|From: Foundation for Economic Growth
By Phil Scott
Jun 15, 2004, 17:11
Geography and People
Finland is located in Europe north of the 60th parallel between Sweden and Russia. It is a low lying plateau formed by glaciers, which have scoured the land leaving deposits of gravel, sand and clay. More than 50% of eastern Finland is hilly and forests cover 65% of the land area.
The climate is temperate with continental winds bringing cold spells in winter and heat waves in summer. Rainfall occurs all year round and the average annual rainfall varies from 500 mm 700 mm. Average temperature ranges in Helsinki are from -7 degrees Celsius in February to 17 degrees in July.
The origins of the Finnish people are still a matter of conjecture, although many scholars argue that their original home was in what is now west-central Siberia. The Finns arrived in their present territory thousands of years ago, pushing the indigenous Lapps into the more remote northern regions. Now the principal ethnic majority are the Finnish who are of Scandinavian-Baltic origins and account for 94% of the population. The estimated population in 2000 is 5,156,000.
Finland's nearly 700-year association with the Kingdom of Sweden began in 1154 with the introduction of Christianity by Sweden's King Eric. During the ensuing centuries, Finland played an important role in the political life of the Swedish-Finnish realm, and Finnish soldiers often predominated in Swedish armies. Finns also formed a significant proportion of the first 'Swedish' settlers in 17th-century America.
In 1809, Finland was conquered by the armies of Czar Alexander I and thereafter remained an autonomous grand duchy connected with the Russian Empire until the end of 1917. On December 6, 1917, shortly after the Bolshevik Revolution in Russia, Finland declared its independence.
In 1918, the country experienced a brief but bitter civil war that coloured domestic politics for many years. During World War II, Finland fought the Soviet Union twice; First in the Winter War of 1939-40 and again in the Continuation War of 1941-44. This was followed by the Lapland War of 1944-45, when Finland fought against the Germans as they withdrew their forces from northern Finland. Treaties signed in 1947 and 1948 with the Soviet Union included obligations and restraints on Finland vis-à-vis the U.S.S.R. as well as territorial concessions by Finland. Both have been abrogated by Finland since the 1991 dissolution of the Soviet Union.
Finland's government structure was established in 1919 with the passage of the Constitution Act. Built on a combination of old institutions from both the Swedish and the Russian periods, this law, together with three others also of constitutional status, has given Finland a system that has been remarkably successful in allowing a once deeply divided nation to govern itself.
Material conditions were difficult at the birth of the Finnish republic. The country's industries had started to develop after about 1860, primarily in response to demand for lumber from the more advanced economies of Western Europe, but by 1910 farmers still made up over 70 percent of the work force. Finland suffered from food shortages when international trade broke down during World War I. The fledgling metal-working and shipbuilding industries expanded rapidly to supply Russia during the early years of the conflict, but the empire's military collapse and the Bolshevik Revolution in 1917 eliminated trade with the East. The Finnish civil war and the subsequent massacres of the Reds spawned lasting labor unrest in factories and lumber camps, while the plight of landless agricultural laborers remained a pressing social problem.
During the seven decades after the establishment of the republic in 1917, Finland made remarkable economic progress. At the time of the collapse of the Russian Empire in 1917, the Grand Duchy of Finland had the most backward economy in Nordic Europe.
Situated at the outer edges of the spheres of influence of the major European industrial powers (Britain, Germany, and Sweden), newly independent Finland appeared destined to remain a poor, peripheral area. During the immediate postwar years, Finland depended on aid from the United States to avoid starvation, but by 1922 industrial production had reached the prewar level.
While trade with the Soviet Union languished for political reasons, West European, especially German, markets for Finnish forest products soon reopened. In exchange for lumber, pulp, and paper, which together accounted for about 85 percent of exports, Finland obtained needed imports, including half the nation's food supply and virtually all investment goods.
Despite political instability, the state built a foundation for growth and for greater economic independence. The first and most important step was an agricultural reform that redistributed holdings of agricultural and forest land and strengthened the class of smallholders who had a direct stake in improving farm and forest productivity. The government also nationalized large shares of the mining and the wood-processing industries. The subsequent public investment program in mines, foundries, wood and paper mills, and shipyards improved the country's ability to process its own raw materials. By the late 1920s, agricultural modernization was well under way, and the country had laid the foundations for future industrialization.
