Why Finland?

I just put up a post on the economic situation of Finland. Now I am putting another. Why the sudden interest? What is there about the Finnish economy which could be of interest to more people than the five million or so who actually live there?

Well basically I am trying to follow a hunch. I think – as most Afoe readers will already know – that the median age of a society is an important piece of information. Well, if we look at the global median age ranking, we will see that Finland is conveniently placed in 4th position:

Japan 42.64
Germany 42.16
Italy 41.77
Finland 40.97

Having noted this, it is perhaps worth adding that Finland has a Total Fertility Rate (TFR) of nearly 1.8 (significantly above that of Japan, Germany and Italy which are all around 1.3).

Finland also has a life expectancy of 78.35 (Japan 81.15, Germany 78.65, Italy 79.68 Italy). Interestingly Finland has a net migration rate of 0.87 (Japan 0, Germany 2.18 Italy 2.07 and – for comparison purposes – United States 3.31- all of this per 1,000 population).

So much for the demography. What about the economic performance? Well, I linked this page on the last post. What we can see is that Finnish growth since 2000 hasn’t been too bad, but it has been a little erratic. 1% in 2001, 2 point something % in 2002 and 2003, 3.6 per cent in 2004, and now a projected 0.9% this for year. Not bad, you might say. Not as strong as the US, Uk or Spain, but hardly pathetic: a 2% per annum average.

It is important to remember here that 40% of Finnish GDP is for export, so this gives Finland tremendous resistance to weakness in domestic demand.

According to the statistics department:

The disposable income of households increased by 5.4% per annum in real terms last year. Household income grew faster than the final consumption expenditure, so households’ savings rate rose to 2.8 per cent last year. Last year’s national income per capita was EUR 23,949, which is over EUR 1,000 higher than in the year before“.

Interesting, is the only comment I would make at this stage. This kind of limited data hardly proves anything conclusively, but it is interesting that savings are on the rise.

Unemployment details can be found here, and what can we see? Well that unemployment is reasonably high in Finland, at around 7 to 8% (this is no labour market model), that it is falling slightly, that the labour force is now stationary (and presumeably about to start falling: there was a 0% increase in the labour force between August 2004 and August 2005).

Inflation is currently around 1%. What is really interesting is the graph which shows inflation steadily declining from 2001 (the disinflation process) to early 2004 (by which time inflation was in negative territory, but this wasn’t a spike, this was a trend), then rising oil and commodity prices pushed it back up again. Looking at the graph I am reasonably convinced that Finland will be entering deflation the next time the world economy has a serious brush with recession. Doubly so given the high level of openness of the Finnish economy.

Deficit and debt figures can be found here. Accumulated government debt seems to have drifted down to a not very significant 40% of GDP in recent years, although the government has been running deficits since 1998.

Now there is one other reason for thinking about Finland and ageing: it is a country doesn’t normally score all that high on people’s ‘in need reform’ agendas. That is, we may, in the case of Finland be better able to separate out the demographic from the normal structural reform components on people’s agendas. Take Transparency International’s Corruption Perception Index for 2004 for the 25 EU Member States: Finland came in first.

The Growth Competitiveness Index, drawn up by the World Economic
(WEF) also puts Finland in first place.

In the Quality of Life Index developed by the Economist Intelligence Unit Finland comes twelfth.

In the World Bank ‘Ease of Doing Business’ report 2005 Finland came 13th overall, but, unsurprisingly in view of what I said above, 84th in the hiring and firing index.

In the Responsible Competitive Index, elaborated by Accountability and the
Copenhagen Centre, Finland comes again first.

In conclusion this post is basically experimental, since it is more about me asking myself questions (and staking out an agenda of things to monitor), than it is about me trying to provide definitive answers. That’s why it is on Afem. If and when this firms up, I’ll do something similar for Afoe.

