The Swedish Recovery from the Great Depression: A

The Swedish Recovery from the Great

Depression: A disaggregated perspective

Kerstin Enflo (Lund) and Joan R. Rosés (LSE)

Contents

Historical patterns of the Depression in Sweden.

Alternative explanations for the recovery.

Macro evidence on these explanations.

The regional variability of the Depression.

New approach for studying the recovery: disaggregated

evidence.

Preliminary results.

Enflo & Rosés: Great Depression in Sweden 2

Historical Facts

Sweden was a small and open economy that depended

strongly from export markets.

The Great Depression arrived at the same time than in the

rest of European countries.

Sweden abandoned the Gold Standard earlier (by September

1931) when the country was unable to raises short-term

loans to maintain its currency.

Sweden was one of the countries that recovered earlier and

swiftly from the Great Depression.

Enflo & Rosés: Great Depression in Sweden 3

The “mild” Swedish Depression

Real PPP GDP per capita, 1929=1, source: Broadberry and Klein (2012), interwar borders.

Enflo & Rosés: Great Depression in Sweden 4

Alternative Explanations for the recovery

Enflo & Rosés: Great Depression in Sweden 5

1. Keynesian recovery led by Sweden’s Social Democratic Party which implemented large public works.

2. Monetary policy: B of S. targeted an objective inflation facilitating GDP growth.

3. Export-led recovery: Weak Krona and German demand for strategic goods were behind Sweden’s success history.

4. Domestic demand: caused by a combination of factors: demographic, low interest ratas and technological change.

Keynesian recovery was unlikely

Enflo & Rosés: Great Depression in Sweden 6

Deficit/GDP and Debt/GDP ratios were low.

Prices in Sweden were far from stable

Enflo & Rosés: Great Depression in Sweden 7

Sweden suffered a severe deflation (like the rest of European countries) and prices recovered 1929 levels by 1940.

85

90

95

100

105

110

1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940

CPI

Deflator GDP

Export versus domestic-led recovery

Enflo & Rosés: Great Depression in Sweden 8

Domestic comsumption, and investments recovered earlier and faster than exports. Even imports recovered earlier.

Also, contribution of domestic demand to GDP growth

was larger than exports contribution …

Enflo & Rosés: Great Depression in Sweden 9

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940

Mil

lio

n C

on

stan

t S

EK

(B

ase

1910

/12

)

Consumption Investment Exports Imports GDP

The impact of the Great Depression was uneven across

Swedish counties

Enflo & Rosés: Great Depression in Sweden 10

And also the recovery

[799.2167,1001.98](1001.98,1204.743](1204.743,1407.506]

(1407.506,1610.269](1610.269,1813.032]

1940

Relative GDPs per capita. Bin widths below 70 per cent of median, 70-90, 90-110, 110-130 and above 130.

The impact of the Great Depression was uneven across

Swedish counties

Enflo & Rosés: Great Depression in Sweden 11

Also in employment

Employment to population ratios, Bin widths below 70 per cent of median, 70-90, 90-110, 110-130 and above 130.

[.4212947,.4325522](.4325522,.4438106](.4438106,.4550691]

(.4550691,.4663276](.4663276,.477585]

1930

[.3821603,.4136489](.4136489,.4451386](.4451386,.4766283]

(.4766283,.508118](.508118,.5396066]

1940

Why the North of Sweden experienced this harsh crisis?

Enflo & Rosés: Great Depression in Sweden 12

The explanation lies in the localization of export industries

Export industries (1930): Location quotients, lightest (below 1) are relatively unspecialized, specialization in darker shades

from 1-1.5, 1.5-2, 2-3 and above 3)

Explaning the recovery: new data and methodology

Enflo & Rosés: Great Depression in Sweden 13

New database of employment and number of firms by

county and industry (24 counties x 10 industries x 10 years).

We consider two different definitions of recovery: (1)

county-industry came back to pre-crisis employment/firm

levels and (2) they came back to pre-crisis growth rates.

We hypothesize that the probability (hazard) of recovery is

positively correlate with the growth of domestic prices,

foreign prices, and domestic market access in 1930

(measured with the Harris specification) and negatively

correlated with the initial level of production.

Explaning the recovery: new data and methodology

Enflo & Rosés: Great Depression in Sweden 14

Then we estimate the following equation:

With 3 different econometric methodologies: Logit;

Dynamic Logit with random effects and Cox-Hazard with

gamma frailty (random effects).

(1) Recovery (0,1)ijt = a0 + Δ Domestic Pricesjt + Δ Export Pricesjt + Ln Levelij1930

+ Ln Domestic Market Potentiali1930 + eijt,

Enflo & Rosés: Great Depression in Sweden 15

The contribution of domestic prices is significantly larger than the contribution of foreign prices.

Table 1. Probit and Cox Hazard Models: Main Results

(1) (2) (3) Probit Dynamic Probit Cox Hazard

a) Employment level (0,1) Domestic Prices 2.6153***

(0.7401) 8.7236*** (1.3018)

18.3781*** (1.1213)

Export Prices 1.9322*** (0.4707)

2.7693*** (0.7536)

4.4974*** (0.6420)

LnWorkers 1930 -0.2665*** (0.0211)

-0.5839*** (0.1069)

-0.1959*** (0.0340)

Domestic Market Potential 1930 0.4787*** (0.0311)

1.0417*** (0.1559)

0.4876*** (0.0916)

b) Firms level (0,1) Domestic Prices 3.4922***

(1.0427) 9.3011*** (1.9468)

24.8984*** (0.8194)

Export Prices 1.7703** (0.6183)

3.5569*** (1.0835)

1.4366*** (0.5466)

LnWorkers 1930 -0.1190*** (0.261)

-0.2917*** (0.1203)

Domestic Market Potential 1930 0.3010** (0.1042)

1.1053*** (0.1767)

Enflo & Rosés: Great Depression in Sweden 16

The contribution of domestic prices is significantly larger than the contribution of foreign prices.

Table 1. Probit and Cox Hazard Models: Main Results

(1) (2) (3) Probit Dynamic Probit Cox Hazard

c) Employment rates (0,1) Domestic Prices 0.1181n.s.

(0.7165) 0.6071n.s. (0.8860)

21.8152*** (1.0397)

Export Prices -0.0409 n.s. (0.4620)

-0.3754 n.s. (0.5844)

10.4487*** (0.3839)

LnWorkers 1930 -0.2492*** (0.0222)

-0.3570*** (0.0687)

-0.2334*** (0.0151)

Domestic Market Potential 1930 0.3101*** (0.0866)

0.4160 n.s. (0.2875)

0.2707*** (0.0186)

d) Firms Rates (0,1) Domestic Prices -1.5875**

(0.699) -1.9728** (0.8083)

16.7581*** (1.3995)

Export Prices 0.9013** (0.4639)

1.1700** (0.5483)

4.8991*** (0.6275)

LnWorkers 1930 -0.1535*** (0.0208)

-0.1720*** (0.0484)

-0.1187*** (0.0222)

Domestic Market Potential 1930 0.0492*** (0.0868)

0.0860 n.s. (0.02075)

0.3787*** (0.0481)

Provisional Conclusions

Enflo & Rosés: Great Depression in Sweden 17

Sweden experienced a mild Great Depression.

However, Depression was uneven distributed across regions

and industries.

The first step towards recovery was the abandonment of the

Gold Standard.

However the recovery was not caused directly by fiscal and

monetary policy.

The main culprit of the recovery was domestic demand

while international markets played a secondary role.

What need to be explained is the sources of this domestic

demand expansion.