More Government Intervention
Although Finland suffered less than more-developed European countries during the Great Depression of the 1930s, the country nonetheless experienced widespread distress, which inspired further government intervention in the economy. Comprehensive protection of agricultural produce encouraged farmers to shift from exportable animal products to basic grains, a policy that kept farm incomes from falling as rapidly as they did elsewhere and enabled the country to feed itself better. Similar policies spurred production of consumer goods, maintaining industrial employment. As in other Nordic countries, the central bank experimented with Keynesian demand-management policies.
Special Deals with Britian
In the 1930s, Britain replaced Germany as Finland's main trading partner. The two countries made bilateral agreements that gave Finnish forest goods free access to British markets and established preferential tariffs for British industrial products sold to Finland. Consequently, Finland's largest industry, paper production, expanded throughout the depression years (although falling prices led to declining export revenues). The economic growth of Finland resumed in 1933 and continued until 1939.
War with Russia and Germany
Production and employment had largely recovered from the effects of the depression when the Winter War began in 1939. The struggle marked the beginning of five years of warfare and privation. By 1944, after two defeats at the hands of the Soviet Union and severe losses suffered while expelling German troops, Finland's economy was nearly exhausted. Under the terms of the 1944 armistice with the Soviet Union, the country ceded about 12 percent of its territory, including valuable farmland and industrial facilities, and agreed to onerous reparations payments. To many Finns, it appeared that most of the achievements of the interwar years had been undone.
Postwar reconstruction proved difficult. Resettling refugees from the areas ceded to the Soviet Union required another land reform act, subsidies for agricultural infrastructure, and support payments for displaced industrial workers. Reparations deliveries to the Soviet Union absorbed much of the country's export potential. The need to remain politically neutral precluded participation in the Marshall Plan (European Recovery Program), but Finland arranged substantial loans from the United States Export-Import Bank to finance expansion in the forest industries. High inflation rates inherited from the war years fed labor militancy, which further threatened output.
Reparations – Foundation for Success
Despite these setbacks, the tenacious Finns soon fought their way back to economic growth. Reparations turned out to be a blessing in disguise, at least for the metalworking industries, which supplied about three-fourths of the goods delivered to the Soviet Union. In effect, forced investment in metalworking laid the foundations for Finland's later export successes. The fulfillment of the reparations payments in 1952 symbolized the end of the postwar difficulties, but the real turning point probably came in about 1950, with the Korean War boom in the West. During the 1950s, the metalworking industries continued to export to the Soviet Union, a market in which the Finns faced virtually no competition from other Western countries. Extensive borrowing in Western financial markets (especially in Sweden and the United States) financed investments in infra-structure, agriculture, and industry. The consumer goods and construction sectors prospered in the booming domestic market, which remained protected by import controls until the end of the decade.
Growth from 1950 to 1974
From 1950 to 1974, Finland's gross national product (GNP) grew at an average annual rate of 5.2 percent, considerably higher than the 4.4 percent average for members of the Organisation for Economic Co-operation and Development (OECD). [These were New Zealand’s good years and we averaged 4.0%] However, partly as a result of continued dependence on volatile lumber exports, this growth was more unstable than that in other OECD countries. The business cycle caused fluctuations in output that averaged 8 percent of gross domestic product (GDP).
Finland's structural transformation was brutally quick, driving workers out of agriculture more quickly than had been the case in any other Western country. Although manufacturing output increased sharply, many displaced farm workers could not be placed in industry. At the same time, Finnish inflation, which tended to exceed that of the country's major trading partners, necessitated regular currency devaluations. Yet, despite the costs of economic growth, most Finns were happy to have escaped the hardships of the depression and the war years.
Rapid structural transformation led to innovative economic policies. During the 1950s, the state had maintained strict controls on many aspects of economic life, protecting the country's fragile economic balance, but it had lifted many restrictions by the end of the decade. Moreover, in 1957 policy makers chose to liberalize foreign trade in industrial goods, strongly influencing future economic developments.
Welfare State Extended
The achievement of prosperity in the 1960s made possible the extension of the welfare state, a development that did much to reduce tensions between workers and management. Finland's increased foreign trade made industrial competitiveness more important, causing greater interest in restraining the inflationary wage-price spiral.
Starting in 1968, the government succeeded in sponsoring regular negotiations on wages, benefits, and working conditions. The political consensus that developed around incomes settlements helped to slow inflation and to increase productivity. Liberalization, welfare programs, and incomes policy thus helped to maintain economic growth during the 1960s and facilitated stronger economic relations with both Eastern and Western Europe.
