To The Finland Station And Back Again

This post accompanies my recent piece on Sweden. I have been scratching my head and trying to see what could be learnt from making a comparison between Finland and Sweden. Some of the differences are obvious – one is in the euro, and the other isn’t, once can adjust monetary policy and currency values, and the other can’t. Others are less so. Finland’s goods trade surplus has been declining steadily since joining EMU while Sweden’s has remained relatively constant. And Swedish males live on average three years longer than their Finnish counterparts. So what is important here, and why? And if convergence theory has anything positive to be said for it, shouldn’t we be able to observe so sort of convergence going on here.

First, and just to remind ourselves, here is the chart from Claus Vistesen which shows what the relation between population ageing and current account balance might look like. The key point is that as populations age beyond a certain point, a tendency to run a current account surplus emerges, as domestic demand steadily weakens, and becomes insufficient to drive growth. Evidence for this phenomenon can be found in Germany, Japan and Sweden.

The idea is that as median population age rises the current account dynamics of a country change. The last ageing phase shown to the right of the diagram is purely speculative at this point, although theory suggests that if the underlying momentum of ageing is left unaddressed it may well be what happens. But it is a development which is to be strongly avoided since although we do not yet know what happens when a society starts to dis-save at an advanced median age, the longer we can put off finding out, the better.

Which is why looking at Finland is important, since unlike the three aforementioned “ideal type” agers, Finland has in fact seen a deterioration in its external position over the last decade, and even though it has, up to now, remained a surplus country, the trend is certainly towards deficit, and this trend needs to be halted and reversed. Indeed this is the most pressing policy problem facing the Finnish authorities during the current recession.

Now, as in Finland, Sweden’s external position underwent a structural shift in the mid 1990s, just as Claus’s model predicts. First positive balance – the submarine breaks water – in 1994, meadian age 38.4 (quite young in international comparisons so interesting). So so far so good.

So Sweden is a sort of normal case, now let’s look at Finland. Once more the mid 1990s “transition” is clear. Finland moves from deficit to surplus. But unlike the Swedish case the surplus peaks around the turn of the century, and since then has been steadily weakening.

There can be a number of explanations for this. The pattern of ageing could, for example, be different in Finland. Or the euro might be a factor, with the loss of control over monetary policy leading to a steady deterioration in the level of international competitiveness. As we will see below, some part of the explanation may be provided by each of these, but first, lets take a look as some of the empirical aspects of Finland’s present recession, since it is evident that Finland, like many other countries, has entered a strong recession on the current back the global crisis.

Strong Decline In Finland’s GDP

In the first three months of this year GDP was down by 2.7% when compared with the last three months of last year (an 11.2% annualised rate of contraction).

And it was down by 7.5% when compared with the first quarter of 2008 (Eurostat data).

One significant difference which can already be noted between Sweden and Finland is that while the last three months of 2008 were definitely much worse than the first three months of 2009 in Swedan, in Finland, as in many other Eurozone economies, Q1 2009 was definitely much worse than Q4 2008. And indeed, while Sweden’s economy shows some definite signs of small green shoots in Q2 2009, as far as we can see, Finland’s economy still remains deeply mired in recession. Finland does not have a local variant of the ubiquitous Purchasing Managers Surveys, but the statistics office does maintain a monthly gross domestic product (GDP) indicator. Now, while the methodology is very different (the PMI composites are survey based and qualitative, and much more reliable) for what it is worth Finland’s GDP indicator fell 9.2 percent in April in comparison with April 2008, that is to say, the year on year contraction was greater than in the first quarter, but it is difficult to draw any definitive conclusion from this, since there are many statistical factors at work here.

According to Statistics Finland building and manufacturing industry were the hardest hit.

The April data showed production in construction and manufacturing – both key contributors to the Finnish economy – down around 17 percent year-on-year. Production in April was down 0.6 percent from March. Output in agriculture and forestry showed slight growth on an annual basis of just below two percent, while services fell six percent.

