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The Agreement On Agriculture Of The Wto Economics Essay

Introduction The Agricultural Agreement, who is going to better off and who is going to worse off, has been one of the most contentious issues within the World Trade Organization Framework and the purpose of this study is to investigate and discuss the matter.
Literature Review The World Trade Organization (WTO) is an established international body promoting and enforcing global free trade. It began life on 1 January 1995, but its trading system is half a century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system. The WTO exists to administer and police the 28 free-trade agreements (dealing with goods, services and intellectual property) in its Final Act, oversee world trade practices, and adjudicate on trade disputes referred to it by member states.
It is a formally constituted entity whose rules are legally binding on its member states, but it is independent of the United Nations. It provides a framework for the rule of law in international trade, expanding the brief of GATT regulations on goods to include trade in services (GATS) and intellectual property rights (TRIPS), as well as certain provisions on trade-related investment measures. Its current work programme, known as the Doha Development Agenda, also calls for negotiations on new issues such as investment, competition policy, government procurement, and trade facilitation. In addition to administering trade agreements and providing a forum for negotiations, the WTO system features an institutionalized mechanism for settling trade disputes that specifies fixed timetables and legal procedures, with the power to authorize retaliation in case of non-compliance. Furthermore, the WTO is a member-driven organization, with decisions reached by consensus among all member governments.
While the WTO polices 28 free-trade agreements concerned with goods, services and intellectual property, we will focus mainly on Agreement on Agriculture (which deals mainly with market access, domestic support and export subsidies) for the purpose of this study.
The Agreement on Agriculture The Agreement on Agriculture of the WTO is mainly to reform trade in the agricultural sector and to make more market-oriented policies thus improving predictability and security for the importing and exporting countries.
It allows governments to support their rural economies through policies that cause less distortion to trade. Trade is distorted if prices are higher or lower than normal, and if quantities produced, bought, and sold are also higher or lower than normal, that is, the levels that would usually exist in a competitive market. For example, import barriers and domestic subsidies can make crops more expensive on a country’s internal market. The higher prices can encourage over-production. If the surplus is to be sold on world markets, where prices are lower, then export subsidies are needed. As a result, the subsidizing countries can be producing and exporting considerably more than they normally would. Governments usually give three reasons for supporting and protecting their farmers, even if this distorts agricultural trade:
• to make sure that enough food is produced to meet the country’s needs
• to shield farmers from the effects of the weather and swings in world prices
• to preserve rural society.
But the policies have often been expensive, and they have created gluts leading to export subsidy wars. Countries with less money for subsidies have suffered.
The agreement also allows some flexibility in the way commitments are implemented. Developing countries do not have to cut their subsidies or lower their tariffs as much as developed countries, and they are given extra time to complete their obligations. Least-developed countries don’t have to do this at all. Special provisions deal with the interests of countries that rely on imports for their food supplies, and the concerns of least-developed economies.
The Agreement on Agriculture has the following central concepts:
Domestic Support The Agreement structures domestic support into three “boxes”: a Green Box, an Amber Box and a Blue Box. The Green Box contains fixed payments to producers for environmental programs such as research, disease control, infrastructure and food security so long as the payments are “decoupled” from current production levels, that is, they have minimal impact on trade. They do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes. The Amber Box contains domestic subsidies that governments have agreed to reduce but not eliminate. Domestic policies that do have a direct effect on production and trade have to be cut back. WTO members calculated how much support of this kind they were providing per year for the agricultural sector (using calculations known as “total aggregate measurement of support” or “Total AMS”) in the base years of 1986-88. Developed countries agreed to reduce these figures by 20% over six years starting in 1995. Developing countries agreed to make 13% cuts over 10 years. Least-developed countries do not need to make any cuts. The Blue Box contains subsidies which can be increased without limit, so long as payments are linked to production-limiting programs. Certain government assistance programmes are permitted to encourage agricultural and rural development in developing countries, and other support on a small scale when compared with the total value of the product or products supported (5% or less in the case of developed countries and 10% or less for developing countries).
