The boundaries have been reset, Steve Maharey

Trade, Employment and Welfare: A comparative study of trade and labour market policies in Sweden and New Zealand. 1880‑1980
Deborah Mabbett
Clarendon Press, no price available
ISBN 019828379 2

A Home of One’s Own: Housing policy in Sweden and New Zealand from the 1840s‑1990s
Alexander Davidson
Almqvist and Wiksell International, no price available
ISBN 9122016392

‘We cannot creep out of our time backwards. Neither can be we jump over something that is difficult and unclear in a utopian future. We can do no other than look reality in the eye in order to master it.’ (Quoted in Davidson)

New Zealanders must like what they hear about Sweden. According to a National Business Review/Consultus poll published last year, 47% of New Zealanders believed Sweden to be a good role model for New Zealand’s future development. In contrast 16% approved of the United States, 34% Japan and 38% Germany.*

As a social democratic politician I can relate to these findings. Ever since I have been involved in politics, Sweden has been part of the iconography of progressive people in New Zealand. We all agreed many years ago that although “already existing socialism” was a lost cause, Sweden offered an example of a prosperous, socially just nation of which social democrats could be proud. This belief was a comfort during the dark days of Muldoonism (‘there is a better way’) and the height of Rogernomics (“the left does not have to adopt right‑wing policies to succeed in the 1980s”). At least it was a comfort until it became obvious that Sweden had its own problems.

In New Zealand, the interventionist policies which had been pursued since the 1930s were finally abandoned in the 1980s… Attention fell on Sweden as a country which had maintained free trade while implementing policies to achieve desired social outcomes. Yet Sweden was simultaneously experiencing a crisis of its own. (pl)

I assume it is because social democrats in New Zealand held Sweden in such high esteem that the likes of the Employers Federation and the Business Roundtable took such delight in the problems of Sweden and in 1991 the defeat of the Social Democratic Party by a four‑party conservative coalition. “Look”, they crowed, “even Sweden has had to acknowledge that the welfare state is an unsustainable burden”. Swedish businesspeople began to visit New Zealand to learn how to hasten the destruction of the welfare state and admonish New Zealanders for looking to Sweden for answers. Here is how the National Business Review reported them on 6 December 1994:

“Sweden provides a frightening example of a welfare state heading for the rocks.

In Sweden, therefore, we feel that New Zealand provides an excellent role model.

We have faced many similar problems and our countries are alike in many ways.

The differences are that you have been successful in addressing long‑term issues.

Obvious examples include the Employment Contracts Act and the Fiscal Responsibility Act, all of which are the sorts of reforms Sweden has yet to implement.”

–Sven Otto Littorin (1994) “Sweden definitely not a role model for New Zealand to follow”, National Business Review, 6 December 1994, p44.

The Swedish Social Democratic Party had already begun to reorganise welfare in line with the demands of the market during the 1980s. However, it wasn’t enough for opponents of the welfare state. It must have been disappointing for them to see Swedish voters dump the conservative government after one term and return to a Social Democrat‑led coalition.

It is because Sweden figures so large in the minds of New Zealanders that it is entirely appropriate for two New Zealand academics to compare the policy history of the two countries. I want briefly to outline what each has to say next.

Deborah Mabbett, a New Zealander teaching at Brunel University in England, explains her study of trade, employment and welfare policies in Sweden and New Zealand on the grounds that:

The two countries make for an interesting comparison because of the similarity in the objectives they have pursued until recently (full employment, income equalisation, social security), and the great differences in the policies they have used to achieve these objectives. (pl)

In a well-researched and densely argued book of 231 pages, Mabbett gives an account of two countries adopting distinctly different trade policies in order to achieve the aim of full employment. Sweden deployed free trade policies while New Zealand became highly protectionist. To compensate for the problems caused by an open trading economy, Sweden expanded its welfare state and provided explicit transfer payments to achieve the desired distribution of income. As the century progressed, Sweden also placed a great deal of emphasis on the quality of employment. As early as the 1930s Swedish government spokespeople were arguing in favour of an excess of jobs, quality jobs and equal pay for equal work.

