The Finnish economy will – perhaps – finally take a tentative upward turn this year. 2013 turned out far weaker than expected, and Finland continues to sail in rough seas. With the population ageing at an increasing speed and the share of working-age population dwindling, pressure to cut public expenditure is high.
Economic Policy Coordinator Jukka Pekkarinen, an experienced economics expert at the Ministry of Finance, highlights the power of regeneration – and growth of productivity in particular – as the key to finding a solution to this difficult equation.
Finnish labour productivity grew at record speed in the 1970s, and was still improving at the turn of the millennium. In spite of subsequent technological advances, the rate since then has stagnated at zero level.
This is a perplexing phenomenon, since the general impression of the situation is quite the opposite. The development of productivity and the underlying reasons are a keenly researched subject, but we are somehow running out of ideas on how to reverse the direction,” says Pekkarinen.
State providing assistance for enterprises
Mika Maliranta, Research Director from the Research Institute of the Finnish Economy (ETLA), also underscores the importance of productivity.
He finds the current trend nonetheless logical: the productivity statistics are dominated by rising economies such as China, the kind Finland once used to be. The more worrying aspect is that trend comparisons made over recent years show Finland to have fallen behind its most important competitors, such as Sweden and Germany.
– In relative terms, productivity in Finland has crashed. At the same time, our labour costs have risen more rapidly than anywhere else. These factors have created a problem with competitiveness, to which decision-makers must now react, says Maliranta.
Maliranta sees competitiveness as having already begun to slip in the early 2000s. He, too, finds it hard to suggest a proper way of intervening in the situation.
Political decisions alone are not enough; the companies themselves must also have a strong desire to regenerate. VTT and other research institutes have their own important role to play in this process.
– The rate of productivity is ultimately decided by companies. The State can provide long-term support through indirect methods of intervention, such as continuing to allocate resources for education and R&D, says Maliranta.
Pekkarinen stresses the part played in the nation’s productivity by the efficiency of public service provision.
– Money has been misspent in health care, and the current municipal structure does not work.
His list of key methods in curbing public expenditure includes harnessing the opportunities provided by ICT, the social welfare and health care reform, and the enhancement of treatment chains.
A deficit of nine billion euros
The government plan to solve the economy’s sustainability problem by cutting public expenditure by three billion euros is inadequate. In Pekkarinen’s opinion, as much as nine million euros will be needed to strengthen the public economy.
– The decisions should preferably be made during the next government term. The unsustainability of the dependency ratio was predicted decades ago, but, as he points out, “major solutions have yet to be turned from words into deeds.
Higher taxation will not be the answer because the Finnish tax rate is already approaching the maximum level. Nor does Pekkarinen see any margin for new tax reliefs, even though these could boost the economy.
The focus must turn to our power of regeneration.
– Improved employment rate; longer working careers; the reform of the pension system; and reduced structural unemployment, says Pekkarinen, defining the key factors to be added to productivity growth.
Maliranta also comments on the need to keep labour costs down. The price of labour has an essential impact on the eagerness of companies to create jobs in Finland.
Wage moderation is no long-term solution, but research shows it to work in acute situations. Politicians can provide support by reducing the secondary expenses of labour, he says.
Jukka Pekkarinen stresses that being forced to create something new produces results.
Under-achievement in research and development
Like other Nordic countries, Finland also provides extensive support for research and development. Budding success stories appear here and there, but no “new Nokia” has been found to patch up the hole torn by structural change in our national economy.
Researchers have differing views on the effectiveness of R&D investments. Pekkarinen thinks there is also room for improvement in this area.
– In the light of the figures, the innovation sector appears to be under-achieving. Major investment in R&D must in future yield better results, he says.
Maliranta, on the other hand, would view the situation over the longer term.
– Investment in innovations is always a risky business, where results are not immediately apparent. In international comparison of the number of patents registered, for example, Finland still places third.
The value of R&D activity in relation to our gross national product has fallen, but the change is largely explained by Nokia having dropped out of the calculations. The company invested exceptionally large amounts of money in research.
Both Maliranta and Pekkarinen are of the opinion that R&D must remain Finland’s spearhead for the future. The State plays a key role in this.
– National governments are typically the drivers of innovation – this applies particularly to innovations considered radical or revolutionary. The Internet, for example, came into being this way. Nor should we overlook the role of major corporations in innovation, even where we are focusing on start-ups and SMEs, says Maliranta.
New impulses for research
No philosopher’s stone has been found to show us which incentives produce the best results.