Market Access Market Access aims at reducing border obstacles to imports of agricultural products, such as taxes and duties – commonly known as tariffs. Furthermore, countries had to abolish restrictions on the quantity of agricultural goods entering their markets. All other barriers that were not tariffs, known as ‘non-tariff barriers’ and including health standards or packaging requirements, had to be converted into tariffs, a process known as “tariffication.” That is, the new rule for the market access in agricultural products is “tariffs only”. With the “tariffication” process covered by this agreement, tariff related to agricultural products in develop countries should be reduced by an average of 36% and 24% for developing countries. These tariffs reduction should as per the agreement be undertaken within 6 years for develop countries, 10 years for developing countries while least developed countries are exempted from it. These are illustrated on the following table.
To provide temporary protection against sudden import surges or falls in world prices, the Special Safeguard (SSG) which is a tariff mechanism was used. However, only countries that underwent tariffication can apply the SSG. Many countries, particularly developing countries, did not undergo tariffication because they did not have a significant amount of non-tariff barriers.
The tariffication package also ensures that quantities imported before the agreement took effect could continue to be imported, and it guarantees that some new quantities were charged duty rates that were not prohibitive. This was achieved by a system of tariff-quotas – lower tariff rates for specified quantities, higher (sometimes much higher) rates for quantities that exceed the quota.
Export Subsidies The Agreement’s approach to export subsidies is to list the export subsidies that WTO Members have to reduce, and to ban the introduction of new subsidies. For example, taking averages for 1986-90 as the base level, developed countries agreed to cut the value of export subsidies by 36% over the six years starting in 1995 (24% over 10 years for developing countries). Developed countries also agreed to reduce the quantities of subsidized exports by 21% over the six years (14% over 10 years for developing countries). During the six-year implementation period, developing countries are allowed under certain conditions to use subsidies to reduce the costs of marketing and transporting exports.
Export subsidies are harmful because they directly support exporters, most commonly agribusinesses or transnational commodity traders, enabling them to displace local producers – most commonly small-scale farmers in the countries to which they sell their goods – with artificially cheap products.
Analysis The aims of the WTO are to raise living standards, ensure full employment and increase incomes. And the agricultural agreement is meant to further these aims. But there are several reasons why the agreement may not do so.
The agreement clearly contains several types of imbalances that are favourable to developed countries and unfavourable to developing countries.
To start with, the Agreement on Agriculture has permitted the developed countries to increase their domestic subsidies (instead of reducing them), substantially continue with their export subsidies and provide special protection to their farmers in times of increased imports and diminished domestic prices. On the other hand, the developing countries cannot use domestic subsidies beyond a certain level, export subsidies and the special protection measures for their farmers. In essence, developed countries are allowed to continue with the distortion of agriculture trade to a substantial extent and even to enhance the distortion; whereas developing countries that had not been engaging in such distortion are not allowed the use of subsidies and special protection”.
Furthermore, developed countries with high levels of domestic subsidies are allowed to continue these up to 80 per cent after the six-year period. In contrast, most developing countries (with a very few exceptions) have had little or no subsidies due to their lack of resources. They are now prohibited from having subsidies beyond the de minimis level (10 per cent of total agriculture value), except in a limited way. In addition, many types of domestic subsidy have been exempted from reduction, most of which are used by the developed countries. While these countries reduced their reducible subsidies to 80 per cent, they at the same time raised the exempted subsidies substantially. The result is that total domestic subsidies in developed countries are now much higher compared to the base level in 1986-88. Thus, in the EEC, the subsidy in the base period 1986-88 was US$83 billion, and it was increased to US$95 billion in 1996. In the United States, the corresponding levels are US$50 billion and US$58 billion. The professed reason for exempting these subsidies in the developed countries from reduction is that they do not distort trade. However, such subsidies clearly enable the farmers to sell their products at lower prices than would have been possible without the subsidy. They are therefore trade-distorting in effect.
Another inequity is in the operation of the “special safeguard” provision. Countries that had been using non-tariff measures or quantitative limits on imports were obliged to remove them and convert them into equivalent tariffs. Countries that undertook such tariffication for a product have been given the benefit of the “special safeguard” provision, which enables them to protect their farmers when imports rise above some specified limits or prices fall below some specified levels. Countries that did not undertake tariffication did not get this special facility. This has been clearly unfair to developing countries, which, with few exceptions, did not have any non-tariff measures and thus did not have to tariffy them. The result is that developed countries, which were engaging in trade-distorting methods, have been allowed to protect their farmers, whereas developing countries, which were not engaging in such practices, cannot provide special protection to their farmers.