New Zealand’s protectionist stance led to a greater emphasis on job security. The kinds of debates about the role of the state in improving the quality of the labour market, so important in Sweden, were not heard in New Zealand. Instead, direct government involvement in the economy was seen as the best way to resolve labour market issues.

Was one “model” better than the other? Mabbett suggests this question is probably irrelevant, given that each country was struggling with unique circumstances that encouraged different responses. At the time of the 1930s depression Sweden had the ability to expand aggregate demand without imposing trade restrictions. However, the Swedish Government found it necessary to negotiate with industry to stop businesspeople sending capital out of the country and leaving nothing for new economic development. The outcome was the “mixed economy” with the Government refraining from direct intervention in business decision‑making but “embarking on welfare and population policies which involved encroaching on areas previously organised by the household sector”. (p204)

The situation was very different in New Zealand where indebtedness to London left the first Labour government looking to the nation’s own resources as a basis for economic growth and full employment. The government believed it had no other choice than to introduce exchange controls and close the economy off from the rest of the world. The first Labour government made a virtue of these policies by arguing that its aim was to ensure that New Zealand did not become vulnerable through dependence on borrowing.

As Mabbett suggests, there are two main reasons for the choice of trade policies in Sweden and New Zealand. The first is the relationship between capital and the state. In New Zealand the government was anxious to ensure full employment through a policy of import substitution which would foster local business development. The weakness of the business sector meant that the government took a significant role in the economy and became increasingly interventionist. In contrast, the strength of the business sector in Sweden meant that political and economic power were dearly separated and the boundaries set after explicit negotiation.

The second reason is the relationship between unions and the state. As Mabbett demonstrates, the maintenance of full employment required wage restraint. In New Zealand this restraint was effectively exercised by the state through the mechanisms of the family wage concept and the style of industrial relations established by the Industrial Conciliation and Arbitration Act of 1894. In Sweden labour organisations played an effective part in centralised wage restraint by forgoing large wage increases in order to maintain full employment.

Mabbett’s work on the relationship between the Swedish Social Democrats and trade unions highlights the “potential for divergence between the political and industrial wings of the labour movement”. (p205) If a political party is to win government it needs to build a larger constituency than can be delivered by the union movement ‑ even in Sweden. This necessity means that the political wing will favour policies which appeal to a wider audience than the industrial wing which will be concerned with the interests of workers. Mabbett gives the example the political wing favouring citizenship‑based benefits while the industrial wing favours benefits based on labour force participation.

Mabbett’s analysis also suggests that an open economy will generate a number of different outcomes compared with a closed economy.

First, in an open economy higher real wages are more likely. This higher level of income will in turn place pressure on the competitive sector to maintain a high rate of technological innovation and change, generating ongoing increases in labour productivity which leads to further wage demands in the competitive sector. In centralised bargaining systems this will fuel wage pressure throughout the economy. In a closed economy the rate of productivity increase is lower and there is less pressure on wages and the need to enhance competitiveness.

To a large extent pressure for higher wages was ameliorated by corporatist labour market arrangements in Sweden. Lower than might be expected wages were a direct result of a powerful trade union movement limiting wage differences in order to maintain a cohesive organisational base. It was this emphasis on cohesion which allowed the trade unions to have as much influence as they did on the activities of the Swedish Government. This did not happen in New Zealand where, in the absence of a powerful trade union movement, the state took the lead.

Second, an open economy demands that the Government adopts policies which will generate jobs and maintain existing ones. Workers have to be encouraged and enabled to shift from one job to another. In a closed economy the higher level of job security makes these policies unnecessary. The active labour market policies adopted by Sweden and the more passive approach adhered to in New Zealand are a result of the kinds of trade policies developed by each country.

The protectionist model developed in New Zealand lasted into the 1980s but came under mounting pressure during the 1970s. The source of this pressure was to be found amongst ‘non‑traditional’ export businesses. The owners and managers of these businesses believed that their best interests lay in reducing the role of the state in both the economy and society. Many observers who have been surprised at how easy it has been to “roll back” the state will find Mabbett’s analysis interesting. She is suggesting that the overwhelming reliance on the state to develop and maintain New Zealand’s version of welfarism means that the model did not have the support from unions and employers found in Sweden. A Labour Government may have been elected in 1984, but it found itself under more pressure to reduce government spending than to extend the welfare state. Struggling to find answers to deal with economic crisis, Labour found the intellectual climate was strongly supportive of a reduced state and more room for the market.