In the 1970s and 1980s, changes in domestic and international economic conditions posed new challenges. At home, Finland was reaching the limits of extensive economic growth. Expansion was incorporating ever-greater amounts of raw materials, capital, and labor in the production process. The economy needed to shift to intensive growth through better resource management, improved labor productivity, and newer technologies.
Inflation and Devaluation
In international markets, the oil crises of 1973 and 1979 caused particular difficulties for the Finns, who imported over 80 percent of their primary energy supplies. The country did suffer less than other West European countries from increased oil prices because of its special trading relationship with the Soviet Union, which supplied petroleum in exchange for Finnish industrial goods. However, recession in Western markets, growing technological competition, and tighter financial markets made Finland's traditional cycles of inflation and devaluation untenable. Thus, although the country managed to delay austerity measures for five years, in 1978 balance-of-payments considerations compelled the government to introduce a far-reaching reform package designed to ensure the competitiveness of Finnish industry in world markets.
Although the austerity package pursued after 1978 slowed growth in personal consumption, the consensus approach to wage and benefit negotiations remained reasonably intact. In addition, many Finnish workers proved sufficiently flexible to accept transfers from declining sectors to those in which the country enjoyed a comparative advantage. As a result of competent macroeconomic management and favorable trading relations with both Eastern and Western Europe, Finland was able to sustain growth in GDP at an average annual rate of about 3.3 percent from 1980 to 1986. A rate well above the OECD average.
During the 1980s, structural developments in the Finnish economy paralleled those in other West European economies. Although surplus production of animal products plagued agriculture and led to cutbacks in agricultural subsidies, the country preserved family farming. Policy makers continued to monitor forestry, energy, and mineral resources closely, even when falling petroleum prices reduced pressures on the economy.
Industry underwent intensive restructuring, eliminating many inefficient producers and consolidating healthy enterprises. Despite mergers and rationalization, Finland lost fewer industrial jobs than most OECD countries, so that unemployment was held below the double-digit levels common elsewhere on the continent. Private services, especially banking and insurance, expanded more rapidly than other sectors, also helping to limit unemployment.
By 1986 postwar economic growth had raised Finland's GDP to about US$70.5 billion, making the country one of the most prosperous in the world. Economic expansion over the years had substantially altered the structure of the economy. By 1986 agriculture, forestry, and fishing had fallen to a little under 8 percent of GDP from nearly 26 percent in 1950. Industry, including mining, manufacturing, construction, and utilities, accounted for about 35 percent of GDP, down from about 40 percent in 1950. Within industry, metalworking had grown most rapidly, its output almost equaling that of wood processing by the late 1970s. In the late 1980s, industrialists looked forward to a shift toward electronics and other high-technology products.
While agriculture and industry had declined in relative terms during the postwar years, the service sector had grown from about 34 percent of GDP to almost 58 percent, leading some observers to characterize Finland as a postindustrial society. Several factors accounted for the expansion of the service sector. Government, very small under the Russian Empire, grew rapidly between the Great Depression and the early 1970s as the state took responsibility for an increasingly greater share of economic life. In addition, transportation, communications, engineering, finance, and commerce became more important as the economy further developed and diversified.
Control and ownership of Finland's economic life were highly concentrated, especially after the industrial and financial restructuring of the 1980s. Thus, by 1987 three firms controlled most shipbuilding, a small number of woodworking enterprises dominated the forest industries, and two main commercial banks exercised wide-reaching influence over industrial development. Large state-owned firms provided most of the energy, basic metals, and chemicals.
The country's farmers, workers, and employers had formed centralized associations that represented the vast majority of economic actors. Likewise, a handful of enterprises handled most trade with the Soviet Union. Some observers suggested that the trend toward internationalization might increase the influence of foreign firms and executives in Finnish enterprises, but this effect would make itself felt slowly. Thus, while Finland remained a land of family farms, a narrow elite ran the economy, facilitating decision making, but perhaps contributing to the average worker's sense of exclusion, which may have contributed to the country's endemic labor unrest.
The Recession 1990 to 1993
The growth of the economy and welfare in Finland was rapid by international comparison until the recession hit Finland in the 1990s. During the entire 1980s, growth in production was consistent, about 4% annually and the employment rate remained high.
In 1990, Finland began its longest and deepest recession this century. Pentti Vuorinen, a senior advisor to the Ministry of Trade and Industry in Finland, identified a number of developments which caused the crisis. Firstly, Finland experienced a decline in economic output for four consecutive years. Trade with the Soviet Union in the 1980s had represented 15-20% of Finland's exports. With the dramatic political changes in Eastern Europe and the Soviet Union at the turn of the decade, this trade all but disappeared. In addition, Western European countries were struggling with their own economies and had decreased their imports.
