Economy of Finland

Among the OECD countries, Finland is one of the late industrialising ones. Up until the 1950s, it was still a predominantly agrarian society. The industrialisation process really took off in the latter part of the 19th century, but the income per capita level remained roughly one half of that of Great Britain—the leading economy at that time. The loss of 10 per cent of its territory, including Viipuri (now Vyborg) and the manufacturing centres of Karelia, during World War II deprived Finland of a substantial amount of its resources. One-third of its hydro electricity, one-quarter of its chemical pulp production, 12 per cent of its productive forests and 9 per cent of its arable land were ceded to the Soviet Union. By the end of World War II, the Finnish economy had virtually collapsed. The reparations schedule imposed on Finland by the Soviets was to be paid in metal goods, heavy engineering products, ships and electrical cables. An intensive programme of investment, much state financed, was undertaken to bring Finland up to the level where it could begin to make reparations. Unlike some other countries devastated by the war, Finland received no foreign aid to help rebuild its broken economy.

Economy of Finland

The transformation from a rural society to an urban industrialised country had to be quick. Driven by the need to meet the Soviet’s reparations, industrialisation made great strides. The reparations schedule eventually ended in 1952. For the next two decades after this, Finland began to prosper. The country recognised that it could not compete in the world of mass production along with countries like the USA and Britain. However, it has become among the top ten industrialised nations of the world, specialising in products in which skill, design, originality and flair account for more than bulk, volume and mass production. Finnish scientists help keep Finland at the cutting edge of new technologies in the fields of electronics and timber products. Production is concentrated on high-value technology orientated products, computer-controlled mechanical systems, special types of vehicles, mobile phones and shipping.

Finnish Expertise

Finland sells its expertise all over the world. Amongst other projects, the Finns designed and built the roads in Tanzania.

Timber is still the raw material of greatest economic value and it is fascinating to see the enormously long trucks, loaded with freshly felled logs, driving across the country. Finland is the most heavily wooded country in Europe, covering 72 per cent of its lands. 63 per cent of the forests are in the hands of private owners, which equates to one in five families being owners. Sixty-six per cent of the total output of the forestry industry is exported. Timber, furniture, paper, pulp, cellulose and various chemicals are its products and Finnish scientists lead the way in finding innovative new ways to use wood and its derivatives. Finland has the largest copper mines in Europe, exports zinc and nickel, but has to import all its oil and coal. Today’s top exports are: first, electronics and telecommunications; second, paper, pulp wood and board; third, metal exports, advance machinery and equipment.

Today, Finland is not only one of the most open economies in the world, but also one of the leading knowledge-based economies. Research and development expenditure in relation to GDP is one of the highest in the world—about 3.5 per cent. Higher education enrollment is well above the OECD average; number of researchers in relation to population is higher than in any other country. During the 1990s, the economy oriented heavily towards ICT (information and communication technologies) and by the end of the decade, the country was the most ICT specialised economy in the world. Finland has been ranked top in virtually all international comparisons measuring competitiveness, or knowledge economy developments—including the World Bank Knowledge Economy Index and OECD’s Student Assessment tests (the so called PISA studies).

GDP structure in 2005

This transition to a knowledge economy is quite remarkable, especially when considering Finland’s economic situation in the early 1990s. Finland went through one of the worst recessions of any experienced by the Western economies in 1990s, characterised by a major banking crisis and the accumulation of government debt from modest levels to over 60 per cent, and approaching international lending limits. The Soviet Union had accounted for 25 per cent of all Finnish exports and its demise cost the country dearly. Once the most expensive country in world (1990), Finland soon became one of the cheapest. From almost full employment, 500,000 jobs disappeared in two years. Finland suffered 20 per cent unemployment, the second highest in Europe. This proved to be an unimaginable burden on the state and in an effort to reduce the deficit the government imposed heavy spending cuts.

However, spending on education and grants for private research and development were actually increased. By 1995, Finland had become a net exporter of know-how and hightech products. By the end of 1999, industrial production had grown by record-breaking figures. The biggest increase took place in the electronics and electro-technical industry, where the growth rate accelerated to 40 per cent. The primary factor boosting growth in industrial production is exports. The Trade Unions, who are a powerful force in the Finnish economy with 83 per cent of the work force, allowed salaries to be pegged at 1.7 per cent over two years, thus helping to keep inflation down. There are strict rules governing working hours and holidays, as Finland pursues a very generous social welfare programme. Finland was one of 11 countries whose economy qualified to begin using the new Euro currency at the beginning of 1999. (Their strict alcohol laws have been relaxed since joining the EU.) By the end of the decade, the country’s macroeconomic performance was among the strongest in Europe.