There were people on the left of politics who disagreed. They pointed to Sweden as a possible alternative. However, Sweden had problems of its own. The Swedish model provided jobs through an expanding welfare sector but in the 1970s there were not enough jobs in the private sector. Pressure built for more direct intervention in the economy and this was tried. However, the problems continued to mount and structures such as centralised bargaining began to fall apart. To maintain their hold on power the Social Democrats tried to appease the business constituency, but this led to an erosion of their traditional political base.

In the 1980s after a decade of slowly rising unemployment the relationship between political and industrial labour began to break down. Industrial labour continued to want full employment while political labour found that this goal was no longer essential to constructing an electoral majority. Instead, a new larger constituency was forming around the goals of higher wages and more disposable income. The break between the unions and Labour in New Zealand reflects the emergence of this new constituency.

This brief summary of Mabbett’s analysis shows that the choice of divergent trade policies was rooted in the socioeconomic structures of the countries. Rather than being judged as better or worse than the other, each country’s policy should be seen as a coherent effort to resolve the tensions that existed in market economies with democratic political systems.

Given that in every settlement arrived at between contending forces in each country the seeds of contradiction and strain were contained, we should not be surprised that the solutions were not permanent. Eventually the compromises would break down and new settlements would have to be reached. Just what those settlements would be clearly has much to do with the intellectual climate of the time. In the case of New Zealand and Sweden this debate took place in a context framed by those who favoured the market rather than the state.

That New Zealand went faster and further down the more‑market road than Sweden can be traced to the strength of the social democratic tradition in each country. The longevity of the Social Democrats in Sweden and the corporatist model gave real institutional depth to the welfare state. TI‑ic reliance on the state combined with the failure of labour to stay in power in the postwar period meant that the welfare state was vulnerable to attack when it came.

The importance of a social democratic government remaining in power and securing strong institutional support for its policies is well illustrated by the work of Alexander Davidson, a New Zealander based at the University of Uppsala in Sweden. Like Mabbett, Davidson sees interesting similarities between Sweden and New Zealand.

The two countries … both gained powerful social democratic governments in the great depression of the 1930s and both sought to promote cost‑rental public housing and a policy of tenure neutrality as an answer to their housing crises. In Sweden the attempt succeeded… In New Zealand, the attempt failed… The questions are why these things happened and what were their results. (piii)

In the case of New Zealand Davidson shows that housing policy has travelled a complete cycle in the space of a century. Government intervention in the New Zealand housing market began in 1894, steadily increased to a peak in early 1950s then began a gradual retreat to a situation of almost complete withdrawal in 1994. In Sweden the process was more erratic, with the first state intervention beginning in 1904, increasing during World War I then falling rapidly after. New initiatives were taken in the 1930s but substantial state involvement was delayed until after World War II, when it rose rapidly to reach its peak in the mid‑1970s.

The high point of state involvement in housing in New Zealand coincides with the period in office of the first Labour Government. Between 1935 and 1949 a three‑tiered system was established with the following features.

Tier 1: State housing at low rentals for the less‑well off, families with young children and others unable to buy or pay high rents.

Tier 2: State advances loans at low interest rates for first‑time purchasers wishing to buy their own homes, perhaps moving up from State housing, but unable to bear the burdens of large deposits and high mortgage repayments.

Tier 3: The private market for those of better means, able to raise more substantial deposits and meet heavier mortgage repayments. (p98)

The aim of the first Labour Government was to make sure all New Zealanders had a house to live in and that differences were minimised. However, Labour lost power in 1949 to a National Government more interested in the home ownership. The emphasis on home ownership was not new. Indeed, it could be argued that Labour’s efforts to establish a strong rental market constituted a break with the way people thought up until the 1930s. National simply picked up on themes which had been less emphasised while Labour was in power.

