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Why is Finland living so well?

 
Tags: Comparative analysis | Russia | USA | Finland | Location | Analytics | History | International Competition | International trade | Specialization | GDP per capita | Human development index | Happiness index | European Union | Microelectronics | Forest | Nokia | Nordic model | Welfare state | Socialism | Inequality | Professional union
 

And can Russia do the same?

The country without reasons to be successful

This is one of the most favorite activities of bloggers and various researchers - to compare neighboring territories. Why one is well-being and successful, but if you go just a few kilometers - you will face a completely different and poor life? For russians, Finland is the closest “real” foreign country (opposite to post-USSR republics). This article will focus on the economic model that bring Finland to such success.

It seems that the Finns have no particular reason for economic prosperity. They are had to survive in the cold Scandinavian climate - similar with neighboring Russia. Finland is located on the European periphery. Even Sweden and Denmark is located better, in the heart of important trade routes. There are no significant mineral reserves in Suomi - unlike hydrocarbon-rich Norway. Finland is a country of a thousand lakes, but they are shallow useless from economic point of view. In antiquity, lakes were formed from the descent of a giant glacier - a kind of peculiar water impregnation on the giant granite plateau on which Finland is located. Suomi is a nation of harsh loggers, and the forest is perhaps the only national wealth (forests occupy about 75% of the country).

Map of Northern Europe

Map of Northern Europe and Finland

Until the 20th century Finlant had no independence and never played a significant role in the international arena. For many centuries, it was part of a more powerful neighbor - Sweden, and in 1809 it became part of the growing Russian Empire. In its composition, it gained some autonomy until it gained its independence by decision of the Soviet leader Vladimir Lenin. Historically, the neighbors treated the finns with a slight neglect. For example, the great Russian poet Pushkin wrote about "shelter of the wretched Chukhonets" in his "The Bronze Horseman". "Chukhonets" is an illiterate, underdeveloped people who inhabited the vicinity of St. Petersburg. Mostly a rural and forested country, without any developed industry (in the same Russia, the industrial revolution took place in the second half of the 19th century - and it was quite late by European standards). Finland, however, remained an insignificant agrarian country until the end of World War II - industrialization was already completed in the USSR then. The population of Finland in those years is at the level of Saint Petersburg and the region.

But now situation has radically changed. The OECD put Finland in 16th place in GDP per capita in 2017 - this is very high, and the it exceeds the Russian indicator by more than 1.5 times. According to the human development index - an expanded indicator that takes into account not only the monetary income, but also life expectancy and other "non-cash" components - the Finns have 15th place in the world. And in the world index of happiness published by the UN, the country of Suomi has taken first place. This is a good progress for the "wretched Chukhonets."

Due to what? In general, researchers are very fond of their countries such as Finland. Their story is about success "not thanks, but contrary to." Although the term “miracle” is rarely applied to the Finns, it will be interesting to understand reasons of its success and compare with eastern neighbor. We will try to explain this in detail in the article.

After World War II growth

The period from 1945 to the end of the 1980s is a determining period in the economic history of Suomi. This is the time when the leap was made and the foundation of the economic model was built, which, with certain adjustments, exists to this day.

If we draw analogies with transport, then for any journey over long distances the most important thing is to choose the right train (which goes in the right direction) and take a convenient place in it.

The post-war period was the heyday of Europe, which led to a sharp increase in living standards throughout the region. Success was based on the ideas of free trade and the narrow specialization of each country. And although the European Union was just beginning to take shape in those years, liberal economic ideas already dominated the thoughts of European politicians. It can be clearly seen from the chart below that during that period a steady trend was observed in the growth of foreign trade activity both in Finland and throughout Europe.

The degree of Finland's openness to foreign trade

Finnish openness to foreign trade

Finland has gained an advantageous place in the pan-European division of labor. The countries of the collapsed Warsaw bloc (Poland, Czechoslovakia, Hungary, the Baltic countries, etc.) jumped into the train later - we can say that now they have to drive while standing. Now the last passenger (Ukraine) is trying to hop onto this train on the go - it is likely that he will have to get there, hanging on the bandwagon of the European train.

