Sweden: The Enemy Is Within

Why has GDP growth fallen? because 75 percent of its economy - mostly services - is protected But not trucks, software, and banking, which are world class One lesson: don't try to block low-wage jobs To examine the causes of this decline, the McKinsey Global Institute studied productivity and employment in several key sectors between 1980 and 1992, comparing Sweden's performance with that of Germany, Japan, and the United States.(*) In order to determine which features of capital, product, and labor markets influence differences in performance, it focused on eight industries: retail; banking; construction; film, TV, and video; processed food; cars; trucks and buses; a nd computers. (See pp. 137-144.) Its principal findings were: * In productivity and job creation, Sweden trails both global best practice and best European performance in all the industries studied except trucks and buses and computer software, where it is world class. * Sweden's performance is strongly affected by the unusually low level of competitive intensity in the large part of the economy that is sheltered from foreign competition. This protection robs corporations of incentives to adopt best practice and continuous innovation, which in turn limits growth in output, productivity, and employment. * The sectors that are successful - trucks, software, and the recently deregulated banking industry illustrate the benefits of competition. * Although important in some industries, and for small businesses, labor market factors have not been the main brake on productivity and employment performance. * The factors limiting growth in Sweden are mostly under the control of policy makers. The government could help improve the nation's economic performance by stimulating domestic and international competition, removing remaining product market barriers, and reforming labor market regulation. Sheltered from competition Three-quarters of the Swedish economy is sheltered from foreign competition. it is in these sheltered areas which fall mainly in the service sector - that the widest performance gaps are to be found, especially in food processing and construction [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. Conversely, globally exposed manufacturing industries such as metals have best-practice productivity [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. This suggests that solving the country's employment and productivity problems will require shifting the emphasis from exports and manufacturing to domestic industries and services sheltered from foreign competition. Low competitive intensity All the sheltered industries studied were characterized by a small number of participants that created barriers to entry for new players and restricted competition among existing firms. This structure was frequently reinforced by rigid horizontal integration and the presence of dominant or sole providers of key inputs. Accordingly, competitive intensity was low. The construction and food processing industries illustrate this central problem in the Swedish economy. Remediable shortfall However, the good news is that the key causes of Sweden's lower productivity can be tackled, as they are not structural (that is, embedded in lack of scale, of capital, or of labor skills). The gap between Sweden's performance and that of benchmark countries is neither inevitable nor accidental. Rather, it is the outcome of management decisions that shape production processes. Sweden's banks, for instance, have efficient electronic systems, yet they still handle many transactions through the branch networks. The food processing industry's capital investments and average plant scale are on a par with those of Denmark or the United States, but its productivity is low because of inefficient organization, outdated processes, short production runs, and excessive product proliferation. …