries. And politics was certainly pushing the process. The White House here in the US was first, opening its Web site in late 1993, but we were not much behind when the Swedish Prime Ministers Office did the same in very early 1994. We demonstrated early the usefulness of email. And a high level IT Commission was set up to focus attention on the importance of these issues.
And since then, we have seen the one development reinforcing the other.
The break-down of old barriers and structures in the wake of the deregulations in the early 90’s created room for a new breed of young, ambitious and sometimes even aggressive entrepreneurs, and these started to set up some of the very first Internet consultancy companies in the world in the mid 90’s.
And when pressure grew within companies to give also home PC’s to their employees, a system of tax incentives that this attractive was eventually decided upon, and we saw a explosion of home PC ownership in the late 90’s. And this naturally created a new market for the fiercely competing telecom operators offering Internet access.
In addition to having become one of the more prolific users of mobile telephones in the world, we thus rapidly become one of the more networked societies in the world.
And the next wave – very much underway now – is the move towards broadband connections all over the country. Much in the focus of public attention during the last few years, development is again driven by fierce competition between a number of private operators, but with an important role played by the state in ensuring access to broadband connections in the more remote and sparsely populated parts of the country
At the same time, our strong position in mobile telephony, not the least through Ericsson, has lead to a cycle of innovations when it comes to further developments in the area of wireless communication. Practically all of the technologies now talked about around the world have their origin – or part of their origin – in Sweden and the clusters of innovation that has emerged around the Baltic.
WAP. Bluetooth. GPRS. UMTS. And more to come not only in the R & D laboratories of the well-known names, but also in the brains of the growing number of young innovators and entrepreneurs in the area of mobile communication and mobile Internet.
I believe even an objective observer would today see the area stretching from Lund and Karlskrona/Ronneby in Southern Sweden over Stockholm to Helsinki in Finland as at the very forefront of the development of the technologies for the mobile internet.
This would not have been possible without the emergence of a functioning venture capital market, which has been able to fund and to help the rapidly growing number of start-up companies, as well as to encourage the process of spinouts from Ericsson and other major companies.
In the early 90’s, there was as much venture capital in Sweden as there were pink elephants on Greenland, but by now we have a situation in which I’m told that two new VC firms are established every week.
IT-Provider – to which I’m associated- and others that have been pioneering these developments are by now well-established and experienced operators reaching out well across the borders of the country.
Impressive as these developments have been during the last few years, we must ask ourselves whether there are issues that need to be addressed in order to create the conditions that would allow us to continue to stay ahead in the rapidly evolving and highly competitive environment of the coming years.
I strongly believe there are. And most independent observers, not to speak about the entrepreneurs and the industrialists themselves, agree.
There is a need to drive the process of deregulation and setting standards all over Europe. This is of profound importance for Sweden, since this will open up markets for us in a more profound way. Indeed, the European Commission has a very ambitious programme in these areas, which has recently been endorsed on the very highest levels of the European Council.
There are also numerous important national problems associated with primarily the structure and level of taxation. Since I could be seen as being partisan on the issue, I’d like to Professor Michael Porter again. He talked about the necessity of aligning the Swedish taxation system – income tax, VAT, long term capital gains tax, wealth tax – with that of other leading countries in order to be able to utilise the potential that is there in Sweden.
And I also believe that we must take more seriously all the issues associated with our education system. In a knowledge-based future, the quality of the education we give our children, from primary school throughout the universities, is crucial. There is clearly much that could and should be done in order to improve the performance of Sweden in these areas.
I mentioned that I believe what we are seeing in Sweden can be explained both by the factors of institutional change we have seen during the 1990’s – and by more cultural factors.
If you go back in the economic history of Sweden, you will find periods of impressive change and transformation, and you will find some less impressive period, and even periods coming very close to stagnation.
As a pattern, you find that in periods when there is a profound technology shift in the global economy, there was a creative talent and curiosity in Sweden that sometimes approached American levels, and that drove change in a very profound ways.
So, it is probably not a coincidence that Sweden has been in the forefront of economic change when we have seen revolutionary new technologies appearing.
The advent of electricity stimulated the development of new technologies that created companies in Sweden that are world-leading to this day – although ABB is now a Swiss-based company.
The advent of the telephone had the same effect – and Ericsson is now on the verge of a new revolution as the global leader in the infrastructure for mobile communications.
And you can argue the same concerning to some degree concerning some other technologies – nuclear energy, aerospace and biomedicine.
We are a nation with a curiosity when it comes to technology, and when science creates the opportunity for new technologies to impact on our economies and societies, you very often find the Swedes out there early trying to shape something new and inspiring.
What we have seen during the last decade has thus been a radical shift in key both macroeconomic and microeconomic institutional factors that have liberated markets as well as well as driven competition and innovation, in combination with more cultural factors that we have seen at work before in our country.
We are certainly not alone in these developments, and there are no guarantees that we can retain the position we now have if we are not prepared to take action in the different fields I talked about.
But there is no doubt that as we see an economic transformation as strong as in the US economy starting to appear in Europe as well, the clusters of innovation that have appeared in the Baltic rimlands have created a Northern Light over the emergence of the New Economy in Europe.
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