And the outlook for the rest of this year does not look much brighter. The OECD forecasts growth in the Finnish economy will fall by 4.7 percent in 2009 with a return to 0.8 percent growth next year. Significantly the OECD also stressed that uncertainty in the evolution of international trade poses the greatest risk in the outlook for the Finnish economy.

The IMF currently expects the economy to shrink by 5.2 percent this year and again by 1.2 percent next year, while the latest finance ministry forecast is for a 6.0 percent shrinkage this year followed by 0.3 percent growth next year. All the 2009 forecasts seem to be subject to downside risk, while the 2010 ones are no better than guesses, since the level of uncertainty is so high, and Finland is so dependent on external trade, but further contraction seems more probable than growth at this point.

Short Term Indicators

Industrial output fell again in May (year on year) for the seventh consecutive month, and was down by 23.2 percent over May 2008. This follows a revised fall of 21.3 in April.

Month-on-month, industrial production also fell – by 2.2 percent from April when it fell by 3.8 percent over March. So the industrial situation is deteriorating, not improving at this point. Output fell in all main sectors, with metal industry reporting the biggest decline around 28 percent, while the paper industry production also shrank by nearly 28 percent year-on-year.

Over the January to May period, industrial output decreased by close on 22 per cent from the corresponding period in the previous year. And there seems to be little improvement on the horizon. According to Statistics Finland, the value of new orders in manufacturing was 39.6 per cent lower in May 2009 than in May 2008, slightly above the January to May average decrease of 38.9 per cent year-on-year.

As in earlier months, the decline in new orders was strongest in the metal industry (47.5 per cent). In the chemical industry new orders fell by 30.7 per cent, in the textile industry by 28.5 per cent and in the manufacture of paper, and paper and board products by 19.4 per cent.

Construction activity is also well down, falling by 14.4% year on year in March (the latest detailed data we have), and by around 17% in April according to the GDP indicator.

Finland did not have a massive construction boom. The construction of new dwellings shows no obvious surge in the first decade of the century.

On the other hand rate of household indebtedness is up, with the ratio of debt to disposable income rising to 101.4 percent in 2007, from 70.3 percent in 2002. Significantly, the rate of indebtedness among households composed of persons in the key 25 to 34 age range reached 189 percent in 2007. House prices seem to be a story of one long steady march upwards since 1995, but prices did start to fall in 2008, and this trend now seems set to continue.

Retail sales, which give us a measure of domestic demand, are also falling, if still only moderately. According to Eurostat, retail trade sales fell by 2.99 percent year on year in April. According to the Finnish Statistics Office, sales between January-April were down by 1.6 percent over a year earlier. During the same time period, motor vehicle trade sales were down 31.8 percent and wholesale trade sales down 17.5 percent.

Finland’s unemployment rate continues to rise, and at an accelerating pace. The increase in those unemployed from April to May alone was greater than that in the whole of last autumn, according to Statistics Finland. From January to May the seasonally adjusted jobless rate was up by two percent and there were more than 300,000 people recorded as without work in May, 60,000 more than in May 2008, taking the national unemployment rate as measured by Finland Statistics to 10.9 percent.

Using the EU (ILO compatible) methodology, Eurostat report the May unemployment rate as 8.1 percent. The OECD expect unemployment to continue to rise in Finland, and forecast an unemployment rate of 8.7 percent this year, rising to 10.8 percent next year (ILO methodology).

The OECD is also worried about employment in Finland in the longer term, and point out that while the country has taken important steps to remove the barriers to employment of older workers (see the OECD publication Ageing and Employment Policies in Finland) more needs to be done. Since the early 1990s, Finland has introduced programmes to support the employment of older workers, notably the National Programme on Ageing Workers. It has also recently undertaken a major reform of the old-age pension system and will phase out early retirement schemes.

However, Finland’s median age is rising steadily (see chart above) and the old-age dependency ratio (population aged 65 and over as a proportion of the population aged 20-64) is projected to increase from 25% in 2000 to 43% in 2025 compared with an OECD average of 22% in 2000 and 33% in 2025. This is a very steep rise, and raising employment rates among the older population is going to be the key to meeting the challenges presented by the need to find export lead growth.