With regard to export subsidies, the developed countries get to retain 64 per cent of their budget allocations and 79 per cent of their subsidy coverage after six years. The developing countries, on the other hand, had generally not been using export subsidies, except in a very few cases. Those that have not used them are now prohibited from using them, whilst those that have subsidies of little value have also to reduce the level.
The Agreement is based on the assumption that production and trade in the agricultural sector should be conducted on a commercial basis. But agriculture in most of the developing countries is not a commercial operation, but instead is carried out largely on small farms and household farms. Most farmers take to agriculture not because it is commercially viable, but because the land has been in possession of the family for generations and there is no other source of livelihood. If such farmers are asked to face international competition, they will almost certainly lose out. This will result in large-scale unemployment and collapse of the rural economy, which is almost entirely based on agriculture in a large number of developing countries.
Futhermore, small-scale farmers who do not have easy access to land, water, technology, infrastructure and capital find themselves disadvantaged as compared to transnational commodity traders and processors who enjoy the facilities of developed countries. Moreover, the gap that exists between local farmers of developing countries and agribusiness of rich countries also prevent them from competing on an equal basis (Kevin Watkins, 1995).
There is also a lack of transparency during negotiation and decision making, create inequality between the participants, even though the developing countries make up two-third of the membership, they do not have much influence over the decision making because their economies are more at stake and need help from the developed countries through the International Monetary Fund to finance their development and growth.
Finally, there are certain human rights that are affected by the Agreement, these are the right to an adequate standard of living, the right to work, the right to food, the right to health and the right to life (unavailability of food can lead to illness and death). In Asia, the majority of people depend on the agricultural sector for employment and a source of income, guaranteeing the right to an adequate standard of living and the right to work. In India alone, 72% of the population lives in rural areas and the agricultural sector provides employment to about 60% of the country’s total labour force. The Agricultural Agreement threatens the strong base of farmer-oriented agriculture in favour of industrialized and mechanized agriculture largely carried out and controlled by transnational commodity producers and traders from developed countries. The consequence is often a de facto discrimination against the poorest and most vulnerable sectors of society, contrary to human rights.
Conclusion and Recommendation Even if the aims of the WTO to raise living standards, ensure full employment and increase incomes and the agricultural agreement is meant to further these aims, the outcomes are totally biased in favour of the developed countries leaving the developing countries behind. The rich with their power take all the benefits of the Agricultural Agreement. And there are certainly loopholes in the agreement.
As recommendations in favour of the developing countries, the following actions can be carried out by the developing countries:
negotiate for a strong Special Safeguard Mechanism that will protect farmers from dumping;
negotiate for the right of developing countries to self-select Special Products on the basis of food security, rural development and livelihoods; and
remind the trade negotiators of their obligation, under human rights law, to ensure that any new agricultural trade commitments promotes the human rights of the poorest and most vulnerable sectors of the population.

Economic Policy In Sweden During The Great Depression Economics Essay

When the Great Depression swept across Europe in the early 1930s the impact of the economic downturn varied across countries. While for example Germany, Austria and most of Central Europe experienced a long and deep economic crisis, the economies of the Nordic countries – Sweden, Denmark and Norway – were not only affected later and more mildly by the Depression, but also recovered earlier. The crisis in Sweden for example only lasted a little more than two years (in Germany and Poland it lasted for more than 4 years, see graph 1) and peak decline in industrial production was at 10.3% while for example Germany or Poland had declines in industrial production of more than 40% (see graph 2). Even when looking at comparable GDP figures, Sweden was with a decline of 6.5% well below countries such as Germany (25%) or Austria (23.4%, see graph 3). Moreover – and of greater interest for this paper – is the fact that Sweden did not only perform better during the Great Depression but also pursued a different economic policy. Most prominently cited amongst economic historians are two distinctly Swedish policy measures:
First, looking at Sweden’s monetary policy, scholars point out, that the country left the gold standard very early and – unique at that time – simultaneously put the preservation of the domestic purchasing power of the krona on top of the political agenda.
Second, it is often mentioned, that the Social-Democratic government, which came into power in 1932, invested heavily in public work programmes following a Keynesian-type fiscal policy.
