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GLOBALIZATION & IT
How will Europe and Sweden cope
with the challenges of
the 21st century?
Klas Eklund
Chief Economist SEB
SACC, Oct. 1999
GLOBALIZATION
• New markets: The greatest economic transformation
in the history of humankind
• From trade…
• …through free capital markets…
• …to rapid diffusion of new technology
• Means new challenges to the old industrialized world
• No control room for the MoF
• Tough limits on fiscal and monetary policy
ALSO STRUCTURES CONVERGE
• The Anglo-Saxon free market model has triumphed
• …over the planned economy, the welfare state and
the “Asian model”
• Increasing pressure for deregulation and free
markets
• Tax structures converge as tax bases turn more
mobile
• Single currency in Europe…
• … and currency boards and dollarization elsewhere
• Cultural trends spread rapidly
• Conclusion: We are truly becoming one world
IT:
A NEW INDUSTRIAL REVOLUTION
• The third industrial revolution - after steam and
electricity/internal combustion engine
• We ain’t seen nothin’ yet
• Speed & accessibility will give new patterns of
communications and production
• A “new paradigm” of growth may be possible...
• …but creative destruction will be painful
• …both on the micro and macro levels
THE NEED TO RESTRUCTURE
• The network economy promotes free exchange of
information
• Flatter organizations and flexibility
• Low inflation
• …all of which puts pressure on the rigid European
economies
• …who suffer from inert labour markets, high taxes
and small nation states
• EMU may help, but is not enough
EUROSCLEROSIS AND EMU
• Europe has been successful in crushing inflation - but
not in promoting growth and employment
• EMU will increase economies of scale, enhance
transparency, stiffen competition - and raise growth
• The euro has started weakly - but it will strengthen.
And it has already created a huge bond market
• The euro-zone is not an optimal currency area. Thus
risks - if markets do not become more flexible
• The long-term imperative: Cut taxes, deregulate and
improve education.
A POLITICAL WILL FOR REFORM
•
•
•
•
•
Globalizations increases pressure to reform
Single market and single currency sharpen the need
Increasing M&A activities
Tax harmonization - downwards
New policy signals
– Blair & Schröder: The third way
– Even Jospin is shaping up
• Conclusion: The potential is there - as well as the
obstacles
SWEDEN IN PAIN
• The old Swedish model: Big business, big
government, big unions
• The model cracked in the 1970’s
• Slow growth, devaluations and inflation in the 80’s
• 1990’s: The great water-shed: Over-heating, currency
crisis, rate hikes, banking crisis, depression,
unemployment, budget chaos
• The grim realization: We are not God’s chosen
people!
• Forced gradual adaptation
GRUDGING ADAPTATION
•
•
•
•
•
•
•
•
•
•
1990-91: Deregulation of credits and currency markets
1991: Exhaustive tax reform
1992-94: Restructuring of banking system
From 1993: Floating exchange rate
1994-95: Cuts of compensation levels
1995: EU membership
1995: Independent central bank, with inflation target
1995-96: Fiscal tightening against the deficit
1996: Pension reform
1996: Budget reform, with expenditure ceilings
THE RESULTS
•
•
•
•
•
•
•
•
•
Well consolidated banks
Current account surplus
Budget surplus
Low inflation
Low interest rates
Gradually diminishing unemployment
Rapid productivity growth
And now, finally: Consumption returns
But a nagging uncertainty: Are these results
sustainable?
THE POLITICAL SCENE
• SDP used to have a hegemonic position
• Threatened as the model cracked, communism
collapsed and the tax ceiling was reached
• SDP has gradually shifted to the middle
…but without a change of rhetoric
• Creates confusion among the rank and file - and
lower popular support
• Poor election results
• But the opposition is split between right and left,
which means SDP can still stay in power
• Now: Persson leans left - for how long?
THE STRUCTURE
• WEF: Sweden ranks high on technology, infra-structure
and management. Low on public sector and taxes.
• Swedish export industry is extremely competitive
• But the base and renewal of manufacturing is in doubt
• A rigid labour market, stiff legislation for small firms
• Mobile tax bases puts pressure on tax revenue
• A growing exodus caused by high taxes, geography and
lack of highly educated people
• But also inflow of investments into manufacturing
• A ray of hope: Growing software and culture sectors
• The financial sector: Modern and hi-tech after
deregulation - but M&A loom on the horizon
ADVANCED IT AND
FINANCIAL SECTORS
• Sweden is one of the most wired nations on earth
• Extremely successful exports of music, culture, computer
games, telecommunications and software
• The financial sector’s technical sophistication is second only
to the US
• Internet banking has reached further than anywhere else
• SEB: at the forefront
– Successful internet site - expanding portal
– Electronic trading station
– We move the market place to the customer
THE SWEDISH ECONOMY TODAY:
STRONG GROWTH
• Strong growth, driven by both exports and
consumption: After a decade, private
consumption rebounds
• Lower unemployment
• Budget surplus suffices for both tax cuts & debt
reduction
• Higher but still moderate inflation
• Tighter monetary policy ahead
• The risks: Fiscal policy and wages. Will Sweden
slip back into its old bad habits again?
