Finland, a thriving economy toughened by recession
What is perhaps the most successful period in the history of Finland began in 1995. By coincidence, that was also the year in which Finland joined the European Union.
Blowing one’s own trumpet is a very un-Finnish thing to do, and as a result Finland’s success story has been scarcely mentioned in the Finnish media. The OECD report on Finland published in May, on the other hand, shows no such restraint: “Growth over the past decade has been among the strongest in the OECD, underpinned by strong innovation and high educational attainment.”
What actually happened, and how did this growth period begin?
In the early 1990s, the Finnish economy went into a tailspin and plunged into a recession exceptionally severe in the history of the industrialized world. It is indicative of the magnitude of the crisis that the unemployment rate rose from 3% in 1990 to 16% in 1994. The GNI plummeted, a record number of businesses went bankrupt, and the entire banking system was in a state of crisis.
There were many reasons for the onset of the recession. One of the most important reasons was the collapse of the Soviet Union, Finland’s principal trade partner at the time. Numerous businesses were somehow involved in the bilateral ‘eastern trade’, as it was known.
Harsh as it may seem, it was the depth of the recession that gave the impetus for an unprecedented growth period. Production structures underwent a sea-change in the crisis years, and productivity improved. Since 1995, productivity of work has increased in Finland twice as rapidly as in the other affluent EU Member States. At its best, Finland’s productivity growth has even matched that of the world’s economic powerhouse, the USA.
The rise from the abyss of the recession to a new boom is one of the greatest success stories in the history of Finland, and as such it has a very Finnish flavour about it. Ice hockey coach Raimo Summanen, who was a player in the Finnish national ice-hockey team when it won its first and hitherto only World Championships, has observed that Finns are always at their best when they have to fight against the odds under difficult circumstances.
Summanen’s observation is not just an idle quip; it is informed with a profound awareness of the nation's past. Everyone familiar with the work of nationally revered author Väinö Linna or with the history of Finland’s wars knows that when the going gets tough, the Finns get tougher. The archetypal national characteristic, sisu, ‘tenacity’, has always been highly esteemed in Finnish literature.
The recession of the 1990s conjured up something reminiscent of the mentality with which Finns coped with the crisis of the wartime years. The public economy, which was teetering on the brink of disaster, was put into shape, the Government enacted tax reforms promoting business, and incomes agreements supporting economic growth were sealed on the labour market.
In the period 1995 to 2005, the decade following the recession, Finland’s production grew by an average of 3.5% per year, an excellent figure in comparison with the affluent EU Member States.
Nokia began its meteoric rise to domination of the world mobile phone market in the depths of the recession. In the early 1990s, Nokia was a conglomerate wallowing in a crisis, but under newly-appointed CEO Jorma Ollila it decided to focus on telecommunications — mobile phones and mobile networks.
Nokia and the ICT industry that has evolved around it were the greatest single factor in the productivity upturn that was unique by European standards.
The history of the world knows plenty of success stories that feature not only hard work and unceasing effort but also a measure of happy coincidences. This is true of Nokia too. “Heck, no,” said Jorma Ollila, who recently stepped down as CEO of Nokia, when Talouselämä magazine asked him whether he had anticipated the company’s future in the mid-1990s.
“There was no way we could have seen the arc that Nokia was going to trace, but the dream was there and the desire to prove ourselves. Things were very dismal in Finland in the early 1990s. We decided to show the world a thing or two, to show that this company could do better. That’s as philosophical as it got,” said Ollila.
Having left the post of CEO on June 1, Ollila is now a part-time Chairman of the Board with both Nokia and Royal Dutch Shell.
Apart from the desire to show the world, and happy coincidences, Finland’s powerful rise is also due to successful innovations and educational attainment.
The OECD report on Finland praises the education system, which has efficiently produced GNI growth factors. The OECD's Programme for International Student Assessment, known as t PISA, has commended the Finnish school system.
It took more than just a decade to bring the Finnish education system up to this level. Back in 1980, a report by the technology committee of Parliament proposed a substantial increase in research and development funding. Investing in information capital has proved to be an excellent choice: without R&D, Finnish technology expertise could never have made it internationally. These investments were made long before the recession, and very few cuts were made in the education system during the recession.
The OECD report goes on to say things like “inflation is among the lowest in the OECD and the government surplus is sizeable”. Nevertheless, even the OECD notes that there are problems in the Finnish economy. The unemployment rate is still highish at 8%, even though that it is lower than in the euro zone on average. Finland has a low labour usage rate compared with the other Nordic welfare states. The average retirement age is 57 in Finland but over 60 in Sweden and Norway.
Finland has been addressing this problem, noted by the OECD, for some time. The extensive pension reform that came into effect a year ago is intended to raise the average retirement age by two to three years.
With EU membership, Finland embarked on a period of unprecedented growth which was due not just to EU membership per se, even though membership did inject confidence into the process. Finnish companies have well understood the benefits of membership to the national economy. This is evident in the eagerness with which Finnish businesses have invested in production facilities and service concepts particularly in the Baltic states and other new EU member countries.
Eljas Repo is editor-in-chief of Arvopaperi, Finland's leading magazine for stock market investors.