Secondly, Finland's exports were becoming uncompetitive. Between 1987 and 1990, the international competitiveness of Finnish industry declined by well over 10%; a result of fast-rising costs and the ever-stronger Markka. Moreover, by far the most important sector of the economy, pulp and paper industry was simultaneously hit by world-wide overproduction and a cost crisis.
Thirdly, the rapid deregulation of the financial markets and of capital imports in the mid-1980s allowed both companies and private households to take out risky loans which eventually could not be repaid. This led to a crisis in the financial sector, particularly in banking. As the demand for domestic services and production collapsed, there were massive lay-offs, especially in the construction industry.
This explains the disproportion-ately high unemployment figure of 36.7% in that sector of industry in 1994, compared to figures ranging between 11% and 17% for the other sectors of industry such as manufacturing, trade, finance and insurance, services, and agriculture.
Vuorinen concedes that "Although the fundamental reasons behind the severe unemployment problems were clearly cyclical, structural features have grown more important as the situation has deteriorated". He backs this up firstly, by pointing out that skilled high-technology sectors of the economy weathered the economic storm relatively well, whereas labour intensive low-skilled jobs disappeared without a trace. Secondly, as a result of the recession, a number of new taxes had been introduced. Employers found themselves paying much more in the form of social security contributions related to pay, and thus were much more reluctant to hire new staff.
The recession has been severe both in terms of its depth and length, with exceptionally high rates of unemployment and external debt. According to the latest OECD survey, Finland was the only OECD member country to record slightly negative growth for exports of manufactured goods in 1990 and 1992. GDP fell by 7.1 per cent in 1991, 3.8 per cent in 1992 and 2.6 per cent in 1993. One third of the decline in real output in 1991 is estimated to have originated from the collapse of sales to Russia.
The crash in the value of the markka and a crisis in banking that shook the whole financial world in Finland increased the atmosphere of panic. Unemployment rose to over half a million in 1994, and deficits in public spending increased rapidly. A tight interest rate policy by the Bank of Finland, cuts in social security proposed by the government and an increase in tax in the middle of the recession increased economic uncertainty. Domestic demand fell away, and construction work dropped to under half of what it had been during the boom years.
The Central Organization of Finnish Trade Unions (SAK) is the biggest labour market organization in Finland. It protects the interests of over a million wage-earners. The 24 member trade unions of SAK represent workers in a balanced range of sectors including industry, private services, local government, the state and transport. 46 per cent of the members are women. One quarter of the total membership is under thirty years of age.
Internal tensions within SAK came to a head in December 1989, when the majority of its affiliated unions failed to reach union-level collective agreements within the framework of the comprehensive incomes policy agreement by the stipulated time limit. The whole comprehensive incomes policy agreement was in danger of falling through.
The economic depression and the centre-right government inspired the employers' federation (STK) to demand a complete revision of the whole system of industrial relations. STK wished to reform labour legislation, comprehensive agreements and collective agreements in such a way that wages and working hours would be agreed at the place of work between employers and workers.
Government Versus Union
Prime Minister Esko Aho was for a complete overhaul of the Finnish industrial relations model. He proposed to replace the tripartite model of cooperation between the government, the employers' associations and the workers organisations with a new division of labour in which the Bank of Finland would be responsible for monetary policy and interest rates, the government for fiscal policy and the industrial relations organisations only for wages. There were dramatic confrontations between the government and the trade union movement. On 22 April 1992 SAK organized a half-day protest strike against the government's cuts in social security.
In autumn 1992 there were negotiations to review the two-year comprehensive incomes policy agreement. Finland's economic situation was extremely weak; thousands of firms had gone bankrupt and unemployment was rising rapidly. The government proposed large cuts in unemployment benefits. In February, SAK organized a demonstration in front of the Parliament building and in April an action day, in which over 300,000 workers took part or were on strike for the whole day. There were also proposals for changes in labour legislation. On 20 December 1992, the General Council of SAK rejected the government's proposals and threatened to use the full strength of the organisation in industrial action. STTK and AKAVA took similar decisions. The employees' confederations rejected the government's sweeping cuts in social security and threatened to call a general strike.
