Speech
19 March 2008
Sven Otto Littorin, Minister for Employment

Speech by Minister for Employment Sven Otto Littorin at the OECD/IMF Conference on Structural Reform in Europe, March 17, 2008

Your excellencies, ladies and gentlemen,

I am honoured to have been invited here today to speak about the structural reform in Europe and the political economy of reform, and to talk a bit about the reforms we have embarked upon in Sweden since the 2006 elections.

Groucho Marx once said: "Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies."

I think most would agree that there is at least some truth to this but the question then remains: why do we politicians go wrong?

Well, as Jean-Claude Juncker was quoted as saying in the Economist last year: "We all know what to do, but we don't know how to get re-elected once we have done it."

The point of political reform would then be to try to be a bit wiser. How can we promote and execute reform despite all the opposition to change in our countries?

Our dilemma reflects the fundamental difference between politics and other areas of society. In most other areas change is for the good. A company needs to produce newer, cooler models of their products to stay ahead. A school needs to develop new methods of learning, new topics to teach to attract students. A hospital needs to use the latest research in treating patients most efficiently.

But politics is different. Politics is, as writer Johnny Munkhammar noted in his latest book "The Guide to Reform": "a complex art of strategy, alliance building, communication, loyalty, conflicts, historic relations and tactics. (...) Politics is the art of the possible, and not everything is possible."

Well then, how do we make the necessary possible?

Since the election in 2006 the new centre-right government embarked on reforming the Swedish economy. We have implemented a long row of measures geared towards increasing labour supply, making our labour market more efficient and thus reducing unemployment and increasing labour participation.

Why?

Simply because we had a situation a few years ago where one out of every five Swedes were outside the regular labour market or working less than he or she would like to do.

Sweden is an economy where transition on the labour market is fairly easy, over 1.5 million jobs changed hands last year. It is also a stable labour market - the Scandinavian model has delivered few strikes and conflicts. And finally, it is a labour market capable of handling the effects of globalisation and change. When Ericsson cut their staff in Sweden in half 6-7 years ago, not one day was lost to strikes and most of those laid off got new jobs in reasonable time.

But thresholds into the labour market are too high. In 2006, one out of every five Swedes was either openly unemployed, on early retirement, on long-term sick leave, on rehabilitation or underemployed.

That is unacceptable - both for political and economic reasons, and was at the core of how/why we prepared for the political reforms we are now implementing.

These reforms have one single and clear political focus: full employment. "All those who can and want to be in the labour market should have a chance to be included."

We try to achieve this by a three pillar strategy: a) making it more worth-wile to work, b) making it easier and cheaper to hire people and c) improving matching in the labour market.

Under these pillars, we have put forward a very long list of reforms. One of the most important is a tax reform, geared at the low and middle income earners, in some cases reducing net margin effects from over 80 percent to around 30 percent. The result has been dramatic in terms of increased labour supply - and has left ordinary workers with an extra 100 euros per month.

We have also tightened our unemployment benefit insurance system - increasing premiums, reducing dividends towards the end of the period (in effect introducing an outer parenthesis), putting harder demands on people to enter into the system, and finally making sure that our active labour market programs are synchronized more with the later and lower stages of benefit payouts

In the summer, we are also introducing a much improved system of rehabilitation activities, connected to financial incentives for returning to the labour market.

In addition to this, we have introduced reduced payroll taxes, especially geared towards the weaker groups on the labour market, effectively reducing thresholds for entering and re-entering into the labour market. We have also improved on the business climate, both by lowering taxes, cutting red tape and improving on legislation and education.

I am happy to say we can already see the results. Sweden now has the fastest falling unemployment rate in the entire OECD area. We are breaking records in the numbers of hours worked, in vacancies, in labour participation and in employment and historically low unemployment. Young people, immigrants and those with disabilities are returning to the labour market faster than the average.

In Sweden today, one person every fourth minute is leaving exclusion and returning in to the labour market, making this policy of reducing exclusion comparable with the Clinton reform years in the 1990s.

What is our experience from this reform process? Well, on a personal note, I have five "What to do's" and four "What to expect's":

1. Be prepared. A disastrous election result in 2002 opened a window of change for my party. We seized this chance and started questioning old truths. In preparing, we recruited a new and brilliant team of experts, helping us with the latest research and with policy formation. The experts can now be found within the government as ministers and state secretaries.

This process took several years, and included policy development, organizational change, alliance building within our side of the political spectrum and so on.

2. Do not be afraid of change. Questioning old truths are difficult in politics - it means saying you were wrong before& My party has been accused of "triangulating", taking our opponent's best issue, making it our own, using some of their arguments. So be it. No one has a monopoly on the issues, nor on the truth. And bear in mind that it is not your opposition who is the enemy but rather the problem itself - unemployment and exclusion in our case.

3. Do not hesitate. Speed is of essence and you will never reach consensus in reform anyway. Roger Douglas, the former NZ finance minister, once said: "Do not advance a step at a time. Define your objectives clearly and move towards them by quantum leaps. Otherwise the interest groups will have time to mobilise and drag you down&"

4. Let the dog see the rabbit. The public will be shocked by reforms, but as you repeat and repeat the objectives it is easier for people to co-operate with the reform process.

I had 3 000 interviews in 15 months, and it is not until now I start to see that people understand that we are not punishing the unemployed but rather fighting for including the excluded.

5. Be positive! Reform is the most important thing a politician can achieve. If it is only for one election term it will still be the most important thing you will ever do. Let the public see how fun it is to make a difference. A happy leader is also a good leader, a confident leader and a leader who inspires people around him.

So what can you expect from a reform process, from a more personal standpoint?

1. First of all, you will have no friends. When you rise up from the political trenches and shout "reform", all your old friends will duck and hide from the bullets. No matter how many good meetings you have had with editorial pages, organisations, MPs and others - they will shy from the heat. Don't even count on support from your own party or allies.

So, make sure you are prepared for this and have a good team and some loyal personal friends in place. It also makes quite a difference if there is a positive mood within the government - good co-operation with the Prime Minister and the Finance Minister are of course of paramount importance.

2. Public support will drop. The answer here lies in managing change. Opinion polls don't matter - election results do. Don't let bad opinion polls drag your party or your government down. This is especially important to remember if you are reforming during a good business cycle, where there is little understanding for the need to reform.

3. The objective is more important than the tools. Don't fall in love with your own technique. What works will be expanded, what is less successful has to be changed.

4. Facts kick! "It is the economy, stupid" said a sign in Clinton's campaign headquarters in the 1992 presidential election campaign. It is and it was. If the economy goes well, so will the polls and ultimately the election results. "It is the jobs, stupid" won our election.

In the Article IV Consultation in 2006, IMF wrote on Sweden: "The government has embarked on a course that is both courageous and necessary. It is courageous because it confronts some long-held beliefs and vested interests. It is necessary because it will help ensure that the much-admired Swedish model of an inclusive society thrives in the face of challenges in demographics and globalisation."

And the OECD wrote in its Economic Outlook 2007 on Sweden: "The labour market reforms implemented this year will increase potential employment. Given the strength of the economy, it is an excellent time to pursue labour supply reforms as that will prolong the current expansion."

That is certainly what I look forward to.

Thank you!