FINLAND'S ECONOMY PERFORMED WELL during the 1980s, allowing the Finns
to enjoy widespread prosperity. After suffering the effects of
depression and war during the 1930s and the 1940s, the economy started
to show steady gains in about 1950. During the 1980s, the country
enjoyed above-average growth, stable prices, and relatively low
unemployment. Nevertheless, Finland did experience many of the problems
found elsewhere in the industrial world, including high unemployment
among youth, expensive agricultural surpluses, and declining industrial
sectors. Moreover, certain aspects of the country's economic
performance, such as serious cyclical instability, endemic industrial
conflict, and difficulties in foreign trade, may have troubled Finland
more than such situations disturbed other countries. Despite these
problems, which required attention from policy makers and from
businessmen, economists could point with pride to Finland's strong work
ethic and pragmatic tradition.
In a country lacking many raw materials, the tenacious Finns had
learned to make the most of scarce natural resources. Although most of
the country was not arable, farmers worked hard to keep the country
self-sufficient in staple foods. The country's forests, carefully
managed to increase long-term yield, provided raw materials for the
wood-processing industries, the largest earner of foreign exchange.
Metals and minerals were scarce, but the country had established
competitive enterprises in basic metals and in chemicals. The
metalworking industry, developed largely to meet reparations payments to
the Soviet Union, continued to expand during the postwar period. This
industry specialized in sophisticated products, such as icebreakers and
paper-making machinery, in which the Finns enjoyed a comparative
advantage. Faced with a serious energy shortage after the oil crisis of
1973, the Finns embarked on a comprehensive conservation program and
shifted investments toward less energy-intensive, high-technology
products.
Effective policies deserved much of the credit for the country's
economic successes. In the early years of the republic, the government
had carried out extensive land reforms, a precondition for agricultural
modernization. State-owned enterprises channeled investments into key
industries, allowing the country to process its own raw materials. The
crises of the depression, war, and reconstruction led to government
controls that provided an essential framework for production. By the
late 1950s, once wartime bottlenecks had been eliminated, the government
chose to pursue trade liberalization and deregulation. Following this
basic orientation, Finland's leaders agreed to free trade in industrial
products, thus forcing the country's industries to compete and to
modernize. By the late 1970s, macroeconomic policies gave priority to
fighting inflation and to dampening cyclical instability. During the
1980s, government policies pursued export competitiveness, in part
through favoring industrial rationalization and financial deregulation.
By the mid-1980s, some economists saw Finland as the most capitalist
country in Europe.
To pay for needed imports, the Finns depended on export markets in
Western and in Eastern Europe. To protect those markets, Finland had
pursued economic integration with both Eastern and Western Europe. The
Finns maintained good commercial relations with the Soviet Union, a
strategy that had paid off handsomely in the 1970s, when rising
petroleum prices increased the value of trade with the East,
compensating Finland for declines in Western markets. After the
mid-1980s, however, as world oil prices declined, the Finns shifted
toward the West, especially toward the European Community (EC). Although
balancing close economic relations with both marketoriented and planned
economies posed special challenges, Finnish traders proved adept in both
environments. In the late 1980s, industry and finance sought to build on
earlier successes by internationalizing their operations, often in
partnership with foreign firms.
In the late 1980s, the most important economic challenge was to keep
both production costs and product quality competitive in international
markets. This challenge would require hard work, as well as close
cooperation among government, business, and labor. The government,
industry, and the universities needed to increase spending on research
and the development of new technologies. The Finns would also have to
limit inflationary wage increases and improve labor flexibility without
worsening labor conflict. Many economists believed, however, that the
prevailing consensus in favor of modernization and stable, steady growth
was strong enough to allow the country to face the future with optimism.
Finland - GROWTH AND STRUCTURE OF THE ECONOMY
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. By the late 1980s,
however, the country had become one of the world's advanced industrial
societies, the citizens of which enjoyed a high standard of living and
the industries of which dominated world markets for significant
hightechnology products. Finland was an industrial society, but it was
self-sufficient in staple foods and produced a wide range of goods and
services for domestic and export markets. Although the economy still
depended on exports, the Finns had developed markets in both Eastern and
Western Europe, avoiding excessive dependence on any single market.
Economic Development
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 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.
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.
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.
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.
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 in the United
States--financed investments in infrastructure, 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.
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). 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. 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. 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.
Structure of the Economy
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 equalling 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.
Finland - ECONOMY - ROLE OF GOVERNMENT
As in most European countries that were late in industrializing, the
Finnish state played an important role in sponsoring economic
development. Thus, in the interwar years, the government carried out
crucial agricultural reforms and established pioneering industrial
enterprises. During World War II, the government imposed comprehensive
economic controls to support the defense effort, many of which remained
in force during the reconstruction years. Starting in the 1950s,
however, as economic growth overcame production bottlenecks and
shortages of consumer goods, the government gradually relaxed the
regulatory framework. Nevertheless, wartime intervention in the economy
had left institutional legacies that influenced later economic policies.
The need to maintain export markets in Western Europe, itself engaged
in a process of economic integration by the late 1950s, led the
government to decide to liberalize trade in industrial products. Free
trade, in turn, undermined the government's ability to isolate the
domestic economy from world market conditions. Increasingly tied to the
economies of the Nordic area and Western Europe, Finland was constrained
to adopt policies similar to those in force elsewhere. Although the
policy packages varied in response to domestic political developments
and international market shifts, they all took into account Finland's
position as a small, relatively open economy, in which fluctuations in
raw material exports had a significant impact on the business cycle. By
the late 1980s, when exports and imports each accounted for about
one-quarter of GDP, export competitiveness had become the dominant
policy concern.
Some analysts saw in Finnish economic management a liberal,
noninterventionist variant of the economic polices of other Nordic
states. Thus, Finland, less prosperous than its Western neighbors, did
not develop a comprehensive welfare state until the late 1960s, and it
held benefits below the Scandinavian average. Like other Nordic states,
Finland had institutionalized wage and benefit negotiations, but the
Finnish system of industrial relations involved substantially more
conflict than the systems in the Scandinavian states. Along the same lines, Finland protected
domestic agriculture, but generally avoided bailing out declining
industrial concerns, favoring measures to facilitate structural
adjustment. Finnish politicians, some of whom saw Sweden as a model,
claimed that their neighbor's mistakes had taught them to avoid
excessive welfare programs and industrial subsidies that would slow
adaptation to new market conditions. Foreign analysts noted, however,
that special factors, such as Finland's relatively late industrial
development and the role of Finland's trade with the Soviet Union, also
helped to explain deviations from the general Nordic pattern. By the
1980s, as austerity policies spread throughout the region, aspects of
Finnish policy seemed to lead rather than to follow Nordic developments.
Despite the laissez-faire slant of Finnish economic policy, direct
state intervention strongly influenced operating conditions in many
sectors. In agriculture, for example, years of government support and
tariff protection had sustained a relatively large rural population that
expected continued aid regardless of the need to cut farm surpluses. Similarly, the state had established enterprises in
capital-intensive, high-risk sectors, including energy, minerals, basic
processing, and manufacturing in which private investment had proven
inadequate. By the mid-1980s, private capital markets were relatively
well-developed, but the twenty state enterprises still accounted for
some 21 percent of industrial production, and they included many of the
country's leading firms, such as the Kemira Group in chemicals,
Enzo-Gutzeit in wood processing, the Valmet Group in engineering and
shipbuilding, and Valvilla in textiles. Yet industrial policy no longer
depended on state ownership, and these enterprises functioned much as
private companies. Indeed, starting in the early 1980s, the Ministry of
Trade and Industry, which was responsible for state enterprises, began
to demand that they earn profits. The state maintained monopolies in
alcoholic beverages, energy (Neste and Imatran Voima), and minerals (the
Outokumpu Group and Rautaruukki) for political reasons, but divestment
in other sectors was a possibility. In 1988 the government decided to
allow certain state enterprises to sell shares. The Valmet Group was the
first state firm to announce plans for a stock offering, and observers
reported that Outokumpu, Kemira, and Neste were also candidates for
partial privatization, depending on how well the Valmet stocks sold. The
government planned to retain controlling interests in the companies for
at least several years, but some politicians favored complete
privatization.
Privatization and deregulation were ways to dismantle the relics of
earlier economic policies and to release public resources for other
purposes. In the late 1980s, government interest concentrated on
speeding rationalization and restructuring, even at the cost of higher
unemployment and greater industrial concentration. Industrial policy
sought to foster a shift away from heavy engineering toward electronics
and high-technology production. The state sharply increased expenditures
for research and development, and it helped coordinate efforts among
universities, private industry, and government research centers. The
government and the Bank of Finland (BOF), Finland's central bank,
gradually deregulated the financial sector in an effort to improve the
efficiency of capital markets. Thus, although the state continued to
control certain key sectors, such as agriculture, forestry, minerals,
and energy, overall economic policy had shifted from sectoral
intervention toward efforts to improve productivity and market
efficiency.
Finland - Macroeconomic Policy
During the 1960s and 1970s, government policy had pursued rapid
economic growth and high investment in industry, often to the detriment
of price stability. By the mid-1960s, the government, generally in
concert with the BOF, which controlled monetary and exchange-rate
policy, established a macroeconomic approach with fixed roles for
monetary, fiscal, incomes, and exchange-rate policies. In general,
monetary policy aimed at keeping interest rates low to favor domestic
investment. The BOF imposed strict controls on capital exports, which
made possible negative real interest rates, and rationed credit to the
commercial banks, which controlled most investment. The perceived need
to balance budgets, usually annually, handicapped fiscal policy. The
government used incomes policy to influence wage settlements, often
offering tax breaks in exchange for concessions from management and
labor, but incomes policy was rarely coordinated with the general
macroeconomic strategy. Exchange-rate policy was dedicated to
safeguarding industrial competitiveness.
Although this policy package favored growth, high employment, and
industrial development, the economy suffered from greater inflation and
instability than those of other OECD countries. Public spending remained
under firm control, but low interest rates and tax cuts fueled domestic
inflation. At roughly ten-year intervals, Finland experienced export-led
booms followed by major devaluations and severe recessions. Fluctuations
in world demand for Finnish exports were largely responsible for the
cycles, but economic policies magnified them. Typically, a period of
overheating in the economy, occasioned by an upswing in exports and by
the relatively inelastic supply of exportable commodities, led to sharp
increases in wages and prices in the export sector as well as to greater
imports of investment goods. Faced with declining export competitiveness
and a worsening external balance, the authorities responded with major
currency devaluations (24 percent in 1967; 10 percent in 1977-78) and
with tighter macroeconomic policies, which dampened domestic demand but
restored competitiveness. Output recovered following each devaluation,
only to decline as domestic inflation rocketed higher, further eroding
competitiveness in external markets.
Although Finland managed to avoid restructuring traditional policies
until several years after the 1973 oil crisis, an especially severe
downturn in the second half of the 1970s, caused largely by recession in
West European markets, inspired a new policy approach. Starting in 1977,
with the adoption of a five-year stabilization program, the government
began to give priority to fighting inflation and to overcoming the
devaluation cycle, even at the cost of higher unemployment and slower
growth in the short run.