At the nadir of the economic depression, in spring 1993 the non-socialist government tried to destroy the foundations of the Finnish industrial relations model with proposals to change the law. The employers' organisations supported these proposals, which would have removed the minimum protection in wages and working conditions offered to the workers by national collective agreements. SAK threatened a strike in the export industries and transport on 19 May that were due to escalate into a general strike on 24 May if the government did not withdraw its proposals. SAK demanded that the government's proposed law reforms reinstate the tripartite negotiations. A strike seemed likely, and production in the paper mills was run down in preparation for it.
The Executive Board of SAK rejected a compromise arrived at by the organisation's leaders and the government. Further negotiations produced a solution which the Executive Board passed by eighteen votes to nine. The government then renounced its planned reforms of labour legislation, and most of the proposed cuts in unemployment benefits were withdrawn. The labour market organisations jointly agreed about the possibility of paying young workers lower rates than older ones for a limited time.
The strong men in the government, the Prime Minister, Esko Aho of the Centre Party, and the Minister of Finance, Iiro Viinanen of the National Coalition Party, were extremely dissatisfied with the compromise. The government suggested in its budget proposals for 1995 that unemployment benefits should still be cut and that the tax deductibility of union dues be removed. Once again discussions between SAK and the government broke down. On 5 September 1994, SAK threatened widespread strike action. The government gave up its plans, and SAK withdrew the strike threat on 7 September 1994. The years of recession had united SAK's affiliated unions in a successful rearguard action, as a result of which Finland's tripartite industrial relations model came through its baptism of fire.
Lack of Economic Progress
Despite the recession and the policies of Aho's government, moderate comprehensive incomes policy agreements that underpinned employment and economic growth once again became the order of the day in collective bargaining and agreements. At the beginning of the depression, a two-year comprehensive incomes policy agreement was made which, because of increases in workers' pension contributions and the taxation of earned income, in practice had the effect of lowering real incomes in the years 1994 and 1995. The experiences of collective agreements that were made at union level in the years 1994 and 1995 were not particularly encouraging from the point of view of promoting economic progress and employment.
Left-Wing Alliance - Union Benefits Reduced
In 1995, after the left-wing parties had strengthened their positions in a general election, the Chairman of the Social Democratic Party, Paavo Lipponen, formed a coalition government of SDP, the Left-Wing Alliance, the Greens, the Swedish People's Party and the National Coalition Party, (known as the "Rainbow Government"). The tripartite cooperation between the government and the industrial relations organisations was restored, although in the spring of 1996 a dispute between SAK and the government over savings in unemployment benefits almost led to a general strike. The cooperation focused on solving the bank crisis, the problems of the recession and unemployment. SAK and the other workers' organisations were prepared to negotiate over, and to accept some deterioration in, the previously agreed benefits.
A comprehensive solution on economic, employment and industrial relations policy for the years 1996-1997 proposed by Lipponen's government was agreed in autumn 1995. Further two-year comprehensive incomes policy agreements were made for 1998-1999 and 2001-2002. In these, the trade unions succeeded in obtaining improvements in the position and pension security of part-time and short-term workers. Thanks to an initiative of SAK, earnings-related unemployment benefits were scheduled to increase in 2002.
Stable industrial relations and limited wage increases have helped to speed the Finnish economy into a rapid growth. The number of those in work has grown swiftly, but there has been a painfully slow reduction in overt unemployment. The moderate comprehensive incomes policy agreements that have promoted economic growth have also reduced the proportion of earned income and correspondingly increased that of unearned income (interest, profits, rent, etc.) in the gross national product.
During the years of the recession and since there has been some organisational consolidation within the unions in SAK. In 1990, the Rubber and Leather Workers' Union and the Glass and Porcelain Workers' Union were amalgamated into the Chemical Workers' Union, and in 1993 the Woodworkers' Union and the Rural Workers' Union fused to form the Wood and Allied Workers' Union. Likewise, in 2000 the Commercial Sector Union, the Hotel and Restaurant Workers' Union, the Real Estate Workers' Union and the Technical and Special Fields Union joined forces to become Service Unions United, the second largest union in SAK in terms of membership.
Centre Party Versus Union
The Centre Party, which had been forced into opposition, made one more attempt to challenge the strength of the trade union movement in the general election of 1999. It criticized industrial relations in Finland and proposed a so-called "employment reform" to solve unemployment and problems at the work place. In this programme, the Centre Party again suggested that labour legislation should be changed so as to weaken the minimum protection afforded by national collective agreements. The programme dismissed the trade unions as forces external to the work place which could be ignored as conditions of employment were negotiated and agreed locally. This was unacceptable to the trade union movement because in Finland the trade union movement is involved at the work place, in collective bargaining at sector level as well as in making comprehensive incomes policy agreements at the national level. The workers organize in order to have a say both in everyday matters relating to conditions at their own places of work and in work conditions affecting the whole sector. The Centre Party was trying to fragment the united strength of the unionised workers.
