We have all heard about or seen on TV Alexander Stubb welcoming the last OECD report about Finland, and congratulating himself and the government on the support for OECDs to the Finnish government’s program.
That is just a communication trick. because this optimistic is simply wrong, and if the government really wants to address Finland’s situation, somebody in the high spheres should read what is actually in the report (click here to read it) and act upon concerns instead of burying it …
The Finnish government program was adopted in Spring 2015 and is based on the assumption that Finland’s problem comes from a lack of competitiveness, but the OECD is attributing Finland’s situation to more factors: the global economic slowdown, the lowering of electronic exports, the lowering of demand for paper and electronics, the collapse of trade with Russia, and the aging of the population. And these need to be clearly analyzed, according to the OECD.
The government policy may prevent Finland from benefiting from moderate world growth
The first fact to be taken into account is that Finland is a small country, subject—because of globalization—to the winds of the world’s economy, and whose prospects, therefore, are not so good. As stated by the OECD, “As a small, open economy, Finland is very dependent on exports. Weaker-than-expected global growth and especially low global investment would hinder the recovery, while a pick-up would boost the economy. Turbulence in global financial markets can result in an increase of the cost of financing for the government and firms alike, although Finland has so far rather been considered as a safe haven.”
Then there should be some hopes for Finland, as it looks that there is recovery benefiting other EU countries. But according to the OECD, the government policy is going to prevent Finland from reaping those same benefits. It notes that “slow household income growth, uncertainty, and cuts in public spending will hold back domestic demand.” So then, only a strong world growth can save Finland.
Finland’s competitiveness is not hampered by costs (and Finnish traditional industries are going to do well after a restructure)
The OECD states that “the economic downturn is largely structural, insofar as it reflects downsizing in industries such as electronics and forestry.” Globally, it is quite surprising that the OECD does not insist more on the necessity to have an industrial policy in the country. They are, however, stressing the fact that there is a need to have a strong export sector.
The OECD repeats the arguments of the government in favor of boosting competitiveness, indicating in particular that “The government estimates that Finland’s cost competitiveness has deteriorated by 10 to 15% compared to its main trading partners over recent years,” and takes note, without real enthusiasm, of the government’s plans to cut salary costs. But a key sentence in the report (“the fall in exports is mostly due to non-cost factors“) indicates otherwise, even if it is clear that better cost competitiveness could have mitigated the effects of the shocks mentioned in the report. And anyway, as further stated by the OECD, the government policy’s benefits will not be visible very fast.
There is one positive element about Finland’s competitiveness in the report: the OECD considers a positive evolution in four key industrial sectors:
• The electronics and ICT industries, including computer games, are restructuring and should be able to contribute to growth again, although not on the same scale as in the early 2000s.
• The paper industry is renewing itself as well, focusing on markets where Finland has a comparative advantage over emerging economies because of the type of wood fibers it produces, and pursuing environment-friendly strategies, including the development of bio-energy from by-products.
• The chemical industry has expanded, and shipbuilding is reviving, partly based on their capacities to produce greener ships propelled by liquefied natural gas.
By not funding research and education, the government has not boosted entrepreneurship, innovation, and R&D
In its previous report (2012), the OECD had recommended to maintain strong government support for basic R&D and education. In its new report, the OECD devotes a full chapter on prioritizing investing for the future, certainly because they have noted that Finland’s government policies have been hitting hard on education and research.
The following OECD statement contradicts the government program; “Finland’s R&D expenditure has declined markedly in real terms after 2011, which contrasts with a pick-up in Germany, Sweden, and the OECD as a whole […]. This is a cause for concern in a knowledge-based economy. To a large extent, the contraction in R&D reflects the difficulties of the ICT sector, where R&D is highly concentrated. The low level of R&D and patents in non-ICT sectors is one of the main weaknesses of the Finnish innovation system, and is reflected in the inability of other industries to compensate for the decline in ICT output. Direct government R&D funding declined by about 14% in real terms between 2010 and 2014. Further cuts are planned over the current parliamentary term. The overall budget for tertiary education will be cut by about 4% and the budget of the Finnish funding agency for technology and innovation (Tekes), which already shrank by about a quarter in real terms since 2010, will be reduced further by about a third.” OECD’s conclusion is quite clear: “R&D spending is likely to be affected by the spending cuts, which could affect Finland’s growth potential.” The promotion of workers’ skills, gender balance, and work immigration should be a priority to compensate for the aging population.
The OECD also notes that though the situation of Finnish education is still good, PISA (Programme for International Assessment) results have worsened since 2006, and the situation for boys has particularly deteriorated. In addition, second-generation immigrant youth score lower than natives and only slightly better than first-generation immigrants. The OECD recommends an analysis and further action on education to improve the situation—for boys, in particular.
The OECD is also asking the government to focus on trade-specific skills in order to make serious inroads on improving vocational education and training that will ease the transition from school to working life, And expounds that “efforts to build foundation skills should be increased, along with lifelong development and training to improve the long-term labor market outcomes of VET graduates. Consolidating VET programs and specializations could be considered as a part of this effort.” It does not look like Alexander Stubb heard the message, however.
There is then the question of female participation in the labor force, which can compensate for the important part of the workforce going in retirement. It is true that compared to other Nordic countries, Finland is not doing well; according to the OECD, “the employment rate of Finnish women (68%) is close to that of men (69%) but considerably lower than in the other Nordics. Despite a second place in the Global Gender Gap Report, only 24% of science, technology, engineering, and mathematics students are female. Furthermore, the Finnish labor market is gender-segregated. Just 30% of legislators, senior officials, and managers are female, and women are 70% more likely than men to be in part-time work, contributing to a gender wage gap of 19%. Labor force participation among Finnish mothers with children below six years of age is the lowest in the Nordics, almost 20 percentage points below that of Sweden and Denmark.”