Immediately after the war, in 1948, Finland joined the Bretton Woods system (the currency system that established the primacy of the US dollar - the exchange rates of all countries became tied to its quotes). Stability of exchange rates allowed to increase trade interaction between European countries - there were more reasons to build export-oriented business projects and not be afraid that unexpected fluctuations in prices would make trade unprofitable. Two years later, the country of Suomi joined the General Agreement on Tariffs and Trade - in the future, the World Trade Organization (WTO) was created on the basis of this agreement. The countries participating in the agreement agreed to lower barriers (duties, tariffs) when trading with each other. Finally, in 1961, Finland joined the European Free Trade Agreement. All this made the export-oriented model of the economy a full-fledged working option.

Here I will stop and move a little to the theoretical side. Why did the Western world at that time make an active bet on the development of free trade ideas? In those same years, the Soviet Union strode along the completely opposite model - building "natural economy" nationwide. In other words, the Soviet model assumed that everything necessary for a full life should be produced in one country. Nevertheless, at the beginning of the 19th century, the classical theory of the relative advantages of David Ricardo was formulated - its essence boiled down to the fact that in the economy of two countries and two goods, regardless of their endowment with resources, it would be beneficial for each country to specialize in the production of only one from these goods - and another to import. In other words - produce what you can do best, and buy the rest abroad. This primitive model was further complicated and supplemented, but the underlying idea lying in it did not undergo significant changes - a decrease in military tension made it possible to put it into practice.

After European liberalization, wool and cotton mills were actively closed in Finland - the textile industry could not compete with countries with lower wages. The agricultural sector was also losing its position - the cold climate and also location far from the main markets, could not offer a competitive price and gradually switched to import. It is unlikely that you can recall the famous Finnish brands in the field of food consumer goods - where the brand strength is great, the Finns did not succeed. It may be difficult for a small country to compete in the cultural and lifestyle markets, the most famous Finnish brands abroad (not counting Nokia) are Stockmann hypermarkets and Tikkurila paint. But along with this, other industries rose. A huge role was played by the far-sighted political position and favorable geographical proximity.

Finland has built good neighborly and trade relations not only with Europe, but also with the Soviet Union

Being an integral part of the Western world, Finland has always tried to maintain good neighborly relations with the USSR. For example, in 1961, Finland became only an associate member of the European Free Trade Agreement (a full member only in 1986). Finland has never been (and is not going to be) in the NATO military alliance. “The tender child of two queens sucks” - this is just about the Finns. As you know, in 1975 the famous summit of the Organization for Security and Cooperation in Europe took place - the highest point of good-neighborly relations between the USSR and the USA in the Cold War era. Before this summit, there was the Caribbean crisis and the war in Vietnam, after it there was a “limited contingent” of Soviet troops in Afghanistan and a downed Korean Boeing. Is it any wonder that the representatives of the two superpowers chose Helsinki as the venue for the historic meeting?

Between the Soviet Union and Finland, mutually beneficial bilateral trade agreements were concluded. Finland exported to the USSR products of the engineering industry - paper machines, cranes, elevators and icebreakers. This allowed the finns to lay the foundation of their own manufacturing industry - which became the basis of their specialization - subsequently, mechanical engineering products (and the inseparably connected electronics industry) became Finland's specialization - the manufactured products also went to the markets of Western countries (Germany, Sweden, Denmark). Trade with the USSR made it possible to earn money in the opposite direction - Finland actively exported oil from the USSR, selling oil products to Europe - petrochemicals are still a significant industry in Finnish exports, which is quite unusual with almost no resource base.

Finnish export structure

Finnish export structure

As at all times, the Finns always helped out the forest. Forest occupies about 75% of the country’s territory - and this is not only wood, but also forest products - building materials, pulp, paper. Since there are not so many forests in Europe, and Finland has convenient access to the ports of the Baltic Sea, forest products have become another important Finnish export industry and have played a role in the economic recovery. Although the forestry industry can hardly be called innovative (unlike engineering and electronics) - it fully operates on domestic raw materials, which means that all the added value remains in the Finnish economy (that is, in the end it is the salaries of Finnish workers and the profit of Finnish enterprises, not payments to foreign supplier). This is its fundamental difference from the petrochemical industry, which is also very noticeable in Finnish exports - but the added value there is not so high, since most of it falls on the import of raw materials from the USSR (Russia).

