It is now quite well-known in Finland, as President Ninistö stated some hours ago, that Finland’s public sector has been spending more than it was getting from taxes in the last few years and that it is a real problem. At the same time, practically everybody knows that the government has presented a program, and more recently a budget, which have made a large number of people very unhappy. They have cut painfully into public expenditures for education, students, development aid, and social benefits particularly for old people and families with young children. The opposition and certain members of the coalition have criticized some of those cuts.

What should we think about the debate?

A perspective on the positions of the government and the opposition on the Finnish economy
The government and the opposition, perhaps with the exception of certain groups of Greens, are considering that the objective is to increase Finland’s economic growth, as it will increase the fiscal revenue for the public sector and will balance Finland’s public accounts. But they have two different conflicting economic approaches for doing it.

The government has taken what is called a neo-classic perspective of the economy. They consider that in a market economy, the only way to create growth is to cut the costs of production. If salaries, taxes, and social contributions for companies are going down, then Kone, for example, will be able to reduce prices to sell more Finnish elevators on international markets and to better contribute to Finnish growth. The government also considers that by reducing salaries, for example by asking Finnish workers to work longer hours at the same salary or to accept pay cuts for working the same hours, Finland will improve its international competitiveness. Another option being considered is to cut taxes for companies and at the same time cut public expenses, thus reducing costs for Finnish production.

The opposition criticizes this move, as it has what could be called a keyneysian approach. They believe that if the government cut salaries and social contributions, the Finnish population would buy less goods and services, which means that sales would decline, causing Finnish companies to limit their production, even if profits increase. And when sales decline this is usually not the time to invest in increased production because it only gives more money to shareholders.
The problem is that from an economic point of view, the government and the opposition are both correct. It is quite clear that from 2008 to 2013, salary costs have been increasing more than in other EU countries. But since 2013, there has been a decrease compared to Finland’s economic partners. And it is also quite clear that if people are paid less, they will buy less. That is not good for the growth, whatever the level of costs. So there is a serious risk that the government’s policy will bring a recession, and that the limitation of the costs for Finnish companies will not be sufficient to compensate for the recession. After all, the exports represent only 25% of the GNP. Any progress that would be made would be slow and would not be expected for months to compensate for the recession on the internal market.

A number of other countries which have applied these policies may be showing some positive indicators, but unemployment will continue to increase. In the long run, unemployed people are going to lose their competence. The present trend is that money invested in training the unemployed does not increase at the same speed as unemployment. Today’s unemployed people individually receive for theirtraining half of what they did five years ago. In the long run, it will be better for Finnish companies to produce outside Finland, in places where people already have the necessary skills.

More generally, the OECD has recently published strong recommendations for countries, and in particular EU countries, to avoid policies which limit growth by cutting off household resources. In addition, the OECD reminds us that the increase in inequality has a very negative impact on growth, in particular in Finland. Alternatively, they stress that reducing inequalities would be very positive for growth. These two elements are also reasons to doubt the effectiveness of the present government program.

Working together on a common solution, in the spirit of the 90s

As we have seen, the government and the opposition are engaged in a unnecessary fight based on different ideologies and oversimplified approaches to a complex economic situation. It should, instead, be the time to recognize that Finland has been the victim of an economical “perfect storm,” one not caused (or very little) by internal mistakes from within Finland, but by a series of events which have totally dismantled the smooth functioning of the Finnish economy:

• The global crisis, which has affected the world and lowered the demand for Finnish products
• The specific euro crisis, which has only recently produced a favorable fall in the level of the euro in comparison with the currencies of Finnish partners (However, in comparison with Sweden’s and Russia’s currencies, the euro is higher than 2 or 3 years ago)
• Nokia’s catastrophic evolution, which has compensated its shareholders, but not the Finnish economy
  Increased emergence of a number of countries, such as China and India, as main players in the high technology markets
• Sanctions against Russia, where 11% of the Finnish exports go

One can consider that other internal factors have negatively affected Finland. There has been the tendency to pay higher wages to employees, a mistake of the Unions, of the governments and of the employers between 2008 and 2013. Everything seemed OK, Finland belongs to an exclusive club, one of the 20 richest countries in the world. Everybody has chosen to forget about the need for improving the country’s competition and innovation system.

