Headlines 2013

New Report on Swedish Privatization

2013-11-13


At a November 13 seminar, Henrik Jordahl of IFN presented a brand new research report, Välfärdstjänster i Privat Regi: Framväxt och Drivkrafter (Welfare Services under Private Management: Rise and Driving Forces). This seminar was part of an initiative between IFN and SNS:  From a Welfare State to a Welfare Society. The report, of which Jordahl is the editor, discusses the circumstances under which Swedish municipalities have privatized tax funded production of welfare services.

"We've all heard confident statements that privatization is governed by the desire to cut costs. However, in our studies, we have seen that it is not so simple," began Jordahl in front of the crowded seminar room.

Jordahl and the other experts painted a complex picture of Swedish privatization. ”One can easily get the impression from the debate that we in Sweden have privatized an unusual amount,” noted economist Assar Lindbeck, “but this is not the case. We are even below the OECD average. However, we have many for-profit companies in the welfare sector.”

henrik Jordahl

Henrik Jordahl is the editor of the research report Välfärdstjänster i Privat Regi: Framväxt och Drivkrafter.

 

On average, private providers account for 15 percent of production in the welfare sector. The proportion of privatization is somewhat higher than this metric in the field of pre-school education and slightly lower in healthcare. Moreover, the difference in the degree of privatization in Sweden’s 290 municipalities is drastic. For example, in Täby, a municipality north of Stockholm, 53 percent of welfare services are carried out by private providers, whereas in Pajala and Strömstad, only 1 or 2 percent are privatized. The authors of this report set out to determine the cause of these discrepancies.

Henrik Jordahl presented several plausible explanations. For example, the rapid growth of the Swedish government through the mid-1980’s led to diseconomies of scale and citizens’ lack of influence. Further, an international trend towards privatization swept across Europe in the 1980’s and 1990’s, and the domestic economic crisis spurred demand for efficiency. Jordahl also highlighted local initiatives as a major driver for privatization in Sweden. He identified local projects such as nurseries and the introduction of customer choice in elderly care as plausible origins of privatization.

"There are no communities that have rolled back privatization once it began. But there are several municipalities that have almost completely refrained from introducing private providers", said Jordahl.

Various Market Models

Henrik Jordahl also discussed the impact of a few important market models on privatization: the contract model (local governments procure private services) and the choice model (users choose performers). “We can see that the implementation of care and choice models in general is pushing privatization," Jordahl remarked.

The report notes that the size of a municipality plays a major role in the degree of privatization. Researchers suggest that the cause of this may be the fixed costs incurred by the municipality in connection with services outsourced to external suppliers as well as the willingness to establish private providers.

Ulrika W

Ulrika Winblad connects the privatization rate in elderly care to geographical proximity.

 

Ulrika Winblad from Uppsala University partly connects the privatization rate in elderly care to geographical proximity. Using the results from her chapter in the report written in conjunction with David Isakson, she explained that there exist clear clusters that can be categorized as either pioneer or follower municipalities. Winblad and Isakson show that the municipalities with right-wing leadership (both pioneers and followers) tend to privatize for ideological reasons. Left-wing pioneer municipalities, on the other hand, privatize for economic reasons, while the follower municipalities follow their neighbors’ example.

Contrasted Decisions

Mikael Elinder, Uppsala University and affiliated with IFN, presented results that contrasted local politicians' decisions and the users' choices. "We find evidence that supports that politicians' attitudes are crucial for privatization", he explained at the seminar. Elinder also suggested that differences between the right and left blocks are less clear in the municipalities than at the national level. Voters' attitudes toward privatization, however, are not nearly as polarized as the politicians’.

Helene Lundqvist and Matz Dahlberg of Stockholm University look at the impact of various politicians' personal backgrounds, including gender, age, education, and employment. "Who is in power plays almost as big role in privatization as party composition does", suggested Lundqvist. The two also find that when standing politicians have a stronger educational background, their municipalities tend to have greater levels of privatization.

"For example, in Karlstad with red-green majority, two-thirds of the politicians have had university education, and almost 20 percent of high school education is privatized. In Tanum, where 15 percent of the leading local politicians have not completed high school and only a third are university graduates, the privatization rate is low, although it is a right-wing controlled municipality,” states Lundqvist.

Furthermore, according to Lundqvist, research suggests that, in left-wing municipalities with more women in leadership positions, there is a greater degree of privatization. Similarly, there tend to be fewer privatizations in municipalities where many politicians are professionals in the municipal welfare sector. Lundqvist uses these observations to affirm the functionality of a representative democracy, as politicians represent their constituents' interests.

Comments by Assar Lindbeck

Economist Assar Lindbeck of IFN and Stockholm University commented on the research report. He emphasized the interaction between local initiatives, company location decisions, and national policies. Lindbeck suggested, however, that it would have been beneficial to go deeper into the analysis of the economic arguments for and against privatization. He also called for a clearer answer to the question of why privatization degree varies with welfare services.

Assar Lindbeck

Assar Lindbeck, IFN, commented on the report.

 

"The report's analysis of the importance of political residence is interesting. Above all, it is interesting that the choice model provides more privatization when compared to the contract model,” asserted Lindbeck. He concluded his statement with a crucial and interesting question for the future: "How far can we finance welfare services with taxes, given that, according to Baumol's law, it is becoming increasingly expensive over time?”

Three Local Politicians

The seminar concluded with a panel featuring three politicians that have significant experience in municipal management: Erik Langby (M), Ilmar Reepalu (S), and Sven-Erik Bucht (S).

Langby, with experience in Nacka Municipality, explained that competition is more important than privatization because competition provides higher quality and efficiency.

Kommunalpolitiker

From right to left can be seen Erik Langby (M), Ilmar Reepalu (S), and Sven-Erik Bucht (S).

 

Reepalu, of Malmö Municipality, said that the researchers should have looked more at 1980’s attempts to establish free municipalities, which would have served as precedents of awarding municipalities with greater autonomy. He asserted that from examining this time period, "We learned that we should focus on the effects.” Reepalu pointed out that a side effect of privatization is segregation in the school system, a matter not to be taken lightly.

"Ideology is the major driving force of privatization,” said Sven-Erik Bucht of Haparanda Municipality, adding that the most important thing in a renewal process is to ensure quality. He struck a blow for freedom for municipalities, receiving support from many at the seminar.

Assar Lindbeck pointed out that if one has local autonomy, differences must be accepted. He sees government intervention as problematic. As Jordahl put it in his final line: "One model does not fit all."

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