I am always curious about Swedish welfare state. During my studies in the University of Hong Kong, I read the Rise and Decline of Nations written by Mancur Olson. Olson (1982) said that by forming encompassing interest groups, the Swedes keep relatively efficient bargaining, avoid excessive redistribution, and even pursue growth-enhancing policy although he did not know the exact reason why they are good at this and simply contributed it to history.
Intrigued by Olson’s thoughts, I tried to search for his other works about Sweden. Then there comes How Bright are the Northern Lights (1990). In this book, Olson extended his discussion about narrow distributional coalitions and encompassing interest groups in his former works and further categorized the type of redistribution into two, implicit and explicit.
Narrow distributional coalitions tend to exploit rational ignorance and rhetoric of public interest to lobby for implicit redistribution like cartelization, monopolization, and protection (e.g. tariffs, subsidies, quotas, exchange control, credit rationing, etc.) which decrease overall efficiency and slow down innovation of an economy. However, encompassing interest groups usually pursue innovation-encouraging policy and use relatively transparent and explicit redistribution more since there is usually no need to conceal income transfers to low-income people especially supported by popular sympathetic sentiment and the relative transparency of explicit redistribution also makes itself limited by the preferences of citizens and encompassing groups.
Furthermore, since the recipients of social welfare have higher possibility of not being in the labor force and transfers to the needed incur only administration costs of taxation and actually few deadweight losses (like slowing innovation) beyond the amounts of taxation itself, the most productive sector or people are not misdirected like the case of implicit redistribution. “It is mainly the needed that are the objects of the sympathy of electorate, but mainly the most productive sector or people who are able to overcome the difficulties of collective action (Olson, 1990, p.60)" since the organization capacity of different groups for collective action depends on income level, established position and numbers.
Applying his theory to Sweden, Olson credits relatively less implicit redistribution in Sweden for its still impressive economic performance but with uniquely large public sector because of its open attitudes toward free trade, high quality of public sphere and its encompassing organization.
Interestingly, dealing with the old problem of a welfare state and public spending in this relatively new way, Olson gives a creative but convincing answer about ambiguous relationship between the size of a welfare state and economic growth after WWII and significantly negativity between protectionism and economic performance.
But unfortunately, he just stopped here. He implicitly assumes state capacity (fiscal and legal capacity, following the definition of Besley and Persson (2011)) as exogenous and simply treated open attitudes toward free trade, high quality of public sphere and encompassing organization as caused by history (accident).
Next part will be my critics on Olson and proposed further possible answers to the institutional origin and unique efficacy of Swedish welfare state.
Besley, T., & Persson, T. (2011). Pillars of prosperity: The political economics of development clusters. Princeton University Press.
Olson, M. (1982). The rise and decline of nations: Economic growth, stagnation, and social rigidities. New Heaven.
Olson, M. (1990). How bright are the northern lights?: some questions about Sweden. Lund: Institute of Economic Research, Lund University.