Quasi-Markets

This chapter discusses the conceptual foundations of introducing market forces in the public sector, drawing on pioneering work by the British academic Julian Le Grand. Creating market-like conditions in tax-financed welfare services (so-called quasi-markets) is a way to empower users and introduce competition among providers. Ideally, service provision will be efficient, responsive, equitable, and of high quality. Such ideal outcomes are, however, far from guaranteed to materialize. A crucial and defining characteristic of quasi-markets is that the end-users do not pay for the services consumed. As a result, care needs to be taken that the incentives of the buyer (the public sector) and the sellers (private firms) are properly aligned. The chapter also brings out the main challenges for quality and contract design that are discussed in depth in later chapters. A fundamental challenge for the government is to assess and monitor quality in welfare services, be they provided directly by the public sector or by the private sector.

Controlling Public Spending and Striving for Efficiency

Extensive welfare services require corresponding revenue. Large spending commitments imply that Sweden’s public sector finances are particularly sensitive to changing trends in demography and hours worked. A particular concern is that productivity growth in labour-intensive services is relatively difficult to uphold, the so-called Baumol effect. Increasing costs and spending pose a severe risk to the welfare state, but a risk that should be possible to handle. Though Sweden’s public finances remain among the strongest in the OECD, it will be a delicate balance to increase spending on welfare services at the desired rate. A continued focus on improving public sector efficiency will need to be coupled by a suitable balance between tax-funded services and parts that people will have to pay for privately.

Profit, Choice, and Competition

This chapter draws on recent empirical work and summarizes the quantitative research on the effects of privatization, for-profit firms, choice, and competition in the Swedish welfare sector. By treating the effect studies together, the chapter presents a coherent picture of the lessons learned across the major welfare areas of education, health care, and elderly care. Overall, private providers appear on average to be a bit better in terms of quality and are also more productive. Choice and competition have improved several services, most notably compulsory education and elderly care. The evidence is more mixed for education at the upper-secondary level, where students at independent schools are more likely to finish on time and continue to tertiary education, but also perform worse on externally graded tests and benefit from lenient grading. A key takeaway is that the design of regulation and quality control matters greatly for outcomes. Each welfare service brings its lessons and mechanisms for quality control of both private and public providers should be strengthened. A general observation is that the playing field is often tilted against private providers since local governments are both arbiters of quality for private providers and a competing service provider. Widespread loss-making among municipal providers suggests that municipalities often treat their own in-house providers more leniently than private providers. In education, attempts at cream-skimming have been more evident at independent schools than at municipal schools. In other services, there is no systematic evidence that private providers practice cream-skimming to the detriment of weak groups, which is also illegal.

Anatomy of Welfare Reforms 1970–2020

This chapter summarizes the main events and reforms in Swedish welfare services 1970–2019 and explains the rise of private involvement and for-profit firms. Throughout these years, the country rapidly expanded the scope and generosity of the welfare state and in many instances had difficulties in meeting strong demand, especially for childcare services. In particular, the chapter charts the rise of private production shares in health care, elderly care, preschools and schools, as well as personal assistance for the disabled. The chapter is thematic in order to make the major trends accessible outside of Sweden. For the interested reader, critical policy decisions and legislation are provided in tables and figures. A birds-eye timeline showcases the major reforms, most of which were initiated at the local (municipal) level rather than from the national government. Underneath the transformation of the welfare state, there has been an ongoing political battle. The chapter explains why those in favour of privatizing welfare services have been more successful in that battle. In particular, there is a discussion of why the large and powerful Social Democrats have not reversed the development.

Introduction

This chapter describes why the Swedish tax-financed service sector is of interest to other countries. While the Swedish welfare state is among the largest in the rich world, most countries face similar policy trade-offs because of rising demands and demographic challenges. It is a challenge for all democracies to achieve cost efficiency without sacrificing quality and fairness. We introduce the main elements of the Swedish model and explain how major reforms in the last decades have turned the country into a giant laboratory from which others can learn. The extensive use of private for-profit firms in tax-financed service provision might surprise many readers. But it is precisely this combination of social ambitions and market forces that has created unique experiences. The chapter introduces the Swedish development and its underlying forces.

Management of Public and Private Welfare Services

This chapter highlights insights from pioneering work on management practices by Nicholas Bloom and John Van Reenen for the performance of tax-financed welfare services. Research has demonstrated that good management matters not only in the private sector but also in traditional public services, such as schools and hospitals. Studies on Swedish data confirm the importance of management practices in the welfare sector but also point the direction to potential improvements. A pervasive pattern is that private providers have better management quality than public providers, suggesting that the privatization of service production has contributed to better services. High management quality goes together with shorter waiting times at primary care centres and with higher process-oriented quality measures at nursing homes. There is, however, no relationship between management quality and patient satisfaction.

Public Opinion

The steady privatization of welfare service production has been a longstanding source of political conflict and debate. For-profit providers have met particularly harsh resistance from the left and only mild support from the right. Public opinion is largely skewed against private providers and affects the welfare sector by influencing implemented and expected regulation. In addition to the left–right divide, opinions on private production are split in several other ways. Notably, elected politicians are more supportive of privatization than the voters. The Social Democrats have been a dominant force in Sweden and have long been split on how to address privatization. The party contains a vocal left-wing with ideological objections that wants to stop and reverse course. Another wing of the party is more market-oriented and in some circumstances in favour of choice and competition. A key finding is that public opinion is fairly negative towards for-profit providers, while simultaneously very supportive of opportunities to choose between providers. To an astounding extent, people tend to overestimate the profits of private providers. As a result, the negative opinion against for-profit providers is partly based on misperceptions. Transparency and information are fundamental underpinnings for the public support of privatization.

Summary and Conclusions

Despite political controversy, the growth of private providers has been steady since the 1990s. The Swedish municipalities have often been more practically inclined—willing to experiment and adopt what works. The expansion of private provision has increased choice opportunities, accessibility, and in many cases service quality. The benefits have mostly been accomplished without increasing costs, although there are examples, including care of the disabled, of spiralling total costs. User choice is popular, but its impact on total costs needs to be handled. A complication is that there must be some excess capacity for user choice to have economic consequences for the providers. Market design and regulation are crucial for the functioning of quasi-markets. Private and public providers should receive the same treatment when it comes to permissions, financing, inspections, and audits. As another general policy conclusion, we emphasize a resolute focus on quality control. This is most evident in education—where there is need for external restrictions on grades or a return to traditional final, and centralized, exams. The soft aspects of quality should not be neglected. An important lesson when it comes to management is that the same management practices that are successful in the private sector work in the public sector too. Entry barriers can be useful in quasi-markets by dissuading unwanted providers and incentivizing the serious ones. The Swedish experiment with quasi-markets and privatized service production provides a rich experience for other countries to determine what works as well as what pitfalls to avoid.