Many countries promote a view advising broad-based targeting of support for innovation. We could mention the tax-deduction of R&D expenses for small companies as one instance. Finland, on the other hand, has favoured a more selective model, emphasising direct support through VTT and Tekes, for example, says Pekkarinen.
He feels the current situation demands that both approaches are considered. Maliranta, on the other hand, says that success of the Finnish model would strengthen cooperation between companies and contribute to the spread of technological know-how, benefiting the national economy as a whole.
– One of our weaknesses is that our production structure is too one-sided, says Pekkarinen.
– Economic recovery in the case of Sweden, for example, with its more versatile structure, has been much easier. On the other hand, a small country needs to select specific focus areas.
Finland’s trump cards will continue to be the high level of education and training and the multidisciplinary basic research conducted by universities and research institutes. Pekkarinen would nevertheless hope for more international contributions.
– We still have too few foreign researchers. The research sector needs dynamism and new impulses to remain strong.
Good and bad incentives
The economic regeneration desperately needs investments. High-cost Finland, however, hardly ranks among the most attractive countries in this respect.
Both Maliranta and Pekkarinen consider that with tightening tax competition between countries the lowering of corporation tax to 20 per cent would be seen as an important decision.
In a global economy, any investment incentives must be considered very carefully. Maliranta points out that poorly considered subsidies may distort investment.
– In many situations, it would probably be advisable to combine local technology expertise with the marketing skills of multinational corporations. Wrongly targeted support funding may defeat the interest of companies in this kind of collaboration, he says.
Similar danger lies in tax incentives.
– By favouring the domestic business activity, we are implicitly punishing the international one. Providing excessive support for Finnish ownership, for example, may produce negative results, says Maliranta.
Necessity breeds innovation
According to a recent expert report on the state of the Finnish economy, the State should intervene in competition as little as possible, nor should excessive funding be provided.
There is no shortage of money out there – it just needs to find the right targets.
– Looked at this way, necessity breeds innovation. Being forced to take the initiative and create something new brings results, Pekkarinen says, summarising the message of the report.
Maliranta also believes strongly in competition in the search for higher productivity growth. He refers to ‘creative destruction’, where obsolete structures are being replaced by something new and more dynamic.
– The struggle between companies is a central driving force behind reforms, he says.
According to Maliranta, every operation has its individual life cycle.
– Nokia created world records in the length of time it maintained its position at the top. The future of Finland is not dependent on sector. Business ideas and how they are implemented is far more important, Maliranta concludes.
A technologically stronger Finland
Erkki KM Leppävuori, President and CEO of VTT, sees no reason why Finland should not continue to be competitive in terms of technology. A small country may have few resources, but it can also be agile and flexible.
– Finns traditionally need some push before something new starts to emerge. This is not necessarily a bad thing. Once we decide to get on with something, we then make it happen, he says.
In the increasingly competitive operating environment, Leppävuori considers the combinations of different technologies as Finland’s primary strengths. In the ICT industry in particular, we have competencies released from Nokia that need to be refocused.
– If we can do this smartly, competitiveness of the traditional export industry will also improve. For example, the forest industry needs new kinds of products, refined in Finland. The price per kilo must be high enough to make exports profitable, says Leppävuori.
Research and new insights have a key role to play in this.
– Research institutes are instruments of success. We develop solutions in collaboration with companies, and they bring income and jobs to Finland.
Both rapid and measured research needed
Benefits from research are needed both in the long and short term. Leppävuori points to biotechnologies, for example, as being based on long-term basic research. The construction and electronics industries, on the other hand, take advantage of existing knowledge by producing rapid applications.
In VTT’s nominated strategic research areas the aim is to create applications within a few years. Such areas include bioeconomy and intelligent transport.
– There must be something coming out of the end of the pipe all the time, not just once in five years, says Leppävuori with emphasis.
He considers public funding essential both for companies and research organisations.
– The funding can be used to encourage companies to take bigger risks. SMEs in particular would be quite unwilling to take risks if there were no public funding available.
VTT’s new motto “Technology for Business” refers to the effectiveness of research needing to penetrate society as a whole – through the success of the export industry and generation of jobs, for example.
– We are also involved in research that is not directly linked with companies, such as energy policy research, and traffic and fire safety studies. These are aimed at the public good, says Leppävuori.
- Research Director, Research Institute of the Finnish Economy (ETLA), 2009–
- (Part-time) Professor of Economics, University of Jyväskylä, 2009–
- Doctor of Philosophy (Economics)
- Has also worked as researcher at Statistics Finland