…the Scandinavian welfare states have an above average growth record during the period 1970-2000: Sweden has to some extent lagged behind, but Finland and especially Norway have grown steadily.
Andreas Bergh offers two answers: First, if we look at measures of economic freedom, especially those measures which track freedom independent from the size of government expenditures, the Scandinavian countries have become much freer. (Note that the Netherlands, which until very recently was outperforming the other European welfare states, experienced the greatest gains in this category.)
Second, the Scandinavian economies have become much more globalized. The old story was that globalization rendered welfare state expenditures unsupportable; it is more likely that the opposite is true, at least provided trade is open, credibility is high, and business regulation is light.
I wish this paper were 100 rather than 20 pages, but I believe the author is on to something very important.
Addendum: Here are other versions of the link to the Bergh paper, if the given link is still down.