The new macroeconomic framework involved changing the traditional
assignments for each policy tool. Perhaps the most important innovation
was a more active role for fiscal policy. Given the low level of Finnish
state debt, policy makers stopped requiring that the budget balance each
year, and they aimed instead for a balanced budget over the life of the
business cycle. Fiscal policy became consciously countercyclical, and
increased spending during the 1982-83 slowdown was followed by tax
increases in the 1984-85 upswing. In addition, the authorities adjusted
tax rates not only to moderate wage demands but also to affect
investments and export competitiveness. The implementation of monetary
policy shifted from offering negative interest rates in a protected
capital market to using interest rates to dampen inflation and to
influence the exchange rate. Monetary policy came to depend even more on
market operations by the mid-1980s, as deregulation of financial markets
eliminated the earlier system of capital rationing. The tighter monetary
stance tended to reduce the volume of investment, but economists
expected that the quality of investments would improve. After 1977, the
BOF attempted to peg the external value of the Finnish mark to a
trade-weighted "basket" of foreign currencies. The new
exchange-rate policy was meant to curtail both domestic and imported
inflation. Indeed, in 1979 and 1980, the currency was allowed to
appreciate for the first time in the postwar period in response to
greater export demand. Policy makers hoped that the stable exchange rate
would eliminate distortions caused by an undervalued or overvalued
currency and would allow market conditions to determine investment
decisions.
The new approach to managing the economy still depended on negotiated
incomes settlements to restrain wage growth and to dampen inflation. The
government continued to try to influence agreements between capital and
labor by means of fiscal or other incentives. Implementing such
sophisticated policies required extensive coordination and cooperation
among government ministers belonging to different parties, the BOF, and
leaders in agriculture, industry, and labor. Although differences among
interest groups continued to exist and sometimes resulted in serious
conflicts, the country enjoyed widespread consensus regarding the
desirability of medium-term stabilization. It was this consensus--and
the macroeconomic policies it made possible-- that deserved much of the
credit for Finland's relatively strong economic growth, low
unemployment, and price stability.
Finland - Public Finance
As of 1987, public-sector spending amounted to about 42 percent of
GDP, below the OECD average. Austerity policies had limited real budget
increases to about 1.5 percent per annum from 1980 to 1987,
substantially less than the rapid growth in government spending during
the 1960s and 1970s. Total taxes amounted to about 36 percent of GDP in
1987, fluctuating by a few percentage points from year to year. Because
of the gap between taxes and spending, government debt grew relatively
rapidly during the 1980s, reaching almost 15 percent of GDP by 1987, but
it was still low by OECD standards.
Each autumn the Ministry of Finance submitted to the Eduskunta, the
country's parliament, the budget for the next fiscal year (which
corresponded to the calendar year), accompanied by a survey of the
economic situation. Early in the following spring, while the budget was
being debated, the ministry published a revised version of the survey,
which estimated the overall fiscal impact on aggregate demand, income,
and money supply. After parliamentary approval of the annual budget, the
government often responded to changing conditions by requesting
supplementary appropriations, sometimes significantly modifying the
original budget.
Starting in the late 1970s, as it sought to maintain tight limits on
the growth of the public sector, the government, in its fiscal policy
considerations, began to analyze social security funds and local
spending as parts of the overall budget. The central government
regularly transferred large sums to local authorities, which accounted
for about two-thirds of publicsector operations. Local administrations
levied a flat tax, which had reached about 16 percent in 1986, on earned
income. The central government influenced local expenditures by
regulating transfers and by negotiating multiyear spending limits.
Nevertheless, current local government expenditures, many of which were
required by law, sometimes exceeded targets. The central government also
attempted to manipulate social security taxes as an instrument of fiscal
policy, a technique that Finland had pioneered. The government lowered
employers' contributions for health, accident, and unemployment
insurance by about 2 percent of the wage bill between 1977 and 1987 in
an attempt to encourage job creation.
National taxes absorbed about 26 percent of GDP, and local taxes,
roughly 16 percent, in the mid-1980s. In 1986 the government introduced
reforms of business income taxes, including a reduced value-added tax on
energy, designed to improve export competitiveness. In 1988 the
legislature enacted a comprehensive tax reform meant to reduce marginal
rates of taxation after eliminating many deductions. Policy makers
expected that the 1988 reform would reduce tax-induced distortions in
investment behavior and would make the tax system fairer.
Government spending had changed significantly during the postwar
years. In the late 1940s and early 1950s, temporary expenditures
associated with the war dominated the budget. From the early 1950s to
the early 1970s, the fastest-growing sectors in the budget were
education, social welfare transfers, and capital investments. By the
late 1980s, current expenditures remained roughly the same as in the
1970s, but investments had fallen. In 1987, for example, debt service
led expenditures (at about 17.2 percent of total outlays), followed
closely by social security (17.1 percent) and education, science, and
the arts (16 percent). Government operations and defense amounted to
about 14.7 percent, and health, to 8 percent. Except for agriculture and
forestry (which absorbed 8.3 percent) and transport (8 percent),
subsidies for different branches of the economy took relatively small
amounts: housing, 4.4 percent; industry, 3.4 percent; and labor, 2.5
percent.
Finland's state debt, at about 14 percent of GDP in 1987, was low by
international standards, as was the debt of local governments, which
stood at roughly 3 percent. Nevertheless, during the 1980s the
government tried to limit the growth of state debt to avoid increased
interest expenditures. As of 1987, slightly more than half the state
debt was in foreign currencies. When the state sought financing abroad,
it avoided crowding out private borrowers in Finland's relatively
shallow capital market, but foreign debt increased foreign-exchange
risk. In 1986 and 1987, however, officials took advantage of their
government's high credit rating to refinance much of the debt at lower
interest rates. Although policy makers would have to manage the debt
carefully, most analysts believed it was unlikely that Finland's state
debt would seriously constrain government operations during the late
1980s and early 1990s.
Finland - HUMAN RESOURCES
In 1986 the civilian labor force numbered a little more than 2.5
million, of which about 5.4 percent were unemployed. Less than 11 percent of the workforce
worked in agriculture and forestry (down from over 45 percent in 1950).
Employment in industry and construction amounted to about 32 percent,
while the service sector employed a little over 57 percent. Finland's
employment structure resembled that of other European countries, except
that agricultural employment was still higher than the West European
average, and industrial employment had fallen more slowly in Finland
after the 1973 oil crisis than it had elsewhere. Economists suggested
that both phenomena reflected Finland's relatively late
industrialization and that the country could expect further declines in
the employment shares of agriculture and industry.
As in most European countries, general unemployment became a serious
problem during the 1970s, rising from about 1.8 percent in 1974 to an
average of about 5.7 percent between 1980 and 1986. Official statistics
showed that unemployment had fallen to 5.5 percent for the first half of
1987, but this figure had resulted from redefining unemployed workers
over 55 years of age as retired. The number of unemployed persons
actually had barely changed between 1986 and 1987. Despite economic
growth, during the early 1980s total demand for labor stagnated, but the
working-age population increased by an average of 1.2 percent each year.
Economists estimated that real GDP would need to rise by over 3 percent
per year in the late 1980s and early 1990s just to keep up with the
growing work force.
While unemployment was less severe in Finland than it was in most
European countries, policy makers considered the job shortage to be the
country's main economic problem. Young people suffered most from the
rise in unemployment. In the late 1980s, the unemployment rate for
people between the ages of fifteen and twenty-four was almost twice the
overall average. The aging of the population would tend to reduce the
youth unemployment rate in the 1990s, but observers predicted that the
total population of working-age persons would continue to rise for at
least a decade and that unemployment would be a serious problem.
Although many workers could not find jobs, some employers reported
difficulties in finding skilled industrial workers; in particular,
construction and service workers were hard to find in the booming
Helsinki area. Although certain skills might be in short supply, the
work force generally was competent and hardworking. Indeed, during the
postwar years, the number of Finns with vocational training had
increased fourfold, and the number of university graduates had increased
fivefold. The graduates of Finland's management schools were well
prepared to meet the challenges posed by an increasingly international
business environment. Some managers argued that young Finns showed more
initiative on the job than their parents.
The government tried to cope with unemployment, focusing on youth
joblessness. Aside from expanding public employment, generally seen as a
stopgap, state efforts included retraining programs for unemployed
workers, advanced vocational training, travel and resettlement
allowances, and subsidieq for housing in areas with labor shortages. A
particularly effective mechanism was the nationwide employment exchange,
which brought together people seeking employment with potential
employers. In the long run, however, such measures could only serve as
palliatives. Analysts believed that the state could best increase
employment by following sound macroeconomic policies and by facilitating
cooperation among the organizations representing labor and management.
Finland - Industrial Relations
Although trade unionization had started somewhat later in Finland
than it had throughout the rest of the continent, in the 1980s the
country's workers and employers were the most highly organized in
Western Europe. According to the Ministry of Labor, about 80 percent of
the work force belonged to unions, although the rate varied
significantly among industries. Employers' federations also represented
most enterprises.
Conflict between labor and management was fierce during the interwar
years because tensions resulting from the civil war had soured
industrial relations. Labor-management collaboration improved in 1940
when the Central Organization of Finnish Trade Unions (Suomen
Ammattiyhdistysten Keskusliitto--SAK) and the Confederation of Finnish
Employers (Suomen Ty�nantajain Keskusliitto--STK) recognized each other
and agreed to cooperate during the national emergency. Industrial
relations languished immediately after World War II, however, in part
because government regulations tied wages to the cost-of-living index.
Despite a general strike in 1956, occasioned by conflicts of interest
among farmers, workers, and management, a spirit of compromise gradually
developed in the late 1950s and early 1960s.
Finland's industrial relations took an important turn for the better
in 1968, when a system of centralized incomes agreements was instigated
by the government, which hoped to curb inflation and improve
competitiveness after a major currency devaluation. After that date,
regular negotiations, involving the government, labor, and employers,
led to central agreements on wages, benefits, work conditions, and
social policy. Negotiations usually started in the fall and ended in
March. Senior civil servants acted as mediators between labor and
management. The government often offered concessions, such as tax
reductions, longer vacations, or reduced employer social security
contributions, in exchange for wage restraint or increased investment.
The central agreement among the national federations was not binding on
individual unions. In practice, however, the central agreement provided
guidelines for contracts made between unions and employers or, if
necessary, between workers and management at individual factories.
Contracts affecting civil servants and professionals were usually
negotiated after settlements in industry, as were settlements concerning
prices paid for agricultural commodities and lumber. In this way, wages
in private enterprises exposed to international competition influenced
the protected sectors of the economy.
Many observers feared renewed labor conflict during the 1980s as
slower growth, stiff foreign competition, and austerity policies put
pressures on the negotiation process. Strikes did occur, mostly during
the spring negotiation season. In 1986, for example, unions representing
salaried employees, technicians, and professional personnel accepted the
central agreement, but SAK held out for shortened work hours. When the
STK demanded greater flexibility in setting work schedules in exchange
for the proposed reduction in work time, SAK responded with the first
general strike since 1956. As a result, SAK gained a larger wage
increase than the other federations and a provision that by 1990 would
reduce the work week in industry to 37.5 hours. Moreover, a number of
local unions refused to follow the central agreement, preferring to
negotiate on their own.
In 1988 the government was unable to implement a national agreement,
largely because of opposition from employers. Unions and employers
reached agreements industry by industry, generally following the
settlement reached in the paper industry. In this industry, blue-collar
workers had achieved wage increases of about 4 percent for the first
year of their two-year agreement, while white-collar workers had
received higher raises; the parties had agreed to delay negotiations for
the second year. Although its proposals had been rejected, the
government still intervened in the negotiation process by introducing
legislation on retraining programs, security against dismissal, and
worker representation on company boards. The fact that important service
branches, such as banking, insurance, and trade, had opted for multiyear
agreements in which wage increases were to be negotiated a year at a
time, further indicated that the centralized negotiation process was
becoming fragmented. Despite these apparent setbacks, most Finns
supported an incomes policy as a way to restrain wages, thereby
protecting real earnings.