According to the OECD, only around 30% of people aged 61 are currently working – a drop of more than 50 percentage points compared with 51 year olds. This steep drop in employment rates can primarily be explained by the fact that Finland has too many pathways to early retirement, notably unemployment benefits, unemployment pension, disability pension and individual early retirement pension. Already at the age of 50, 18% of individuals are receiving either unemployment or disability benefits, increasing to more than 46% by the age of 60. Moreover, in the age group 60-64 most unemployed persons transfer to the unemployment pension with a further 20% relying on disability benefits and about 10% rely on the individual early retirement pension.

Deflation dynamics

Like Sweden, the inflation data also throws into the limelight the disparity between the EU HICP measure (which does not include housing interest) and the national CPI (which does). Year-on-year inflation, calculated by Statistics Finland dropped to 0.0 per cent in May, while in April it was still 0.8 per cent. According to Statistics Finland the drop was primarily due a fall in food prices and interest rates. Between April and May, consumer prices fell by 0.2 per cent. On the EU HICP index, however, year on year inflation is currently running at 1.5 percent. Thus, in a time of falling house prices and lowered interest rates, the HICP totally underestimates the deflation danger.

It is important to remember here that two-thirds of Finland’s housing stock consists of owner-occupied homes, and home ownership is widespread in all forms of housing, including apartments as well as detached houses and row houses. Normally falling interest rates would produce rising house values, due to the affordability effect, but under current conditions we are observing the opposite. I can’t help feeling that European monetary policymakers need to think more about this type of thing.

More evidence for deflationary headwinds is offered by producer prices for manufactured products, which fell by 8.1 per cent year on year in May. Export prices were down 9.8 per cent and import prices fell by 11.7 per cent. The year-on-year change in the wholesale price index was -8.9 per cent.

So Where Are We?

Finland’s economy faces important challanges in both the short and long terms. Finland’s state debt is low at the present time, which gives the capacity for short term stimulus and bank bailouts. But it is rising, and reached a record high of 70.6 billion euros by the end of the first quarter of 2009. General government debt, calculated according to Eurostat methodology, grew by 7.5 billion euros in January-March, and reached 38 percent of 2008 gross domestic product (GDP). Still, there is plenty of stimulus ammunition left, the important thing is to use it wisely, and try to engineer an economic transition.

The severe contraction in the Finnish economy is also likely to take its toll on bank credit fundamentals, according to the credit rating agency Moody’s. The agency recently reaffirmed its negative outlook for the Finnish banking system. Up until now the Finnish banking sector – lead by Pohjola Bank and local branches of Nordea and Danske Bank – appear to have been weathering the storm without undue difficulty due to minimal exposure to toxic assets and a focus on traditional banking activities, according to Moody’s. However:

“Given that the crisis on financial markets has now spread extensively into the real economy, Moody’s expects Finnish banks to be adversely affected,” according to the latest report. Moody’s said an increase in bankruptcies was indicative of the weakened credit environment.

Corporate bankruptcies increased 33 percent in January-May from a year ago, according to Statistics Finland.

The Finnish government has already approved one supplementary budget for 2009 including a special stimulus package. The overall impact is estimated at around €2 billion (although new spending is estimated at only €1.2 billion), and includes about €140 million in transport infrastructure projects. The government has committed itself to implementing a guaranteed pension from the beginning of March 2011. This will cost around €111 million a year, and will raise the lowest pensions by about €100 a month – affecting about 120,000 people.

There have also been a number of measures aimed directly at helping corporate finance. The government now offers banks operating in Finland both deposit guarantees and capital, and will also invest its pension funds in corporate bonds, offer companies financial support through the specialised state-owned finance company, Finnvera, and provide partial financing for the construction of thousands of new homes through the state-owned credit institution Kuntarahoitus (Municipal Finance).

Overall, the government has pledged about €60 billion in guarantees, loans and investments, and is expecting a boost of €45 billion in corporate financing. Prime Minister Vanhanen described the decisions as ‘massive, even gigantic’. The largest sums of money are in the bank support package, which aims to secure the continuity of corporate credit. In fact, the Finnish parliament has already approved guarantees of €40 billion to help banks to raise capital.

