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Economy of Finland

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Economy of Finland
CurrencyEuro (EUR)
calendar year
Trade organisations
EU, WTO, OECD and others
Statistics
GDP$185.9 billion (2007 est.)
GDP growth
4.5% (2007 est.) [2]
GDP per capita
$33,500 (2006 est.)
GDP by sector
agriculture: 2.5%, industry: 31.7%, services: 65.9% (2007 est.)
2.7% (2007 est.)
Population below poverty line
N/A
Labour force
2.68 million (2007 est.)
Labour force by occupation
agriculture and forestry 4.4%, industry 17.5%, construction 6%, commerce 22%, finance, insurance, and business services 12%, transport and communications 8%, public services 30.2% (2006 est.)
Unemployment6.9% (2007) [1]
Main industries
metals and metal products, electronics, machinery and scientific instruments, shipbuilding, pulp and paper, foodstuffs, chemicals, textiles, clothing
External
Exports$92.62 billion (2007 est.)
Export goods
machinery and equipment, chemicals, metals; timber, paper, pulp (1999)
Main export partners
Germany 11.3%, Sweden 10.5%, Russia 10.1%, UK 6.5%, US 6.5%, Netherlands 5.1% (2006)
Imports$76.36 billion (2007 est.)
Import goods
food stuffs, petroleum and petroleum products, chemicals, transport equipment, iron and steel, machinery, textile yarn and fabrics, grains
Main import partners
Germany 15.6%, Russia 14%, Sweden 13.7%, Netherlands 6.6%, the People's Republic of China 5.4%, UK 4.7%, Denmark 4.5% (2006)
Public finances
32.9% of GDP (2007 est.)
Revenues$124.2 billion (2007 est.)
Expenses$114 billion (2007 est.)
Economic aiddonor: ODA, $1.023 billion (2007)
All values, unless otherwise stated, are in US dollars.

Finland has a highly industrialized, free-market economy with a per capita output equal to that of other western economies such as France, Germany, Sweden or the UK. The largest sector of the economy is services at 65.7 percent, followed by manufacturing and refining at 31.4 percent. Primary production is at 2.9 percent.[2] With respect to foreign trade, the key economic sector is manufacturing. The largest industries[3] are electronics (21.6 percent), machinery, vehicles and other engineered metal products (21.1 percent), forest industry (13.1 percent), and chemicals (10.9 percent). Finland has timber and several mineral and freshwater resources. Forestry, paper factories, and the agricultural sector (on which taxpayers spend around 2 billion euro annually) are politically sensitive to rural residents. The Greater Helsinki area generates around a third of GDP. In a 2004 OECD comparison, high-technology manufacturing in Finland ranked second largest after Ireland. Knowledge-intensive services have also ranked the smallest and slow-growth sectors – especially agriculture and low-technology manufacturing – second largest after Ireland. Investment was below expected.[4] Overall short-term outlook was good and GDP growth has been above many EU peers. Inflation has been low, averaging 1.8 percent between 2004 and 2006.

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

History

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

After World War II

Property rights were strong. While nationalization committees were set up in France and UK, Finland avoided nationalizations. After failed experiments with protectionism, Finland eased restrictions and made a free trade agreement with the European Community in 1973, making its markets more competitive. Local education markets expanded and an increasing number of Finns also went abroad to study in the United States or Western Europe, bringing back advanced skills. There was a quite common, but pragmatic-minded, credit and investment cooperation by state and corporations, though it was considered with suspicion. Support for capitalism was widespread.[5] Savings rate hovered among the world's highest, at around 8% until the 80s. In the beginning of the 1970s, Finland's GDP per capita reached the level of Japan and the UK. Finland's economic development shared many aspects with export-led Asian countries.[5]

In 1991 the Finnish economy fell into recession, the magnitude of which was similar to that of the Great Depression. This was caused by a combination of economic overheating, depressed Western, Soviet and local markets, and the disappearance of the Soviet barter system. Stock market and housing prices declined by 50%.[6] The growth in the 1980s was based on debt, and when the defaults began rolling in, GDP declined by 13% and unemployment increased from a virtual full employment to one fifth of the workforce. The crisis was amplified by trade unions' initial opposition to any reforms. Politicians struggled to cut spending and the public debt doubled to around 60% of GDP.[6] Much of the economic growth in the 1980s was based on debt financing, and the debt defaults led to a savings and loan crisis. Total of over 10 billion euro were used to bail out failing banks, which led to banking sector consolidation.[7] After devaluations the depression bottomed out in 1993.