As a result, engineering and electronics, petrochemicals and logging have become the main driver of Finnish economic growth. Economic growth over the post-war decades was about 4-5% per year (in terms of GDP per capita). Similar dynamics at that time showed many European countries. This was the best advertisement for the liberal model - many European countries chose the path of narrow specialization.

Specialization alone does not lead to prosperity

States have a choice - try to develop the largest possible number of industries, or choose the path of specialization in a limited number of products. The first way is usually possible with a noticeable domestic market and it is usually chosen by fairly large countries (USA, Germany, Russia, etc.). The second way is specialization in the production of a narrow number of products, and it is typical of many small countries. Choosing the second way, the country should understand that the majority of industries are characterized by the economies of scale - the more you produce, the lower the cost and the lower the price you can offer. If you choose a product for specialization, you need to produce a lot of it. Since the domestic market is too small and cannot be swallowed, surpluses will inevitably have to be exported.

Generally speaking, a small country with a narrow export specialization is not unique example in the world economy. But not all such countries are so high in per capita GDP and human development index ratings.

Typically, the economy's dependness on foreign trade is measured using the Trade indicator (% GDP). In simple terms, this is the ratio of the sum of exports and imports to the country's GDP. The higher this indicator, the more the country is oriented to the foreign market. The table below shows the indicator values ​​for individual countries for 2017 (according to the World Bank):

Region Trade (% GDP) Region Trade (% GDP)
Belarus 134 Russia 47
Belgium 170 Saudi Arabia 63
Brazil 24 Serbia 114
Bulgaria 131 South Africa 58
China 38 Spain 66
Denmark 102 Sweden 87
Estonia 149 Switzerland 119
Finland 77 Turkey 54
France 63 Ukraine 104
Germany 87 United Kingdom 61
India 41 USA 27
Italy 59 World 58
Japan 34 European Union 85
Kazakhstan 61 East Asia 56
Luxembourg 413 Latin America 44
Mongolia 117 North America 30
Nigeria 26 South Asia 40
Norway 69 Africa in the Sahara 51
Pakistan 26 Middle East 78
Romania 85

To be honest, looking at this table, absolutely no conclusions can be drawn. The indicator strongly depends on the size of the country — Luxembourg has the highest value, and the largest economies — the USA, Germany, India, and others — have the lowest levels. Even China, which we perceive as a classic example of an export-oriented economy, has very modest indicators. In addition, the indicator is highly dependent on GDP structure - on average, services are more difficult to export.

Another important observation is that Europe has, on average, higher values ​​of trade openness (the impact of EU policies affects). On a global scale, Finland is a typical export economy, but on a European scale it is a middle peasant. Moreover, higher rates do not directly correlate with the economic well-being of the country - for example, they are quite high in Romania, Bulgaria, Belarus, Ukraine and other countries, which is depressed economies.

Hence the important conclusion - not the economy's specialization is important, it plays a significant role in what exactly the country is specialized

We have already touched on the issue of the structure of Finnish exports, and then we will look at its components in a little more detail.

High Tech Specialization

Not so long ago, in 2009, several researchers proposed the so-called Economic Complexity Index. The indicator takes into account not only the level of specialization of the economy, but also the prevalence of the goods that the country exports. In other words, if you export goods that no one else exports, you will be very high in this ranking. Examples of countries with the highest index values ​​are Germany and Japan. And vice versa, if you export what many other countries export, your rating goes down. At the bottom of this ranking are countries such as Angola and Zambia, which export a small amount of standard agricultural products. Also, a very large number of countries in the world specialize in tourism - which also has a negative impact on the indicator.

Thus, if you export standard goods, be prepared for a large number of competitors. So, the prices of your goods (and as a result, the income of the population) will be relatively low - you, as a supplier, can be easily changed without losing quality, you do not have significant market power.

Finland ranked extremely high 8th in the ranking of the economic complexity of exports in 2017. This is significantly higher than that of the countries of Southern Europe (Spain, Greece, Italy), which are traditionally focused on agriculture and tourism. This means that the basis of the Finnish economy is the production and export of goods with a high degree of uniqueness in the world market.