The present paper seeks to analyse whether these two factors are a) sufficient and b) withstand a closer empirical evaluation when it comes to explain the better development of Sweden during the Great Depression. In order to do so, the paper will, as a first step, outline the economic situation in Sweden and the corresponding economic policy prior to the crisis. This is necessary, as it provides an overview of the nature of Sweden’s economy, its degree of integration into the international market and accordingly its general contagion risk at the time of the crisis. Secondly, the above mentioned policy measures during the Great Depression will be outlined. Thirdly and most central in this paper is an analyses of the effectiveness and consequences of these policy measures. The last chapter will then draw the attention to other factors outside the control of government policy that might have helped Sweden to ease the effects of the Great Depression.
Immune to crisis? Sweden’s economic development prior to the Great Depression
Even though Sweden’s macro-economic policy is often seen as the major contributor to the countries positive development during the Great Depression, one must not fail to see, that some of the reasons for this development are rather to be found in specific characteristics of Sweden’s economy prior to 1929/31 than in any explicit policy measure thereafter. Two “pre-existing conditions” can be outlined, that seemed to have stabilized the economy during the crisis. Firstly, a constantly undervalued krona made Swedish exports cheap on the international market. Secondly, the banking sector in Sweden was centralized and crisis-prone. Thus, a banking panic never occurred. The following paragraphs explain these specifically Swedish conditions in greater detail.
Traditionally, Sweden’s economy was based on the country’s rich endowments of iron and timber. Its main trading partner was Britain and later on Germany and the United States. During the beginning of the 20th century Sweden also became a major exporter of technologically sophisticated goods such as telephones (e.g. Ericsson) or appliances (e.g. Electrolux). As Sweden was – at least on paper – a neutral power during World War I (WWI) many investors sought to acquire Swedish assets at that time, as the country seemed to be a safe haven for capital. Additionally, by mainly exporting raw materials, Sweden could take advantage of the increase in foreign demand for those goods caused by WWI. By the end of the war Sweden had transformed from a major international borrower to a creditor to the rest of the world. While the export industry could profit from these developments, inflation increased mainly due to increasing costs for imports. Between 1915 and 1918 the cost of living rose by as much as 90%. This inflation was eventually condemned between 1920 and 1924 when prices declined by 55% due to a restrictive monetary policy. After 1924 a slower, but persistent deflation continued until 1931. With such low domestic prices, Sweden was highly competitive on the international market. That is why during most of the 1920s Sweden experienced a strong export-led economic growth. This is why after WWI Sweden reinstated the gold standard as one of the first industrialized countries in 1924. Many economic historians believe that this return to the gold standard occurred at a rate that left the krona undervalued well into the 1930s. As a consequence Swedish exports remained highly competitive even in times of economic crisis.
The domestic market also stabilized during the 1920s. Due to export bans and high import taxes during and after WWI, Swedish consumers, whose purchasing power constantly increased during the 1920s, substituted imports with domestic products. Additionally, demographics played a role. During the 1920s and 1930s there was a rapid rise in the number of young people of working age (especially those aged 20-29). Respectively, demand for housing, food, clothes and other consumer products increased which contributed to a strong growth of domestic production as well.
When the stock market crash of October 29, 1929, triggered the Great Depression, another factor for Sweden’s low proneness to crises became obvious. Sweden’s banking structure was very concentrated. This was much in contrast to for example the United States, where the banking structure was highly fragmented and decentralized. According to Ben Bernanke, such a structure is much more likely to cause banking panics. Sweden however was characterized by a branch banking system, where risks were dispersed. It is argued that especially in the case of Sweden, earlier experiences with failing banks in the 1920s had led to reforms that had put the banking system on a sound footing. That is why at the beginning of the 1930s the banking sector in Sweden did not experience widespread panics.
Putting all these facts together, it can be argued, that Sweden was from the very beginning less likely to be effected by the Great Depression than those countries whose banking sector collapsed. This especially holds true when considering the fact that trust in the economy never vanished in Sweden due to a generally stable banking structure. Additionally, even though exports declined from 1931 until 1932, Sweden’s export industry always remained highly competitive. This was not least due to an undervalued krona, whose parity remained stable well into the 1930s. Nevertheless, analyzing the characteristics of Sweden’s economy prior to the Great Depression only answers part of the question to why Sweden performed considerably better during the crisis than other nations. Especially when Sweden left the gold standard in 1931, specific policy measures as described in chapter two played an equally significant role.
