Economy of Finland

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Finland has a highly industrialized, free-market economy with a per capita output equal to that of other western economies such as France, Germany, Sweden or the UK. The largest sector of the economy is services at 65.7 percent, followed by manufacturing and refining at 31.4 percent. Primary production is at 2.9 percent.^[2] With respect to foreign trade, the key economic sector is manufacturing. The largest industries^[3] are electronics (21.6 percent), machinery, vehicles and other engineered metal products (21.1 percent), forest industry (13.1 percent), and chemicals (10.9 percent). Finland has timber and several mineral and freshwater resources. Forestry, paper factories, and the agricultural sector (on which taxpayers spend around 2 billion euro annually) are politically sensitive to rural residents. The Greater Helsinki area generates around a third of GDP. In a 2004 OECD comparison, high-technology manufacturing in Finland ranked second largest after Ireland. Knowledge-intensive services have also ranked the smallest and slow-growth sectors – especially agriculture and low-technology manufacturing – second largest after Ireland. Investment was below expected.^[4] Overall short-term outlook was good and GDP growth has been above many EU peers.

As an economic environment, Finland's judiciary is efficient and effective. Finland is highly open to investment and free trade. Finland has top levels of economic freedom in many areas, although there is a heavy tax burden and inflexible job market. Finland is ranked 16th (ninth in Europe) in the 2008 Index of Economic Freedom.^[5] Recently, Finland has topped the patents per capita statistics, and overall productivity growth has been strong in areas such as electronics. While the manufacturing sector is thriving, OECD points out that the service sector would benefit substantially from policy improvements.^[6] The data-based IMD World Competitiveness Yearbook 2007 ranked Finland 17th most competitive, next to Germany, and lowest of the Nordics.^[7] The World Economic Forum report, based on loose opinion polls, has ranked Finland the most competitive country.^[8] The central government has officially given many promised such as emphasis on information technology, but critics question the central government's competency to deliver much. For instance, Finland did not have an Internet-based tax filing system as of 2007.^[9] Finland is one of the most fiscally responsible EU countries. Inflation has been low, averaging 1.8 percent between 2004 and 2006.

Finland is highly integrated in the global economy, and international trade is a third of GDP. The European Union makes 60 percent of the total trade. The largest trade flows are with Germany, Russia, Sweden, United Kingdom, USA, Netherlands and China. Trade policy is managed by the European Union, where Finland has traditionally been among the free trade supporters, except for agriculture. Finland is the only Nordic country to have joined the Eurozone.

[edit] History

Finland started out as a relatively poor country that was vulnerable to shocks to the economy such as the great famine of the 1860s. Until the 1930s, the Finnish economy was predominantly agrarian, and, as late as in the 1950s, more than half the population and 40 per cent of output were still in the primary sector.

[edit] After World War II

Property rights were strong. While nationalization committees were set up in France and UK, Finland avoided nationalizations. After failed experiments with protectionism, Finland eased restrictions and made a free trade agreement with the European Community in 1973, making its markets more competitive. Local education markets expanded and an increasing number of Finns also went abroad to study in the United States or Western Europe, bringing back advanced skills. There was a quite common, but pragmatic-minded, credit and investment cooperation by state and corporations, though it was considered with suspicion. Support for capitalism was widespread.^[10] Savings rate hovered among the world's highest, at around 8% until the 80s. In the beginning of the 1970s, Finland's GDP per capita reached the level of Japan and the UK. Finland's economic development shared many aspects with export-led Asian countries.^[10]

In 1991 Finland fell into a Great Depression-magnitude depression caused by a combination of economic overheating, depressed Western, Soviet and local markets, and disappearance of Soviet barter system. Stock market and housing prices declined by 50%.^[11] The growth in the 1980s was based on debt, and when the defaults began rolling in, GDP declined by 13% and unemployment increased from a virtual full employment to one fifth of the workforce. The crisis was amplified by trade unions' initial opposition to any reforms. Politicians struggled to cut spending and the public debt doubled to around 60% of GDP.^[11] Much of the economic growth in the 1980s was based on debt financing, and the debt defaults led to a savings and loan crisis. Total of over 10 billion euro were used to bail out failing banks, which led to banking sector consolidation.^[12] After devaluations the depression bottomed out in 1993.