But in the longer term the issues raised at the start of this post need to be addressed. Competitiveness needs to be restored to the Finnish economy, and exports boosted, as illustrated by the REER chart below. In particular the situation pre 2007 needs to be restored. The change is not massive (maybe only 5% or so), so it is doable, and it needs to be done, especially since the Swedish Krona has been significantly devalued.

As mentioned previously, the goods trade balance has been deteriorating, and the earlier positive balance now needs to be restored.

One of the things that stands out is Finland’s differential preformance vis a vis Sweden. Using data prepared by Eurostat which shows the volume indexes of GDP per capita as expressed in Purchasing Power Standards (PPS) (with the European Union – EU-27 – average set at 100) it is apparent that a gap exists (see below) and that it is not being closed. In fact, after 1998 the two lines move tantalisingly in tandem, but with Finnish per capital GDP stuck just short of the Swedish level. Any reading on these indexes of over 100 implies that the country’s level of GDP per head is higher than the EU average and vice versa, and relative movements in the indexes imply that the rates of change in GDP per capita are either improving more or less rapidly than the EU average. The basic data behind the charts is expressed in PPS which effectively become a common currency eliminating differences in price levels between countries making possible meaningful volume comparisons of relative GDP per capita. Since the index is calculated using PPS figures and expressed with respect to EU27 = 100, it is only valid for cross-country comparison purposes and not for individual country inter-temporal comparisons, nonetheless charts based on such data are extraordinarily revealing.

So the real reason is why (given some sort of loose convergence expectation) this gap is not being closed. There can be several explanations. One may be differences in institutional quality (education systems, for example), another might be the impact of euro membership: it could be, for example, that, as OECD economists Jorgen Elmeskov and Romain Duval argued in a suggestive paper (Structural reforms in product and labour markets) presented at the 2005 ECB conference “What effects is EMU having on the euro area and its member countries?”, that membership has up to now slowed down rather than accelerating the reform process. Thirdly, the issue could be differential demographics. Few economists seem willing to investigate this possibility in any depth, despite mounting evidence that it may be important.

One demographic indicator that springs to mind immediately when I think about these two countries is the differential in life expectancy. Swedish males live on average around 3 years longer than Finnish males (see below). Now this may be important, although no one has started to calibrate this effect yet. The economic intuition for the importance would be, think of investment in a machine (physical capital), then obviously the value of the investment is greater (other things being equal) if the machine keeps running five years longer.

Things cannot be that much different with human capital. The education and on the job training costs are similar, but the person is able to work three years less. Is it mere coincidence that labour market exit at 61 is so typical if the health outlook is worse? Here are the relative labour force participation rates for me between 55 and 65. It is my contention that this alone accounts for a substantial part of the GDP per capita difference between the two countries.

But the solution to this problem is not an easy one, and the OECD and others really need to think much more seriously about this phenomenon when they indisciminately propose raising higher-age participation rates across the board as a solution to the declining workforces problem.

What is involved here is a complex mix of health provision, lifestyle and genetic differences, and any response needs to take account of all of these.

Raising the health and life expectancy of the Finnish population would be one sure way to raising GDP per capita, another way (in the longer term) would be raising fertility back up to replacement levels, and a third path would be extending the younger labour force by encouraging immigration (which interestingly has been on the rise in the Helsinki area in recent months, although if many of the newcomers simply arrive from equally affected Estonia this is nothing more than moving the deckchairs around). Whichever way you look at it though, in both the short and longer term the deterioration in Finland’s trade surplus needs to be addressed. If it isn’t the outcome will not be a pleasant sight.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

9 thoughts on “To The Finland Station And Back Again

  1. I love the graphs on construction output. There are 25% and 16% peaks – this at the time when every politician worried that the construction sector was “overheating”. But in spite of this, there’s no increase in the completed dwellings?

    So, what’s the deal? “Dwellings” include only those houses and flats which serve as abodes for actual people, but excludes supermarkets, shopping centres, nuclear reactors and other stuff like that?