Nokia is the pillar of the Finnish economy

Nokia - the pillar of the Finnish economy

First of all, of course, we are talking about the electronics industry. It may seem strange to you, but in the article on the economic model of Finland, the name Nokia was mentioned only now. At the peak of its power, the giant cell phone market had a huge impact on the Finnish economy. The Economist magazine even coined the special term “Nokia effect” - not a single company in the world no longer mattered so much to the economy of their country. But the Nokia phenomenon, as well as the reasons for the rise and fall of the company, is a story for another discussion.

Now something else is important to us. By the end of the 1980s, the Finnish development model was in a certain crisis. An important reason was the loss of the Soviet market - the eastern neighbor faced deep crisis and did not present such a great demand for Finnish exports. This was superimposed on a certain crisis of traditional industries all over the world - including the production industry important for Finland. The world was moving more and more towards a post-industrial society - with its dominant high technology and service industries. Kari Kairamo, CEO of Nokia, spoke about the need to transform the Finnish economy. Like the country as a whole, the company at that time was in crisis.

Nokia had its history since 1865 and in the late 1980s was a conglomerate of various businesses - it produced rubber products (modern Nokian company), cables and electronics, was engaged in wood processing and electricity generation. Decisive in the history of the corporation was the decision to specialize on the telecommunications business and abandon most other non-core activities. At the same time, Finland decides to enter the European Union and begins gradual integration into the euro area. The European market was supposed to replace the Soviet one, and further integration and a single currency increased opportunities for efficient trade. There is a suspicion that Nokia was extremely interested in this - it improved the company's ability to conquer the European market of cell phones.

From that moment, electronics and telecommunications have become a key area of ​​specialization in the Finnish economy.

Please note that this is a industry with high added value, requiring highly paid specialists and with a fairly high level of uniqueness of products in the world market (primarily when it comes to accessories for cell phones). Despite the fall of Nokia, Finland has retained this specialization for now.

Another important сomment - Finland, as part of its specialization, does not seek to produce the final product. The same Nokia phones were a kind of exception to the rule. Let's see what the leaders of the Finnish electronic industry are doing now:

Company Field of Specialization
Kone Production of elevators and components (one of the four world leaders, along with ThyssenKrupp, Otis Elevator, Schindler)
Wartsila Production of ship power plants, power plants, screw mechanisms, ship control systems and other equipment
Cargotec Production of handling equipment for ships, ports and terminals
Tieto IT services for industry and services
PKC Group Most of the revenue comes from the production of cable and wire harnesses for automotive customers
Salcomp Production of adapters for mobile phones and other electronic devices (power adapters for laptops, gateways, routers, set-top boxes, lighting and other electronic applications).
Vacon Production of frequency converters - electronic devices designed to control the speed of rotation of an asynchronous electric motor.
Vaisala Oyj Sensors for determining humidity and temperature

You may not know the names of these companies, since many of them sell not end consumer goods, but components and spare parts for other industries. All kinds of cables, adapters for mobile devices, various components for ships and warehouse equipment - all this is the basis of Finnish specialization. According to the Bank of Finland Newsletter

Most Finnish exports consist of intermediate industrial goods

Similarly, about a third of Finnish imports are also the import of intermediate industrial goods into the country. In other words, the Finns export parts and assemblies for various industrial systems, assemble them into a more complex system and export them further along the production chain, while retaining some added value.

I can not help comparing with Russia. It is important for our country to produce exactly the final product - so that the brand embossed on the bodywork is uniquely associated with Russia. Hence, for example, attempts to create their own civilian aircraft (hello, the Superjet and MS-21 projects). The only thing that immediately began to be considered by Russian journalists and ordinary people in the next technological product is the share of units and assemblies produced in Russia. And after Russia's foreign relations deteriorate with another supplier country, management advises engineering team to “start looking for solutions for import substitution.”

At the same time, many modern technological products are extremely complex systems. The same manufacturer of Airbus aircraft, in fact, is considered a pan-European aircraft manufacturer - the production chain covers many countries. Finland, as a small country, does not seek to create something completely its own and large, but simply boringly integrates into the global technological chain, while specializing in high value-added manufacturing processes.