[edit] Liberalization

Like other Nordic countries, Finland has liberalized the economy since late 80s. Financial and product market regulation was removed. The market is now one of the most free in Europe. State enterprises were privatized and taxes were cut. However, unlike in Denmark, trade unions blocked job market reforms, causing persistent unemployment and a two-tier job market. Trade unions also blocked social security reform proposals towards basic income or negative income tax. Finland joined the European Union in 1995. The central bank was given an inflation-targeting mandate until Finland joined eurozone.^[11] The growth rate has since been one of the highest of OECD countries and Finland has topped many indicators of national performance.

Since then the growth rate has been one of the highest of OECD countries, and national debt has been reduced to 32.9 percent of GDP.

Finland was one of the 11 countries joining the third phase of the Economic and Monetary Union of the European Union, adopting the euro as the country's currency, on 1 January 1999. The national currency markka (FIM) was withdrawn from circulation and replaced by euro (EUR) in the beginning of 2002.

The stability that the monetary union has brought to the Finnish economy has been largely welcomed as one of the cornerstones of continued economic expansion. However, some of the biggest EU trading partners, notably Sweden and UK, have not joined the monetary union, which has left the export sector vulnerable to currency changes.

[edit] Companies

Aleksanterinkatu, a commercial street.

Notable companies in Finland include Nokia, the market leader in mobile telephony; Stora Enso, the largest paper manufacturer in the world; Neste Oil, an oil refining and marketing company; UPM-Kymmene, the third largest paper manufacturer in the world; Aker Finnyards, the manufacturer of the world's largest cruise ships (such as Royal Caribbean's Freedom of the Seas); Instrumentarium Imaging, the creator of the Orthopantomograph (Pan X-Ray machine) and world innovative leader of dental imaging systems and software.; KONE, a manufacturer of elevators and escalators; Wärtsilä, a producer of power plants and ship engines; and Finnair, the largest Helsinki-Vantaa based international airline.^[13] Finland has sophisticated financial markets comparable to UK in efficiency.^[5] Though foreign investment is not high, the largest foreign-headquartered companies included names such as ABB, Tellabs, Carlsberg, and Siemens.^[14]

Finland-headquartered companies are quite international, though statistics are affected by the few largest. About 70% - 80% of equity in Helsinki Stock Exchange is owned by foreign-registered entities^[15], large Finland-headquartered companies get most revenue abroad, and employ the majority of their workers abroad. Cross-shareholding and other uncompetitive practices have been abolished and there is increasing anglo-Saxon style corporate governance. However, only around 15% of residents had invested in stock market, compared to 20% in France, and 50% in the US.^[14] As elsewhere in Western Europe, the environment is less favorable to small companies and small shareholders than in the US and UK. Hence ownership is quite concentrated.^[14]

Large Finland-headquartered companies tend to be older than in the US. Between 2000-2003, early stage venture capital investments relative to GDP were 8.5 percent against 4 percent in the EU and 11.5 in the US. Later stage investments fell to the EU median.^[16] Invest in Finland and other programs attempt to attract investment.^[17] In 2000 FDI from Finland to overseas was 20 billion euro and from overseas to Finland 7 billion euro. Acquisitions and mergers have internationalized business in Finland.

[edit] Income and consumption

Finland's income is generated by the approximately 1.8 million private sector workers, who make an average 25.1 euro per hour (before the median 60% tax wedge) in 2007.^[18] In 2003 residents worked on average around 10 years for the same employer^[19] and around 5 jobs in lifetime. 62 percent worked for small and medium-size enterprises.^[20] Female employment rate was high and gender segregation on career choices was higher than in the US.^[21] In 1999 part-time work rate was one of the smallest in OECD.^[21]

Unemployment rate was 6.8% and employment rate 68% in early 2008.^[22] The unemployment security benefits for those seeking employment are at an average OECD level. The labor administration funds labor market training for unemployed job seekers, which is often vocational. The aim of the training is to improve the channels of finding employment. Very much like in Sweden^[23], the government is often accused of "cleaning the unemployment statistics" by vocational training programmes.^[24]

Future liabilities are dominated by the pension deficit. Unlike in Sweden, where pension savers can manage their investments, in Finland employer chooses a pension fund for the employee. The pension funding rate is higher than in most Western European countries, but still only a portion of is funded and pensions exclude health insurances and other unaccounted promises.^[25] Directly held public debt has been reduced to around 32 percent in 2007.^[26] In 2007, the average household savings rate was -3.8 and household debt 101 percent of annual disposable income, a typical level in Europe.^[27]