Despite widespread consensus on incomes policy, Finland continued to
experience more strikes and lockouts than other Nordic states. In
principle, Finnish legislation blocked strike actions during periods
governed by incomes agreements. Moreover, according to the law
regulating strikes, unions were required to give two weeks' notice to
both employers and the state before initiating a strike, and the
government could delay a strike and could require mediation. Despite
these controls, illegal work stoppages occurred regularly, often
involving small, but wellplaced , groups of workers. In 1986, for
example, air traffic controllers shut down the Helsinki airport for two
weeks. The number of strikes had declined, however, after 1984, when the
central incomes agreement had included a ninefold increase in the fines
for illegal strikes.
Finland - AGRICULTURE, FORESTRY, AND FISHERIES
Finland's climate and soils make growing crops a particular
challenge. The country lies between 60� and 70� north latitude-- as
far north as Alaska--and has severe winters and relatively short growing
seasons that are sometimes interrupted by frosts. However, because the
Gulf Stream and the North Atlantic Drift Current moderate the climate,
Finland contains half of the world's arable land north of 60� north
latitude. Annual precipitation is usually sufficient, but it occurs
almost exclusively during the winter months, making summer droughts a
constant threat. In response to the climate, farmers have relied on
quick-ripening and frost-resistant varieties of crops, and they have
cultivated south-facing slopes as well as richer bottomlands to ensure
production even in years with summer frosts. Most farmland had
originally been either forest or swamp, and the soil had usually
required treatment with lime and years of cultivation to neutralize
excess acid and to develop fertility. Irrigation was generally not
necessary, but drainage systems were often needed to remove excess
water.
Until the late nineteenth century, Finland's isolation required that
most farmers concentrate on producing grains to meet the country's basic
food needs. In the fall, farmers planted rye; in the spring, southern
and central farmers started oats, while northern farmers seeded barley.
Farms also grew small quantities of potatoes, other root crops, and
legumes. Nevertheless, the total area under cultivation was still small.
Cattle grazed in the summer and consumed hay in the winter. Essentially
self-sufficient, Finland engaged in very limited agricultural trade.
This traditional, almost autarkic, production pattern shifted sharply
during the late nineteenth century, when inexpensive imported grain from
Russia and the United States competed effectively with local grain. At
the same time, rising domestic and foreign demand for dairy products and
the availability of low-cost imported cattle feed made dairy and meat
production much more profitable. These changes in market conditions
induced Finland's farmers to switch from growing staple grains to
producing meat and dairy products, setting a pattern that persisted into
the late 1980s.
In response to the agricultural depression of the 1930s, the
government encouraged domestic production by imposing tariffs on
agricultural imports. This policy enjoyed some success: the total area
under cultivation increased, and farm incomes fell less sharply in
Finland than in most other countries. Barriers to grain imports
stimulated a return to mixed farming, and by 1938 Finland's farmers were
able to meet roughly 90 percent of the domestic demand for grain.
The disruptions caused by the Winter War and the Continuation War
caused further food shortages, especially when Finland ceded territory,
including about one-tenth of its farmland, to the Soviet Union. The experiences of the depression and the
war years persuaded the Finns to secure independent food supplies to
prevent shortages in future conflicts.
After the war, the first challenge was to resettle displaced farmers.
Most refugee farmers were given farms that included some buildings and
land that had already been in production, but some had to make do with
"cold farms," that is, land not in production that usually had
to be cleared or drained before crops could be sown. The government
sponsored large-scale clearing and draining operations that expanded the
area suitable for farming. As a result of the resettlement and
land-clearing programs, the area under cultivation expanded by about
450,000 hectares, reaching about 2.4 million hectares by the early
1960s. Finland thus came to farm more land than ever before, an unusual
development in a country that was simultaneously experiencing rapid
industrial growth.
During this period of expansion, farmers introduced modern production
practices. The widespread use of modern inputs-- chemical fertilizers
and insecticides, agricultural machinery, and improved seed
varieties--sharply improved crop yields. Yet the modernization process
again made farm production dependent on supplies from abroad, this time
on imports of petroleum and fertilizers. By 1984 domestic sources of
energy covered only about 20 percent of farm needs, while in 1950
domestic sources had supplied 70 percent of them. In the aftermath of
the oil price increases of the early 1970s, farmers began to return to
local energy sources such as firewood. The existence of many farms that
were too small to allow efficient use of tractors also limited
mechanization. Another weak point was the existence of many fields with
open drainage ditches needing regular maintenance; in the mid-1980s,
experts estimated that half of the cropland needed improved drainage
works. At that time, about 1 million hectares had underground drainage,
and agricultural authorities planned to help install such works on
another million hectares. Despite these shortcomings, Finland's
agriculture was efficient and productive--at least when compared with
farming in other European countries.
Finland - Farms and Farmers
Finland's agriculture was based on privately owned family farms. This
was especially the case after 1922, when the republic, anxious to reduce
rural discontent, implemented the first of a series of land reforms that
redistributed land to tenants and to landless farm workers. After World
War II, the government resettled some 40,000 farm families displaced
from areas occupied by the Soviet Union. The postwar resettlement
program also transferred land to farms considered too small for
efficient operations, many of which had been set up in the interwar
period.
As a result of the resettlement program, Finland was one of the few
industrialized countries in which the number of farms increased after
1945; by 1950 there were about 260,000 farms. The number of farms
started to decline in the 1960s, however, falling to about 200,000 by
1981. The decrease in the number of farms caused an increase in average
farm size, but large farms still remained rare. Thus, in the mid-1980s,
about 60 percent of farms covered less than ten hectares, 25 percent
included between ten and twenty hectares, and only 15 percent occupied
more than twenty hectares. At that time, both large and small farms were
disappearing, leaving an increasing number of farms that were between
ten and twenty hectares. Observers predicted that this trend was likely
to continue.
In the late 1980s, the average farm comprised twelve hectares of
arable land and thirty-five hectares of forest. The relative proportions
of field holdings to forest holdings varied from region to region; in
the south, farmers tended to own more arable land but less forest, while
in the north, the reverse was true. Farm families formed the basic
production unit. Family members provided about 95 percent of farm labor;
wage earners supplied the remainder. Most farms specialized in one or
two activities, such as hog production, dairy farming, or grain
cultivation. Although in the early postwar years most farms produced
some milk, by the early 1980s only one out of three farms did so, and
about half of all farms had no farm animals. This tendency toward
specialization increased the efficiency of Finland's relatively small
production units.
Farm incomes lagged behind those of the total population. For
example, according to a 1984 study, the average income of fulltime
farmers totaled only 70 percent of that of industrial workers.
Nevertheless, income disparities between agriculture and other sectors
were probably less severe than these figures indicate because many farm
families supplemented their incomes with earnings from forestry and
other occupations. In the mid1980s , only 62 percent of farmers' incomes
came from agriculture, while another 26 percent was derived from wages
and 12 percent was earned from forestry.
Farmers had a strong tradition of practical and political
cooperation. In the late 1980s, some 90 percent of Finnish farmers
belonged to agricultural unions, which were divided between those for
Finnish speakers and those for Swedish speakers. More than 330,000 union
members belonged to 430 Finnish-language locals or to 80
Swedish-language locals. Founded in 1917, the Confederation of
Agricultural Producers (Maataloustuottajain Keskusliitto--MTK) served as
an umbrella organization for agricultural unions, and it represented
farmers in agricultural price negotiations with the government and with
other producer groups.
In addition to joining unions that helped influence farm policy,
farmers had established cooperative associations that provided farm
supplies, shared marketing expenses, and arranged farm financing. The
umbrella organization of farm cooperatives was the Pellervo Society,
which had more than a million members. Each branch of agriculture
organized its own cooperatives to handle sales of farm products and
purchases of supplies. Cooperative banks provided about half of all
money used to finance farming, and cooperative insurance associations
handled farm and crop insurance.
Finland - Agricultural Policy
Finland's agricultural policy has long been inspired by more than
purely economic considerations. The need to maintain secure food sources
caused the Finns to subsidize uncompetitive grain production rather than
to allow further specialization in dairy and meat operations. Social
concerns drove policies designed to maintain family farms and to give
farmers incomes and working conditions more equal to those of other
workers. The desire to maintain settlements in the sparsely populated
northern provinces led to heavy subsidies for farmers in those regions.
Other goals included stabilizing retail food prices and increasing farm
size and efficiency.
In the late 1980s, agricultural policy making involved tradeoffs
among these partially contradictory objectives. For national security
reasons, the government gave priority to ensuring selfsufficiency in
basic foodstuffs. But self-sufficiency, like other farm-policy goals,
resulted in costly agricultural surpluses that had to be dumped on
international markets. Structural reforms, designed to increase farm
size, could improve efficiency, strengthen family farms, and increase
farm incomes, but they were difficult to implement.
By the early 1960s, the first goal--self-sufficiency--had been
achieved. By the late 1970s, however, surplus production had become a
pressing problem. According to government estimates made in the early
1980s, crop productivity would increase by about 1.5 percent per year,
and productivity in animal husbandry would increase by about 0.5 percent
per year. Because Finland's consumption of agricultural products was
stagnant, crop and animal surpluses would therefore continue to
grow--unless agricultural prices were reduced.
In the late 1970s, the government stepped up programs designed to
encourage farmers to shift production from products in surplus, such as
eggs, milk, and meat, to products that replaced imports, such as wheat,
sugar, and vegetables. Starting in the mid-1980s, worldwide agricultural
surpluses depressed prices and made agricultural exports especially
expensive. In response, the government redoubled its efforts to control
output and to encourage reforestation of surplus farmland. This policy
had begun to make a significant impact by 1987.
Agricultural policy centered on target prices set by the Ministry of
Agriculture and Forestry each spring and fall, after negotiations with
the MTK. Administered under the periodic farm income acts, which defined
general rules for setting farm prices, the negotiations included two
phases. In the first phase, farmers received compensation for increases
in input costs according to a formula laid out in the applicable Farm
Income Act. In the second phase, the negotiations addressed how much
farm labor would be paid. In general, farm pay settlements reflected
nonagricultural wage agreements, and they were based on estimated hourly
wages in agriculture. For example, in the spring of 1986 farmers
received no compensation for input costs, which had been stable (largely
as a result of falling world energy prices), but they did achieve a 6.1
percent increase in income, much higher than the 2.4 percent agreed to
in the 1986 framework agreement for other workers. Observers considered
the settlement to have been generous, but perhaps justified, because
agriculture remained a low-wage sector.
Once the negotiation process had determined overall farm income, the
Ministry of Agriculture and Forestry fixed target prices for individual
crops. In response to overproduction problems, the ministry reduced
prices for surplus products and required that farmers pay part of the
costs of subsidizing exports. Programs to reduce surpluses by lowering
target prices achieved only limited results, however, because increases
in productivity often outweighed declines in target prices. The ministry
established a dual-price system for milk and eggs, which made production
beyond output quotas unprofitable, and implemented a number of voluntary
production controls, including contracts to increase fallow land or to
limit production of milk, beef, pork, and eggs. In the summer of 1987,
the government prohibited clearing fields, introduced measures to
encourage reforestation, and began considering heavier taxes on the
agricultural earnings of part-time farmers as well as increased pensions
for farmers who agreed to retire early.
