The US is one example of a country that despite weak domestic saving attracts capital from abroad, thus helping to hold up investment. In turn, investment in new technology forms the basis for productivity growth, thereby making it important for potential growth. The structure of the tax system is also of significance in this area. Swedish taxes on capital are not appreciably higher than the EU average. Their distribution is distorted, however, with high wealth tax and capital gains taxes for individuals, and low taxes for institutional and foreign investors. This distorted distribution of the tax burden may come to play a more important role for Sweden’s  4  BIS Review 45/2003  attractiveness, in terms of how both Swedish and international investors decide to allocate their investments between Sweden and abroad. As regards the functioning of the financial markets, the unfortunate truth is that this is also a neglected area in many countries on the Continent. In some respects Sweden has progressed further than the euro area countries in terms of improving the efficiency of the financial system. After the period of deregulation in the 1980s the progress of the Swedish financial market has been well in line with what has happened in the Anglo-Saxon economies in the US and UK. As a result, the equity market has become more important as a source of financing and firms have become less dependent on banks. Meanwhile, banks have focused to a greater degree on providing credit and financing opportunities to individuals.
A new regulatory framework was adopted for fiscal policy, including an expenditure ceiling and a surplus target, while the focus of monetary policy was aimed at keeping inflation in check. This increased stability and made policy more predictable, thus boosting the willingness to invest. The tax and social security systems were also reformed, not least by reorganising the pension system. Sweden’s entry into the EU’s common market together with deregulation in a number of important markets gave rise to increased competition and greater demands on businesses to use their resources more efficiently. It is likely that the faster growth experienced by the private sector compared to the public sector, as well as advances in IT during the latter stages of the 1990s, also contributed to higher potential growth. Reforms behind favourable growth in the labour market If we compare the situation in the Swedish labour market to that of the euro area, we can see a number of differences. Sweden was among the first in some areas to initiate reforms that helped improve the functioning of the economy. Deregulation carried out in the 1980s and at the beginning of the 1990s was partly the reason that Sweden performed relatively well after the crisis years. 2  BIS Review 45/2003  One such deregulation was an easing in working-hour legislation, which, for example, has made it possible to shop more or less round the clock in Stockholm today. It is only recently that this has started to catch on in the euro area.