From 1949 on government policy worked to aid first home buyers and borrowing on the private market. State rental housing became residual, means tested and the “pepper-potting” policy which saw state houses spread through a community was replaced in favour of locating all houses in one area. The number of state houses was gradually reduced as they were sold off to tenants. The result was a very high level of home ownership which was brought about by the policies of successive National governments. On the occasions Labour returned to power little was done to change the emphasis away from home ownership.

The Labour Government of 1984‑1990 may have had the time in office to make significant changes to housing policy. However, as has been noted in Mabbett’s work, the 1980s were hardly conducive to a revival of traditional social democratic thinking. In tune with the times, Labour struck out in new directions. Home ownership was no longer financed by the state and the Housing Corporation became obliged to borrow on the open market on a competitive basis. The allocation of loans was highly targeted through means testing criteria. The provision of state rental housing, a rea a residual function after decades of National Party government, became even more tightly targeted. A new concept of “serious housing need” was introduced and state housing was reserved for special marginal groups otherwise known as “the poor”. When National returned to power in 1990 the state withdrew almost completely from the housing market.

The history of housing policy in Sweden is more complex than in New Zealand. Up to the 1930s conflict between different left political groupings prevented any coherent approach. During the depression the Government oversaw an increase in housing construction but this did little to change the housing market. During World War II legislation introduced by Gustav Moller proposed “public utility” (that is, non‑profitmaking) enterprises would receive low‑interest state finance for up to 100% of building costs, cooperative companies would be financed to 95% and private companies 85%. As Davidson points out, this decision meant that rental housing was given priority.

In the postwar period the provision of housing for rent became a priority. Continuing housing shortages during the 1960s led to a million dwellings being built over 10 years. Although the “own home” ideology had its supporters and was taken up as a major policy plank by the conservatives in the 1950s, the dominant Social Democratic Party chose instead the strategy of promoting and favoring public utility cost‑renting over co‑operative and private alternatives. Such was the scale of their activities up to 1974 that the three‑tier system became entrenched, with the subsequent growth of owner‑occupier sector challenging but failing to supplant other forms of tenure. At least, not yet.

These outlines of the books by Mabbett and Davidson demonstrate their value as historical accounts of public policy in Sweden and New Zealand. But they also hint at their value to debates in the 1990s.

Their contemporary value is identified by Mabbett in her introduction when she notes that “in the 1980s, the tide in many countries turned against state intervention in favour of the ‘free’ operation of markets, minimisation of the tax burden and openness to international trade and capital flows”. (pl) The question of why this change in policy direction took place has exercised academic and political commentators in both countries.

Both authors are anxious for readers to make the connection between a century of policy development and the changes that took place in the 1980s and continue in the 1990s. Mabbett argues that the compromises and solutions to problems arrived at by previous generations using particular policy frameworks became problematic in the face of rising unemployment. New problems emerged in new circumstances and were debated using a different intellectual framework. Nothing lasts forever, she says. Do not be surprised.

Davidson shows that the same kind of argument can be applied to the more specific case of housing. In New Zealand the compromise was short-lived because the Labour Government did not stay in power long enough. It was replaced by a National Government that favoured home ownership above cost‑rental housing and crucial changes were put in place during the middle of the century which eventually destroyed the practice of state housing. In Sweden the reversal of cost‑rental housing in favour of home ownership has been threatened but not yet achieved. Davidson points out that the longevity of a Social Democratic government meant that rental housing has become so widespread and part of the Swedish way of life that it will be hard to dislodge.

Sweden and New Zealand are not just any countries. For decades they had been at the forefront of socially progressive legislation. They were thought to have exemplified social democratic political hegemony. Then in the 1980s and 1990s they embarked on programmes of change which in some cases exceeded even Margaret Thatcher’s ambitions. For countries dominated by right‑wing governments to make such changes is one thing ‑ but Sweden and New Zealand? In both countries changes were at least begun by parties of the left, even if they were subsequently carried on with enthusiasm by parties of the right.