In 2006, there were 2,381,500 households of average size 2.1 persons. 40 percent of households consisted of single person, 32 percent two and 28 percent three or more. There were 1.2 million residential buildings in Finland and the average residential space was 38 square meters per person. The average residential property (without land) cost 1,187 euro per sq metre (without land) and residential land on 8.6 euro per sq metre. Consumer energy prices were 8-12 euro per kilowatt hour.^[28] 74 percent of households had a car. There were 2.5 million cars and 0.4 other vehicles.^[29] Around 92 percent has mobile phone and 58 percent Internet connection at home. The average total household consumption was 20,000 euro, out of which housing at around 5500 euro, transport at around 3000 euro, food and beverages excluding alcoholic at around 2500 euro, recreation and culture at around 2000 euro. Upper-level white-collar households (409,653) consumed an average 27,456 euro, lower-level white-collar households (394,313) 20,935 euro, and blue-collar households (471,370) 19,415 euro euro.^[30]

[edit] Energy

Olkiluoto Nuclear Power Plant with two existing units. The third unit and Finland's fifth (far left) is computer manipulated and will be ready by 2011.

See also: Nordic energy market

See also: Nuclear power in Finland

Anyone can enter the free and largely privately-owned Nordic energy market traded in Nord Pool exchange, which has provided competitive prices compared to other EU countries.

In 2006, the energy market was around 90 terawatt hours and the peak demand around 15 gigawatts in winter. Industry and construction consumed 51% of total consumption.^[31][32] Finland's hydrocarbon resources are limited to peat and wood, while neighboring Norway has oil and Estonia oil shale. Finland has little hydropower capacity compared to Sweden or Norway. Most energy demand is satisfied with fossil fuels such as coal, oil and natural gas. Finland has four privately-owned nuclear reactors producing 18 percent of the country's energy.,^[33] one research reactor in Otaniemi campus, and the fifth AREVA-Siemens-built reactor – the world's largest at 1600 MWe and a focal point of Europe's nuclear industry – is scheduled to be operational by 2011. Renewable energy forms (industrial and consumer wood, peat, industrial residue, garbage) make high 25 percent compared to the EU average 10 percent. A varying amount (5–17 percent) of electricity has been imported from Russia (at around 3 gigawatt power line capacity), Sweden and Norway. A new submarine power cable from Russia has been considered a national security issue and one permit application has already been rejected.

Finland negotiated itself expensive Kyoto and EU emission terms. They are causing a sharp increase in energy prices and 1-2 billion euro annual cost, amplified by the aging and soon commissioned capacity.^[34] Nuclear power is by far the most inexpensive energy form and energy companies are already ready to file applications for several new reactors. Each reactor requires a permit from the parliament, where The Green League and a sect of The Centre Party are particularly opposed, and the discussion about the permit can take years. Some industries are excepted to exit because of the rising energy costs.

[edit] Transportation

Wild animals, chiefly moose and reindeers, cause several thousand accidents every year.

Main article: Transport in Finland

See also: Highways in Finland, List of airports in Finland, and Public transport in Helsinki

The extensive road system is utilized by most internal cargo and passenger traffic. As of 2005, the country's network of main roads has a total length of 13,258 km and all public roads 78,186 km, of which 50,616 km are paved. The motorway network totals 653 km. The annual road network expenditure of around 1 billion euro is paid with vehicle and fuel taxes which amount to around 1.5 billion euro and 1 billion euro.

The main international passenger gateway is Helsinki-Vantaa Airport with over 13 million passengers in 2007. About 25 airports have scheduled passenger services. Many airports are semi-privatized. The Helsinki-Vantaa based Finnair (known for an Asia-focused strategy), Blue1 and Finncomm Airlines sell air services both domestically and internationally. Helsinki has an optimal location for great circle routes between Western Europe and the Far East. Hence, many international travelers visit Helsinki on a stop-over between Asia and Europe.

Despite low population density, taxpayers spend annually around 350 million euro in maintaining 5,865 km railway tracks even to many rural towns. Operations are privatized and currently the only operator is VR. It has 5 percent passenger market share (out of which 80 percent are urban trips in Greater Helsinki) and 25 percent cargo market share.^[35] Helsinki has an urban rail network.