Also, here’s a convenient ‘factoid’ link for Finland

Finland has a highly industrialized, largely free-market economy, with per capita output roughly that of the UK, France, Germany, and Italy. Its key economic sector is manufacturing – principally the wood, metals, engineering, telecommunications, and electronics industries. Trade is important, with exports equaling two-fifths of GDP. Finland excels in high-tech exports, e.g., mobile phones. Except for timber and several minerals, Finland depends on imports of raw materials, energy, and some components for manufactured goods. Because of the climate, agricultural development is limited to maintaining self-sufficiency in basic products. Forestry, an important export earner, provides a secondary occupation for the rural population. Rapidly increasing integration with Western Europe – Finland was one of the 12 countries joining the European Economic and Monetary Union (EMU) – will dominate the economic picture over the next several years. Growth in 2003 was held back by the global slowdown but picked up in 2004. High unemployment remains a persistent problem.

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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".

12 thoughts on “Why Finland?

  1. Couple comments:
    1) I’d take a closer look at the demographics. It’s not so much that the younger generations are not producing at or near replacement rate (it is pretty close given net migration, very low child mortality and the fact that fertility rates are propably higher than they appear in Western societies due to woman post-poning having children.) It is that the baby boom generation (peak year 1945) is older than in other countries and very big, see http://www.tilastokeskus.fi/tup/suoluk/suoluk_vaesto_en.html
    And the boomers are about to retire…

    2) Inflation is low, but consumer price index was highly influenced by a considerable drop in alcohol taxes. What makes figuring out Finnish macro-economics in general hard from distance is that due to its small size the Finnish economy can be largely influenced by one-off factors (see my comment on this year’s growth on.) Nokia having a bad quarter would show immediatealy, the Soviet Union chaos in early nineties plunged Finland in to a heavy recession and so on…

    3) I doubt we’ll see deflation for three reasons:
    3.1) With the boomers retiring, economy is closer and closer to labor shortage. Unemployment just dropped to 7% nationally and given that a good portion of that 7% is regional structural unemployment (low-population density areas in the east can have unemployment up to 20%) it is not that far off in Helsinki for example. Anything labor-intensive that can be outsourced has been outsourced a long time ago (we use to have a textile industry for example) and as such the relatively labor un-intensive industry can afford to pay better wages. Taken together these imply wage inflation, which should keep overall price inflation over water (notice, and this is not much talked up, that this is a politically painless way to effectively cut pensions which are price-indexed.)
    3.2) Finland on the whole has a high savings rate. This is due to pension funds receiving more than they pay, thus pushing public finance on the whole to surpluss, with the retirements they will start paying out. Also, I believe there is pent up consumer demands, because the less than stellar labor market has made consumers weary about spending, thus pushing up personal savings rate. Lower unemployment helps here.
    3.3) The pensions being price-indexed, the government can not afford deflation and they have a lot of tools to push inflation if needed.

  2. Hello Teme, and thanks for the extensive comments.

    “due to its small size the Finnish economy can be largely influenced by one-off factors”

    Yes I’d noticed this, and your other comment :).

    “It’s not so much that the younger generations are not producing at or near replacement rate (it is pretty close given net migration)

    I’m afraid it’s more complicated than that. (incidentally, thanks for the link). Wolfgang Lutz has pointed out (and I think this is extraordinarily important), that the tempo effect does do long-term damage to the age pyramid, even if long term cohort TFRs finally achieve say 1.9 (which may be the case in Finland). To understand this you need to look at the table ‘Population by age group – end 2004’ in the link you provide.

    You will see here that you have a peak 5 year cohort between the ages of 55 – 59 and that the 0-5 cohort is less than 75% of this. This is clearly not as bad as the situation in some South and East European countries, but it does mean that your working age population is shrinking by roughly 25% every 50 years or so which isn’t negligable.

    From the 55-59 cohort the numbers drop steadily in each cohort with the only real exception being the 10-15 one. The thing about the tempo effect (higher age at first birth) is that we don’t know how much longer it can continue (Lutz suggests that it could go on for another 50 years) so we don’t know when this structural inversion in the pyramid might at least begin to stabilise. I have written quite a lot about all this here and there (see my low-fertility trap post).

    Immigration would, as you note, help consdierably in closing this shortfall, but in recent years, again going by the table on the link, immigration has been dropping off.

    So I still think there are two problems: ageing through lower mortality, and a shortage of children which distorts the age pyramid.

    OK, I’ll deal with your other points in other comments.