SAK, the trade union movement in general and the Centre Party held an exhaustive public debate over the "employment reform", and this probably undermined the success of the major opposition party in the general election of 1999. The Foreign Minister, Tarja Halonen (SDP) and the President of the Centre Party, Esko Aho, were the opposing candidates in the second round of the presidential election in February 2000. The most influential voices in SAK had already given their support in the first round to Halonen, who was a former lawyer of the confederation, and in the second round the leaders of STK and some AKAVA leaders put themselves squarely behind her. They felt that the presidential election represented a contest between the Finnish welfare state defended by Halonen and the crushing of the Finnish industrial relations model proposed by Aho. Tarja Halonen was duly elected President of Finland, the first woman to hold this post.
SAK came from the recession strong and vigorous. The influence of the trade union movement in society continues to be solid. The total organisational strength of the three workers' confederations is approximately what it was before the slump. According to opinion polls, the esteem enjoyed by the trade union movement and particularly SAK among the people by 2000 is clearly higher than it was at the beginning of the 1990s. At the inception of the new millennium, being a member of a trade union is practically a civic custom, of which Finns are rightly proud.
Unemployment Down from 18% to 10%
With the streamlining of the workforce, labour productivity growth was higher than the average for industrial economies in the 1990s, at an annual average 3.6 per cent. Coupled with this has been a shift into more capital intensive sectors, and into higher value-added and high technology products. The unemployment rate dipped below 10 per cent in 2000–02 (compared to 18 per cent in 1994), approaching the EU average, but still higher than that of other OECD economies with comparable economic performances.
High Tax Diminishing Growth
Having fostered growth since its deep 1991–93 recession by strengthening fundamentals and stabilising public finances (although this still remains a problem), the focus has switched to structural issues such as the very high level of taxation, in order to anchor stable economic expansion and enhance job creation. The global slowdown has had a major effect on Finland's economy, with GDP growth falling from 5.6 per cent in 2000 to 0.7 per cent in 2001. In 2002, there was a slight improvement with growth of 1.6 per cent.
Finland was ranked the second most competitive economy in the world in 2002 by the World Economic Forum (WEF) in its competitiveness index which identifies the factors that underpin high current productivity and hence economic performance, measured by the level of GDP per person.
Finnish Direct Investment Abroad
In the 1970s, the forest industry led a shift toward capital exports by founding sales outlets in the most important foreign markets, especially in Western Europe. The metalworking and chemical industries did not begin to expand overseas until the late 1970s, but they made up for lost time during the following decade. These industries first invested in Sweden, Norway, and Denmark, important markets sharing Nordic culture.
Next came subsidiaries in the United States, which by the mid1980s became the second-largest recipient of Finnish investments after Sweden and which hosted more than 300 Finnish manufacturing and sales firms. In the late 1980s, some firms targeted markets in the rapidly expanding economies of the Pacific basin.
Beginning in the late 1980s, the service sector began to follow industry abroad. Banks, insurance companies, and engineering and architectural firms established branches in major business centers worldwide. By the late 1980s, Finnish firms owned more than 1,600 foreign concerns, of which some 250 were engaged in manufacturing; more than 900, in sales and marketing; and 450, in other functions.
Businessmen had many motives for setting up overseas operations. In general, the Finns wanted to deepen ties with industrialized countries where consumers and businesses could afford high-quality Finnish goods. Maintaining access to important markets in an era of increasing protectionism and keeping up with new technologies had become crucial. Finnish enterprises, generally small by international standards, needed additional sources of capital and know-how to develop new technologies. Analysts believed that, despite their small size, Finnish firms could succeed abroad if they followed a comprehensive strategy, not only selling finished products but also offering their services in the management of raw materials and energy, development of new technologies, and design of attractive products.
Current economic situation
Finland is a highly developed industrialized country with a per-capita GDP slightly above the European average (in 2002: € 26,872). Germany is Finland's most important trading partner in terms of both exports and imports (11.8% of Finnish exports and 14.5% of Finnish imports in 2002). The other major sources of imports are (in order) Sweden, Russia, the United States and the United Kingdom; the other major export destinations are (in order) the United Kingdom, the US, Sweden and Russia. In 2002, 54.0% of Finland's exports went to EU member states and 55.7% of imports originated from them.
