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| Finland Mosjeed |
Country Profile
Formal Name: Republic of Finland
Short Form: Finland
Term for Citizens: Finns
Capital: Helsinki
Date of Independence: December 6, 1917.
GEOGRAPHY
Size: About 338,145 square kilometers, slightly larger than Missouri and Illinois combined. About 10 percent of area made up of inland water. A quarter of the country above Arctic Circle.
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| Finland in Map |
Topography: Four natural regions. Archipelago Finland begins in southwestern coastal waters and culminates in Aland Islands. Coastal Finland a band of clay plains, extending from Soviet to Swedish border. Seldom exceeding width of 100 kilometers, plains slope upward to central plateau that forms basis of interior lake district. This core region contains more than 55,000 lakes set within country's densest forests. Rising above central plateau, upland Finland extends into Lapland, where forests gradually yield to harsh climate. Above timber line are barren fells and numerous bogs. Upland Finland crossed by country's largest and longest rivers.
Climate: Gulf Stream and North Atlantic Drift Current moderate temperatures somewhat, but winter still lasts up to seven months in north, and most years gulfs of Finland and Bothnia freeze, making icebreakers necessary for shipping. Long days in summer permit farming far to north. Continental weather systems can bring quite warm summer temperatures and severe cold spells in winter.
ECONOMY
Gross Domestic Product (GDP): US$70.5 billion in 1986 (US$14,388 per capita). Economy grew faster than other Western industrialized countries throughout 1980s, averaging about 3.3 percent per year from 1980 to 1986.Agriculture and Forestry: Below 8 percent of GDP and about 10 percent of employment in 1986, but sufficient to make country self-sufficient in staple foods and provide raw material to crucial wood-processing industries.
Industry: Major growth sector, contributing nearly 35 percent of GDP and 32 percent of employment in 1986. Main engine of postwar structural change, industry faced increasing competition in 1980s causing restructuring and a shift to hightechnology products.
Services: Largest sector, providing nearly 58 percent of GDP and about 57 percent of employment in 1986. Generally labor-intensive and uncompetitive, but banking, engineering, and consulting showed promise.
Imports: Raw materials, especially fuels, minerals, and chemicals, but growing share of foods and consumer goods.
Exports: Primarily industrial goods, especially forestry products and metal products; growing high-technology exports.
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| Goods Trade |
Major Trade Partners: Soviet Union largest single trade partner, but West European countries together accounted for nearly two-thirds of trade.
Balance of Payments: Despite positive trade balance, Finnish tourist expenditures abroad and debt service caused continuing current account deficits in 1980s.
General Economic Conditions: Standard of living high despite difficult environment. Inflation traditionally exceeded that of other industrialized countries, but fell below 4 percent in 1986; unemployment, at about 6 percent in 1987, was considered Finland's most serious economic problem.
Exchange Rate: In March 1988, Finnish mark (Fmk) 4.08=US$1. Fully convertible, but some capital controls maintained by Bank of Finland.
Economic Development
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| Export rate |
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.
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.
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| ERU billion of Finland |
From 1950 to 1974, Finland's gross national product 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. 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. 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. 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. 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.
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.
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| Trade rate of Finland |
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.
Structure of the Economy
By 1986 postwar economic growth had raised Finland's GDP to about US$70.5 billion, making the country one of the most prosperous in the world. Economic expansion over the years had substantially altered the structure of the economy. By 1986 agriculture, forestry, and fishing had fallen to a little under 8 percent of GDP from nearly 26 percent in 1950. Industry, including mining, manufacturing, construction, and utilities, accounted for about 35 percent of GDP, down from about 40 percent in 1950. Within industry, metalworking had grown most rapidly, its output almost equalling that of wood processing by the late 1970s. In the late 1980s, industrialists looked forward to a shift toward electronics and other high-technology products.While agriculture and industry had declined in relative terms during the postwar years, the service sector had grown from about 34 percent of GDP to almost 58 percent, leading some observers to characterize Finland as a postindustrial society. Several factors accounted for the expansion of the service sector. Government, very small under the Russian Empire, grew rapidly between the Great Depression and the early 1970s as the state took responsibility for an increasingly greater share of economic life. In addition, transportation, communications, engineering, finance, and commerce became more important as the economy further developed and diversified.
