urban backstrom : the swedish economy cyclical upswing or a more fundamental improvement? speech held by mr urban backstrom, governor of the sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, at a meeting with institut international d ’ etudes bancaires, held in stockholm, on 19 may 2000. * * * the current economic situation in sweden differs appreciably from the early - 1990s, when our country was on the brink of a serious financial crisis, with a currency and banking crisis, sizeable public sector deficits and rapidly rising unemployment. today the picture is considerably brighter. the question i want to consider here with you is whether the impressive performance in recent years amounts to a conventional cyclical upswing or has to do with a more fundamental improvement in the workings of the swedish economy. in the three years from 1991 to 1993, the swedish gdp fell by a total of 5 %, employment dropped more than 10 %, unemployment shot up from 3 to 8 %, the public sector financial deficit grew to 12 % of gdp and government debt accumulated rapidly. meanwhile, the stock of non - performing loans in the banking sector peaked at 10 % of gdp or 8 % of the total loan portfolio. the fixed exchange rate was questioned, there were sizeable interventions and for some days in the autumn of 1992 sweden ’ s central bank raised its instrumental rate to 500 %. various explanations have been put forward for the depth of sweden ’ s economic crisis. they range from the loss of demand in connection with the adjustment to the bursting of the bubble from the late - 1980s, to more underlying structural factors. to some extent the explanations overlap and each of them certainly played a part in the dramatic course of events in the early 1990s. in order to understand what happened i believe that we have to go back to the beginning of the 1970s and the collapse of the bretton woods system. for it was then that the stability oriented regime - a regime that had worked well in the post - war era - broke down in our country. in the absence of a global currency system, it proved difficult to establish a regime in sweden that would be equally stable. during the 1970s and 1980s sweden had to manage without a distinct anchor for either monetary and exchange rate policy, wage formation or economic policy in general. we moved through a series of devaluation cycles, fiscal discipline was undermined, structural problems accumulated and wage formation ceased to function properly. when

of shops. a new payment service on a two - sided market must solve this “ chicken and egg ” problem, that is ensure that sufficient numbers of consumers and merchants start using the service. launching a product that is not fundamentally based on existing payment services thus entails major problems. the banks managed to solve this problem for card payments, but just consider how long it took to achieve the volumes that we see today. consider also the fact that the banks did not manage to solve this problem for an e - money product called cash card that was finally phased out a number of years ago. a natural consequence of network effects is that those who are already connected to a welldeveloped network, for example for card payments, will think carefully about whether it is worth connecting to a new network that is currently much smaller but might in the future be as large or larger than the existing network. there is a risk of not being able to reach as many payers and payees in the new network. it may thus be better for consumers or merchants to wait and perhaps join the network later when a critical mass of users has been achieved. launching a service that is not based on an established network is therefore much more difficult and more costly than adding new services to an established network. third, it is easier and less costly for established payment mediators to launch new products as they have the advantage of having already attracted a circle of customers that buy their services. these customers can easily be reached through the relationship that is already in place. the customers also already have an account with the mediator, usually a bank, which can be used as the basis for new payment services. the established players also have an advantage in that their relationship with the customers gives rise to a certain lock - in effect, that is changing from one service supplier to another, for example from one bank to another, may entail certain costs for the customer. it may be the case that the local branch of the new bank is further from the customer ’ s home, the legal terms and conditions governing the payment services may be different, the customer service centre may be slower, the personnel may be less friendly and so on. getting private individuals to change their bank has proved to be much more difficult than expected. the new alternative service must be better than the existing payment service by a broad margin in order to make changing from one service provider to another an attractive prospect. this affects what innovators will be able to charge for their new services,