Nordic ("Swedish") model

Speaking about the Finnish phenomenon, we cannot ignore the special socio-economic structure of the country. The Nordic (Swedish) model of socialism is typical for all largest countries in the north of Europe - Sweden, Finland, Norway, Denmark and Iceland. All these countries have the highest GDP per capita (often even higher than Finland) - could this be just a coincidence?

The Nordic model (Sweden), or the so-called welfare state, is a special form of organization of the economy at the junction of the market and socialist models. Typical signs of a welfare state:

  • free (or close to free) education and medicine nationwide
  • high in size and long-term unemployment benefits
  • extensive retirement programs
  • high share of government spending in GDP

So, in Finland, the share of government spending in GDP exceeds 50%, which is a lot by the standards of any country (in Russia, for example, as in the USA, this figure is in the region of 20% of GDP).

In other words, the Nordic model assumes high attention to social spending and social support of the population. The famous attribute of the Finnish social state is the so-called baby boxes. This is a large set of little things issued at the expense of the state to the parents of each newborn. Want to buy sliders and other necessary things yourself? You have the right to receive money. In addition to this, mothers are entitled to four-month maternity leave for childcare with full payment and another six months with partial payment. It is clear that in Russian realities it seems that this is not so much, but by world standards it is a very worthy option (in the United States, there are no maternity leaves).

Education at Finnish universities is free for EU citizens (fees for students who came from countries outside the European Union were established only in 2017). This is an important difference from the United States, where education usually requires an educational loan.

Can't get a job? No problems. Unemployment benefits in Finland are paid within 500 days. If work could not be found even during this period, by fulfilling certain criteria, the allowance can be received for an almost unlimited period of time (the amount of the allowance is also very decent). By the way, Finland was one of the first countries to conduct an experiment on introducing the concept of basic unconditional income.

All these social guarantees are based on the extremely high level of taxation of companies and the population

The share of taxes in relation to GDP in Finland is about 54% - this is the fourth place in the world. The rating neighbors are other countries with a “Swedish model” - Norway, Denmark and Sweden. In Russia, this figure is about 20% of GDP, in the United States - about 27%. But taxes also act as a powerful redistribution mechanism - as a result, Finland (and other Scandinavian countries) are among the world leaders in income equality - neither Russia nor the United States are even close by. For all this, the Scandinavian model by no means implies the destruction of market mechanisms - moreover, in all areas not affected by social programs - classical free competition is supported, without protectionism and any benefits for individual producers - this is the fundamental difference between Scandinavian socialism from the classic that we have tried to build in the Soviet Union.

Choosing socialism, you will not be able to create innovative products

I'm not trying to talk about the Nordic model as an ideal system of the country's economic structure. In my opinion, she has many advantages and disadvantages. A good way to understand them is to compare them with the economic model that has been operating in the United States for several centuries.

Current America was built on a different economic philosophy. The USA is a country of opportunity, but not a country of universal prosperity. There are both rich and poor. Here you have the opportunity to both achieve dizzying success and fall to the very bottom. All that the state guarantees is equality of opportunity, but not equality of living standards. Expensive education, expensive medicine, income inequality - this is just about America. The USA is, if you like, a classic “wild” market with all its advantages and disadvantages, slightly combed by separate social elements. If you suddenly become uncompetitive, no one will specifically protect and support you, and you need to think about your treatment and education yourself.

Countries with an aggressive work environment (such as the United States) motivate you to create new products. Here you (whether you are a hired worker or an entrepreneur) should always, excuse me, “move your buttocks”, invent something, promote yourself. Otherwise - the risk of losing your job (or business) and getting a very modest allowance. It is not surprising that Silicon Valley, the main venture center in the world, was formed in the USA. At the same time, the innovator does not always win the market - often, he incurs too high launch costs and gives the palm to his less talented, but more calculating follower.

Commonwealth states (such as Finland and other Scandinavian countries) integrate into the chain of creation of such new products. If you want, such peculiar “fish-sticks”. As a result, there are many notable players in the field of creating intermediate products (cables for computers, components, assemblies for high-tech goods), but few primary brands, that is, what the market is built around, what the buyer knows and chooses.

One can argue with this - the Finns gave the world Nokia and Linux. But it’s important to understand that Nokia is a single example, and Linux has never been a commercial product. Kone elevators are still, in my opinion, difficult to call the primary product.

