Socialist Countries Set to Recover Quicker from Recession

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Ben Cohen
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A Sunset and a Archipelago in Sweden by Johan Runegrund.

(sunset in Sweden by Johan Runegrund)

by Ben Cohen

In their hey day, the IMF and World Bank (two American led institutions) had a prescription for turning a Third World country around during recession. It was called 'Structural Adjustment', and essentially gutted a country of it's public infrastructure to make way for private investment. Cuts were prescribed across education, welfare and a host of spending projects, the economy deregulated, trade barriers lowered and services privatized. Only then could a country apply for a loan from the IMF and World Bank.

The system essentially destroyed much of the Third World sending millions more people into abject poverty. The cuts in public spending and privatization led to spiraling costs as the market figured out how to set prices, while health care and education became privileges of the rich.

Interestingly, the countries that ignored the IMF and World Bank achieved massive success - China, India, and much of SE Asia saw huge economic gains from state planning and direct intervention in the market.

State planned economies with trade barriers to protect markets, government investment across key economic sectors and a social welfare net to protect the poor was the formula most of Western Europe and North America used, and it worked extremely well. The countries that followed those rules succeeded, and those that did not failed.

The United States and Britain embarked on a huge deregulation binge from the 1970's onwards, and have lectured other countries to do the same. But as latest crash has shown, public spending and welfare are essential in times of crises, and the U.S and U.K are having trouble because the have spent the last 30 years destroying the welfare state. The Northern European countries that have built large welfare states are in no such bind. As the Guardian reports:

According to liberal thinkers, Scandinavian countries should have
drowned in the current economic crisis with their bloated public
sectors and a nanny-state mentality that stifles individual creativity.

But the opposite has happened. Sweden, Denmark and Norway,
where many people pay 50% of their income in taxes – with some even
paying 60% – are coping better than most, in particular better than
Britain.

If you lose your job in the U.S or U.K, you can expect moderate unemployment benefits, but usually for no longer than 6 months and at a substantially lower rate than your usual pay. Not so in Sweden or Norway:

Overall, these countries' high-tax, high-benefit welfare systems have
been acting as stabilisers to their economies. If you lose your job in
Sweden, you can expect to receive 80% of your wages for the first 200
days of inactivity, up to 680 kronor (£55) per day, dropping to 70% for
the following 100 days. If you lose your job in Norway, you will
receive 62% of your previous salary for up to two years.

The public sector spending is holding up the Northern European economies, taking over where the market is failing. They have their finances in order, and have not relied on debt to fuel economic growth. The Scandinavian economies are set to recover far faster than the rest of Europe and North America precisely because they ignored the doctrine of the free market. Like those countries subjected to the the ravages of the IMF and World Bank, we are now learning the limits of unfettered capitalism. And hopefully, it won't be too late.