  3. “Nokia having a bad quarter would show immediatealy, the Soviet Union chaos in early nineties plunged Finland in to a heavy recession and so on…”

    I agree, and that is why I think it is so important to sort out trend from volatility here. And this, incidentally, is why I was so interested to see the graph on inflation.

    Now, as you note, Finland is an extraordinarily open economy. This is one of the factors which must impact on the price level.

    Basically I have been arguing that global disinflation (as identified by the BIS and other multilateral entities) is being produced by the confluence of three factors:

    1/ Globalisation, outsourcing and global labour arbitrage – something which by definition impacts on an open economy like Finland.

    2/ Moore’s Law and other technology related phenomena which mean prices in the tech sectors have a strong downward pressure (especially when you correct for things like quality improvements). Again this seems relevant to Finland

    3/ Ageing population. This is to do with the marginal propensity to consume, and the fact that people over 50 seem to have a lower marginal propensity to consume than some younger age groups. This results in more saving (something which, as I indicate, I intend to watch in Finland) and economies which become more dependent on exports for growth. This is the so-called global imbalances story, and I think it *might* fit Finland, this is what I am looking at.

    Obviously factors which can offset this tendency to limpid internal demand are increasing participation rates, and raising the human capital-productivity factor in the workforce. In this sense this research into Nokia doesn’t seem particularly encouraging:

    Aging Technology and Productivity by Francesco Daveri and Mika Maliranta. You can find at the top of this list of wps:


  4. “I doubt we’ll see deflation for three reasons:”

    Well as I indicate, I’m not so sure, but at the moment I simply have this in the ‘things to watch’ category.

    “With the boomers retiring, economy is closer and closer to labor shortage”

    Yes, this I note. You can see a similar phenomenon in Japan and Italy. Unemployment in Italy is now – in the midst of a recession – at its lowest level in many years.

    This puts upward pressure on wages, but because of a generally disinflationary (take oil out for the moment) environment, it is hard to pass on the price increases. So whether this movement in wages is permanent, or temporary before unit labour costs have to be cut back to maintain competitiveness, is one of the big unknowns about the ageing process at this moment in time. Clearly the sustainability of the Japanese recovery depends on wages being able to move upwards. I have strong doubts on this, but only the future will show.

    “Anything labor-intensive that can be outsourced has been outsourced a long time ago”

    Yes, I’m sure. But what about the shift from manufacturing to services? Many service activities – especially health and care of the aged – seem to be inherently labour intensive, this would be one of my concerns.

    “Finland on the whole has a high savings rate. This is due to pension funds receiving more than they pay, thus pushing public finance on the whole to surpluss, with the retirements they will start paying out. Also, I believe there is pent up consumer demands, because the less than stellar labor market has made consumers weary about spending, thus pushing up personal savings rate”.

    Well this was what I suspected, but don’t feel I know enough to assert yet. This would fit exactly with the age related marginal propensity consume issue, and generally put Finland smack in line with the global imbalances story.

    “The pensions being price-indexed, the government can not afford deflation and they have a lot of tools to push inflation if needed.”

    Well really there are 3 arguments here.

    1/ pensions being price-indexed then pensions go down (as do wages) under deflation.

    2/ However the principal impact of deflation is over savings and debts. If you have a PAYGO system then there are a lot of undeclared inter-generational liabilities (or if you likie debts) and a deflationary regime raises the ongoing costs of these.

    3/ That the government have as many tools to push inflation in a globalised context as you imagine I doubt. The Japanese government has been trying hard to provoke inflation since 1998 and still hasn’t succeeded.

  5. Hugh, yes I read this space, just not that often and I do have a day job 🙂 Appreciate your comments, some replies in no particular order:

    First, the housing market. Six things to note here. First, Finland urbanized fairly late (50’s to 70’s), and the process is still on-going, that is there demand in growing areas like Helsinki due to internal migration.

    Second, Finns live in comparitively small apartments, and as people are getting wealthier bigger apartements and houses are increasingly in demand. This has led to rather curious situation where the price per square meter can actually go up when moving to bigger apartments.

