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The expansion of welfare-state arrangements is seen as the result of dynamic interaction between market behaviour and political behaviour, often with considerable time lags, sometimes generating either virtuous or vicious circles. Such interaction may also involve induced (endogenous) changes in social norms and political preferences. Moreover, the internationalisation process not only limits the ability of national governments to redistribute income; they also increase the political demands for international mobility of welfare-state benefits and social services. I also discuss the dynamics of reforms and retreats of welfare-state arrangements.

The achievements of social-welfare arrangements in Western Europe are well known: considerable income security, relatively little poverty and, in some countries, ample supply of social services. But there are also well-known weaknesses and hence considerable scope for improvement. Three types of weaknesses are considered in this paper: social-welfare arrangements are often not financially robust to shocks; individuals make undesirable behavioural adjustments in response to welfare-state arrangements and their financing; and social-welfare arrangements are often poorly adapted to recent changes in socio-economic conditions and preferences of individuals. I discuss these weaknesses, and alternative methods to mitigate them, in the context of various types of welfare-state arrangements that the individual may encounter over the life cycle.

The expansion of welfare-state arrangements is seen as the result of dynamic interaction between market behaviour and political behaviour, often with considerable time lags, sometimes generating either virtuous or vicious circles. Such interaction may also involve induced (endogenous) changes in social norms and political pre­ferences. Moreover, the internationalisation process not only limits the ability of national governments to redistribute income; they also increase the political demands for international mobility of welfare-state benefits and social services. I also discuss the dynamics of reforms and retreats of welfare-state arrangements.

The expansion of welfare-state arrangements is seen as the result of dynamic interaction between market behaviour and political behaviour, often with considerable time lags, sometimes generating either virtuous or vicious circles. Such interaction may also involve induced (endogenous) changes in social norms and political preferences. Moreover, the internationalization process not only limits the ability of national governments to redistribute income; they also increase the political demands for international mobility of welfare-state benefits and social services. I also discuss the dynamics of reforms and retreats of welfare-state arrangements.

Developing countries, in particular the least developed ones, probably have more to learn from social policies in Europe during the early 20th century than from the elaborate welfare-state arrangements after World War II. In addition to macro­economic growth and stability, the main ambitions must be to fight human deprivation, including illiteracy, malnutrition, poor access to water and sanitation – and, in some cases, also weak, incompetent and/or corrupt governments. It is also important that informal systems in the fields of transfers and social services are not destroyed when developing countries embark on more formal systems in these fields in the future. The European experience also warns against the creation of social systems that are so generous that disincentives, moral hazard and receding social norms seriously distort the national economy, including the labor market.

"Developing countries, in particular the least developed ones, probably have more to learn from social policies in Europe during the early 20th century than from the elaborate welfare-state arrangements after World War II. In addition to macroeconomic growth and stability, the main ambitions must be to fight human deprivation, including illiteracy, malnutrition, and poor access to water and sanitation; in some cases, also weak, incompetent, and/or corrupt governments. It is also important that informal systems in the fields of transfers and social services are not destroyed when developing countries embark on more formal systems in these fields in the future. The European experience also warns against the creation of social systems that are so generous that disincentives, moral hazard, and receding social norms seriously distort the national economy, including the labor market"

Developing countries, in particular the least developed ones, probably have more to learn from special policies in Europe during the early 20th century than from the elaborate welfare-state arrangements after World War II. In addition to macroeconomic growth and stability, the main ambitions must be to fight human deprivation, including illiteracy, malnutrition, poor access to water and sanitation – and, in some cases, also weak, incompetent and/or corrupt governments. It is also important that informal systems in the fields of transfers and social services are not destroyed when developing countries embark on more formal systems in these fields in the future. The European experience also warns against the creation of social systems that are so generous that disincentives, moral hazard and receding social norms seriously distort the national economy, including the labor market.