What was so special? Sweden’s response to the Great Depression
Prior to the Great Depression, the political mainstream of the Western industrialized world followed a laissez-faire ideology that propagated the free play of the market. It was believed that capitalism had a self-equilibrating tendency, leading to an optimal level of resource utilization. Hence, economic policy at that time simply meant that governments should balance their budget, maintain the gold standard and let businesses reequilibrate themselves. However, while many countries had to reconsider their economic policies during the Great Depression, Sweden had already made this step beforehand. During the late 1920s, Sweden’s economic policy was already based on the advice of trained economists who did not solely propagate the contemporary neo-classical view on economics but rather pursued their own theories on how the state should react during an economic crisis. This so called Stockholm School was a loose group of economists whose most important figures were Knut Wicksell, Eli Heckscher, Gustav Bagge, Bertil Ohlin and David Davidson. Especially Knut Wicksell’s findings at the beginning of the 20th century inspired most of the works of his followers.
Wicksell is best known for Interest and Prices, his contribution to the fledgling field now called macroeconomics. In this book and in his 1906 Lectures in Political Economy, volume 2, Wicksell sketched out his version of the quantity theory of money (monetarism). The standard view of the quantity theory before Wicksell was that increases in the money supply have a direct effect on prices-more money chasing the same amount of goods. Wicksell focused on the indirect effect. In elaborating this effect, Wicksell distinguished between the real rate of return on new capital (Wicksell called this the “natural rate of interest”) and the actual market rate of interest. He argued that if the banks reduced the rate of interest below the real rate of return on capital, the amount of loan capital demanded would increase and the amount of saving supplied would fall. Investment, which equaled saving before the interest rate fell, would exceed saving at the lower rate. The increase in investment would increase overall spending, thus driving up prices. This “cumulative process” of inflation would stop only when the banks’ reserves had fallen to their legal or desired limit, whichever was higher.
In laying out this theory, Wicksell began the conversion of the old quantity theory into a full-blown theory of prices. The Stockholm school, of which Wicksell was the father figure, ran with this insight and developed its own version of macroeconomics. In some ways this version resembled later Keynesian economics.
Wicksell also argued passionately for making price stability the supreme goal of monetary policy. A stable price level, he maintained, made planning easier for participants in both financial and labour markets. In an 1898 analysis, Wicksell’s key recommendation for central banks was to increase interest rates whenever prices were rising and to lower them when prices were falling-a monetary policy that he considered to be straightforward. He argued that low interest rates would tend to increase prices. A low rate of interest would lead a borrower to “buy some commodity which otherwise he would not have bought at all” and would lead someone who “wishes temporarily to keep some or all of his goods off the market . . . [to ask ] . . . the Bank for money with which to meet his immediate or pending liabilities without having to sell his goods.” Thus, demand would rise and supply would fall, thereby ensuring an increase in prices.18 This meant that the stabilization of prices required only that interest rates be increased when prices were rising and reduced when prices were falling.
Wicksell stressed that movements in the price level exerted a particularly large effect on borrowers because an increase in all prices made it easier to repay debts while a reduction made it harder. He also noted that real wages could be affected if nominal wages (in kronor) did not keep up with changes in prices.
Even though Wicksell died in 1926 his followers such as Eli Heckscher, Bertil Ohlin, Gustav Cassel and Gunnar Myrdal, could build upon his theoretical work and formulate concrete policy advice in 1931, when the Great Depression finally reached Sweden. The following paragraphs reveal how their influence and advice on the Swedish central bank (Riksbank) and on the political elite helped Sweden through the crisis.
Monetary policy
During the early months of 1931, Sweden was the recipient of capital inflows. However, the German standstill led many international investors to withdraw their funds from Sweden both because they lacked access to their German funds and because they feared that the crisis would spread. These withdrawals contributed to a drastic reduction in Swedish reserves. By September of 1931, reserves had fallen to less than one-tenth of their January level. Similar pressure was placed on the British financial system, and on September 21, Britain abandoned the gold standard. On September 27 Sweden, too, abandoned the gold standard. The Riksbank and the minister of finance immediately announced that the new monetary goal for the country would be to preserve the domestic purchasing power of the krona “using all available means.” The next day, September 28, the Riksdag gave its official assent by relieving the Riksbank of its responsibility to convert notes into gold at a fixed rate. People who wished to exchange kronor for foreign exchange could still do so at commercial banks, whose representatives met daily (along with a Riksbank official) to set exchange rates.