    I wouldn’t call it a “massive boom”, but at least on the street level, and judging by that first graph, the surge in Finnish construction activity, when compared with the late ’90s, was visible enough.

    (Focusing on private construction, of course, and leaving aside roads, bridges and other such public works, although there was an increase even on that part of the construction sector.)

    Other than that, while it’s not your intention, there are some anti-EU populist politicians who would read this with delight, cherry-picking those comments where you propose that “the euro might be a factor, with the loss of control over monetary policy leading to a steady deterioration in the level of international competitiveness” and “it could be that the EMU membership may have up to now slowed down rather than accelerating the reform process”.

    Also, yes, the old-age pension system became more flexible in 2005; whether this could be described a “major reform” depends on the viewpoint. This is still an incendiary topic. The Prime Minister’s proposal of gradually raising the minimum pension age from 63 to 65 caused a massive political uproar back in March. The end result was that the government withdrew its initial proposal, and the trade unions hammered down a new, watered-down resolution which stated that the “average exit age of 59,4 from the labour market should be raised by three years”… by the year 2025.

    Wow, what an achievement! Is this what you mean when you note that “the government will phase out early retirement schemes”? Because I sure didn’t see it that way. Frankly, it seemed like just another “let’s make it sure that the baby-boomers are safe and cozy, and dump this on the next generation instead”-decision.

    As for encouraging immigration, not likely to happen. At the moment, populism, nativism and xenophobia are on a steady rise, and recession is likely to intensify these feelings. With the rising unemployment rates, the obvious question is, as always, “why should we import here more people when we can’t provide work for our own?” Mainstream politicians can’t afford subscribing to these feelings openly, but they’ll have to pander to the popular majority opinion at least passively, if nothing else.

    I might also note that at the moment, the acting government is practically impotent and paralyzed by the election funding scandal. This is nicely balanced by the fact that the major opposition parties are equally toothless. No prizes for guessing which political forces are likely to reap the benefits of the situations (see above for “nativism and populism”).

    Still, on simple economic terms, it’s not that bad. In fact, an average citizen is doing just fine. And it’s definitely not as bad as it was back in the early ’90s. Or, at least, not yet.

    Cheers,

    J. J.

  2. Oh yeah, and many of those graphs aren’t really _that_ different from Sweden. As I already mentioned, the development of the median age follows the same pattern. Even the roller-coaster on the retail sales is similar, except that the downward rides are steeper in Finland, whereas the upward rides are steeper in Sweden. But I’ll accept the correction that some of the structural differences that I mentioned are already visible in some statistics; the GDP seems to have already diverged, for example.

    As for the collapse in trade, supposedly one of the biggest external problems that need addressing before Finland turns into Hungary, as you predicted… well, you do know the country that was the most important destination for Finnish exports in 2008? Russia. ‘Nuff said. That direction has required “addressing” for most of the written history, but it’s sort of difficult, never mind what methods one has used; pilgrimages by the estates delegations, military expeditions or frequent presidential visits and hunting trips at Zavidovo.

    The comment on the male life expectancy and labour force reminded me of the gender factor. The last statistic information that I could find was from 1999, and back then, women made up 47,5% of the work force in Sweden and 47,3% in Finland. But the graph on the exit age from labour force seems to cover both sexes, anyway, so this may not be all that relevant.

    As for raising the average Finnish male life expectancy, well, that’s simple. All we have to do is to wait for the last men in North Karelia (where the demographics are similar to the eastern side of the border) to die from alcohol or suicide. After that, with those basket-cases from a peripheral rural region no longer skewing the statistics and with only us healthy people around, the overall Finnish average should definitely look better.

    (Cf. Swift’s “Modest Proposal”.)

    Cheers,

    J. J.

  3. Hi Jussi,

    “All we have to do is to wait for the last men in North Karelia (where the demographics are similar to the eastern side of the border) to die from alcohol or suicide.”

    Interesting question this, the Karelian one. I am vaguely aware of all this, although my knowledge is very superficial. I have a Finnish friend whose mother is Karelian. He once wrote me the following, which seems somehow relevant.