Subsidies for agricultural consumption were partially effective in
increasing demand for surplus products. Health concerns, however,
apparently limited consumers' willingness to eat more dairy and meat
products. Surplus-reduction measures were having some effect by the late
1980s, but in 1987 farm surpluses remained a serious problem.
Structural reforms also received considerable attention. To slow the
growth of large, "industrial" farms, the government required
licenses for farms that exceeded certain production levels, hoping that
limiting the size of farms would both reduce surpluses and help maintain
family farms. The Agricultural Development Fund provided low-interest
loans and subsidies for investments in farm infrastructure; most of the
loans from this fund went to farmers in northern Finland. Small farmers
who wanted to enlarge their farms could also receive low-interest
credits. In an effort to keep new farmers from falling into debt, the
government also allowed farmers under the age of thirty-five to apply
for state grants when they established a farm. Moreover, the state tried
to make farming more attractive to young people by providing outside
helpers to take over farm operations temporarily. This arrangement
facilitated maternity leaves and even annual vacations.
Farmer training programs, crop research, and extension services
helped farmers to improve agricultural practices. Local schools provided
agricultural training for youths who could later attend specialized
schools; university students could major in agriculture. The Ministry of
Agriculture and Forestry and the universities undertook research
projects that emphasized the development of frost-resistant crop
varieties. The ministry also administered extension services that gave
technical advice and communicated research findings to farmers. These
training and research programs deserved much of the credit for the
progress that farmers had achieved during the postwar period.
Finland - Farm Production Patterns
During most of the twentieth century, Finnish farmers have favored
raising animals over growing plants for human consumption. These
preferences resulted in part from the country's climate and soils, which
were more suitable for the production of feed for animals than for the
production of crops for human consumption. The small size of many farms
also encouraged the emphasis on milk, eggs, and meat; only on a large
farm could a family earn sufficient income from less laborintensive
field crops. Thus, in the late 1980s, about 40 percent of farm income
came from milk; 30 percent, from meat; 9 percent, from grain; 5 percent,
from eggs; and 16 percent, from other products.
Regional ecological variations influenced the distribution of
agricultural production. In the southern and western parts of the
country, where the climate is more favorable and soils are richer,
farmers generally produced grain, poultry, and pigs, while in the north
and the east they specialized in hardier root crops and in dairying. It
was in the north, too, that the country's 200,000 reindeer, one-third of
which were owned by Lapps were raised.
In the late 1980s, cattle operations remained the mainstay of
farming, but Finland's farmers also raised pigs, poultry, and other
animals. Most pigs were raised on relatively large, specialized farms.
Poultry production increased after the mid1960s to accommodate an
increased demand for meat. A more recent development, a response to the
oversupply of traditional animal products, was a shift to fur farming.
By the mid-1980s, about 6,000 farms, especially those in Vaasa Province
along the coast of the Gulf of Bothnia, were producing a substantial
share of the world's mink and fox furs. The Finns exported most furs,
but some were used domestically in luxury clothing.
About 85 percent of Finland's arable land supplied feed for farm
animals. Farmers dedicated more than 30 percent of their land to hay,
silage crops, and pasture. Grains, the most important field crop, took
up slightly more than half the country's arable land. The most widely
planted grain crops--barley and oats--were used primarily to feed
livestock. Rutabagas and mangels, particularly hardy root crops, also
served as animal feed.
Despite the emphasis on producing feed for livestock, the Finns made
substantial efforts to ensure supplies of basic human foodstuffs. By the
1980s, the annual wheat and rye crops, used for making bread, met
domestic demand in years with normal harvests. Potatoes produced high
yields even in the north, and the potato crop was usually large enough
for domestic needs. Domestic sugar beets provided about half of the
sugar consumed in the country. Some farmers, especially those with small
holdings near large cities, specialized in growing vegetables; they
managed to raise as much as 80 percent of the vegetables consumed in
Finland.
Finland - Forestry
Forests played a key role in the country's economy, making it one of
the world's leading wood producers and providing raw materials at
competitive prices for the crucial wood-processing industries. As in
agriculture, the government had long played a leading role in forestry,
regulating tree cutting, sponsoring technical improvements, and
establishing long-term plans to ensure that the country's forests would
continue to supply the wood-processing industries.
Finland's wet climate and rocky soils are ideal for forests. Tree
stands do well throughout the country, except in some areas north of the
Arctic Circle. In 1980 the forested area totaled about 19.8 million
hectares, providing 4 hectares of forest per capita--far above the
European average of about 0.5 hectares. The proportion of forest land
varied considerably from region to region. In the central lake plateau
and in the eastern and northern provinces, forests covered up to 80
percent of the land area, but in areas with better conditions for
agriculture, especially in the southwest, forests accounted for only 50
to 60 percent of the territory. The main commercial tree species--pine,
spruce, and birch--supplied raw material to the sawmill, pulp, and paper
industries. The forests also produced sizable aspen and elder crops.
The heavy winter snows and the network of waterways were used to move
logs to the mills. Loggers were able to drag cut trees over the winter snow to the
roads or water bodies. In the southwest, the sledding season lasted
about 100 days per year; the season was even longer to the north and the
east. The country's network of lakes and rivers facilitated log
floating, a cheap and rapid means of transport. Each spring, crews
floated the logs downstream to collection points; tugs towed log bundles
down rivers and across lakes to processing centers. The waterway system
covered much of the country, and by the 1980s Finland had extended
roadways and railroads to areas not served by waterways, effectively
opening up all of the country's forest reserves to commercial use.
Forestry and farming were closely linked. During the twentieth
century, government land redistribution programs had made forest
ownership widespread, allotting forestland to most farms. In the 1980s,
private farmers controlled 35 percent of the country's forests; other
persons held 27 percent; the government, 24 percent; private
corporations, 9 percent; and municipalities and other public bodies, 5
percent. The forestlands owned by farmers and by other people--some
350,000 plots--were the best, producing 75 to 80 percent of the wood
consumed by industry; the state owned much of the poorer land,
especially that in the north.
The ties between forestry and farming were mutually beneficial.
Farmers supplemented their incomes with earnings from selling their
wood, caring for forests, or logging; forestry made many otherwise
marginal farms viable. At the same time, farming communities maintained
roads and other infrastructure in rural areas, and they provided workers
for forest operations. Indeed, without the farming communities in
sparsely populated areas, it would have been much more difficult to
continue intensive logging operations and reforestation in many prime
forest areas.
Finland's government monitored and influenced all aspects of
forestry. The Ministry of Agriculture and Forestry was responsible for
preparing and implementing forestry legislation. Subordinate to the
ministry, the National Board of Forestry supervised private forests and
managed state-owned forests. The national board also maintained liaison
with the two central forestry boards, which in turn controlled a total
of nineteen district forestry boards. The central and the district
boards were self-governing bodies comprising representatives of the
forest owners, wood-processing industries, and forestry workers. The
boards supervised forest operations, often working in cooperation with
the local forest management associations, which were entirely controlled
and financed by forest owners.
The ministry carried out forest inventories and drew up silvicultural
plans. According to surveys, between 1945 and the late 1970s foresters
had cut trees faster than the forests could regenerate them.
Nevertheless, between the early 1950s and 1981, Finland was able to
boost the total area of its forests by some 2.7 million hectares and to
increase forest stands under 40 years of age by some 3.2 million
hectares. Beginning in 1965, the country instituted plans that called
for expanding forest cultivation, draining peatland and waterlogged
areas, and replacing slow-growing trees with faster-growing varieties.
By the mid-1980s, the Finns had drained 5.5 million hectares, fertilized
2.8 million hectares, and cultivated 3.6 million hectares. Thinning
increased the share of trees that would produce suitable lumber, while
improved tree varieties increased productivity by as much as 30 percent.
Comprehensive silvicultural programs had made it possible for the
Finns simultaneously to increase forest output and to add to the amount
and value of the growing stock. By the mid-1980s, Finland's forests
produced nearly 70 million cubic meters of new wood each year,
considerably more than was being cut. During the postwar period, the
annual cut increased by about 120 percent to about 50 million cubic
meters. Wood burning fell to one-fifth the level of the immediate
postwar years, freeing up wood supplies for the wood-processing
industries, which consumed between 40 million and 45 million cubic
meters per year. Indeed, industry demand was so great that Finland
needed to import 5 million to 6 million cubic meters of wood each year.
To maintain the country's comparative advantage in forest products,
Finnish authorities moved to raise lumber output toward the country's
ecological limits. In 1984 the government published the Forest 2000
plan, drawn up by the Ministry of Agriculture and Forestry. The plan
aimed at increasing forest harvests by about 3 percent per year, while
conserving forestland for recreation and other uses. It also called for
enlarging the average size of private forest holdings, increasing the
area used for forests, and extending forest cultivation and thinning. If
successful, the plan would make it possible to raise wood deliveries by
roughly one-third by the end of the twentieth century. Finnish officials
believed that such growth was necessary if Finland was to maintain its
share in world markets for wood and paper products.
Finland - Fisheries
Even before the 1973 oil crisis, energy was a major concern, and
Finland had started energy-saving programs meant to cut dependence on
imports and to maintain export competitiveness. Nevertheless, the
country had one of the world's highest per capita rates of energy
consumption. The cold climate required that the Finns expend about a
quarter of their energy supply for space heating, while the relatively
long distances separating Finland's settlements required heavy fuel use
for transportation. The importance of energy-intensive processing
industries, including not only the lumber, pulp, and paper sectors but
also the minerals and basic metals sectors, further expanded the
country's energy needs. In the late 1980s, Finland consumed about 30
million tons of oil equivalent per year, distributed among solid fuels
(15 percent), liquid fuels (40 percent), and electricity (45 percent),
which put annual per capita consumption at 0.6 tons of oil
equivalent--about 50 percent higher than per capita consumption in the
United States.
Domestic sources could cover only about 30 percent of total energy
demand, and imported energy supplied the remainder. In 1986 the
government estimated that, even assuming continued efforts at
conservation, energy demand would grow by at least 1 percent per year
during the 1990s and that demand for electricity would grow even faster.
By the late 1980s, policy makers faced important choices in their
efforts to maintain secure supplies of electricity and other forms of
energy. Four major goals governed policy decisions: increasing the use
of domestic energy sources, providing for possible import shortages,
expanding electricity production, and improving conservation programs.
The state played a strong role in energy management. The government
used state-owned energy enterprises and price controls to influence both
production and consumption. The state owned the most important energy
supply enterprises, including Imatran Voima, the largest electricity
producer, which managed the national electricity distribution grid;
Kemijoki, a hydropower concern; Neste, which controlled the import,
refining, and distribution of petroleum and natural gas; and Vapo, a
producer and distributor of peat and other domestic fuels. Another major
policy tool was the control of energy prices, either directly or by
means of taxes and tariffs.
Finland's main domestic energy sources were hydroelectric power,
peat, and wood. By the late 1980s, the country's large hydroelectric
potential had been thoroughly tapped, except possibly for the rivers
protected by environmental legislation. Nevertheless, hydroelectric
production could still be increased by renovating existing installations
and by building additional plants at secondary sites. Encouraged by
investment subsidies and by the results of state-funded research,
Finland had begun systematic exploitation of its peat reserves.
Peatlands covered more than one-third of Finland's surface area, but in
the mid1980s only about 5 percent of this area was being used. The
government hoped to more than double peat output by the year 2000. Wood
was widely used for heating in rural areas, especially after the oil
price increases of the 1970s; it was even more important for the forest
industries, which used waste wood to supply about 60 percent of their
energy needs.