    Third, while you wouldn’t believe it looking at a satellite image of Helsinki area, there is a shortage of land due to slow zoning process. This is partly due to broad complaints process, but mainly due to infrastructure burden new residental areas place on cities and communs, which are by law obliged to provide not only roads, sewers, electricity, etc. but also daycare centers and schools to new residents.

    Fourth, both cars and petrol are very heavily taxed, which makes long commutes uneconomical thus halting urban sprawl. (Also note that single-earner families are rare, meaning there would be two people commuting from neck of the woods.)

    Fifth, real mortage rates are close to zero, due to low interest rates, low margins, and tax deductions on interest. (2% euribor, 0.6% bank margin = 2.6% – 1% inflation – 2.6%*0.27 (capital gains tax rate)*0.5(high end income marginal tax rate)=~1.25% real interest rate.)

    Sixth, the dip in early to mid nineties is due to the recession which also involved a rate spike (~10%) due to sharp fall in external value of Markka and the housing bubble blowing up. Which left many mortage holders either with extremely high payments or forced to them to sell their housing at considerable loss. Ten years after people are still bit jittery, but I think the Euro finally restored the confidence, which among other things has led to sharp rebound in housing prices.

    Is there a bubble now? Let me put it this way, I had a real estate agent come by yesterday. He reckons I could propably get about 170 to 180 kiloeuros for my apartment in Helsinki. I could rent it out for about 900 euros a month, which would leave me about 700 euros a month after maintenance costs, or 8400 a year. That’s less than 5% a year return ignoring inflation, long term maintenance (rough guess, 1500 a year) and the risk premium for possibility of asset depreciation (which of course is negative if you think the prices will go up). So yes, I do think the prices are bit on the high side.

  6. Now regarding inflation.

    Yes, globalization does drive down prices, for now on at least. It is just educated chatter at this point, but quite a few Finnish companies are finding the returns on investment in say China disappointing. I find this very interesting given that companies like Nokia or Kone were among the first to outsource (due to Finland being an open economy). I think this has to do with rising transportation cost, lower percentage of labor costs in manufacturing due to automation and rising material costs (if your labor costs are less than 10% to begin with, extremely low wages are not that interesting), and more realistic picture of the strength and weakenesses of emerging markets in general. Outokumpu just announced it is concentrating its stainless steel production to Tornio, which according to company leadership is not only their most productive factory but the most productive stainless steel factory in the world. Vaisala has been quietly re-centralizing its distributed operations, it is a typical Finnish company: medium sized, high tech, and a market leader in its niche (meteorological measuring devices and information networks.) And so on. I am not suggesting we are seeing a reversal of globalization, just that even the big picture is much more complex, and that we can’t take it for granted that prices will keep dropping ad infinitum.

    Regarding Moore’s law, if we are talking stricly about computing it is worthwhile to remember that processing power is very small part of the total cost (and also that new application development has not been for a good time now processing power contained, security, administration and market acceptance are the issues today.) The old rule of thumb was that cost of IT is 15% hardware, 15% software and 70% administration. Nowadays it is more like 5-10-85.

    That said I do see technology driving productivity, healthcare is often touted as having great potential for better information management, and while I agree on that I have higher expectations for plain old fashioned logistics and transport. There are both technologies maturing like RFID, process management software (it almost works nowadays), lighter materials and new engine desings, to go with trends like higher oil prices, environmental concerns and longer shipping distances. (See for example a very interesting and provocative article about shift from mechanical engineering to electrical engineering and associated benefits at http://www.memagazine.org/contents/current/features/endofme/endofme.html)
    That said, while the new tech will be more efficent, it will also require more educated people to manage it which will eat some of the productivity gains at least in short term. (Ignoring this fact is how you usually end up with inflated expectations of both the pace and the size of productivity gains due to new tech.)

    The marginal propensity to consume of older people is interesting. First thing that strikes me is that this is counter-intuitive, surely a fourty year old has a higher incentive to save than a seventy year old. I’m not saying it isn’t true, but might it have something to do with the supply side, that is the market hasn’t yet adjusted to older consumers? (My father, 62, keeps telling me that in marketing studies he sees there is no age group above 55, which suggests that the study methodology is well due to reviosion.)