After growing by 5.1% in 2000, approximately double the average in the euro area, Finland's GDP grew by only 1.2% in 2001 and rose again to 2.2% in 2002. Both the Government and economic research institutes expect a continued economic recovery, estimating a growth rate of 1.5% for 2003. Unemployment is approximately 9.3%. The Government's budget for 2003 has a volume of € 36.1 billion and envisages new debt of only € 155 million. Due to revenue outside the budget the Government will achieve a budget surplus of 0.4%. The overall national balance shows a surplus of 2.7% of GDP. Public debt should fall to 42.4% of GDP by the end of 2003. The rate of inflation was 1.8% in 2002 and is expected to be 1.2% in 2003. The draft budget for 2004 has a volume of € 37.2 billion.
Finland introduced the euro on 1 January 2002.
Some Finnish Strengths
Inventiveness and innovation in Finland has gone from strength to strength during the twentieth century. A number of important inventions were made in the early years of the century, and a Finnish scientist received the Nobel Prize in 1945. The number of new products invented and commercialized during the last couple of decades has steadily increased, and many of these have scored international successes.
Finland has gone through a major transformation, or series of transformations, during the twentieth century. The Finland of forest and farm became a fully fledged industrial economy around mid-century, while the Finland that will enter the new millennium is increasingly a service- and knowledge-based economy.
This process of change and growth has been driven by a combination of public and private commitment. The state has systematically promoted new technologies, R&D, and new business creation, particularly over the last couple of decades. Numerous technological programmes have been launched, and extensive funding provided through organizations such as the Finnish National Fund for Research and Development (Sitra), Finnvera, the Foundation for Finnish Inventions, and the Finnish National Technology Agency (Tekes). Companies have steadily increased their R&D and worked hard to develop and market their products on the world market.
A World Leader
Finnish researchers are at the leading edge of developments in a number of fields, including forest improvement, brain research, neural networks, low-temperature physics, new materials, biotechnology, and genetic technology. Their results speak for themselves. The neural network concept developed by Professor Teuvo Kohonen, for example, is probably the single most widely disseminated Finnish scientific achievement to date.
Product development work has spawned numerous important and innovative new products. Product areas in which Finnish engineers and companies have made a major international mark include such diverse areas as icebreakers, cruise liners, lifts, diesel engines, sailing yachts, compasses, fishing lures, frequency transformers, stone drills, harvesters, contraceptives, pipettes, and scissors and axes, together with Internet encryption systems and numerous other forestry, engineering, and information technology products. In the latter area, particular mention should be given to the Linux operating system developed by Linus Torvalds.
In 2000, the private and public sectors in Finland invested a total of some EUR 4.3 billion in research and product development, equivalent to approximately 3,3% of the country’s GNP. Relatively, it is at the top level in the world.
Patents, Patents, Patents
The number of patents a company or a country can lay claim to can be used as one measure of relative innovation. Finnish individuals, research teams, and companies file around 2,500 patent applications annually, of which around half result in patents. Per capita, this places Finland in the number-four slot worldwide, after Japan, Germany, and the US.
Who Hasn't Heard Of Nokia?
With thousands of researchers and product development engineers on its payroll worldwide, and what has become one of the world's most valuable brands to its name, Nokia is at the leading edge of mobile phone and related communications technology. Indicative of Nokia's position is the fact that today it spends roughly the same annually on R&D as the Finnish state, and files by far the largest number of patents in Finland.
The roots of Finland's mobile phone phenomenon go back to research work on point-to-point communications initiated in the 1970s by the country's military and Finnish State Railways. The technology first reached the consumer through simplex car phones. Simultaneous dialogue was made possible by a patented duplex filter developed by Lauri Kuokkanen and others. Direct dial car phones were introduced in Finland in 1971, the NMT system in 1982, and the digital GSM system in 1992. The next generation of technology is just around the corner.
A Challenging World
The twenty-first century brings new challenges for Finnish innovation, both in well-established areas such as the metal industry and the forestry products industry, as well as in the third major driver of today’s Finnish economy, the information technology sector. The pace of developments can also be expected to continue accelerating in biotechnology, pharmaceuticals, and the service sector.
Future success will call for a continued, broad-based commitment to fostering knowledge and innovation from the school classroom onwards. Good R&D, and adequate R&D funding, will be of key importance in ensuring that future generations will be even more innovative and inventive than their predecessors.
A small country such as Finland needs to specialize and focus on areas of specific excellence if it is to be competitive in the global marketplace. And that also means being successful in commercializing the right products at the right time, marketing them to the right people, and being in the right place with those products worldwide.