Despite increased use of domestic energy sources, the economy
depended on imports of petroleum, coal, natural gas, uranium, and
electricity. Observers expected that this dependence would get worse in
the 1990s and beyond as consumption increased. Moreover, the fall in
world petroleum prices, starting in the early and mid-1980s, had made
oil imports more competitive and thus might delay investments in
domestic energy sources.
The Soviet Union was traditionally Finland's main energy supplier,
providing petroleum, natural gas, electricity, uranium, and even nuclear
fuel reprocessing services. Energy products played an important role in
Finnish-Soviet trade, accounting for about 80 percent of Soviet exports
to Finland. The decline in world petroleum prices in the 1980s meant
that Finland had to increase the volume of petroleum imports from the
Soviet Union in order to maintain the level of sales to the Soviet
market. To respond to the resulting oversupply of crude petroleum, Neste
began refining oil for export. Finland's imports of Soviet
natural gas transited a pipeline to the southeastern part of the
country, with branches leading to the Helsinki and the Tampere areas. In
the late 1980s, Finland participated in discussions regarding the
construction of a Nordic gas pipeline network that was designed
primarily to transport Soviet gas to other Nordic countries but that
might also carry Norwegian gas to Finland.
The Finns reduced their dependence on Soviet energy by patronizing
other suppliers. For example, during the late 1980s, the Finns began
importing coal not only from Poland and the Soviet Union but also from
the United States, Colombia, and Australia. Coal imports had declined in
the late 1970s as a result of rapid increases in the generation of
electricity from nuclear plants, but they rose again by the mid-1980s to
some 5 million tons per year. Finland also purchased electricity from
Sweden, and the Finns were interested in finding other sources for
electricity imports.
To reduce further their vulnerability to cutoffs of foreign energy
supplies, the Finns also undertook an energy stockpiling program.
Informed observers believed that the country maintained stocks
sufficient to supply it for six months, which compared favorably with
stockpiles held by other industrial countries.
Experts predicted that Finland would face an electricity shortage by
the mid-1990s, unless additional generating capacity came into operation
by then. Electricity consumption had grown faster than energy use as a
whole during the 1980s, largely because more and more households had
switched to electric heating. In the late 1980s, most observers expected
that demand would rise by 2 to 3 percent per year until the year 2000.
Finland's growing needs for electric power spurred attempts to increase
domestic generating capacity, which in early 1986 had reached 10,700
megawatts. In the late 1980s, hydroelectric plants supplied
approximately 30 percent of total electric power. Finland produced about
41 percent of its electricity at four nuclear power plants built between
1977 and 1980: two Swedishmade , 660-megawatt, boiling-water reactors on
the island of Olkiluoto; and two Soviet-made, 440-megawatt,
pressurized-water reactors at Loviisa. Conventional thermal plants
accounted for another 22 percent of electricity production, and imports
from neighbors covered the remaining 6 percent.
In early 1986, the Ministry of Trade and Industry prepared a plan for
the 1990s that called for increasing installed electrical capacity by
about 2,700 megawatts by the year 2000. About 1,200 megawatts of the new
capacity was to come from small plants scattered around the country.
Another 1,500 megawatts would have to come from large
plants--peat-fired, coal-fired, and nuclear. According to the plan,
Finland could either import another 500 megawatts from the Soviet Union
or further expand nuclear capacity.
In the spring of 1986, the Eduskunta almost approved the plan,
including the construction of a fifth nuclear plant. Public reaction to
the nuclear disaster at Chernobyl in the Soviet Union froze
consideration of nuclear power, however, and induced a complete review
of energy policy. Public pressure caused the government to replace the
proposed plant with coal-fired plants. Despite this setback to the
nuclear industry, informed observers believed it probable that Finland
would increase its nuclear capacity in the 1990s, once public opposition
had died down.
Since the 1970s, the government has made considerable efforts to spur
energy conservation. Domestic energy prices have been maintained at
realistic levels--gasoline prices were among the highest in all European
countries--encouraging the public to conserve. The government raised
energy efficiency standards for home construction and renovation,
cutting energy use for heating by 30 to 40 percent over a decade.
Finland pioneered the development of district heating, which used
otherwise-wasted energy from power plants. Observers predicted that this
efficient source of domestic heat would supply half the country's homes
by the year 2000. Environmentalists believed that further energy savings
could be achieved that would reduce the need for building more power
plants, but mainstream opinion supported continued increases in energy
production to support economic growth. Yet no matter how much Finland
conserved, the country would still need to import large amounts of
energy and would face difficult tradeoffs between the benefits and the
risks and costs of various energy options.
Finland - Minerals
Finland contained only limited mineral deposits, and it coninued to
be only a modest producer of minerals. The country's most important
deposits were located at Outokumpu in eastern Finland. Discovered in 1910, the Outokumpu area contained commercially
exploitable deposits of copper, iron, sulfur, zinc, cobalt, nickel,
gold, and silver. In 1953 prospectors discovered a major source of iron
ore at Otanmaki in central Finland. Other sites yielded nonmetallic
minerals, including pyrites and apatite (a low-grade phosphoric ore used
for fertilizer production), and stone for building. The mineral industry
employed more than 60,000 people, but only 500 of them were in mining
and quarrying; the others worked in mineral processing.
The government intervened directly in the mineral sector. Under
Finnish law, the Ministry of Trade and Industry controlled prospecting
and mining rights. The ministry's Geological Survey dominated
prospecting, and it had made most major mineral discoveries. The
ministry controlled most production through joint-stock companies, in
which the state owned most or all of the shares, but in which the
management ran the companies much like private firms. The industry
comprised two large, statecontrolled companies, the Outokumpu Group and
Rautaruukki, and a number of smaller, generally private companies. The
Outokumpu Group, by far the largest producer, operated the Outokumpu
mines, as well as others producing cadmium, chromite, ferrochrome,
mercury, pyrite, and zinc. The company also invested in foreign mines
and produced mining equipment. Rautaruukki controlled the Otanmaki iron
mine, other mines producing cobalt, quartz, and vanadium, and Finland's
largest steel plant.
By the mid-1980s, Finland had exploited most of its limited mineral
deposits and had to work hard to supply its processing industries. The
Geological Survey had undertaken an extensive exploration program to
find new resources. Finnish firms had purchased interests in mineral
operations in other Scandinavian countries, and they had participated in
joint ventures with Soviet enterprises to exploit the rich mineral
deposits on the Kola Peninsula. The leading companies had also developed
vertically integrated structures, investing in all stages of metal
production from the design and production of mining equipment to metal
processing. The Outokumpu Group, for example, was one of the few firms
in the world that controlled all aspects of the production of stainless
steel. Industry leaders hoped that, as mining output fell during the
later years of the twentieth century, overseas investments and vertical
integration would make it possible to maintain employment despite the
exhaustion of domestic mineral resources.
Finland - INDUSTRY
Although industrial development began later in Finland than it did in
many other European countries, by the 1950s manufacturing and processing
had replaced agriculture and forestry as the leading sectors of the
economy. By the late 1970s, the service sector had surpassed industry in
total production and employment, but industry remained the main export
earner, allowing the country to pay for needed imports of energy and raw
materials. Labor efficiency was greater in industry than it was in the
economy as a whole--the one-third of the work force employed in industry
produced about 40 percent of GDP--and it continued to grow at a higher
rate here than it did in other sectors. In turn, industrial wages tended
to be higher and to rise faster than the national average, making
industrial jobs attractive. Thus, although some observers categorized
Finland as a postindustrial society, the Finns strove to maintain
industrial competitiveness, which they saw as the foundation for their
high standard of living. By the early 1980s, however, as a result of the
oil crises of the 1970s and the increased competition in world markets
for manufactured goods, Finnish industry faced serious challenges. Many
observers argued that to maintain industrial exports, the Finns would
have to shift from heavy industry to high-technology products.
The geographical distribution of industry had been strongly
influenced by the relative shortage of raw materials (other than lumber)
and by the small size of the domestic market. The woodprocessing
industries had grown up on rivers near the coast of the Gulf of Bothnia
and the Gulf of Finland, in locations that offered sources of both
lumber and hydroelectric power as well as access to foreign markets. As
many raw materials were imported and most industrial production was
exported, other industries had grown up in the four southern provinces,
especially near Finland's main harbors along the southern coast.
Although the government had implemented policies that favored
development in the north during the postwar period, in the late 1980s
more than 70 percent of industrial jobs were still located in the south.
In the long run, the development of high-technology industries, less
dependent on transportation and energy supplies, might facilitate
efforts to decentralize industry, but such development would be gradual.
Once dominated by the forest industries, Finnish industry underwent
rapid structural change after World War II. A boom in metalworking began
in the immediate postwar years in response to the need to ship capital
goods, including machine tools, ships, rolling stock, and chemicals, to
the Soviet Union. By the mid-1950s, heavy industry had
taken over the leading role traditionally held by wood products.
Beginning in 1957, Finland began to liberalize its trade policies,
forcing domestic industry to compete in world markets and bringing new
industries to the fore, especially metalworking and engineering, but
also petroleum refining, chemicals, plastics, and high-technology goods.
Guided by domestic and foreign tastes and by fierce international
competition, industrial firms had developed a wide range of products and
had maintained quality standards that were often higher than those
typical of industry in the United States. Aware of the relatively small
size of their industry, industrial leaders and government officials
aimed successfully for technological leadership in narrowly defined
subsectors in which Finland enjoyed comparative advantages. Since the
1950s, Finnish firms have been able to dominate world markets for
products such as icebreakers, wood-processing and paper-processing
machinery, and environmental protection equipment. Buyers of such
products were often less sensitive to price increases than they were to
technical innovations, quality, and durability. At the same time,
Finland had avoided some of the structural weaknesses, such as excessive
investments in declining product lines, that plagued the other Nordic
economies.
Finland's industrial structure traditionally was polarized between
large and small firms. In the early 1980s, the vast majority of
Finland's 15,000 industrial firms each employed fewer than 100 people.
These small firms accounted for only about onefifth of the industrial
work force and for slightly more than one-fifth of the value of
industrial output. The approximately 130 firms that employed more than
500 people apiece commanded about 60 percent of the labor force and
produced about two-thirds of industrial output. During the mid-1980s and
the late 1980s, a wave of mergers further reduced the market share of
small firms. Although industry was thus quite concentrated, the
flexibility and innovativeness of small firms had often proven crucial,
and observers believed that small firms would continue to serve
important entrepreneurial functions.
Despite many notable successes, industry faced new difficulties in
the 1970s and the 1980s, in addition to increases in world energy
prices. By the late 1970s, industrial firms faced tougher foreign
competition and had to scramble to maintain their shares of export
markets. To ensure competitiveness, industry needed to renovate existing
plants and to increase sharply investments in high-technology product
lines that could supplement traditional specialties.
Industrial capital formation was a major priority. Although Finland's
relatively recent industrial development meant that many industrial
facilities were still relatively new and efficient, the drive to develop
high-technology production required massive investments. Industrial
firms carried a debt load that averaged about 80 percent of total
assets, making further investment difficult. In the late 1980s, however,
a number of developments promised to improve industrial financing.
Helsinki's financial markets were becoming more innovative, and informed
observers expected that the state would cut taxes on corporate profits,
would eliminate taxes on industrial energy consumption, and would
increase tax credits offered for research and development expenditures.
Despite these positive developments, however, industry needed to attract
more resources from abroad if it were to remain competitive in world
markets.