So Finland is facing a serious challenge. It is extremely sad to see that at a time when there is a strong need to build a consensus on what should be done, the government and the opposition, who each have a part of the solution, are not able to work together. There are ways to approach solutions, even if it means ideological sacrifices will have to be made on both sides.

The first one is to recognize that moderation in costs for companies are necessary, beginning with the salaries. I have a deep feeling that everybody would agree that all salaries be frozen, as they have more or less been since 2013, and that no new social benefits should be given before the situation improves seriously in Finland. Additionally, the unwise idea of increasing the work week by 5% as requested by employers should be dropped. It’s common knowledge that productivity decreases when work hours increase, and that work hours in Finland are higher than in many of the most efficient countries, such as Germany.

There are also some actions to take regarding Russia.There has to be a discussion in Brussels before the next vote on the sanctions, to ask that Finland, which is probably the main EU victim of the sanctions, get some compensation from the EU, for example, a serious increase of the EU structural funds. This would be the typical behavior of all other countries, but here there is a certain restraint to ask for what would not be a privilege, but a right.

In the field of development aid, cutting expenses without finding ways to make these expenses profitable for Finland is not necessarily the best move, from a humanitarian and reputation perspective. A number of big countries have found ways to link their foreign aid to openings for their own companies in the relevant developing countries. To the Finnish eye it may be a questionable move, but when considering the alternative, which is to cut the subsidies (or at least 50% of them), it looks ethically acceptable.

Then a united Finland would have to address the most serious matter of the competitiveness of Finnish production. It is quite evident that it will never be competitive in a number of markets, because Asia is going to produce the same quality of products with lower costs, even with a 50% salary reduction. However, there are alternatives to consider.
One way to manage production is to have the best, well-trained and productive workforce, with the ability to provide very good quality. This could still work, because a number of European companies who have outsourced in Asia have finally repatriated the production in Europe, as transportation and inferior product quality were costing too much (for example, the Finnish bicycle company Jopo). In these types of cases there could be ways to support these moves by providing focused support in training workers for these companies which are ready to move production back to Finland and support the investment of repatriation.

Another orientation could be to support the development of Finnish companies in domains where Finland has already a competitive advantage, such as in the clean energy field, or in activities linked to forestry, or video games. There are also possibilities in other fields such as robotics, where qualified engineers are needed. There has been a lot of work performed for defining such sectors. One of the shortcomings in the government program is certainly to make cuts in research without defining a coherent strategy.

There is another path to consider for a modern Finland, which has been neglected by the government and the opposition: the development of an immigration policy facilitating innovation and exportation, which should be seriously considered. If, for example, Finland wants to develop trade with China or India, or even with France or the U.S., there is a serious need to facilitate immigration to Finland, beginning, for example, with the funding of university studies in Finland for citizens from other countries, with PhD funding as a priority. Again, this is not an easy task, but the cuts announced in research funding are going to have the opposite effect, which is not good for Finland.

These are only some examples of what could be done with groups working together. They may not necessarily be the most relevant, but a common effort by the government and the coalition, assisted by experts, can produce a brilliant plan that can accommodate the interests of both sides. This can hopefully lead to broadening the perspectives and the hopes necessary for the Finnish population to accept certain sacrifices. But without a plan and cooperation we will surely see Finland sinking and demonstrators invading its streets.

Or should we call back President Kekkonen and ask him to send one of his “Mill letters” to the members of the government and of the opposition, to oblige them to finally work for Finland together?

Categories: Economy, Government

Tags: Economy, Finland, growth