It looks like the government has heard only the recommendation of the OECD to lower the subsidies which encourage women with low potential earnings to stay at home, but has passed on the need to promote better equality at the workplace, reduce the salary gap, and ensure that women going back to work after a pregnancy get adequate training.
Another major recommendation from the OECD was forgotten by Minister Stubb (probably a side-effect of the presence of the Finns Party in the government): in order to support the aging population, the OECD recommends facilitating work immigration. It strongly urges to “encourage more work immigration by abolishing the “work test” that stipulates that non-EU work immigrants can only immigrate if the job offer is in an occupation where there is a lack of local supply, by improving systems for recognition of foreign qualifications, and by bridging courses and streamlining systems to integrate workers’ families.”
For other immigrants, such as refugees and asylum seekers, the OECD notes that “the number of asylum-seekers has surged in 2015, notably from Iraq, Somalia, and Afghanistan. Tapping this potential to reinvigorate Finland’s aging workforce depends on effective integration policies in which “up-skilling,” starting with language, is the cornerstone. Experience from Canada and Switzerland shows that utilizing immigrants’ full skills is a challenge, but that well-developed apprenticeship schemes help integration of low-skilled immigrants and their children.”
Finland’s other vulnerabilities
In addition to certain weaknesses of the present policies, the OECD is indicating that Finland is very vulnerable to certain risks that are not easily mitigated:
The main domestic financial vulnerability relates to high household debt, noting that high loan-to-value mortgages are common in Finland, and that most mortgages carry variable interest rates. Heavily indebted households are thereby vulnerable to higher interest rates, losses in income, or falls in housing prices. The existing risk is limited, however, and the government is addressing it by cutting mortgage interest tax deductions progressively, and limiting the possibility to take high mortgages (which are, again, measures threatening growth).
Finland can also be a victim of euro-area turbulence, as this can affect bond yields and financial conditions in Finland. It should also be noted that a euro-area wide recession will affect Finnish exports, although a weaker euro can boost exports to countries outside the euro zone.
Then there is the deepening recession in Russia and her further political tensions with the European Union which can still reduce exports, despite this country’s shrinking shares in Finnish exports. Escalating political tensions can lead to damaging sanctions on both sides. With the situation in Syria and the low oil prices to weaken Russia, there is real risk for these two events to happen:
- Global or regional financial crisis contagion
- The Finnish financial system is dominated by Nordic banks, which have low liquidity buffers. A liquidity crisis triggered by events outside Finland can lead to difficulties in the banking sector, falls in asset prices, and a credit squeeze, which will cause a deep recession.
Some additional interrogations concerning the OECD report
But everything is not grim in the horizon, and the OECD is, on a number of points, satisfied about the actions of the Finnish government in the last years and in the last months.
A funny table in the report called “Many earlier OECD recommendations are being followed,” points at Finland having been the good pupil that has implemented what the OECD had recommended. Yet since the last OECD report, Finland has gone down on a lot of domains. If it did not work in the last years, why not imitate other EU countries in better straits, and define intelligently Finland’s own policies and forget about the OECD recommendations?
There are two other slightly strange elements in the report and in the government policy: the OECD seems happy about the idea to reform education and the healthcare system. But then it recognizes that the Finnish education system is one of the 5 best in the world and one of the less expensive in the EU. As for the health system, the OECD notes that Finland wants to improve its efficiency. And when one looks into it, this reform may be necessary because the healthcare in place presents inequalities—though not because it is inefficient. The Finnish health system is one of the best in the world and in Europe (you can look here at an EU comparison which puts Finland as number 4 in Europe, very near the top). And from the point of view of expenses, Finland spends (in percentage of its GDP) less than any other country of the EU or the main OECD countries, except for some of the countries from Eastern Europe (figures here). As said in the US, “If it ain’t broke, don’t fix it.”
The OECD supports Finland’s actions in favor of entrepreneurship and a new tax structure
The OECD is also happy that the government plans to develop entrepreneurship through the streamlining of regulations, and supports innovation and entrepreneurship in several ways: allocating special funds to raise equity capital and enhance the risk-taking capacity of businesses (notably start-ups and growth firms), strengthening Team Finland (which brings together a range of government-funded organizations to support exporters and promote Finland’s brand name), improving cooperation between higher education institutions and businesses, plus a one-off package of €1.6 billion to fund key projects in 2016-18 through investments in clean technologies, digitization, and health. Though there is something lacking in terms of supporting new entrepreneurs, and in particular, allowing for failure and giving them a larger share (which is thereby less taxing) of the income from their companies in the first year in order to reinvest. Admittedly, as noted by the OECD, these are good initiatives.
And finally, the government received a green light from the OECD to make the tax structure more growth-friendly. Translated in plain language, this means that there will be fewer taxes on the private sector, some increase in the earned income deduction focusing on low and medium incomes, and an increase of indirect taxes paid by the Finnish population. You can add to this the reduction of deducted mortgage interest rate payments from our taxable personal income and one can have a clear idea of what is ahead.
Note, however, that the OECD has totally forgotten any mention of the effort to go in the direction of a green economy and the question of a greener tax system, as was done in Sweden.
Generally speaking, this OECD report—as are all these reports written by international organizations about their member states–is as nice as possible. But, as indicated, it has politely and discretely pointed out all the dangers of the present situation and the weaknesses of the government policy. We should promote a serious debate in order to arrive at some kind of consensus regarding sustainable growth.