  7. On the pensions and deflation. Agreed on price-indexing. The system is PAYGO, although the existing funds (held in thightly regulated private pensions companies, it is complex see http://www.tyoelake.fi/default.asp?lang=2) are relatively high, so the implicit debt isn’t as high as in USA for example. The comparison to Japan isn’t very good, the government is about twice as big chunk of the economy, and with VAT (up to 22%) and other taxes they do have a lot of tools to push inflation if needed. (Raise VAT, lower income tax for example. Also see the effect of alcohol tax cuts on inflation.) In addition, both the employee and employers unions definetly do not want deflation, and could agree to raise wages and so on

    I guess it is possible to have a declining labor force and deflation, but it still seems unlikely to me, I’m more concerned about inflation picking up right now.

  8. Hi again Teme, and thanks for all those very interesting comments.

    Let me say straight off that everything I say here is tentative. As I indicated when I put this post up I knew very little about Finland, and still do really, although I am learning :).

    The thing is I have a general approach, but general approaches normally fall down on details. So it is interesting to monitor, check and counter check.

    On TFRs, I am reading a book by Tomas Sobotka:


    It was his doctoral thesis, and I managed to download it when it was online. It is definitely the most comprehensive study of low fertility issues in Europe I have found to date.

    This presentation sums up a lot of his ideas:


    Here is his most recent paper:


    As you will see here he is very much in demand:


    Basically the conclusion seems to be that we don’t know how much longer the postponment factor will continue to operate. But it isn’t over yet (except perhaps in the Netherlands).

    My point is that even if completed cohort TFRs do climb again eventually, structural consequences have already taken place, and as an economist (rather than a demographer) I am interested in what those consequences may be.

  9. “The marginal propensity to consume of older people is interesting.”

    Well this is sort of state of the art macro, and as I say tentative. However:

    The thing is that the traditional Life cycle hypothesis (Modigliani) or income smooting (Friedman) seem to have assumed that you could read off the hump shaped earnings curve (with a peak somewhere in the 50s).

    Now this doesn’t work. It doesn’t work in the first place since people take a lot longer in dis-saving than the theory predicts (so there is an add-on of the bequest motive, but my guess is that even this isn’t adequate. I think we just get meaner – with ourselves – as we get older beyond a certain age).

    Anyway this isn’t the important thing. The important thing is what Rowntree discovered in his large study of poverty in the UK at the end of the 19th century: the so called poverty life cycle. Now this has applications for more than poverty. But basically we are net dis-savers in childhood (obvious), when we get that first job but live at home we are able to save, when we set up a family, and take on a mortgage we become dis-savers again (my guess is that the US – with a young median age of 36 – is dominated by this effect right now, no net saving). As the children grow up and start working, we can seriously begin to save (this is the period of low propensity to consume, it is also clustered around the high hump in our life earnings curve) and, as I say, theoretically we reach an age when we need to dis-save (move to a smaller house, take out an annuity on the property or whatever). But no society has really manifested this last stage clearly (yet!).

  10. Ok, look I can’t reply in detail to all your points. I would just say that they are interesting. If you want to continue the dialogue, gently over time, please mail me via the fistful mail you can find in the sidebar, and I will send you anything I do on Finland.

    Basically what you say about globalisation *may* be the case, but this is an empirical question and time will show. Personally I think there is a hell of a lot of juice still to be squeezed out of this lemon.

    I also think people tend to insufficiently value learning by doing. Obviously the initial activities in China, India, Indonesia, Brazil wherever may produce results well below initial expectations, but learning will operate.

    Incidentally I think I now also understand better what happened to Finnisn house prices in the early sixties with the monetary shock issues. It is what happens next that will be interesting.

    Well, nice talking to you :).


  11. Edward,

    I can’t find the mail on the sidebar you are talking about, so if you like to, please mail me instead… In the mean time, may I suggest you take a look at the research of Matti Pohjala at Helsinki School of Economics, http://hkkk.fi/~pohjola/

    To make a really long story short, their findings on macro level show little relation within productivity and age. Generally speaking, Finnish productivity growth comes from new tech, and the crucial question is whether the ICT lead productivity growth will continue.

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