In making price stability the primary objective of its monetary policy, Sweden pursued an internationally unique agenda. Based on Knut Wicksell’s argument that stable price levels made planning easier for participants in both financial and labor market, the Riksbank new role was to maintain price levels within a certain range.
In order to do so, the first step the Riksbank undertook was to develop a new, weekly index of consumer prices. This was necessary as the goal was to “give the public certain definite stand points for estimating future developments in prices.” Consequently, the new index was designed to include a wide range of goods and services that reflected purchases made by average families in Sweden. This ensured that the purchasing power of the Krona could be measured for most individuals correctly. The weekly inflation was then computed by weighing the percent change in each good and service consumed by the fraction of total consumer expenditure that households allocated to this item. Instruments used by the Riksbank in order to fulfill the price stability target were changes in the discount rate and operations in the foreign exchange market. Accordingly, the Riksbank changed the discount rate from 8% to 6% in 1931 as there were no longer signs for a continuing inflation. After that, the discount rate was lowered to 2.5% in 0.5% steps until 1937.
In retro perspective the monetary policy of the Riksbank proved to be very effective. Statistics show a considerably stable level of consumer prices between 1931 and 1938 (see graph 7). Most importantly however is the fact, that “…the monetary program of 1931 … maintained public trust and confidence in the banking sector. One can therefore conclude, that not only did the centralized branch system of the banking structure prevented Sweden from the experience of a fully scaled banking panic, but also a sound monetary policy based on the theoretical findings of the Stockholm School.
Nevertheless, the price stabilizing policy of the Riksbank did not remain unchallenged. For example, Bertil Ohlin, who wrote an article entitled “The inadequacy of price stabilization.” There he acknowledged that “the economic situation would most undoubtedly have been still worse if prices had been allowed to fall as they did in countries that kept to the old gold parity,” and that “the knowledge that the Riksbank would endeavor by every means in its power to prevent any appreciable fall in prices has exercised a reassuring influence on trade.” However, Ohlin went on to argue that stabilization of prices could not prevent reductions in investment and hence in GDP. The next chapter explains how this argument was also put forward by the Social Democrats in 1932.
Public deficit spending
In the 1932 elections, the Social Democrats obtained the highest number of votes and formed a government. The new minister of finance, Ernst Wigforss, held that a monetary policy focused on price stability was insufficient to obtain an acceptable outcome for Sweden. The new finance minister had long championed the idea of intentional deficit spending in recessions. Wigforss had been a professor of linguistics at Lund before he became one of the leading intellectuals of the Social Democratic Party, and he worked closely with a number of Swedish economists, including Gunnar Myrdal, Erik Lindahl, and Bertil Ohlin. The group developed theories justifying the use of fiscal policy as a stabilization tool that were quite similar to those developed by John Maynard Keynes. In a 1928 article, for example, Wigforss wrote: “If I want work for 100 people I do not need to put all 100 to work. . . . [I]f I can get an unemployed tailor work, he will get the opportunity to buy himself new shoes and in this way an unemployed shoemaker will get work. . . . This crisis is characterized above all by a relationship which is called a vicious circle. . . . One can say the crisis drives itself once it begins, and it [will] be the same once recovery begins.” Wigforss’s advocacy of deficit spending in response to the Depression was a radical departure from the policies of previous governments. Prior to 1933, government borrowing was primarily limited to loans for “productive” purposes, that is, for investments that would generate future government revenue, such as the postal service, telephones, electrical power generation, and railroads. Income derived from these activities would then cover the interest payments on the public debt while also generating additional income for the state.36 In contrast, “nonproductive” government expenditure was supposed to be paid for with current government revenues. Since it was impossible to predict current revenues or nonproductive expenditures accurately, Sweden had reserve funds that accumulated any unanticipated surpluses. These funds were then available to cover unanticipated deficits. In the fiscal years 1931-1932 and 1932-1933, for example, the budget was balanced by reducing the reserves of the Alcoholic Drink Account. Thus, while budget deficits in the modern sense occurred, they were not acknowledged, and they were not the result of any policy aimed specifically at creating or allowing a deficit.