    Not all Russians in Finland are Ingrians but, following the pattern to which you have often pointed, they also served as pioneers for others Russians to follow. And then again, in east and south east of Finland the natural contacts towards Russia have always been more frequent than towards, say, Scandinavia. It’s certainly easier for a Russian to settle in the Finnish side of Karelia than in western Ostrobothnia.

    lncidentally, mother’s side of my family are from the Ladogan Karelia (part of Russia since 1945), from a rural area pretty close to the Petrozavodsk mentioned in the article. Karelia was always a sort of “in between” place – a western outpost to some, a cultural crossroads to some others – and when its people were relocated in the western parts of Finland after the war they often faced forced conversions, ethnic insults and other types of discrimination. What I have been told has always somehow reminded me of the southern Italians who once moved to work in factories of the north, and the attitudes they faced. Karelians and the westerners had had little natural contacts before the evacuation, and the same goes for the northern and southern Italians.

    Basically, I don’t view the Helsinki, St Petersberg, Tallinin tie in a bad light at all. I mean Russia has its problems, and they are bound to be ongoing if you look at the political culture and the demography, Russia is likely to be quite unstable. But you can do business with the Russians, and it isn’t what happened in the second half of 2008 that worries me, as what happened between 2002 and 2008. This is the problem that needs addressing.

    But if you get your relative prices right, you could undoubtedly do significant business with Russia, although you would effectively become a “derivitive commodities economy” in the sense that movement in activity will follow the movements in commodity prices, as we are now seeing. You cannot count on automonous demand inside Russia without high oil prices. So you would need a Finnish equivalent of the Sovereign Wealth Fund, to even out the ups and downs in activity.

  4. Incidentally Jussi,

    “Other than that, while it’s not your intention, there are some anti-EU populist politicians who would read this with delight, cherry-picking those comments where you propose that “the euro might be a factor, with the loss of control over monetary policy leading to a steady deterioration in the level of international competitiveness” and “it could be that the EMU membership may have up to now slowed down rather than accelerating the reform process”.”

    I am sure you are right that anyone can twist my comments, but I am more worried about people ignoring them altogether. What worries me most about the euro at the moment is the level of complacency it induces. People seem to be waiting for the crisis to end, rather than rolling up their sleeves to struggle their way out of it.

    We do this at our peril. If we don’t go fight the crisis it will come looking for us, and in concrete terms – just like a forest fire – it can leap at some stage straight across from the Baltics to South Eastern Europe, and then down into the heart of Southern Europe itself. The “internal devaluation” they are struggling to introduce in Latvia is evidently needed in a number of euro member countries, and it is needed now. If we don’t build the firebreaks in time, there is a danger the whole thing gets out of control.

    Also, your name seems to be quite a common one in Finland, since I tried looking for you in Facebook to invite you to my friends, but turned up a host of possibilities, none of whom, at the end of the day, may have been you.

  5. “I am sure you are right that anyone can twist my comments, but I am more worried about people ignoring them altogether. What worries me most about the euro at the moment is the level of complacency it induces. People seem to be waiting for the crisis to end, rather than rolling up their sleeves to struggle their way out of it.”

    The following may sound a bit like cheap drugstore philosophy, but I have to say it anyway. Sometimes, complacency and passive behaviour may not be such bad things. As I hinted, there’s always the danger that those people who are ready and willing to take action and “fight the crisis”, are likely to pursue an easy way out and take all the _wrong_ and _counterproductive_ actions.

    Cf. the Bush administration in the aftermath of 9/11. Or, well, as you’ve already noted, certain European countries right now. “We must do something!” -> “OK, this is something”.

    So, the Finnish lethargy at the moment may have its benefits. But the same tendency for rash decisions motivated by panic exists also here, and the recession is likely to stir things up further. During the last recession, the end result was the increased political passivity of the populace, but this time, as I mentioned, actual populism is suddenly on the rise. The required political channel for these emotions exists, and punchlines such as “blame the Euro” and “immigration is the problem” are likely to attract actual support.