Moreover, Nokia's failure included the inability to build an ecosystem around itself and change when it was necessary. Nokia management thought - why give up Symbian (the operating system for Nokia mobile phones) when financial results are so good. As a result, they lost the moment when the market changed and consumers came to a new level of service, and they could not answer the challenges of the time. Drawing parallels with the Finnish mentality, they were too slow and relaxed, as they believed that personally for them everything would always be fine. Why change something when the risk of losing everything is not so obvious and there is insurance? Conversely, numerous American high-tech companies were able to create an ecosystem around themselves (Apple and Facebook are a typical example), as they were motivated by constant search (the competitive environment permeates all levels in the corporate hierarchy). Due to its special mentality and a penchant for experimentation and risk, America has become the power we are used to know.

Thus, giving everything to the tough market, which acts like the laws of biology, you, of course, will have the primacy in innovation. But part of the population will necessarily lose - as a result of this model, poverty, inequality and other typical problems of the “animal grin of capitalism”. So I don’t want to advocate one or another model - they are just different and everyone chooses his own path for himself.

If we draw parallels with Russia, then the main problem of our country is the lack of an economic model (American or Swedish) as such. We inherited from the Soviet Union many features of the Scandinavian model - free education and medicine, support for motherhood. But in order to make all these benefits truly high-quality for the population, we have too low a level of taxes. In addition, some of our institutions are purely market-based (a legacy of the 1990s capitalism) - the lack of high-quality income redistribution mechanisms, low and short-term unemployment benefits - here we are much closer to the American model. As a result, Russia came across features from completely different concepts, poorly combined with each other. As a result, the country is not able to achieve prosperity either according to the Scandinavian or American model. Moreover, today it’s even poorly understood which way we are going. As always, a special “Russian way”.

Other factors

But back to Finland, there are a number of other things that I consider necessary to mention.

Finland has an extremely high level of spending on research and development - about 3% of GDP (one of the highest rates in the world). Research in itself requires a high-paying workforce - but beyond that, it creates an environment that allows you to maintain and update the competencies of workers (who can move from industry to industry).

In Finland, trade unions are traditionally strong. In Finland, these are real associations of workers (not as in USSR) that make it possible to maintain a high level of wages in the country and protect employment.

It is important to say about the size of population in Finland. Despite the large territory by European standards, only about 5 million people live in the country. This is very little. And this also fits very well in the selected economic model. When you specialize in high-tech industries, as a rule, you need highly qualified employees, but they do not need so many. High incomes have to be spread over a relatively small number of people. It can be assumed that if the population were larger, then there were not enough vacancies for everyone - and the load on the system of social benefits would increase. In other words, with a larger population, the probability of social dependency could become much higher, and the “welfare state” could not cope with such a volume of payments, and “Swedish socialism” itself became impossible in principle.

Challenges of recent years

Instead of a conclusion, it is worth saying that in recent years the Finnish economy has faced a certain set of difficulties. The main one, of course, is Nokia’s problem, which for a long time has been the driver of the Finnish economy, and now has actually lost the gigantic mobile phone market.

But this is not the only difficulty. Throughout the world, the consumption of pulp and paper is decreasing due to the widespread expansion of electronic devices. This reduces the demand for forest products. In addition to this, the Finnish forest is losing competition to tropical forests on the world market - they grow much faster than coniferous trees, which means that more wood can be obtained from the same square in the same period. Finally, in 2014, Finland was forced to join the sanctions against Russia. As a result, Suomi lost an important market for their exports - perhaps they are one of the main victims in Europe in this area.

Finally, the entire European model today is in easy stagnation - first of all, due to high salaries, it cannot compete with Asian states in many sectors. It is all the more interesting to observe the Finns in the near future - the fundamental pillars of their economic model remain unchanged. And even with all these problems, Finland maintains the position of one of the most successful world economies - which means that, despite all the initial differences between our countries, we have something to learn from our neighbors.

Why do some countries, cities or companies achieve economic success, while others are in poverty? Why is economic growth so weak and income inequality constantly increasing? How can new technologies change the global economic landscape? On this site we look at the most important global trends from the perspective of an economist.

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