Finland's industry had long depended on world markets, but until the
1980s direct foreign investment in Finland had played only a minor role.
The country hosted significantly fewer foreign firms than its Nordic
neighbors, partly as a result of limitations on foreign ownership of
Finnish assets. Such regulations had been relaxed after 1980, but
foreign firms still controlled only about 5 percent of industrial
capacity. Finnish firms likewise began to invest abroad in the 1970s.
Thus, whereas in 1970 only 5 Finnish firms had invested in the United
States, by 1987 about 250 had done so. By the late 1980s,
internationalization had begun to supplant the traditional strategy of
specialization, as more and more firms entered joint ventures with
foreign partners and built plants in countries to which they exported.
The trend toward internationalization offered the prospect that Finland
would be able to attract additional capital and up-to-date technologies.
Finland - Industrial Policy
The state had played an important role in Finland's industrial
development, but it did not intervene directly so much as many other
European governments. Intervention in industry began in the
mid-nineteenth century, and it increased over time. Tariff policy and
government procurement, the latter being especially important during the
two world wars, furthered the development of manufacturing. The
government's influence was probably most important in the years after
1944, when Finland struggled to make reparations payments to the Soviet
Union. Partially as a legacy of this period, the state controlled
companies that owned about 15 percent of manufacturing capacity,
employed about 14 percent of the work force, and contributed about 25
percent of industrial value added. The state was especially active in
sectors requiring heavy investments, such as basic metals and
shipbuilding. These state-owned firms, however, did not receive
government subsidies; if unprofitable, they failed. Thus, while the
state controlled most prices and implemented long-term sectoral plans in
agriculture, forestry, energy, and minerals, state-owned firms in
manufacturing remained largely free to manage their own affairs.
In the late 1980s, Finnish industrial policy continued to be
considerably less interventionist than the policies of most West
European countries. The government's strategy for industries that were
having difficulty favored rationalization and restructuring instead of
subsidies. Industry was encouraged to step up investments to increase
productivity and to arrange mergers with domestic and foreign interests
to increase efficiency. Policy makers argued that industry, as a small
sector (compared with that of many other countries) open to private
investment but dependent on exports, must adjust to international
conditions.
Despite this hands-off approach, the government did subsidize the
research and development of new industrial technologies. Research and
development expenditures had remained low until the 1980s, reaching only
slightly more than 1 percent of GNP in 1980. After that time, however,
the government increased such spending, which exceeded 2 percent of GNP
by the late 1980s. The State Technical Research Institute in Otaniemi,
founded in 1942, played an important role in providing industry with
up-to-date information on new technologies; its maritime engineering
laboratory was one of the largest and best equipped in the world. In
1984 the Ministry of Trade and Industry initiated a four-year program of
research on target technologies, including applications of laser
technology to machine engineering, advanced measurement techniques, and
offshore construction techniques for arctic conditions. The government
also sponsored technology parks, such as the one at Oulu, that provided
facilities for cooperative research projects involving industry and
local universities. In addition, investments in technical training
promised a continuing supply of workers able to maintain the quality,
durability, and dependability of Finnish industrial goods.
Finland - Wood-Processing Industries
Wood processing has long been the mainstay of the Finnish economy.
Facilitated by extensive timber supplies, convenient transportation, and
abundant water power, lumbering and papermaking developed rapidly after
1860 to meet growing European demand for paper products and lumber.
Production and export patterns established before 1900 lasted until the
second half of the twentieth century; in the 1950s, wood and paper
products accounted for some 80 percent of total exports. By the 1980s,
however, although the sector had continued to expand in absolute terms,
its share of exports had fallen to about 40 percent as a result of the
rapid growth of the metalworking sector, which had surpassed woodworking
in both value added and employment in 1969.
Despite this relative decline, forest products were still the
country's most important earner of foreign exchange in the late 1980s.
Roughly four-fifths of wood and paper production was sold abroad, while
most raw materials--including energy--were produced at home; and,
although the sector contributed only about onefifth of industrial value
added, it still accounted for about one-quarter of industrial
employment.
Analysts conventionally divided the woodworking industries into two
branches, mechanical and chemical, depending on the primary means of
processing in each branch. The mechanical branch comprised milling,
manufacturing of plywood and particle board, and fabrication of
furniture and building components. In 1986 the branch included some 200
large sawmills that produced most exports and some 6,000 small mills
that met local needs. Products of the chemical branch included pulp and
paper, cardboard, and packaging materials. In 1986 the chemical branch
encompassed twenty-four pulp mills, thirty paper plants, and sixteen
cardboard factories. The division between the two branches was somewhat
artificial, however, as many leading firms operated integrated plants in
which sawdust, waste wood, and chemical byproducts of mechanical
processes served as raw materials for such chemical products as pulp and
turpentine. Industrial waste also supplied a large share of the
industry's needed energy, making the chemical branch self-sufficient and
reducing the energy demands of the mechanical branch.
Finnish manufacturers had long been leaders in developing new
wood-processing technologies. Several firms had developed their own
shops for machine building, and their highly efficient papermaking
equipment had captured an important share of world markets.
In the 1980s, Finland's wood industries experienced increasing
difficulties in exporting, largely as a result of rising input costs.
Wages and stumpage (value of standing timber) rates were traditionally
higher in Finland than they were in many competitor countries. Moreover,
by the early 1990s analysts believed that the mechanical branch, which
consumed about onethird of Finland's electricity, might face an energy
shortage because of the 1986 decision not to build a fifth nuclear
plant. In response, firms modernized their plants and shifted to
higher-value-added products.
In the mid-1980s, interfirm cooperation and a wave of mergers
resulted in concentration of production at a smaller number of centers,
and observers expected that industry restructuring would continue into
the 1990s. An increasing tendency to build plants overseas, which
improved access to Finland's main markets, complemented the merger
drive. The government had stepped in with the Forest 2000 program and
with a system of tax incentives for logging, both of which were designed
to allow wood harvests to increase by about 3 percent per year until the
end of the century. By 1986, moreover, representatives for workers and
landowners, apparently recognizing some of the difficulties faced by the
industry, had negotiated decreases in both wages and stumpage prices.
Finland - Metal Industries
The metal industries led Finland's postwar economic development, and
they were crucial to the country's economic health. Until World War II,
Finland generally produced relatively unsophisticated goods for domestic
consumption. The country's shortages of energy, basic metals, and
capital accounted for the sector's slow development. Although Finland
had produced ships and other capital goods for the Russian market since
the late nineteenth century, the real breakthrough came after 1944. Then
the metalworking industry, goaded by Soviet reparations demands,
overcame its handicaps, sharply increasing both the the quantity and
quality of output. Reparations deliveries ended in 1952, but the Soviet
Union continued to absorb Finnish metal goods. By the late 1950s,
Finland had built an efficient and innovative metalworking sector.
In the 1960s, the metalworking sector, stimulated by the effects of
trade liberalization, embarked on an export drive in Western markets.
Domestic demand rose as a result of both the expansion of the forest and
the chemical industries and major infrastructure projects. Throughout
the 1960s and the 1970s, the sector prospered, growing at an average
annual rate of over 6 percent, higher than the rates of other industrial
sectors. The strategy of specializing in a small number of products in
which the country already possessed a comparative advantage paid off in
export markets. Finnish design, which integrated ergonomics, durability,
and attractive appearance, also helped maintain sales. Thus, the sector
was relatively well prepared to respond in the 1970s, when rapid
increases in energy prices, competition from newly industrialized
countries, and worldwide improvements in capital-goods technologies
threatened profitability.
Beginning in the mid-1970s, metalworking, like the forest industries,
underwent a period of intense rationalization and restructuring--with
only limited state help. By the late 1980s, it appeared that the sector
was well on the way to transforming itself to meet the conditions of
high energy costs. Indeed, metalworking grew faster in Finland than it
did in most industrialized countries, and it remained Finland's leading
industrial sector.
Finnish analysts divided the sector into four branches: basic metals,
machine building, transport equipment, and electrical equipment.
Although many companies were active in more than one branch, the
categories provide a useful framework for reviewing industrial
developments.
Finland - Basic Metals
Shipbuilding, which had led the development of heavy industry,
continuing to be the most important branch of the transport sector, and
it determined the sector's health. The land transportation branch,
however, led by exports of railroad locomotives and rolling stock to the
Soviet Union, provided a valuable supplement to shipbuilding. Finland
first began to produce automobiles in 1969, and it had developed a full
range of vehicles.
By the late 1980s, Finland's shipbuilding industry ranked fifteenth
worldwide. The country boasted eight major shipyards, which employed
about 14,000 highly skilled workers. Unlike many other countries
(including nearby Norway), Finland had avoided large investments in
petroleum tankers, a choice that proved to be a blessing when the world
tanker market slumped in the late 1970s. Instead, Finland had
specialized in high-priced vessels such as icebreakers, luxury liners,
car ferries, ocean exploration vessels, and container ships. Starting in
the 1970s, shipbuilders also had branched out into offshore oil-drilling
platforms and equipment. Finnish icebreakers were world-famous-- the
country had produced about 60 percent of all icebreakers in service by
the late 1980s. Finland also specialized in vessels designed to operate
in arctic conditions. Such projects were well suited to Finnish
expertise, and they yielded higher-value-added products that compensated
for high input costs.
Shipyards exported up to 80 percent of their production, which made
them heavily dependent on world market developments. The shipbuilding
industry had survived the difficult years following the 1973 and the
1979 oil shocks without subsidies from the government (except for
occasional favorable financial packages); these years had seen a wave of
mergers and large-scale investments that had improved competitiveness.
Above all, the industry owed its success to continued orders from the
Soviet Union in a period when demand lagged in Western markets. Finland
was thus the one European country in which the number of shipyard
workers had increased after 1975. During the same period, the Finns
built two new shipyards for oceangoing vessels, established a heavy
engineering works for oil-drilling rigs, and modernized older yards.
By the late 1980s, however, it appeared that shipbuilding was
entering a crisis. The decline in the price of oil in the middle of the
decade caused a reduction in Soviet purchasing power, limiting new
orders for ships. Moreover, Soviet buyers, who had long preferred
Finnish ships, had started to place orders with other countries,
including East European firms that enjoyed lower labor costs. At the
same time, certain Finnish specialties, such as icebreakers, were
attracting competition from more advanced shipbuilding countries such as
Japan.
The crisis in shipbuilding led to a decline in employment and to
further restructuring. In July 1986, two of Finland's four major
shipbuilding companies, Wartsila and the Valmet Group, merged their
shipbuilding divisions and planned to eliminate about 40 percent of
their 10,000 jobs. Another several thousand workers were out of work,
and the increased competition from the new firm threatened the two
remaining firms, Rauma-Repola and Hollming. Indeed, competition had
already undermined an arrangement under which each firm specialized in a
particular field: Wartsila in icebreakers and luxury liners, the Valmet
Group in cargo ships, Rauma-Repola in offshore oil equipment, and
Hollming in high-technology research vessels. As the crisis continued,
industry analysts began to question whether the industry could survive
without government bailouts.
Finland - Electrical Equipment and High Technology
Several smaller sectors contributed significantly to industrial
output. Food processing--concentrating on dairy products, baked goods,
and preserved meats--grew during the postwar period, as rapid
urbanization heightened reliance on processed foods. Indeed, as late as
1970 food processing was the largest sector in terms of gross value of
production (but in terms of value added, food processing ranked only
third that year, behind wood and metal processing). Nevertheless, during
the 1970s and the 1980s, food processing suffered a relative decline.