    This brings up the second matter, which is the tendency of the mainstream political parties to integrate the issues of the marginal movements with their own agenda. Back in the 1980s, after the first political success of the Greens, the old political parties were quick to notice the advantages of adopting the ecological issues as part of their platform. These days, when the so-called “immigration criticism” – the salon term for xenophobia – is gaining ground, the result may be exactly similar. Xenophobia may become part of mainstream politics.

    Plus, most Finnish politicians are idiots. The era of great men and women who actually lived through the years of peril and who were thus genuinely concerned of the fate of the country and the nation is over. These days, we’re saddled with spineless assholes who are just looking for re-election and unwilling to rock the status quo. So, again, the tendency to make occasional quick-‘n-easy decisions is there, and we’ve seen some of them already. “Let’s declare something illegal!” “Let’s raise the taxes on alcohol!” “Let’s pass this snooping law that Nokia has asked for, never mind if it violates people’s privacy!” “Let’s set up a national fingerprint registry!” I mean, sigh. And these are supposed to make things better?

    But apart from that, there are also some positive signs. The stimulus package seems to be working. The bank sector is in a good shape, and actual bailouts almost certainly won’t be required. Also, while the private construction has halted, the public construction seems to have increased, and this year, there will be twice the usual number of state-supported apartments completed. So, some things are ticking along just fine.

    The problems are under the surface, as you already noted yourself. But I’m more concerned about the politics than the economy or even the demographics. The last recession, while a blow to the social security, at least had no adverse effect on people’s _freedom_. This one just may have. What if the potential economic problems are solved, but there’s a notable deterioration in civil rights? I’m not all that interested in living in some Nordic counterpart of Singapore.

    When it comes to North Karelians, I was, of course, making a reference to the local folks who always lived in the region. The post-war evacuees from the Ladoga Karelia – which was a very similar place – are perhaps a bit more diverse lot, and they settled all around the country. Likewise, the more recent Ingrian and Russian immigrants have also settled here and there, and probably have more or less similar demographics as the people around them.

    Oh yeah, and I don’t actually have a profile in Facebook – sorry, I meant to notify you about this, but forgot. My first name is common, the last name less so, but there seems to be a few people who have this same combination, and they seem to be more active online than I am.

    But none of them are me. I’m a military historian and a free-lance, part-time writer and journalist, affiliated with the University of Tampere, currently working on grants from the Finnish Academy and the Finnish Cultural Fund. I don’t really work on the field of economics, but you could perhaps say that my focus is on certain _consequences_ of economics.

    Cheers,

    J. J.

  6. Statics is interesting , but they are only reflecting the ned result of problems.
    True problems are deeper in the structure of Finnish society.
    However we might some how see these problems also trough statics , but in a differnt way.

    GDP is a basic figure which shows our ability to produce. But as the government operations stands for more or less than 50% of our GDP , we have to be sceptical about GNP.
    GNP corrected with price level compared with the nominal GNP will give us an important knowledge.
    There is basically two realistic reasons for high price level. High level of productivity and knowledge of workforce will lead to a high price level, as the competetion of workforce pushes the wages even of less productive employes. This will lead to a high nominal level of GNP naturally.
    The other reason for high price level is uneffective public sector, wich raises the price level by taxes and costs related with public services. If the output of public sector is less what could be expected , it will lead to a smaller PPC GDP .
    The wages of the export sector is allways in relation with the productivity. It can`t be any other way , as long as we have export and free trade. The GNP generated trough export sector has to be in correlation with the GNP nominal.
    The same applyes to the private domestic sector as they compete on the workforce market with equal terms.
    On the other hand the wages of the public sector can signifantly differ from the productivity. This is probably true in all states. If our public sector performs worse than average, it will lead to big difference in nominal and price corrected GNP.

    This development comes clearly out in the latest figures. The inflation is record high in Finland , the taxes are record high , the GNP declines and the unemployment increases.
    In relation with the declining private sector the public sector increases, because not cuts has been done in government expenditure.
    This increases the inflation .
    In an open market situation unemployment will lead to a diminishing inflation as the wages claims do decline also.
    Acoording to Tilastokeskus ( finnish statics authorities ) the effecinecy of the public sector has decline about 20 % during the last decade. The ECB did research the effeciency of public sectors in 2003 and Finland was second to worst among all OECD countries.