Liberalization

Like other Nordic countries, Finland has liberalized the economy somewhat since late 1980s. Financial and product market regulation was removed. State enterprises were privatized and taxes were cut. However, unlike in Denmark, trade unions blocked job market reforms, blocking social security reform proposals towards basic income or negative income tax. Finland joined the European Union in 1995. The central bank was given an inflation-targeting mandate until Finland joined eurozone.[6] The growth rate has since been one of the highest of OECD countries and Finland has topped many indicators of national performance.

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

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

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

Industry

From the1990s industry, which for centuries had relied on the country's vast forests, became dominated by electronics and services as globalization has lead to a decline of traditional industries.[8] Out sourcing means that manufacture has been transferred abroad with Finnish based industry focusing on R&D and Hi tech electronics.

Forestry

Nokia founded Finland's first wood pulp mill, in 1865. About 70 per cent of Finland is covered with forest and one in five Finns earn their livelihood from trees - directly or indirectly, accounting for almost 30 percent of total exports and 2.4 percent of the GDP in 2001.[9] One quarter of Finland's export revenue is derived from these industries. 90 per cent of the paper made in Finland and 70 per cent of the sawmill products are exported, mainly to Western Europe. Finland has three major international forest corporations - Stora Enso, UPM and M-Real producing pulp, paper, board and sawn goods, paper machines and logging equipment. Research organisations and universities contribute to the forest industry. Wood processing also supplies materials for the packaging industry, which includes one of the world's largest packaging companies, Huhtamäki (e.g. disposable tableware, in which plastic is also a raw material). Wood is of course the most important raw material in furniture, the biggest manufacturer in Finland being Isku and the most famous perhaps Artek, which markets furniture designed by Alvar Aalto.

Media

Finnish media has its roots in the traditional forest sector producing raw materials for printing. This industry benefits from advances in electronic communications and rapidly developing telecommunications. Being a sparsely populated area, Finland has high penetration of cell phones and Internet connections. [10] The biggest media company in Finland is SanomaWSOY but the industry is expanding quickly with many of Finland's startup companies being in this area. New media companies such as Mediatonic are growing rapidly[11]

Electronics

The Finnish electronics and electrotechnics industry relies on heavy investment in R&D, and has been accelerated by the liberalisation of global markets. Electrical engineering started in the late 19th century with generators and electric motors built by Gottfried Strömberg. Now part of the ABB Group. Other Finnish companies – such as Instru, Vaisala and Neles (now part of Metso) - have succeeded in areas such as industrial automation, medical and meteorological technology. Nokia, is a world leader in mobile telephony.

Metals and Mechanical Engineering

Finland has an abundance of minerals but the large mines have closed down and most raw materials are now imported. For this reason, companies now tend to focus on high added-value processing of metals. The Metals Industry exports over 70 per cent of output to over 60 countries. This includes the production steel, copper, zinc and nickel and the production of finished products such as steel roofing and cladding, welded steel pipes, copper pipe and coated sheets. Outokumpu is known developing the flash smelting process for copper production and stainless steel.

The mechanical engineering industry is Finland's largest employer,[12] including forest and paper industry machines, mining and quarrying equipment, forest and agricultural tractors, ship building, lifts, hoists, diesel motors, valves and power stations. Many companies are globally known and hold market leadership, such as Wärtsilä, producers of large diesel engines and Assa Abloy, a global leader in the manufacture of locks and locking systems. In 1999, mechanical engineering and metals manufacturing industries employed 187,175 people, and total revenues reached around FMk123 billion.[13]

Chemical Industry

The chemical industry is one of the Finland's largest industrial sectors with its roots in tar making in the 17th century.[14]It produces an enormous range of products for the use of other industrial sectors, especially for forestry and agriculture. In addition, its produces plastics, chemicals, paints, oil products, pharmaceuticals, environmental products, Biotech products and petrochemicals. Biotechnology is regarded as one of the most promising high-tech sectors in Finland and it is growing extremely rapidly. The major companies are Kemira's fertilizers and explosives and Neste's oil refining.

Energy Industry

Finland's energy resources are limited and the major industries are energy-intensive, so a significant share of all energy must be imported. Local sources include timber and by-products of the forest industry, bio-fuels, peat, nuclear reactors, wind power and hydroelectric power. Finland's energy production is divided as follows: 24% oil, 21% wood fuel, 16% nuclear power, 14% coal and 11% natural gas. Peat, hydropower and wind power are negligible by comparison, as are electricity imports. One half of all the energy consumed in Finland goes to industry, one quarter to heating buildings and one fifth to transport.[15]

Companies

Aleksanterinkatu, a commercial street.

