How Sweden chose lower growth

Spoiler: SwedishGDP per capita growth is declining. The decline is mainly due to decreasing growth of GDP per hours worked. While average hours worked, the employment rate and the labour force participation rate worked in the other direction, the contributions from these factors are small. The working-age population rate continue to decrease.

The declining growth rates of GDP per hours worked are a consequence of how patterns of consumption change when incomes increase. As incomes increase, demand shifts from goods to services. The relatively stronger demand for services leads to a reallocation of capital and labour towards these industries from goods-producing industries.

The shift leads to a change in the industrial structure which reduces overall GDP per capita growth through two channels. Firstly, increasing shares of services in overall consumption, increases the weight of services industries relative to manufacturing industries. Secondly, services industries’ productivity growth is lower than manufacturing industries’ productivity growth. Thus, the contribution of the less productive services industries, to GDP per capita growth, increase at the expense of the more productive manufacturing industries.  

This may not be as worrying as one might think. It is partly a consequence of increasing living standards. As our incomes increase, we spend more on services than on goods. The decreasing working-age population rate is also a consequence of increasing living standards. As incomes increase, people choose to have smaller families.

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Albania unchained

Spoiler: The Stalinist Hoxha made Albania the poorest country in Europe. To paraphrase Marx and Engels, by overthrowing the communist regime, the Albanian proletarians had nothing to lose but their chains. Or perhaps a shotgun and a bunker, which were the average endowments of an Albanian household. When the communist era was over, the Albanian economy began to grow. And its growth rate has been higher than most other European countries.

The economy has improved more than the political situation. Even though free elections were held in 1991, the political situation in the country has been tumultuous. Manipulations of elections, repressions of political opponents and riots have from time to time plagued the country since the end of communism.

Assessments of how the political situation develops, vary. Albania is slowly moving, and sometimes backwards, from an authoritarian past towards a democracy with guaranteed civil rights.

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Putin’s home-made Middle-Income Trap

poiler: The Russian economy is stagnating. The Russian growth rate is exceptionally low. The 2008-2019 average annual Russian growth rate was 0.7 percent to be compared by 3.9 percent per year for the average Upper Middle-Income economy. The Russian economy appears to be in a Middle-Income Trap.

Resource-rich countries can escape the trap by implementing policies that exploit new sources of sustained growth. This has not happened in Russia. The reason is that sustained growth requires growth-friendly economic and political institutions because such institutions favour the creatin of new firms but may threaten the incumbent economic and political elites’ business.

The Russian Middle-Income trap is made of Putin. It is a political economy trap which is characterised by institutions that favour the deals-based relationship between Kremlin and the oligarchs.

While this may seem counter-intuitive, it is deliberate. Putin doesn’t care about growth. He cares about sovereignty and stability.

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The stagnating Construction industry slows down Swedish growth

Spoiler: The historically meagre productivity growth of the Swedish Construction industry is a serious problem. Low productivity growth for an industry does not have to be a problem if the industry is small relative to the rest of the economy. But it is problematic when a large industry’s share in the economy is increasing over time at the same time as its productivity growth is stagnating. The Swedish Construction industry’s contribution to overall Swedish productivity growth is almost as small as the public sector’s contribution.

Unless the Construction industry’s productivity growth increases, the other industries’ productivity growth will have to increase. The increases will have to be continuously higher as long as the Construction sector’s share of the economy keep increasing. The reasons behind the weak productivity growth are well-known. Weak competition, many and complex regulations, municipal monopoly of the planning process for buildings, and other factors leading to high entry costs making it difficult for new firms enter the markets.

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