    Wide rasearches regarding wealth indicate without any questions that , demoracy, uncorrupted administration, fair justitce , human rights,and freedome of trade and competetion are basic elements of wealth.

    The IMF and Commission have pointed out that lack of competetion is a major problem in the Finnish economy. The Greco organisation has criticzed Finland of not opening political funding to become transparent. Public procurements are not transparent in Finland either.
    Finland is an ex eastblock country with all problems related with this past.

  7. Hello Torsti,

    Sorry I’ve taken my time replying. I’ve been away for the last few days.

    “True problems are deeper in the structure of Finnish society.”

    Well, my intention was to get through to the deeper structural problems in the Finnish economy which I see as being associated with a loss of competitiveness, and a decline in export oriented industrial activity, at a time when domestic consumption is now in more or less inevitable decline due to the rising median age (in conjunction with relatively low male life expectancy). This whole approach may be wrong, but it is my view, and it does go down to the deep structure of modern Finnish society.

    “There is basically two realistic reasons for high price level. High level of productivity and knowledge of workforce will lead to a high price level, as the competetion of workforce pushes the wages even of less productive employes. This will lead to a high nominal level of GNP naturally.”

    Well, this is the Harrod-Balassa-Samuelson effect, but there is nothing “natural” about this. The tendency of wages in low productivity non tradeable sectors to rise in tandem with high productivity high wage tradeable sector is a political process that needs to be addressed with concrete policy measures. The fact that this phenomenon is also widespread in Southern Europe and Ireland does not make it benign.

    “On the other hand the wages of the public sector can signifantly differ from the productivity. This is probably true in all states.”

    Well not in all states. Not in Germany, not in Japan (since they run large trade and CA surpluses) and evidently not in Sweden, since this is the explanation you are offering for the long term structural deterioration in the Finnish situation, it quite evidently isn’t happening in Sweden since their external position is following a more normal path for an ageing society – which is the point of my comparison – ergo this process can’t be happening in Sweden. Thus we are not talking about all societies – there are black swans – and there is nothing natural about it.

    “The ECB did research the effeciency of public sectors in 2003 and Finland was second to worst among all OECD countries.”

    Well, this doesn’t surprise me, since this is what we can see in the underlying data. So what you need is a plan to attract ibvestment in productive manufacturing industry for export, and move a chunk of these people over. That would be a first step.

    “Finland is an ex eastblock country with all problems related with this past.”

    Well, this may or may not be the case, but whatever the reasons, you need to turn this round quickly and put things straight. The clock is now ticking away on Finland, and with a growing number of voters over 50, every day reform gets more difficult.

  8. Some mistaken assumptions here.

    I’ll leave aside the obvious slur about a “former Eastern bloc country”, which was, not surprisingly, apparently made by a countryman. If one wants to look at the historic roots, the problem is actually in the fact that Finland is the only surviving inter-war democracy. On the plus side, the country was able to avoid a good deal of crap after the War; but on the minus side, the continuity and maintenance of the status quo in the face of totalitarianism has made the democratic system rigid, and the country never received any dynamic reboot.

    As for the age of the voters which is supposed to make reform more difficult… debatable. With the exception of the Centre, which is currently on a kamikaze trajectory, the entire political party system from Left to Right is safely in the hands of the Generation X. And much like all politicians, they’re quite able to mislead the voters when necessary. The only question is if they’re willing to do it for a noble cause.

    Also, as I pointed out, there are other, more immediate issues than “structural problems”.

    By the way, Edward, that comment of yours, about how “the clock is now ticking away on Finland”? I declared that same truth to one of your co-bloggers already years ago. According to his own words, he was getting “just the /teensiest/ bit impatient when someone from one of the most advanced and comfortable countries in Europe can’t stop complaining about what a pathetic hellhole it is”.

    Cheers,

    J. J.

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