Notable companies in Finland include Nokia, the market leader in mobile telephony; Stora Enso, the largest paper manufacturer in the world; Neste Oil, an oil refining and marketing company; UPM-Kymmene, the third largest paper manufacturer in the world; Aker Finnyards, the manufacturer of the world's largest cruise ships (such as Royal Caribbean's Freedom of the Seas); Instrumentarium Imaging, the creator of the Orthopantomograph (Pan X-Ray machine) and world innovative leader of dental imaging systems and software; KONE, a manufacturer of elevators and escalators; Wärtsilä, a producer of power plants and ship engines; and Finnair, the largest Helsinki-Vantaa based international airline.[16] Finland has sophisticated financial markets comparable to UK in efficiency.[17] Though foreign investment is not high, the largest foreign-headquartered companies included names such as ABB, Tellabs, Carlsberg, and Siemens.[18]

Companies that have their headquarters in Finland are quite international[citation needed], and a few of the largest tend to dominate the economic statistics. Around 70-80% of the equity quoted on the Helsinki Stock Exchange is owned by foreign-registered entities[19]. The larger companies get most of their revenue from abroad, and the majority of their employees work outside the country. Cross-shareholding and other uncompetitive practices have been abolished and there is a trend towards an Anglo-Saxon style of corporate governance. However, only around 15% of residents had invested in stock market, compared to 20% in France, and 50% in the US.[18] As elsewhere in Western Europe, the environment is less favorable to small companies and small shareholders than in the US and UK[citation needed]. Hence ownership is quite concentrated.[18]

Large Finnish companies tend to be older than in the US[citation needed]. Between 2000-2003, early stage venture capital investments relative to GDP were 8.5 percent against 4 percent in the EU and 11.5 in the US. Later stage investments fell to the EU median.[20] Invest in Finland and other programs attempt to attract investment.[21] In 2000 FDI from Finland to overseas was 20 billion euro and from overseas to Finland 7 billion euro. Acquisitions and mergers have internationalized business in Finland.

Household income

Finland's income is generated by the approximately 1.8 million private sector workers, who make an average 25.1 euro per hour (before the median 60% tax wedge) in 2007.[22] In 2003 residents worked on average around 10 years for the same employer[23] and around 5 jobs in lifetime. 62 percent worked for small and medium-size enterprises.[24] Female employment rate was high and gender segregation on career choices was higher than in the US.[25] In 1999 part-time work rate was one of the smallest in OECD.[25]

Unemployment rate was 6.8% and employment rate 68% in early 2008.[26] The unemployment security benefits for those seeking employment are at an average OECD level. The labor administration funds labor market training for unemployed job seekers, which is often vocational. The aim of the training is to improve the channels of finding employment. Very much like in Sweden[27], the government is often accused of "cleaning the unemployment statistics" by vocational training programmes.[28]

Future liabilities are dominated by the pension deficit. Unlike in Sweden, where pension savers can manage their investments, in Finland employer chooses a pension fund for the employee. The pension funding rate is higher than in most Western European countries, but still only a portion of is funded and pensions exclude health insurances and other unaccounted promises.[29] Directly held public debt has been reduced to around 32 percent in 2007.[30] In 2007, the average household savings rate was -3.8 and household debt 101 percent of annual disposable income, a typical level in Europe.[31]

Household consumption

In 2006, there were 2,381,500 households of average size 2.1 persons. 40 percent of households consisted of single person, 32 percent two and 28 percent three or more. There were 1.2 million residential buildings in Finland and the average residential space was 38 square meters per person. The average residential property (without land) cost 1,187 euro per sq metre (without land) and residential land on 8.6 euro per sq metre. Consumer energy prices were 8-12 euro per kilowatt hour.[32] 74 percent of households had a car. There were 2.5 million cars and 0.4 other vehicles.[33] Around 92 percent has mobile phone and 58 percent Internet connection at home. The average total household consumption was 20,000 euro, out of which housing at around 5500 euro, transport at around 3000 euro, food and beverages excluding alcoholic at around 2500 euro, recreation and culture at around 2000 euro. Upper-level white-collar households (409,653) consumed an average 27,456 euro, lower-level white-collar households (394,313) 20,935 euro, and blue-collar households (471,370) 19,415 euro euro.[34]