In the 1980s, the food industry undertook an ambitious research
program aimed at foreign markets. Finnish firms hoped to develop special
foods for the cafeterias of hospitals, mines, and oil rigs as well as to
develop delicacies, such as fresh berries and fresh-water fish. New
technologies, such as plant and animal genetics, freeze-drying,
irradiation, aseptic production, and methods to limit food oxidation,
promised to improve the attractiveness of Finnish products. Another
export was highly automated equipment for bakeries, dairies, and
slaughterhouses. Although Finland's high production costs limited
exports of staple foodstuffs, observers believed that the industry could
expect to sell special products in Europe and in North America.
Finland's chemical industry, established at the time of independence,
had come a long way by its seventieth anniversary in 1987. By the late
1980s, the sector ranked fourth after wood, metal, and food processing.
Oil refining accounted for about half the gross value of chemical
production, followed by fertilizers, plastics, fibers, rubber products,
and other chemicals. Two large, state-owned firms controlled more than
half of chemical production. Neste, established in 1948, was the only
oil-refining enterprise. Its chemical operations had grown out of
refining, while its rival, the Kemira Group, had developed interests in
many products, including fertilizers, paints, fibers, and industrial
chemicals. During the 1980s, both companies had purchased production
facilities abroad in an attempt to remain on top in an international
market that suffered from overcapacity in many basic product lines.
Construction, which accounted for almost 10 percent of GDP in 1950,
declined to less than 8 percent of GDP during the postwar period, as the
country completed its transportation and energy infrastructure and
established heavy industry. In the short term, construction activities
depended on the overall health of the economy. Thus, new building
slumped from 1984 to late 1986 because of a recession and because many
industries invested more in new machines than in new buildings.
Residential construction was also slow in the mid-1980s, but it
responded to financial stimuli after 1985. By late 1986, both commercial
and domestic building were on the rise, increasing by an estimated 3
percent in 1987. Finland also exported construction services, especially
to the Third World and to the Soviet Union, usually to complement
exports of machine goods. The industry was able to offer clients all
types of planning, engineering, and building services for turnkey
factories.
Textiles and ready-made clothing, two of the country's oldest
industries, concentrated on cotton, wool, and knitted goods. During the
postwar period, this sector had declined in relation to other
industries; however, in the 1980s, Finland still produced high-quality
fabrics and fashions for export, especially to Europe. Likewise, Finnish
fur and leather designs had carved out export markets in the developed
countries.
Finland - SERVICES
Under the regulatory structures that had developed since the
mid-nineteenth century, banks had dominated the financial scene, leaving
the stock market and insurance companies to play secondary roles.
Control over investment capital gave a few large banks great power.
Distinct laws for each type of bank contributed to the development of a
fragmented banking structure in which separate types of institutions
served different purposes. Closely regulated by the central bank, the
operations of which depended less on market mechanisms than on capital
rationing, the traditional financial system served Finland's postwar
reconstruction and industrialization well. This same system, however,
appeared outdated in the dynamic international markets of the 1970s and
the 1980s. As a consequence, a process of deregulation and
internationalization was begun, which led to rapid changes in the
financial sector. Observers expected further changes during the late
1980s and the early 1990s. In mid-1988 the process of liberalization was
still incomplete, however, and many institutions retained their
customary roles, making Finland's financial system a peculiar mixture of
new and old.
Founded in 1811, the Bank of Finland (BOF) first provided the
services of a true central bank in the 1890s. Formally independent, the
BOF's management comprised bodies responsible to both the executive and
the legislative branches of government. The governor and a board of
directors, who were appointed by the president of Finland, controlled
day-to-day operations. A nine- member supervisory council, named by and
responsible to the Eduskunta, reviewed bank policy and made most
fundamental decisions, especially those regarding monetary policy. The
BOF served as the lender of last resort, and it regulated the currency
and the financial markets. It also determined monetary policy and
participated in the formulation of government economic strategies.
Although BOF policy originally had concentrated on maintaining the
value of the currency, during the Great Depression of the 1930s the
influence of Keynesian theories began to modify bank policies. After
World War II, the BOF developed regulations designed to favor
reconstruction and the development of manufacturing, and these remained
in force almost unchanged throughout the 1960s. The regulations were
part of a comprehensive government scheme for financial markets that
included foreign-exchange restrictions, regulation of bank lending
rates, a quota system for bank borrowing from the BOF, and an interbank
agreement on deposit rates. At the heart of the system were tax rules
that made interest earnings on bank deposits tax-free and interest
charges paid by companies on loans fully deductible. These two measures
combined to favor bank deposits and to facilitate debt financing for
industry. The BOF used this panoply of regulations to hold borrowing
rates artificially low--generally at negative real rates--to favor
investment. As money markets were not in operation, the BOF resorted to
distributing specific quotas of credits to commercial banks. Strict
limits on the foreign-exchange market protected the system from
international competition.
Besides the central bank, the banking system included a small number
of commercial banks based in Helsinki, many local branches of
cooperative and savings banks, and a small number of state- owned banks.
The commercial banks differed from the others because they could borrow
directly from the BOF, and they controlled most corporate banking. The
networks of savings and cooperative banks primarily served households,
which provided a solid deposit base. The split between the two banking
networks was not absolute, however, as the savings banks and the
cooperative banks had formed their own so-called central banks, which
enjoyed commercial bank status.
Finland's commercial banks were the real leaders of the financial
industry, and they controlled most lending to Finnish corporations.
Although about ten banks were considered to be commercial banks, only
two--the Suomen Yhdyspankki (Union Bank of Finland--UBF) and the
Kansallis-Osake-Pankki (KOP)--were national banks with extensive branch
networks. The four foreign-owned banks active in Finland also operated
as commercial banks.
The cooperative and savings banks served a wide range of regional and
local customers, but usually exercised relatively little economic power.
They tended to specialize in providing home and farm banking services in
rural areas. The savings banks were nonprofit banks designed to promote
saving, and they served small-scale trade and industry as well as
households.
Although private banks formed the backbone of Finland's financial
structure, state-owned banks still accounted for about one-quarter of
bank assets in the mid-1980s. The most important of these, the
Postipankki, had about 40 branches of its own and made its services
available at windows in more than 3,000 post offices throughout the
country. Other state banks included the Industrialization Fund of
Finland, Finnish Export Credit (partially owned by commercial banks and
private industry), and the State Investment Fund and Regional
Development Bank, both of which invested in underdeveloped regions and
in industries with capital requirements that were too large for private
firms.
Finland's commercial banks traditionally were allowed to hold as much
as 20 percent of the total assets of Finnish corporations, and the
leading banks had substantial holdings in the largest corporations. A
1987 law reduced the cap on bank ownership of corporate assets, but the
banks' real power derived from their control over capital supplies.
During the long postwar period of negative real interest rates, banks
controlled the supply of capital--much of which was imported from abroad
by the BOF. The two largest banks, KOP and UBF, built up rival spheres
of influence that extended to many of Finland's largest industrial
firms.
The crises and the restructuring of the late 1970s and the early
1980s provided the leading banks with further opportunities to
strengthen their hold on Finnish industry. Starting in the late 1970s,
KOP and UBF arranged many mergers among the wood- processing companies;
by the mid-1980s, they had turned their attention to rationalization in
the metal-processing industry. Several banks also engaged in takeover
battles through the Helsinki Stock Exchange.
In the 1970s, several developments combined to reshape the operations
of the postwar financial system. First, many corporations began to
search for investment opportunities that offered both liquidity and
higher rates of return than those offered for bank deposits. Second, as
Finland shifted from importing capital to investing abroad, the old
restrictions on foreign-exchange transactions became burdensome.
Finally, a number of major Finnish corporations, having large shares of
the domestic market, sought to expand abroad. Some, intent on foreign
acquisitions, wanted to sell stocks on world exchanges in order to build
assets sufficient for world-scale operations.
By the late 1970s, in response to the increasing internationalization
of corporate life, the BOF management became convinced of the need to
liberalize the regulatory system. The bank relaxed controls on borrowing
abroad, and it allowed the establishment of an interbank money market;
at the same time, the banks began to compete on interest rates for large
deposits. These two developments caused Finnish interest rates in the
corporate market to float up toward world levels, while the rates for
most small depositors remained controlled. In 1982 the BOF allowed
foreign-owned banks to open branches in Finland. In 1984 the BOF
permitted Finnish banks to establish branches abroad, abolished
bank-specific credit allocation, and began to levy identical reserve
requirements on all banks. In 1987 legislation on bank deposits
eliminated their traditional tax-free status. And in early 1988, the
government proposed new banking laws that would put all major banks on
the same legal footing.
The BOF had thus been willing to deregulate corporate banking
partially, but important aspects of the regulatory system remained
unchanged. The BOF continued to watch closely both foreign long-term
borrowing and investments abroad by Finnish corporations. Retail banking
continued much as before: small deposits placed at the regulated rates
were tax-free, and the banks maintained their interest-rate cartel. The
Finns had become accustomed to low and stable interest rates; proposals
regarding interest were politically sensitive and might influence
incomes agreements. Most observers thus expected that the BOF, ever
cautious, would not rush toward further deregulation.
One effect of the liberalization of financial regulations and the
internationalization of Finnish commercial life was the revival of the
Helsinki Stock Exchange. Turning away from debt financing, more and more
corporations issued stocks and bonds in the 1980s. Starting in 1982, the
stock exchange attracted foreign investors, who accounted for about
one-third of turnover in 1985. Younger, more prosperous Finns showed
increased interest in stocks. As a result, although the market suffered
a major slump in the second half of 1984, by late 1986 the stock index
had increased tenfold compared with its 1980 level.
Incorporated in 1984, and almost immediately shaken by allegations of
insider trading, the stock exchange in 1985 issued new regulations that
were intended to increase the openness of its operations, thereby
increasing its attractiveness for small investors. In 1987 the
government reduced restrictions on foreign investors and passed a law
allowing banks and insurance companies to set up mutual funds. In the
fall of 1987, options exchanges opened, offering new instruments to
stock traders. Also likely to enliven the market was legislation of the
same year that eliminated the tax-free status of bank deposits. As
Finnish equities continued to offer better rates of return than those on
many markets, stock brokers had good reason to be optimistic.
Insurance companies, once marginal actors in capital markets, became
Finland's largest institutional investors, after the establishment of
compulsory insurance schemes in the early 1960s. After that time,
insurance grew faster than the economy as a whole, and it contributed
some 5 percent of GNP in the mid-1980s. As the result of restructuring
in the early 1980s, there were about fifty insurance companies,
associated in five large groups. The insurance companies placed about
two-fifths of their investments in industry and an additional fifth in
commerce. Other investments included other insurance firms and real
estate.
Finland - Tourism
Trade in agricultural commodities, consumer products, and services
had been relatively limited, but exchanges with the outside world were
crucial for industry. Not only had the forest industries grown largely
in response to foreign demand for wood and paper, but the metal-working
industry had also taken off only under the goad of postwar reparations
deliveries to the Soviet Union. By the mid-1980s, exports accounted for
half of all industrial output and for as much as 80 percent of the
output of the crucial forest industries. Similarly, imports of energy,
raw materials, and investment goods remained essential for industrial
production. The development of export-oriented industries had driven
Finland's postwar structural transformation, indirectly affecting the
rest of the economy. Industrial competitiveness would largely determine
the economy's overall health into the 1990s.
