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Finland Economic Development
Material conditions were difficult at the birth of the
Finnish republic. The country's industries had started to
develop
after about 1860, primarily in response to demand for
lumber from
the more advanced economies of Western Europe, but by 1910
farmers still made up over 70 percent of the work force.
Finland
suffered from food shortages when international trade
broke down
during World War I. The fledgling metal-working and
shipbuilding
industries expanded rapidly to supply Russia during the
early
years of the conflict, but the empire's military collapse
and the
Bolshevik Revolution in 1917 eliminated trade with the
East. The
Finnish civil war and the subsequent massacres of the Reds
spawned lasting labor unrest in factories and lumber
camps, while
the plight of landless agricultural laborers remained a
pressing
social problem
(see Independence and the Interwar Era, 1917-39
, ch. 1).
During the immediate postwar years, Finland depended on
aid
from the United States to avoid starvation, but by 1922
industrial production had reached the prewar level. While
trade
with the Soviet Union languished for political reasons,
West
European, especially German, markets for Finnish forest
products
soon reopened. In exchange for lumber, pulp, and
paper--which
together accounted for about 85 percent of
exports--Finland
obtained needed imports, including half the nation's food
supply
and virtually all investment goods.
Despite political instability, the state built a
foundation
for growth and for greater economic independence. The
first and
most important step was an agricultural reform that
redistributed
holdings of agricultural and forest land and strengthened
the
class of smallholders who had a direct stake in improving
farm
and forest productivity. The government also nationalized
large
shares of the mining and the wood-processing industries.
The
subsequent public investment program in mines, foundries,
wood
and paper mills, and shipyards improved the country's
ability to
process its own raw materials. By the late 1920s,
agricultural
modernization was well under way, and the country had laid
the
foundations for future industrialization.
Although Finland suffered less than more-developed
European
countries during the Great Depression of the 1930s, the
country
nonetheless experienced widespread distress, which
inspired
further government intervention in the economy.
Comprehensive
protection of agricultural produce encouraged farmers to
shift
from exportable animal products to basic grains, a policy
that
kept farm incomes from falling as rapidly as they did
elsewhere
and enabled the country to feed itself better. Similar
policies
spurred production of consumer goods, maintaining
industrial
employment. As in other Nordic countries, the central bank
experimented with Keynesian demand-management policies.
In the 1930s, Britain replaced Germany as Finland's
main
trading partner. The two countries made bilateral
agreements that
gave Finnish forest goods free access to British markets
and
established preferential tariffs for British industrial
products
sold to Finland. Consequently, Finland's largest industry,
paper
production, expanded throughout the depression years
(although
falling prices led to declining export revenues). The
economic
growth of Finland resumed in 1933 and continued until
1939.
Production and employment had largely recovered from
the
effects of the depression when the Winter War began in
1939. The
struggle marked the beginning of five years of warfare and
privation. By 1944, after two defeats at the hands of the
Soviet
Union and severe losses suffered while expelling German
troops,
Finland's economy was nearly exhausted. Under the terms of
the
1944 armistice with the Soviet Union, the country ceded
about 12
percent of its territory, including valuable farmland and
industrial facilities, and agreed to onerous reparations
payments. To many Finns, it appeared that most of the
achievements of the interwar years had been undone
(see World War II, 1939-45
, ch. 1).
Postwar reconstruction proved difficult. Resettling
refugees
from the areas ceded to the Soviet Union required another
land
reform act, subsidies for agricultural infrastructure, and
support payments for displaced industrial workers.
Reparations
deliveries to the Soviet Union absorbed much of the
country's
export potential. The need to remain politically neutral
precluded participation in the Marshall Plan (European
Recovery
Program), but Finland arranged substantial loans from the
United
States Export-Import Bank to finance expansion in the
forest
industries. High inflation rates inherited from the war
years fed
labor militancy, which further threatened output.
Despite these setbacks, the tenacious Finns soon fought
their
way back to economic growth. Reparations turned out to be
a
blessing in disguise--at least for the metalworking
industries,
which supplied about three-fourths of the goods delivered
to the
Soviet Union. In effect, forced investment in metalworking
laid
the foundations for Finland's later export successes. The
fulfillment of the reparations payments in 1952 symbolized
the
end of the postwar difficulties, but the real turning
point
probably came in about 1950, with the Korean War boom in
the
West. During the 1950s, the metalworking industries
continued to
export to the Soviet Union, a market in which the Finns
faced
virtually no competition from other Western countries.