Public policy

See also: Nordic model

Finnish politicians have often emulated other Nordics and the Nordic model.[35] Nordics have been free-trading and relatively welcoming to skilled migrants for over a century, though in Finland immigration is relatively new. The level of protection in commodity trade has been low, except for agricultural products.[35]

As an economic environment, Finland's judiciary is efficient and effective. Finland is highly open to investment and free trade. Finland has top levels of economic freedom in many areas, although there is a heavy tax burden and inflexible job market. Finland is ranked 16th (ninth in Europe) in the 2008 Index of Economic Freedom.[17] Recently, Finland has topped the patents per capita statistics, and overall productivity growth has been strong in areas such as electronics. While the manufacturing sector is thriving, OECD points out that the service sector would benefit substantially from policy improvements.[36] The IMD World Competitiveness Yearbook 2007 ranked Finland 17th most competitive, next to Germany, and lowest of the Nordics.[37] while the World Economic Forum report has ranked Finland the most competitive country.[38] Finland is one of the most fiscally responsible EU countries.

Product market

Economists attribute much growth to reforms in the product markets. According to OECD, only four EU-15 countries have less regulated product markets (UK, Ireland, Denmark and Sweden) and only one has less regulated financial markets (Denmark). Nordic countries were pioneers in liberalizing energy, postal, and other markets in Europe.[35] The legal system is clear and business bureaucracy less than most countries.[39] For instance, starting a business takes an average of 14 days, compared to the world average of 43 days and Denmark's average of 6 days. Property rights are well protected and contractual agreements are strictly honored.[17] Finland is rated one of the least corrupted countries in Corruption Perceptions Index. Finland is rated 13th in the Ease of Doing Business Index. It indicates exceptional ease to trade across borders (5th), enforce contracts (7th), and close a business (5th), and exceptional hardship to employ workers (127th) and pay taxes (83rd).[40]

Job market

According to the OECD, Finland's job market is the least flexible of the Nordic countries.[35] Finland increased job market regulation in the 1970s to provide stability to manufacturers. In contrast, during the 90s, Denmark liberalized its job market, Sweden moved to more decentralized contracts, whereas Finnish trade unions blocked most reforms. Many professions have legally recognized industry wide contracts that lay down common terms of employment including seniority levels, holiday entitlements, and salary levels, usually as part of a Comprehensive Income Policy Agreement.[35] Some consider these agreements to be bureacratic, inflexible, and, along with tax rates, a key contributor to unemployment and distorted prices. Possibly it may also slow down structural change as there are fewer incentives to acquire better skills.[4][35] Trade unions have traditionally lobbied for anti-immigration policies, but Finland has now made some effort to improve the economy's competitiveness and marketing as a destination for skilled foreign workers.

Taxation

The middle income worker suffers from a nearly 60 percent tax wedge[35] and effective marginal tax rates are very high.[4] Value-added tax is 22 percent for most items. Capital gains tax and corporate tax are 26 percent, about the EU median. Property taxes are low, but there is a stamp duty of 4% for home sellers.[4] Alcoholic beverages are separately taxed and highly restricted. For instance, McKinsey estimates that a worker has to pay around 1600 euro for another's 400 euro service[41] - restricting service supply and demand - though some taxation is avoided in the black market and self-service culture. Another study by Karlson, Johansson & Johnsson estimates that the percentage of the buyer’s income entering the service vendor’s wallet (inverted tax wedge) is slightly over 15%, compared to 10% in Belgium, 25% in France, 40% in Switzerland and 50% in the United States.[42] Tax cuts have been in every post-depression government's agenda and the overall tax burden is now around 43% of GDP compared to 51.1% in Sweden, 34.7% in Germany, 33.5% in Canada, and 30.5% in Ireland.[43]

State and municipal politicians have struggled to cut their consumption, which is very high at 51.7% of GDP compared to 56.6% in Sweden, 46.9 in Germany, 39.3 in Canada, and 33.5% in Ireland.[17] Much of the taxes are spent on public sector employees, many of which are jobs-for-life and amount to 124,000 state employees and 430,000 municipal employees.[4] That is 113 per 1000 residents (over a quarter of workforce) compared to 74 in the US, 70 in Germany, and 42 in Japan (8% of workforce).[44] The Economist Intelligence Unit's ranking for Finland's e-readiness is high at 13th, compared to 1st for United States, 3rd for Sweden, 5th for Denmark, and 14th for Germany. Also, early and generous retirement schemes have contributed to high pension costs.[4] Social spending such as health or education is around OECD median.[4] Social transfers are also around OECD median. In 2001 Finland's outsourced proportion of spending was below Sweden's and above most other Western European countries. Outsourcing to free market has saved costs and increased customer satisfaction. For instance, Finland's health care is more bureaucrat-managed than in most Western European countries, though many use private insurance or cash to enjoy private clinics. Better access to private services is very popular among voters and small reforms toward more equal marketplace have been made in 2007-2008.[45] In education, child nurseries, and elderly nurseries private competition is bottom-ranking compared to Sweden and most other Western countries.[35] Some public monopolies such Alko remain, and are sometimes challenged by the European Union. The state has a programme where the number of jobs decreases by attrition: for two retirees, only one new employee is hired.