The majority of international cargo utilizes ports. Port logistics prices are low. Vuosaari harbour is the largest container port after completion in 2008. There is passenger traffic from Helsinki and Turku, which have ferry connections to Tallinn, Mariehamn, Sweden and several other destination. The busy Helsinki-Tallinn route is also served by a helicopter line.

[edit] Nordic model

See also: Nordic model

Finnish politicians have often emulated other Nordics and the Nordic model.^[36] Nordics have been free-trading and relatively welcoming to skilled migrants for over a century, though in Finland immigration is relatively new. The level of protection in commodity trade has been low, except for agricultural products.^[36]

Economists attribute much growth to reforms in the product markets. According to OECD, only four EU-15 countries have less regulated product markets (UK, Ireland, Denmark and Sweden) and only one has less regulated financial markets (Denmark). Nordic countries were pioneers in liberalizing energy, postal, and other markets in Europe.^[36] The legal system is clear and business bureaucracy less than most countries.^[37] For instance, starting a business takes an average of 14 days, compared to the world average of 43 days and Denmark's average of 6 days. Property rights are well protected and contractual agreements are strictly honored.^[5] Finland is rated one of the least corrupted countries in Corruption Perceptions Index. Finland is rated 13th in the Ease of Doing Business Index. It indicates exceptional ease to trade across borders (5th), enforce contracts (7th), and close a business (5th), and exceptional hardship to employ workers (127th) and pay taxes (83rd).^[38]

According to OECD, the job market is the most inflexible among Nordic countries.^[36] Finland increased job market regulation in the 1970s to provide stability to manufacturers. In the 90s, Denmark liberalized its job market, Sweden moved to more decentralized contracts, and Finnish trade unions blocked most reforms. Finnish law forces all workers to obey the lengthy and bureaucracy-imposing country-wide contracts that are drafted every few years for each profession (copy machinist, metallurgical engineer, etc.) and seniority level, usually in Comprehensive Income Policy Agreement.^[36] Along with tax rates, the system is a key contributor to unemployment and distorted prices, and possibly slows down structural change as there are less incentives to acquire better skills.^[4][36] Trade unions have traditionally lobbied for anti-immigrant policies, but Finland has now made some effort to improve the economy's competitiveness and marketing as a destination for skilled workers.

The middle income worker suffers from a nearly 60 percent tax wedge^[36] and effective marginal tax rates are very high.^[4] Value-added tax is 22 percent for most items. Capital gains tax and corporate tax are 26 percent, about the EU median. Property taxes are low, but there is a stamp duty of 4% for home sellers.^[4] Alcoholic beverages are separately taxed and highly restricted. For instance, McKinsey estimates that a worker has to pay around 1600 euro for another's 400 euro service^[39] - restricting service supply and demand - though some taxation is avoided in the black market and self-service culture. Another study by Karlson, Johansson & Johnsson estimates that the percentage of the buyer’s income entering the service vendor’s wallet (inverted tax wedge) is slightly over 15%, compared to 10% in Belgium, 25% in France, 40% in Switzerland and 50% in the United States.^[40] Tax cuts have been in every post-depression government's agenda and the overall tax burden is now around 43% of GDP compared to 51.1% in Sweden, 34.7% in Germany, 33.5% in Canada, and 30.5% in Ireland.^[41] State and municipal politicians have struggled to cut their consumption, which is very high at 51.7% of GDP compared to 56.6% in Sweden, 46.9 in Germany, 39.3 in Canada, and 33.5% in Ireland.^[5] Much of the taxes are spent on public sector employees, many of which are jobs-for-life and amount to 124,000 state employees and 430,000 municipal employees.^[4] That is 113 per 1000 residents (over a quarter of workforce) compared to 74 in the US, 70 in Germany, and 42 in Japan (8% of workforce).^[42] The Economist Intelligence Unit's ranking for Finland's e-readiness is high at 13th, compared to 1st for United States, 3rd for Sweden, 5th for Denmark, and 14th for Germany. Also, early and generous retirement schemes have contributed to high pension costs.^[4] Social spending such as health or education is around OECD median.^[4] Social transfers are also around OECD median. In 2001 Finland's outsourced proportion of spending was below Sweden's and above most other Western European countries. Outsourcing to free market has saved costs and increased customer satisfaction. For instance, Finland's health care is more bureaucrat-managed than in most Western European countries, though many use private insurance or cash to enjoy private clinics. Better access to private services is is very popular among voters and small reforms toward more equal marketplace have been made in 2007-2008.^[43] In education, child nurseries, and elderly nurseries private competition is bottom-ranking compared to Sweden and most other Western countries.^[36] Some public monopolies such Alko remain, and are sometimes challenged by the European Union. The state has a programme where the number of jobs decreases by attrition: for two retirees, only one new employee is hired.