Extensive
borrowing in Western financial markets--especially in
Sweden and
in the United States--financed investments in
infrastructure,
agriculture, and industry. The consumer goods and
construction
sectors prospered in the booming domestic market, which
remained
protected by import controls until the end of the decade.
From 1950 to 1974, Finland's gross national product
(GNP--see Glossary)
grew at an average annual rate of 5.2 percent,
considerably higher than the 4.4 percent average for
members of
the Organisation for Economic Co-operation and Development
(OECD--see Glossary).
However, partly as a result of continued
dependence on volatile lumber exports, this growth was
more
unstable than that in other OECD countries. The business
cycle
caused fluctuations in output that averaged 8 percent of
gross
domestic product
(GDP--see Glossary).
Finland's structural
transformation was brutally quick, driving workers out of
agriculture more quickly than had been the case in any
other
Western country. Although manufacturing output increased
sharply,
many displaced farm workers could not be placed in
industry. At
the same time, Finnish inflation, which tended to exceed
that of
the country's major trading partners, necessitated regular
currency devaluations. Yet, despite the costs of economic
growth,
most Finns were happy to have escaped the hardships of the
depression and the war years.
Rapid structural transformation led to innovative
economic
policies. During the 1950s, the state had maintained
strict
controls on many aspects of economic life, protecting the
country's fragile economic balance, but it had lifted many
restrictions by the end of the decade. Moreover, in 1957
policy
makers chose to liberalize foreign trade in industrial
goods,
strongly influencing future economic developments. The
achievement of prosperity in the 1960s made possible the
extension of the welfare state, a development that did
much to
reduce tensions between workers and management
(see Finland in the Era of Consensus, 1966-81
, ch. 1). Finland's increased
foreign trade made industrial competitiveness more
important,
causing greater interest in restraining the inflationary
wage-
price spiral. Starting in 1968, the government succeeded
in
sponsoring regular negotiations on wages, benefits, and
working
conditions
(see Human Resources
, this ch.). The political
consensus that developed around incomes settlements helped
to
slow inflation and to increase productivity.
Liberalization,
welfare programs, and incomes policy thus helped to
maintain
economic growth during the 1960s and facilitated stronger
economic relations with both Eastern and Western Europe.
In the 1970s and 1980s, changes in domestic and
international
economic conditions posed new challenges. At home, Finland
was
reaching the limits of extensive economic growth.
Expansion was
incorporating ever- greater amounts of raw materials,
capital,
and labor in the production process. The economy needed to
shift
to intensive growth through better resource management,
improved
labor productivity, and newer technologies. In
international
markets, the oil crises of 1973 and 1979 caused particular
difficulties for the Finns, who imported over 80 percent
of their
primary energy supplies. The country did suffer less than
other
West European countries from increased oil prices because
of its
special trading relationship with the Soviet Union, which
supplied petroleum in exchange for Finnish industrial
goods.
However, recession in Western markets, growing
technological
competition, and tighter financial markets made Finland's
traditional cycles of inflation and devaluation untenable.
Thus,
although the country managed to delay austerity measures
for five
years, in 1978 balance-of-payments considerations
compelled the
government to introduce a far-reaching reform package
designed to
ensure the competitiveness of Finnish industry in world
markets
(see Role of Government
, this ch.).
Although the austerity package pursued after 1978
slowed
growth in personal consumption, the consensus approach to
wage
and benefit negotiations remained reasonably intact. In
addition,
many Finnish workers proved sufficiently flexible to
accept
transfers from declining sectors to those in which the
country
enjoyed a comparative advantage. As a result of competent
macroeconomic management and favorable trading relations
with
both Eastern and Western Europe, Finland was able to
sustain
growth in GDP at an average annual rate of about 3.3
percent from
1980 to 1986--a rate well above the OECD average.
During the 1980s, structural developments in the
Finnish
economy paralleled those in other West European economies.
Although surplus production of animal products plagued
agriculture and led to cutbacks in agricultural subsidies,
the
country preserved family farming. Policy makers continued
to
monitor forestry, energy, and mineral resources closely,
even
when falling petroleum prices reduced pressures on the
economy.
Industry underwent intensive restructuring, eliminating
many
inefficient producers and consolidating healthy
enterprises.
Despite mergers and rationalization, Finland lost fewer
industrial jobs than most OECD countries, so that
unemployment
was held below the double-digit levels common elsewhere on
the
continent. Private services, especially banking and
insurance,
expanded more rapidly than other sectors, also helping to
limit
unemployment.
Data as of December 1988
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