References

  1. ^ Statistics Finland - Labour Market
  2. ^ "Finland in Figures – National Accounts". Statistics Finland. Retrieved 2007-04-26.
  3. ^ "Finland in Figures – Manufacturing". Statistics Finland. Retrieved 2007-04-26.
  4. ^ a b c d e f g Finland Economy 2004, OECD Cite error: The named reference "oecd2004" was defined multiple times with different content (see the help page).
  5. ^ a b Growth and Equity in Finland, World Bank
  6. ^ a b c Inflation targeting: Reflection from the Finnish experience
  7. ^ Converted
  8. ^ http://virtual.finland.fi/netcomm/news/showarticle.asp?intNWSAID=28308
  9. ^ http://www.nationsencyclopedia.com/economies/Europe/Finland.html
  10. ^ http://www.finnfacts.com/english/company
  11. ^ http://thenextweb.com/2008/10/07/the-list-of-finnish-startups/
  12. ^ http://www.finnfacts.com/english/company
  13. ^ http://www.nationsencyclopedia.com/economies/Europe/Finland.html
  14. ^ http://virtual.finland.fi/netcomm/news/showarticle.asp?intNWSAID=28308
  15. ^ http://virtual.finland.fi/netcomm/news/showarticle.asp?intNWSAID=28308
  16. ^ "The largest companies (turnover)". Largestcompanies.com. Retrieved 2007-04-30.
  17. ^ a b c d Economic freedom: Finland
  18. ^ a b c Onko omistamisella väliä (in Finnish)
  19. ^ http://virtual.finland.fi/netcomm/ImgLib/3/133/ecograph2.gif
  20. ^ [http://www.etla.fi/files/1892_the_nordic_model_complete.pdf by Torben M. Andersen, Bengt Holmström, Seppo Honkapohja, Sixten Korkman, Hans Tson Söderström, Juhana Vartiainen]
  21. ^ Invest in Finland
  22. ^ Tehdyn työtunnin hinta 23-27 euroa, Statistics Finland
  23. ^ Keskustelua suomalaisen työelämän luonteesta ja sen muuttumisesta
  24. ^ Tilastokeskus - Pienten ja keskisuurten yritysten merkitys työllistäjinä on kasvanut
  25. ^ a b The Nordic Model of Welfare: A Historical Reappraisal, by Niels Finn Christiansen
  26. ^ Statistics Finland: Labour Market
  27. ^ FT.com / World - 'Real Swedish jobless rate 15%'
  28. ^ Employment vs unemployment rates in the EU - Europe Forum
  29. ^ Ikääntymisen taloudelliset vaikutukset ja niihin varautuminen
  30. ^ CIA Factbook: Public Debt
  31. ^ [1] (in Finnish)
  32. ^ Sähkön hinta kuluttajatyypeittäin 1994-, c/kWh
  33. ^ Statistics Finland: Transport and Tourism
  34. ^ Own-account worker households' consumption has grown most in 2001-2006
  35. ^ a b c d e f g h The Nordic Model by Torben M. Andersen, Bengt Holmström, Seppo Honkapohja, Sixten Korkman, Hans Tson Söderström, Juhana Vartiainen
  36. ^ Kilpailuvirasto: OECD:n raportti suosittelee kilpailun lisäämistä palvelualoilla
  37. ^ World Competitiveness Yearbook 2007
  38. ^ "Global Competitiveness Report". World Economic Forum. Retrieved 2007-01-22.
  39. ^ Finland economy
  40. ^ Economy Rankings, Doing Business Report 2008, World Bank
  41. ^ McKinsey: Finland's Economy
  42. ^ Karlson, Johansson & Johnsson (2004), p. 184.
  43. ^ Government Finance
  44. ^ Is Japan's bureaucracy still living in the 17th century? | The Japan Times Online
  45. ^ Three quarters would like to raise private health care KELA reimbursements (in Finnish)

See also

Other links

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