GDP GROWTH
Procent
5
Procent
5
4
4
3
3
2
2
1
1
0
0
Prognos
-1
-1
SEB
-2
-2
-3
-3
80
82
84
86
Källor: SCB, SEB
88
90
92
94
96
98
00
FORECASTS
GDP
Export
Private consumption
Savings rate
Unemployment
Wage costs
3,8
Current account
Inflation (CPI)
Genl govt balance
1998
2,6
6,9
2,4
3,8
6,5
3,8
1,9
0,4
1,9
1999
4,0
6,6
3,1
2,7
5,5
4,4
1,4
0,4
2,6
2000
3,8
6,1
4,4
2,4
5,0
4,6
1,1
1,9
3,0
2001
3,5
4,5
4,1
3,3
4,5
0,6
2,8
2,5
BUDGET DEFICIT/SURPLUS
Per cent
10
Per cent
10
5
5
0
0
Forecast
SEB
-5
-10
-5
-10
Financial savings
Savings without tax cuts
-15
-15
80
82
84
86
Sources: N.I.E.R. SEB
88
90
92
94
96
98
00
FISCAL POLICY
(bln SEK)
Earned income allowance
Adjustment of threshold
Lower tax on rental prop.
“Expert” tax
Double taxation
Wealth tax
Local government grants
Other
TOTAL
ca 50
2000
8
1,5
0,8
0,04
0
0
5
5
ca 20
2001
20
1,5
0,8
0,04
7
3
10
8
PRO-CYCLICAL FISCAL POLICY
• Also after tax cuts, there will be a rapid
amortization of debt
• Fiscal policy becomes more expansionary in a
period of strong consumption-lead growth.
• The policy mix is risky - but still, tax cuts are
needed
• Conclusion: The pressure on the Riksbank is
increasing
• But with a floating exchange rate the Riksbank is
free to counteract inflationary pressures
WHAT OUGHT TO BE DONE?
• Dampen consumption growth:
– Tax cuts to stimulate savings (capital income & wealth
taxation)
• Increase potential GDP growth & and capacity:
– Improve business climate, stimulate investments (double
taxation & coperate taxation
• Increase labour force:
– Stronger incentives to work (duration and level of
unemployment benefit levels, marginal taxes, union
strength etc)
• Long term:
– Tax reform to stimulate entrepreneurs, higher quality in
education
• Conclusion: Structural problems not dealt with fully
INFLATION
• Inflation will rise:
–
–
–
–
Strong global and domestic demand
Tight labour market
Expansionary fiscal policy
Low real yields
• But not as much as it used to:
–
–
–
–
Global and technological pressure
Monetary regime more credible
Transmission mechanism more efficient
Structural improvements
• Pipeline indicators benign
• Conclusion: Inflation increases - but not much
MONETARY POLICY
• The Riksbank is uncertain
– Optimistic inflation propensity
– More dependant on pipeline indicators
• The Riksbank will be cautious
–
–
–
–
–
Takes time to change forecast
Pedagogical problems
Symmetric target
Uncertainties regarding fiscal policy
… and the Executive Board is split
• Pre-emptive, careful move later this autumn, but next year
gradual tightening will follow
• Substantial tightening needed (275 bps)
REPO RATE FORECAST
9
9
F orecast
8
8
7
6
6
Percnt
Percnt
7
5
5
4
4
3
3
2
2
969798990001
Repo
Repo
rat e,
rat e,
S weden
E M U (Germ an
Sourc e
Ec oWin
INFLATION FORECAST
1 5 .0
1 5 .0
1 2 .5
F
o
re ca st
1
2
.5
1 0 .0
SEB
1 0 .0
7 .5
Percnt
Percnt
7 .5
5 .0
5 .0
2 .5
2 .5
0 .0
0 .0
-2 .5
-2 .5
90
91
92
93
94
95
96
97
98
99
00 1
Cons um er pric es
Underly ing inflat ion,
Sourc e
Ec oWin
UND
SHORT REAL RATE
y b i lls
7
-
ho use ho ld s
i nfla ti o na
7
6
6
F orec as t
SEB
5
4
4
Percnt
Percnt
5
3
3
2
2
1
1
94
95
96
97
98
99
00
01
Sourc e
Ec oWin
EMU MEMBERSHIP POSTPONED
• Sweden outside the first member group, for domestic
political reasons
• Prime Ministerial fast track last winter became blind alley
after SDP defeat in EU parliamentary elections
• Party leadership governed by tactical considerations but in the long term membership is unavoidable
• SDP will say: “Yes, but later” (UK Labour position)
• Earliest decision in 2002 election or later referendum
• Conclusion: ERM off the agenda for now
• Floating exchange rate will stay
FINANCIAL MARKETS
• Stronger krona
– High growth, expansionary fiscal policy and tighter
monetary policy
– Credible economic regime
– The krona is undervalued
• Stable bond yield spread to Germany
– Sweden outside EMU, slightly higher inflation
– but strong fundamentals
• The yield curve will flatten - next year
– Riksbank timing is crucial
THE KRONA
Index
135
Index
135
130
Forecast SEB
130
125
125
120
120
115
115
110
110
96
Source: SEB
97
98
99
00
01
THE YIELD CURVE
Per cent
12
Per cent
12
10-year benchmark
3-month treasury bills
10
10
Forecast SEB
8
8
6
6
4
4
2
2
95
96
97
Sources: Datastream, SEB
98
99
00
01
SWEDISH RISKS
• The window of opportunity may not be
exploited
• Structural transformation may be stopped
• Even more expansionary fiscal policy
• Too high wage increases
• The Riksbank reacts too little and too late
But even so, Sweden looks strong
- at least for the foreseeable future...