What makes the changes of the past decade even more extraordinary is that many theorists thought they could not happen. It was taken for granted that welfare states would expand, not shrink, because too many people had too much to lose for a reorganisation of the welfare state to be possible. Thatcherite Britain used to be referred to as an “exceptional” case. Now we know Thatcher was not so exceptional. If Sweden and New Zealand can change, any country can.

In both countries governments overturned policy traditions stretching back decades to reconfigure the state. They decentralised operational authority and responsibility for outcomes by putting them in the hands of line agencies while centralising control over the volume of spending. They brought market and market‑like pressure to bear on the administrators and personnel of state agencies to foster competition and hence greater efficiency. In other words, in addition to the selling off of national assets, the welfare state itself was privatised by creating markets for the provision of welfare state goods and services.

Consumers of state services were offered freedom of choice of services and service providers. They were also asked to pay user fees. Rather than using direct spending cuts or unwieldy regulation to control the behaviour of state personnel and consumers, the structure of incentives confronting employees, managers and consumers was altered. And the fact that they have persisted through the 1980s and 1990s suggests that they are not just a passing fad but a trend.

In other words, the state has not just been “rolled back”. It has been fundamentally reorganised. The rules of the game have been altered in an effort to create more autonomy for the state by breaking up the broad social base of support for the welfare state that characterised Sweden and (albeit to a lesser extent) New Zealand during most of this century. People have been encouraged to recalculate where their interests lie. If in the past they saw some value in working collectively, individualism is the more rational behaviour today.

In both countries reorganisation of the state pushed institutional changes that enhanced central state autonomy. Decentralising operational authority forces local agencies and localities to use their new operational autonomy to priontise activities within global budgetary constraints. This disperses political conflict from central government to the localities where small groups fight over their particular interests. It increases central state autonomy by removing pressures to increase spending on broad problems with broad constituencies and by shifting responsibility for failure on to local government and specific service providers. Put crudely, if the former system of quasi‑monopoly provision of state services encouraged people to complain because they had no other choice, the new system is intended to encourage consumers to leave one service provider for another rather than complaining about the central state.

It is too soon to say what the long‑term consequences of these changes are likely to be in Sweden and New Zealand. Certainly the governments that began the changes did not fare well at the ballot box. However, changing the party in government has served to accelerate, not stop, the process of reorganisation. This suggests that a support base for reorganisation now exists in both societies and that no party can win government if it does not appeal to this new alliance. If this is correct the political debate of the 1990s does not pit the old status quo against reorganisation ‑instead it is about reorganisation with a caring face versus reorganisation with a harsh face. Certainly those nostalgic social democrats/sodalists who dream of rolling the state forward may have to think again because they are now dealing with a world where the boundaries between the state and society have been reset.

Understanding what has happened in Sweden and New Zealand over the past decade may well prove crucial to (re)defining the future for social democratic parties which have, for over a decade now, been in a state of policy confusion. What I will call social democratic/socialist “traditionalists” claim that working people were betrayed by political parties they trusted and the best thing we can do is get back to the 1960s as fast as possible. Meanwhile those who cast themselves as “modernists” argue over what comes next and hail any politician on the centre‑left who can win (or look like winning) an election, whether it be Bill Clinton, Paul Keating or Tony Blair, as the harbinger of a new glorious age.

Neither of these responses will do. As the Swedish functionalists quoted by Davidson wrote:

“We cannot creep out of our own time backwards. Neither can we jump over something that is difficult and unclear in a utopian future. We can do no other than look reality in the eye and accept it in order to master it”. (p195)

In other words going backwards into the future is not an option. Nor is it possible to rebuild social democracy by fudging difficult issues and grasping at passing straws. Only by understanding that the political and economic relationships which characterised the earlier part of the century and led to particular solutions being agreed to have gone, that real problems did emerge which could not be answered in traditional ways, that new circumstances existed which had to be answered, that social democracy was not the intellectual force it was in the early part of the century can we hope once again to set the policy agenda as we have done for most of this century.

Current behaviour suggests arriving at this position will not be easy.


Steve Maharey is MP for Palmerston North and Labour Party speaker on employment. He formerly lectured in sociology at Massey University and is writing a monograph on the future of social democracy in New Zealand.

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