During the postwar period, Finnish exports shifted from lumber and
other raw materials to increasingly sophisticated products, a change
which reflected the increasing diversification of the country's economic
structure. The forest industries continued to dominate exports, but,
while they had accounted for about 85 percent of total exports in 1950,
they accounted for only 40 percent by the mid-1980s. The relative shares
of different forest exports also shifted. Sawn timber and various board
products accounted for more than one-third of total exports in 1950, but
by 1985 they had fallen to only 8 percent. Exports of pulp and paper
fell more gradually during the same period, from 43 percent of exports
to about 30 percent. Pulp and cardboard, the main exports of the
chemical wood-processing branch, declined in importance, while
specialized paper products incorporating higher value added, such as
packing material, printed paper, and coated paper, grew in importance.
Taking the place of forest products, exports of metal products grew
rapidly during the postwar period from a little over 4 percent of
exports to about 28 percent. Here, too, exports of more sophisticated
manufactured goods grew faster than those of basic products. By the late
1980s, basic metals accounted for about 20 percent of metal exports,
ships for about 25 percent, and machinery and equipment for about 20
percent. Advanced products such as electronics and process-control
equipment were gaining on conventionally engineered products. The
chemical industry had exported relatively little until the 1970s, but by
1985 it had grown to account for about 12 percent of exports. By
contrast, the textile, confectionery, and leather goods industries had
peaked at over 10 percent in the late 1970s and early 1980s, and then
they had fallen to about 6 percent of exports by the mid-1980s. Minor
export sectors included processed foods, building materials,
agricultural products, and furs.
Up to the 1970s, Finland tended to export wood-based products to the
West, and metal and engineering products to the East. By the mid-1980s,
however, Finnish machines and high-technology products were also
becoming competitive in Western markets.
Finland's imports had consisted primarily of raw materials, energy,
and capital goods for industrial production, and in the late 1980s these
categories still accounted for roughly twothirds of all imports. The
commodity structure of imports responded both to structural changes in
domestic production and to shifts in world markets. Thus, the heavy
purchases of raw materials, energy, and capital goods up until the
mid-1970s reflected Finland's postwar industrial development, while the
subsequent period showed the influences of unstable world energy prices
and Finland's shifts toward high-technology production. Imports of
investment goods climbed from about 15 percent in 1950 to almost 30
percent in the late 1960s and early 1970s, only to fall again by the
1980s to about 15 percent. Foodstuffs and raw materials for the textile
industry accounted for about half of all raw material imports during the
1950s, but by the 1980s inputs for the chemical and metal-processing
industries took some 75 percent of raw material imports. World energy
prices had strongly influenced Finnish trade because the country needed
to import about 70 percent of its energy. After rising slowly until the
early 1970s, the value of oil imports had jumped to almost one-third of
that of total imports in the mid-1970s, then had fallen with world oil
prices to about 13 percent by the late 1980s.
Like its export markets, Finland's import sources were concentrated
in Western Europe and the Soviet Union. The country usually obtained raw materials,
especially petroleum, from the East and purchased capital goods from the
West.
Finnish service exports had exceeded service imports until the early
1980s. Up until this time, shipping and tourism earnings had generally
exceeded interest payments to service the national debt. In the
mid-1980s, however, the balance was reversed as the earnings of the
merchant marine declined and Finns began to spend more on tourism
abroad. Although Finnish businesses tried to compete in these
labor-intensive sectors, the country's high wage levels made shipping
and tourism difficult to export.
Like other Nordic countries, Finland's trade was concentrated in the
Nordic area and in Europe. Unlike the others, however, Finland had, as
its most important trading partner, the Soviet Union. During the postwar
years, trade with the Soviets had expanded and contracted in response to
political developments and market forces. During the immediate postwar
period, the Soviet share of Finland's trade, spurred by reparations
payments, rose to over 30 percent. However, the following two decades
saw this share gradually decline as Finland expanded exports to Western
Europe. A second cycle began after the 1973 oil crisis, when recession
in Western markets cut demand for Finnish products while the increased
value of Soviet oil deliveries to Finland allowed expanded exports to
the East. Finnish exports to the Soviet Union rose sharply during the
years after 1973, only to fall--along with world petroleum prices--by
1986.
By the late 1980s, the geographical distribution of Finland's trade
was moving back to the pre-1973 pattern. In 1986, for example, although
the Soviet Union continued to be Finland's single largest trade partner,
trade with West European countries, which together accounted for about
61 percent of Finnish trade, was much more important than trade with the
Soviet Union. Finland's main trade partners in Western Europe were
Sweden, which took the biggest share of Finnish exports, and the Federal
Republic of Germany (West Germany), which supplied the largest slice of
Finnish imports. East European countries other than the Soviet Union
accounted for only slightly over 2 percent of trade. Non-European
countries were responsible for some 19 percent of trade. The United
States, Finland's main non-European trade partner, accounted for over 5
percent of Finnish exports and imports in 1987.
As in many small European countries, the postwar trade policy of
Finland had been to pursue free trade in industrial products while
protecting agriculture and services. During the 1980s, strict quotas
still blocked imports of most agricultural commodities (except for
tropical products that could not be produced domestically), but
liberalized regulations allowed increased imports of services,
especially financial services. Most industrial imports and exports were
free of surcharges, tariffs, and quotas under multilateral and bilateral
agreements between Finland and its major trading partners. Health and
security concerns, however, inspired restrictions on imports of products
such as radioactive materials, pharmaceuticals, arms and ammunition,
live animals, meat, seeds, and plants. With a few exceptions, Finland
discontinued export licensing in the early 1960s. The State Granary,
however, controlled all trade in grains, while the Roundwood Export
Commission reviewed all lumber exports.
Finland - Finnish Direct Investment Abroad
From the end of World War II until the 1970s, Finland imported large
amounts of capital to finance infrastructure investment and industrial
development; however, by 1987 Finnish capital exports exceeded capital
imports by about six to one. During the earlier period, foreign firms
had set up subsidiaries in Finland, but few Finnish enterprises had
established branches 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.
Government policies helped achieve greater international integration
of productive facilities. During the 1980s, legislation relaxed limits
on foreign investment in Finnish firms, allowing foreigners to hold up
to 40 percent of corporate equities; likewise, the BOF loosened
restrictions on capital exports. The Technology Development Center
(TEKES), under the Ministry of Trade and Industry, sponsored
international cooperation in research and development. The government
also arranged for Finnish participation in joint projects sponsored by
the European Space Agency (ESA) and the European Community (EC),
including the EC's Eureka technology development program. Although it
was still too early to predict how Finland would perform in
international joint ventures, many observers felt that such enterprises
were the best way for the country to achieve industrial progress.
Finland - Ties to West European Markets
Although trade with Western Europe developed slowly in the early
postwar years, by the 1980s it was more important than trade with the
East. During the early and mid-1950s, when the West European countries
liberalized trade and exchange regulations under the OEEC, Finland
maintained import and export controls inherited from World War II and
the reparations years. Conducting almost all trade under bilateral
agreements (except for occasional trilateral deals worked out with the
Soviet Union and another East European country), Finland saw its trade
grow only slowly. Thus, although the forest industries were competitive,
the economy as a whole remained isolated. The Finns did participate to a
limited extent in international economic organizations, joining the
International Monetary Fund (IMF), the World Bank, and the General
Agreement on Tariffs and Trade (GATT) in the late 1940s. The country
also became a member of the Nordic Council and agreed to a Nordic labor
market, but did not favor a Nordic common market because of Soviet
opposition. Faced by the growing movement toward West European economic
integration after 1955, Finland ran the risk of remaining on the
sidelines, not only because of Soviet pressures but also as a result of
domestic protectionism.
It was not until 1957 that the Finns first shifted their policy
toward Western Europe in a move designed to protect access to
traditional export markets, especially in Britain, and to shift economic
activity to branches in which the country had a comparative advantage at
a time when extensive economic growth was reaching its limits. The new
policy package combined an austerity program, a sharp currency
devaluation, and multilateral tariff reductions for trade in industrial
goods arranged through the Helsinki Club, which was a model for further
trade agreements. In effect, Soviet opposition had blocked Finnish
membership in the OEEC, leading the Finns to set up the Helsinki Club,
which the OEEC countries, agreeing to apply their liberalized import
lists to Finnish goods, then joined. In 1958 Finnish authorities further
liberalized trading conditions by making the Finnish mark convertible in
European markets.
Since the late 1950s, Finland has consistently pursued freer trade in
industrial products with the members of EFTA and the EEC, while
protecting domestic agriculture to maintain food supplies and while
controlling oil imports to safeguard trade with the Soviet Union. Under
the FINEFTA agreement, signed in March 1961, Britain and other EFTA
states extended associate membership and free-trade arrangements to
Finland. In 1969 Finland joined the Organisation for Economic
Co-operation and Development (OECD), the successor to the OEEC. Although
the OECD played a minor role in commodity trade, its recommendations
regarding cooperation among industrialized free-market economies touched
on issues such as freer trade in services and liberalized capital
transfers. When two important trading partners, Britain and Denmark,
switched from EFTA to the EEC, Finland (like the other EFTA states)
negotiated with the EEC an industrial free-trade agreement that came
into effect in 1974. In 1986 Finland became a regular member of EFTA,
the Soviet Union's finally having recognized that the organization posed
no threat to its security or its trade interests. Under these freetrade
agreements, virtually all Finnish industrial goods entered West European
markets duty-free (but they sometimes faced troublesome nontariff
barriers). These arrangements led to rapid increases in trade with
Western Europe, stimulating specialization and improving economic
efficiency in Finland.
Finnish business intensified its interest in Western Europe during
the mid-1980s and the late 1980s, as falling oil prices led to a
curtailment in trade with the Soviet Union. In 1986 and 1987, the Finns
managed to shift trade smoothly from Eastern to Western markets, a
development that soothed trade worries. Despite this success, in early
1987 prominent Finns voiced fears that the EC's plan to unify its
markets by 1992, a plan approved in June 1985, might harm Finnish trade
interests. According to this line of thought, the elimination of the
remaining hindrances to trade in commodities, the establishment of free
markets in services and capital, and the further harmonization of
European macroeconomic policies would favor EC products, reducing
Finnish access to EC markets. Commentary became especially heated after
reports that other EFTA states, including Norway and Austria, were
considering joining the EC, as Portugal had done in 1986. Moreover, the
tendency for EC countries to expand cooperation from economic matters to
security questions made Finnish membership in the EC politically
impossible.
Informed analysts noted that, as it had in the years after 1957,
Finland could maintain access to European markets without undermining
its independent foreign policy. Although deepened integration among the
EC countries would tend to reduce EC-EFTA trade, Finland and the other
EFTA countries were not defenseless. As a group, the EFTA countries
formed the EC's largest trading partner and could exert considerable
pressure on EC harmonization decisions. Indeed, the EC had demonstrated
some willingness to cooperate with the EFTA countries in April 1984,
when representatives of the two trading groups issued the Luxembourg
Declaration, which called for reduced technical barriers to trade, for
common norms in information technology and telecommunications, and for
greater cooperation in multilateral research and development programs.
Even if EFTA efforts lagged, Finland could maintain trade ties with the
EC by aligning national technical norms, commercial practices, and
economic policies with those chosen by the EC. Other arrangements were
also possible. For example, in 1986 Finland joined the ESA (which
included other non-EC countries), participating in the group's earth
observation satellite program as well as in basic research efforts. In
effect, expanded technical cooperation offered the prospect that, while
integration with the EC countries would extend far beyond commercial
agreements during the 1990s, Finland could participate without
sacrificing political neutrality.