One of the more controversial issues amongst economic historians is the questions whether public deficit spending and public work programs really helped Sweden out of the economic slump or whether they were merely a side note during the Great Depression. The reason for that is that the coming to power of the Social Democrats in 1932 are widely perceived as a turning point in Sweden’s economic policy and sometimes even as the global “birth of modern macro-economic policy”. However, empirical evidence proving that a special Social Democratic economic policy caused Sweden’s quick recovery is scarce. As a matter of fact, the debate about the future fiscal policy of Sweden under Social Democratic rule already circled around issues much similar to those that John Maynard Keynes dealt with four years later in his magnum opus “the General Theory of Employment, Interest and Money”. Sweden’s financial minister Ernst Wigforss argued that price stabilization would not be enough to fight the depression. He rather proposed a public work program designed to put unemployed back to work even if this meant budget deficits. Much like the policy advocating stable prices, this one was again based on advice put forward by contemporary economists. This was a radical departure from the policies of previous governments. A balanced budget had always been the highest maxim. Usually, government loans were only used for investments that were expected to generate future profits such as postal services, railroads or electric power supply. All other “nonproductive” expenditures were paid for by reserves the government had built up. Unsurprisingly, this radical change in policy went not without fierce debate and controversy in parliament. The first unbalanced budget proposed by Wigforss for the years 1933 and 1934 was criticized for causing inflation and “depriving businesses of capital necessary for their development”. To counter these arguments, the Social Democrats moved away from financing public work programs through deficits and proposed an inheritance tax used to finance their plans. Additionally, the Agrarian Party did not agree to the budget as they feared a negligence of the population working in the agrarian sector. As a consequence, the Social Democrats had to include high subsidy payments for the agricultural sector in the budget. When it finally passed the parliament in 1933 much of the planned deficit spending policy had disappeared. Moreover, most of the funds still allocated to public work programs could not be put to use as a nationwide lockout of employees in the construction sector blockaded the building industry. This lockout took place because the employer association SAF wanted to enforce lower wages for the industry. This conflict was solved in 1934 and only then could the government finally make use of the allocated funds for public works.
Did they find the Holy Grail? The effects of Sweden’s economic policy
Renowned economist and chairman of the Fed, Ben Bernanke, wrote in his essay collection on the Great Depression that “Understanding the Great Depression is the holy grail of macro-economics”. He thereby referred to the very difficult but ultimately rewarding task of finding a definite answer to the question of the real causes of the Great Depression. This, he argues, could help to identify future crisis better and address them more effectively.
When looking at the fact that Sweden had overcome the Depression rather well by applying certain types of policies, the question arises whether the Holy Grail might have already been found long before Bernanke published his book. This chapter will therefore look more closely at the real effect that the Swedish economic policy had from 1929 to 1937.
The range and depth of the several above mentioned policy measures varied significantly. It is therefore convenient to divide the chapter into the several policy fields that were addressed between 1929 and 1937. The evaluation is mainly done by using statistics of key figures that are in direct relation to the executed policy. By drawing on secondary literature it is then elaborated whether the figures in the statistics did or did not change due to a specific policy or due to other factors.
When looking at the debate on the cause of Sweden’s recovery the author argues that according to one view the increasing demand and thus increasing exports led to a recovery. Hence, monetary policy was the most powerful contributory factor. The public works policy could not have had any significant effect, since the works were not started on any substantial scale until recovery was well under way. On the other hand, the expansion of the export market at first did not have an extensive impact on the labor market as at first large pile of build up stock were used for exports. No increase in production or employment took place. The author concludes that it was a mixture of growing demand abroad, monetary policy, deficit spending and support of the agriculture that led to Sweden’s recovery. Even if it is clear that the public works did not lead to recovery it is unclear whether exports alone did the trick.