[edit] References

1. ^ [1]
2. ^ Finland in Figures – National Accounts. Statistics Finland. Retrieved on 2007-04-26.
3. ^ Finland in Figures – Manufacturing. Statistics Finland. Retrieved on 2007-04-26.
4. ^ ^{a b c d e f g} Finland Economy 2004, OECD
5. ^ ^{a b c d} Economic freedom: Finland
6. ^ Kilpailuvirasto: OECD:n raportti suosittelee kilpailun lisäämistä palvelualoilla
7. ^ World Competitiveness Yearbook 2007
8. ^ Global Competitiveness Report. World Economic Forum. Retrieved on 2007-01-22.
9. ^ Virtual Finland (Ministry for Foreign Affairs of Finland). Retrieved on 2007-01-22.
10. ^ ^{a b} Growth and Equity in Finland, World Bank
11. ^ ^{a b c} Inflation targeting: Reflection from the Finnish experience
12. ^ Converted
13. ^ The largest companies (turnover). Largestcompanies.com. Retrieved on 2007-04-30.
14. ^ ^{a b c} Onko omistamisella väliä (in Finnish)
15. ^ http://virtual.finland.fi/netcomm/ImgLib/3/133/ecograph2.gif
16. ^ [http://www.etla.fi/files/1892_the_nordic_model_complete.pdf by Torben M. Andersen, Bengt Holmström, Seppo Honkapohja, Sixten Korkman, Hans Tson Söderström, Juhana Vartiainen]
17. ^ Invest in Finland
18. ^ Tehdyn työtunnin hinta 23-27 euroa, Statistics Finland
19. ^ Keskustelua suomalaisen työelämän luonteesta ja sen muuttumisesta
20. ^ Tilastokeskus - Pienten ja keskisuurten yritysten merkitys työllistäjinä on kasvanut
21. ^ ^{a b} The Nordic Model of Welfare: A Historical Reappraisal, by Niels Finn Christiansen
22. ^ Statistics Finland: Labour Market
23. ^ FT.com / World - 'Real Swedish jobless rate 15%'
24. ^ Employment vs unemployment rates in the EU - Europe Forum
25. ^ Ikääntymisen taloudelliset vaikutukset ja niihin varautuminen
26. ^ CIA Factbook: Public Debt
27. ^ [2] (in Finnish)
28. ^ Sähkön hinta kuluttajatyypeittäin 1994-, c/kWh
29. ^ Statistics Finland: Transport and Tourism
30. ^ Own-account worker households' consumption has grown most in 2001-2006
31. ^ Statistics Finland - Electricity consumption by sector 2006
32. ^ Statistics Finland - Total energy consumption increased clearly in 2006
33. ^ Energy Consumption in 2001 (PDF). Statistics Finland. Retrieved on 2007-01-22.
34. ^ Päästökaupasta voi tulla miljardilasku teollisuudelle
35. ^ Transport and communications ministry - Rail
36. ^ ^{a b c d e f g h} The Nordic Model by Torben M. Andersen, Bengt Holmström, Seppo Honkapohja, Sixten Korkman, Hans Tson Söderström, Juhana Vartiainen
37. ^ Finland economy
38. ^ Economy Rankings, Doing Business Report 2008, World Bank
39. ^ McKinsey: Finland's Economy
40. ^ Karlson, Johansson & Johnsson (2004), p. 184.
41. ^ Government Finance
42. ^ Is Japan's bureaucracy still living in the 17th century? | The Japan Times Online
43. ^ Three quarters would like to raise private health care KELA reimbursements (in Finnish)

[edit] See also

• OECD's Finland country Web site and OECD Economic Survey of Finland
• Finland
• Finnish Maritime Cluster
• Finland and Globalization
• Economy of Europe
• List of Finnish companies
• List of banks in Finland
• Commemorative coins of Finland
• Current statistics from Statistics Finland

Other links

• Economy of Europe
• European Union

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