In developed countries, pensions systems emerged as a political response to socioeconomic changes brought about by industrialization and urbanization in the late 19th and early 20th centruries. Today, new socioeconomic changes create both rationales and political forces for revisions of existing pensions systems. Changes in demography, real wage growth and real interest rates are perhaps the most obvious examples. Increased instability of the family, more heterogeneity among individuals, greater internationel mobility of labor and capital, and amibitions to ecourage individual responsibility also have important implications for pensions systems. When discussing these issues, it is useful to set up a more elaborate classification of pension systems than the usual distinction between defined-benefit (DB) and defined-contribution (DV) systems. The choice of an appropriate taxonomy depends, of course, on the issues to be raised. One question that is focused on in this paper concerns the consequences of socioeconomic shocks on the distribution of income and the sharing of income risk among generations. it turns out that the distinction between pensions systems with exogenous and endogenous contribution rates (tax rates) then becomes crucial. Bu the paper also deals with socioeconomic changes that are induced by the pension system itself via behavioral adjustments of individuals - and the feedback of these changes on the pension system. When dealing with such adjustments, highly relevant features of pension systems are the degree to which they are actuarial and funded, respectively - two aspects that are related but not the identical. Six generic pension systems are classified in Section I, highlighting the distinctions mentioned above. The contribution rate is exogenous in two of these systems, while it is endogenous in the other four systems. Each of the six pension systems can ba varied considerably, both by incorporating elements from other systems and by introducing restricitions on contributions or benefits. Section II turns to the consequences of socioeconomic changes for the distribution of income and macroeconomic balance, while sections III and IV examine alternative pension reforms aimed at mitigating some of these consequences. A few of these reforms are "marginal" in the sense that certain rules of a pension system are modified, including both ad hoc policy measures and the introduction of various automatic adjustment mechanisms. Other reforms are "radical" since they imply shift to different types of pensions sytems. Section V concludes. As always when designing social insurance systems, it is necessary to strika balance between conflicting considerations, such as distribution, risk sharing and incentives. But it is also important to be concerned with the balance between paternalism and individual freedom of choice (and hence individual responsibility). This also raises the more general question of the appropriate role of government in society as a whole, including the control of capital markets and government intervention in the management of firms.

Sweden experienced exeptionally fast economic growth during the century-long period 1870-1970. This illustrates that a decentralized market economy, highly open to international transactions, may be quite conductive to sustained productivity growth if the government fulfills its 'classical' functions well. The subsequent period of centralization and large government, 1970-1985/90, was characterized by considerable social achievements. But the rate of economic growth was quite low as compared to other developed countries. The last period discussed in the paper, after about 1985/90, may be characterized as a 'period of transition' away from the centralized and highly interventionistic system of the 1970s and 1980s. A number of transition problems are discussed in the paper.

Can income equality be combined with high economic efficiency and rapid economic growth? Fortunately, we need not to answer such a general question. Indeed, the question is poorly phrased. The relationship between income and wealth distribution, on one hand, and efficiency/growth, on the other, depends on how a certain distribution of income and wealth has come about.

When reforming their own countries, several observers, ideologues and politicians in former socialist countries have pointedf to Sweden as a blueprint. It is then believed that Sweden, or the "Swedish model", has combined the efficiency, dynamism and flexibility of capitalist market economies with the economic security and egalitarianism so highly evaluated by many social liberals and socialists. An analysis of the Swedish experience, and its relevance for former socialist countries, may therefore be of rather general interest. When addressing this issue, it is important to realize that basic features of the economic and social system in Sweden have changed considerably over time. Though attempts to divide history into periods are hazardous, in this paper I partition modern economic and social history in Sweden into three periods. The first is the century-long time span from about 1870 to 1970, which may be called "the period of decentralization and small government". During this period, the economic system in Sweden did not differ much from those in other countries in Western Europe, although Sweden was probably one of the least regulated economies in this part of the world. The second period, from 1970 to 1985/90, may be characterized as a "period of centralizaion and large government". In this time span, Sweden acquired idiosyncratic features, though still within the framework of a capitalist market economy. The third period, from 1985/90 onwards, may be regarded as a "period of transition" due to deregulation of markets for capital and foreign exchange, intensified importance of private saving and private supply of capital, comprehensive tax reforms (with lower rates, a broader base and fewer asymmetries), a shift of the macroeconomic policy regime towards greater emphasis on price stability, a stricter budget process in the public sector, as well as some (modest) attempts to reform and rewind various welfare-state arrangements. The paper deals mainly with the last two periods. By way of introduction, I will make a few comments on the first, century-long period, as it was largely then that the foundation of today's affluence in Sweden was established. Some of the experience from this period is also highly relevant for post-socialist countries.