Just lucky? External factors fostering Sweden’s recovery
Leaving the gold standard
After Great Britain left the gold standard on September 21st 1931, Sweden followed six days later as one of the first countries. The effects on both the domestic markets and the foreign sector were at first positive. Leaving gold meant that the Swedish Riksbank could lower the interest rate, therefore practicing an inflationary monetary policy rather than a deflationary policy as before. This let the money supply increase and accordingly aggregated product demand. As Sweden experienced a deflation prior to 1931 the increase in money now turned the economic situation into a mild inflation. This proved to be a rather favorable constellation, as with lower interest rates at the central bank and accordingly low real interest rates for businesses, investments increased. Hence, optimism amongst entrepreneurs never fell to a point where all investments were put on hold. Rather, trust in the economy always remained at a substantially high level, while prices remained at level that did not seem to hurt the economy too much.
Another important factor was the effect of an inflationary monetary policy on the export sector. Leaving gold was followed by a depreciation of the Krona. This meant that Swedish products became cheaper and did not decrease significantly, which is remarkable when looking at global trade statistics during the Great Depression. Graph 6 shows that Swedish exports did quite well during the 1930s, while a lot of other western economies had to face significant declines in exports. Additionally, a depreciation of the Krona also meant that imports became more expensive for Swedish consumers. As a consequence import substitution occurred, strengthening domestic enterprises. All put together, it becomes evident (see Berry Eichengreen), that leaving the gold standard early played an important role for the depth of and the recovery from the Great Depression.
This paper examined the economic policy of Sweden during the Great Depression. The primary question was to find out which factors contributed to the relatively mild course of the crisis. Accordingly, the first chapter outlined the basic condition the Swedish economy was in prior to the crisis. This was a necessary entrance into the subject as it revealed that Sweden’s exposure to contagion was – at least with respect to the banking sector – limited. On the other hand, the chapter revealed as well that the decrease of foreign demand due to the crisis had a definite negative impact on Sweden’s export industry. Nevertheless, it can be argued that under these circumstances, Sweden was from the very beginning less likely to be effected by the Great Depression than those countries whose banking sector collapsed. This especially holds true when considering the fact that trust in the economy never vanished in Sweden due to generally stable, basic economic parameters. Hence, the specific characteristics of Sweden’s economy prior and during the Great Depression already answer part of the question to why Sweden performed so well.
As Sweden was nevertheless hit by the crisis through the export market and the collapse of the international trading system, the second part of the answer can be found within the internationally unique policy measures Sweden pursued between 1931 and 1937. In chapter two it is argued that Swedish politicians deliberately followed an economic policy outside the neoclassical mainstream. This is mainly due to the so called Stockholm school, whose followers very early acknowledged that the state had to play a vital role during an economic crisis. As this group of economist and their advice was very well accepted within the political elite, policy measures could be put into practice without having to make too many concessions to third parties. Thus, policy reaction to the crisis was quick and effective.
In chapter three, several major policy measures that helped Sweden to recover from the Great Depression quicker than others are analysed in detail: the early abandoning of the gold standard, the stabilization of the purchasing power of the krona and public work programmes.
While the suspension of the gold standard was merely a reaction to the fact that one of Sweden’s major trading partners, the UK, abandoned gold, the other two measures can clearly be traced back to the Stockholm School. It is argued in the paper, that stabilizing the purchasing power of the krona definitely helped to maintain trust in the economic system and provided planning reliability for businesses. The role of the public work programmes however remains somewhat blurry. Even though Sweden seems to be an early if not the first country to follow Keynesian-like policies, the effects of the deficit spending policy is somewhat disputed by scholars. There is however consensus on the fact that the policies of the Social Democrats in the early 1930s paved the way for true deficit spending and broad government intervention in the following decades, leading to the today renown Swedish welfare state.
Lastly, Sweden’s quick recovery is looked upon in chapter four. As available statistics do not reveal a significant success of the government work program, outside factors might explain more accurately why Sweden recovered so quickly. Looking at exports statistics one can clearly see that a general upswing in the global business cycle was very well received by Sweden’s export industry. Especially the booming housing market in Great Britain pampered the export sector.
Putting all pieces together, this paper showed that a mixture of internal and external factors helped Sweden to overcome the Great Depression better than others. While a relatively low exposure of the banking sector to the international market helped to maintain trust in the economy, the stabilizing monetary policy of the Riksbank strengthened the planning reliability for customers and businesses alike. The quick recovery at the end of the Depression however can mainly be traced back to external factors. Nevertheless, the fact that businesses could quickly react to the growth in foreign demand at all is in great parts due to the stabilizing policy of the government.