All this, but; Low Growth
The actual growth rate of GDP is difficult to determine exactly but there seems to be general agreement that in the last three years it has been from about 0.7% to about 1.5% and unemployment is still around 10% which is very high for a healthy economy.
Could this lack of growth be due to high taxes and strong unions with centralized planning? Is a large public service too heavy a burden for a modern society?
The OECD mentions high growth from 1995 to 2000 but forgets to mention the next two years of low growth! OECD reports are always kind as they are written by OECD members themselves. Let us finish by looking at their most recent report.
OECD Report – (13/05/2003).
Finland's reform efforts over the last two decades have strengthened competition in many parts of the economy and fostered above-average growth. A key feature of reform has been the deregulation of important sectors of the economy, reversing a legacy of state control.
However, the challenges posed by high unemployment and a rapidly aging population underline the need to spread reforms across all parts of Finnish society, according to a new OECD report, Regulatory Reform in Finland - A New Consensus for Change. Finland also needs to improve efficiency in its large public sector, says the report.
Finland's economy has changed significantly in the last 20 years. To complement the country's traditional strength in industrial goods and natural resources, an information and communications technology sector has flourished. R&D expenditure is now the second highest in the OECD, as a percentage of GDP. Productivity gains have underpinned economic growth. Finland's economy grew by 5% per annum between 1995 and 2000, one of the best performances in the OECD.
To build on those successes, further reforms are needed, says the report. Some parts of the economy remain protected from competition, creating an imbalance that undermines performance and leaves Finland vulnerable to external shocks. The public sector remains large relative to other OECD countries, as do tax burdens. Government jobs account for nearly a quarter of total employment - a situation that has changed little since 1990. Most public services are delivered at the municipal level, where spending has risen. Although significant reforms of the public sector have already taken place, further steps are needed to promote greater efficiency, especially at the local level. Finland has worked hard to improve its regulatory governance since the1980s, but stronger political drive for impact assessments of new laws and regulations, as well as supporting structures in the centre of government, would improve the efficiency and coherence of regulatory instruments.
There is urgency for further reform, since Finland's population is aging more rapidly than it is in most OECD countries. The number of people over age 65 is projected to increase by more than 50% by 2020, and the labour force could start to decline within a decade. The old age dependency ratio, which compares the number of elderly individuals in the population to those of working age, is projected to rise from 25% today to 39% by 2020, the fastest increase in the OECD.
Rapid aging also underscores the need for labour market reforms. Although unemployment has halved since 1994, at 9% it is still above the EU average. Structural unemployment, especially long-term unemployment, remains a major problem. Centralized wage negotiations offer little incentive for improvement in sheltered sectors of the economy. Moreover, the regulatory regime does little to encourage unemployed individuals to return to work.
The report on Finland is the latest in a series of regulatory reviews of OECD economies. It reflects the input and views of all 30 OECD member countries and the European Commission, as well as contributions from the business and labour communities.
Finland developed the institutions of the Nation State around 800 years ago and has a unified population which has successfully survived the depredations of Russia and Germany in the middle of the last century.
Industrialisation started at the same time as other European countries and although under State control, traded successfully.
The State has deregulated some of the important sectors of the economy, reversing a legacy of state control.
The State has a high R & D expenditure.
Very successful industrial trade and growth from 1950 to 1990.
Large downturn from 1990 to 1994.
Turnaround from 1995 to 2000 but, very low growth from 2001 to 2003.
• High unemployment and a rapidly aging population underline the need to spread reforms across all parts of Finnish society.
• The public sector remains large relative to other OECD countries.
• Strong unions defeat Government moves to improve the commercial and industrial situation.
• Tax burdens are too large.
• Government jobs account for nearly a quarter of total employment.
• Steps are needed to promote greater efficiency in the State sector.
• Stronger political drive for impact assessments of new laws and regulations is needed.
• There is urgency for further reform because of Finland's aging population.
• Centralized wage negotiations offer little incentive for improvement in sheltered sectors of the economy.
• The regulatory regime does little to encourage unemployed individuals to return to work.
It would appear that the Welfare State and the strong Unions have conspired to halt Finland’s 5% growth rate and drop it down to around 1% for the last three years. The OECD report seems quite clear on what needs to be done. Let us hope that New Zealand’s strong growth up to 2003 continues. Unfortunately, it looks like our growth is set to decline to 1% or 2% over the next few years, and for the same reasons!
Our task is to change all this.
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