Main Destinations of Export 2009
Germany 10.32 per cent
Sweden 9.79 per cent
Russia 9 per cent
US 7.85 per cent
Netherlands 5.9 per cent
UK 5.2 per cent
Main Origin of Imports 2009
Russia 16.2 per cent
Germany 15.76 per cent
Sweden 14.65 per cent
Netherlands 6.99 per cent
China 5.29 per cent
France 4.22 per cent

Exports are now about 40 per cent of GDP with IT technology having the highest share of exports today. In 1900, 85 per cent of all exports were forestry related; now they account for only one-third. Finland is the second largest exporter of paper in the world. Nokia is the world’s largest manufacturer of mobile phones. Metal mining, technology and engineering together make up exports almost as large as paper. The service and construction industries are playing an increasingly important part in the Finnish economy. There are very close historical and cultural links between Finland and Estonia which gave Finland a competitive advantage when the Baltic States, with its population of over 7 million, opened up to international trade. Unemployment is down to 7.3 per cent (August 2010) and inflation, which hovers between 1 to 2 per cent annually, is 1.4 per cent (September 2010).

The Finnish experience confirms what the recent economics literature emphasises— institutions and organisations play an even more important role in economic growth than we have thought so far. In the case of Finland, two key elements are worth mentioning: education system and consensus building mechanisms.

The Finnish experience shows that it is possible to make a dramatic recovery in GDP, undertake a major restructuring, and turn a crisis into an opportunity in a short time, as long as there is a real sense of urgency, supporting institutions and political consensus of what needs to be done. The Finnish case is not unique in this respect. Korea turned its major 1997 financial crisis into an opportunity and undertook a major reform of its economic incentive and institutional regimes. The Finnish transformation to a knowledgebased economy was, no doubt, to a large extent a business driven process, but policies and institutions played a role too. There was a clear shift in policy making in Finland in the 1990s. High priority was given to sound macroeconomic policies to overcome the recession, but at the same time there was a gradual shift to microeconomic policies, i.e. innovation, technology and education policies. It was recognised that, after all, the competitive edge of an economy is created at micro level: in firms, innovation and policy organisations, and educational institutions.

Finns and Technology

Figures released at the end of 1999 showed that 67 per cent of the Finnish population had mobile phone subscriptions. As of 2010 there are now more mobile phone subscribers than people! Innovations by small technology companies have brought Finland to the forefront of development in the field of health care, in which the need to improve service efficiency grows as the population ages. One service creates better conditions for diabetes patients to care for themselves by allowing them, via mobile phone and the Internet, to give information on blood glucose measurements, dosage of insulin used, meals and exercise to a database, thus eliminating the need for patients in sparsely populated areas to travel long distances to see a specialist.

In 1999, as it was written earlier: “Finland is poised in a strong position to become one of the world’s most successful economies.” At the outset of 2000, the Finnish Telephone Giant, Nokia, was Europe’s biggest company by capitalisation. In 2003, Finland outranked all other countries in global competitiveness, reflecting the country’s ability to sustain its high rates of growth based on 259 criteria, including openness of the economy, technology, government policies, and integration into trade blocks. Currently, Finland leads the world in The Economist’s Environmental Sustainability Rating. This is based on five broad, durable areas: environmental systems, the reduction of environmental stress, the reduction of human vulnerability, social and institutional capacity and global stewardship. Finland is also the world leader in the management of water resources, and it was back in 1896 that she passed a law forbidding the wasteful use of forest resources and the compulsory planting of new trees to replace any felled to create sustainability. Finland is unrivalled in various fields of technology and number one in the world for network readiness for ICT. No wonder The Economist and the Financial Times in the UK recently stated that “the Future is Finnish”.

Nearly 20 years ago, Finland was a closed society. Foreigners were unable to work in the country unless they had an exceedingly specialist job. Those who married a Finn found that the formalities took forever to grant them the right to live and work there. Finland was like a fortress. Foreigners were not allowed to own land or property without a special dispensation at ministerial level and they were not allowed to hold the majority of shares in any business. Today Finland is open, has more immigrants than emigrants and Helsinki has turned into a very cosmopolitan city.

During the past five years, immigration into Finland from other EU countries has been higher than emigration from Finland to other EU countries. In 2006, Finland had a migration gain of 3,300 persons from other EU countries. Immigration into Finland from other EU countries has been growing since 1997. Emigration from Finland into other EU countries has remained stable during the past few years. However, although Finland seems very welcoming to foreigners, especially foreign scholars and technical experts, the number granted residency is very low: just 0.4 per cent of the population.

Main Economic Indicators

 2008 2009 2010 2011 2012
GDP (change in volume, %)  0.9 -8.0 2.1 2.9 2.6
Industry (change in volume, %)  -0.3 -17.8 6.8 6.0 4.5
Imports of goods and services (change in volume, %)  6.5 -18.1 4.0 7.3 4.3
Exports of goods and services (change in volume, %)  6.3 -20.3 6.1 8.0 5.0
Private consumption (change in volume, %)  1.7 -1.9 2.0 2.0 2.7
Public consumption (change in volume, %)  2.4 1.2 0.4 0.7 0.7
Current account (% of GDP)  3.5 1.3 1.4 1.1 0.7
General government net lending (% of GDP) 4.2 -2.7 -3.3 -1.4 -0.8
Consumer price index (change %) 4.1 0.0 1.5 2.5 2.0
Unemployment rate (%) 6.4 8.2 8.6 8.2 7.9