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| Currency picture of Finland |
Control and ownership of Finland's economic life were highly concentrated, especially after the industrial and financial restructuring of the 1980s. Thus, by 1987 three firms controlled most shipbuilding, a small number of woodworking enterprises dominated the forest industries, and two main commercial banks exercised wide-reaching influence over industrial development. Large state-owned firms provided most of the energy, basic metals, and chemicals. The country's farmers, workers, and employers had formed centralized associations that represented the vast majority of economic actors. Likewise, a handful of enterprises handled most trade with the Soviet Union. Some observers suggested that the trend toward internationalization might increase the influence of foreign firms and executives in Finnish enterprises, but this effect would make itself felt slowly. Thus, while Finland remained a land of family farms, a narrow elite ran the economy, facilitating decision making, but perhaps contributing to the average worker's sense of exclusion, which may have contributed to the country's endemic labor unrest.
FOREIGN ECONOMIC RELATIONS
International economic relations--especially foreign trade-- have been vital for Finland throughout the twentieth century, but never have they been more so than during the 1980s. The country was self-sufficient in staple foods, and domestic supplies covered about 70 percent of the value of the raw materials used by industry. However, imports of petroleum, minerals, and other products were crucial for both the agricultural and the industrial sectors. From the end of World War II until the late 1970s, the development of modern infrastructure and new industries required substantial capital imports. Sound foreign economic relations made it possible to exchange exports for needed imports and to service the large foreign debt. A policy of removing obstacles to the mobility of commodities, services, and factors of production facilitated economic modernization. |
| Foreign trade growth |
Business leaders and government policy makers devised innovative strategies to manage economic relations. Close economic ties to the Soviet Union grew out of the postwar settlement under which Finland agreed to pay reparations and to maintain a form of neutrality that would preclude threats to Soviet security. Except for agriculture, which remained strictly protected, postwar commercial policy sought to link Finland's economy with the economics of the Nordic area and of Western Europe as closely as possible without aggravating Soviet fears that such economic ties would undermine loyalty to the East. Thus, since 1957 Finland had pursued trade liberalization and had established industrial free-trade agreements with both West European and East European countries. Spurred by these liberal policies, exports and imports had each grown to account for roughly one-quarter of GDP by the mid-1980s. By the late 1980s, Finnish industrial and service firms were going beyond trade to internationalize production by attracting foreign partners for their domestic operations and by acquiring foreign firms. Most observers believed that Finnish firms needed to follow an international tack not only to protect export shares but also to maintain their positions in domestic markets.
Foreign Trade
Trade in agricultural commodities, consumer products, and services had been relatively limited, but exchanges with the outside world were crucial for industry. Not only had the forest industries grown largely in response to foreign demand for wood and paper, but the metal-working industry had also taken off only under the goad of postwar reparations deliveries to the Soviet Union. By the mid-1980s, exports accounted for half of all industrial output and for as much as 80 percent of the output of the crucial forest industries. Similarly, imports of energy, raw materials, and investment goods remained essential for industrial production. The development of export-oriented industries had driven Finland's postwar structural transformation, indirectly affecting the rest of the economy. Industrial competitiveness would largely determine the economy's overall health into the 1990s.During the postwar period, Finnish exports shifted from lumber and other raw materials to increasingly sophisticated products, a change which reflected the increasing diversification of the country's economic structure. The forest industries continued to dominate exports, but, while they had accounted for about 85 percent of total exports in 1950, they accounted for only 40 percent by the mid-1980s. The relative shares of different forest exports also shifted. Sawn timber and various board products accounted for more than one-third of total exports in 1950, but by 1985 they had fallen to only 8 percent. Exports of pulp and paper fell more gradually during the same period, from 43 percent of exports to about 30 percent. Pulp and cardboard, the main exports of the chemical wood-processing branch, declined in importance, while specialized paper products incorporating higher value added, such as packing material, printed paper, and coated paper, grew in importance.
Taking the place of forest products, exports of metal products grew rapidly during the postwar period from a little over 4 percent of exports to about 28 percent. Here, too, exports of more sophisticated manufactured goods grew faster than those of basic products. By the late 1980s, basic metals accounted for about 20 percent of metal exports, ships for about 25 percent, and machinery and equipment for about 20 percent. Advanced products such as electronics and process-control equipment were gaining on conventionally engineered products. The chemical industry had exported relatively little until the 1970s, but by 1985 it had grown to account for about 12 percent of exports. By contrast, the textile, confectionery, and leather goods industries had peaked at over 10 percent in the late 1970s and early 1980s, and then they had fallen to about 6 percent of exports by the mid-1980s. Minor export sectors included processed foods, building materials, agricultural products, and furs.
Up to the 1970s, Finland tended to export wood-based products to the West, and metal and engineering products to the East. By the mid-1980s, however, Finnish machines and high-technology products were also becoming competitive in Western markets.
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| Statistic of foreign trade |
Finland's imports had consisted primarily of raw materials, energy, and capital goods for industrial production, and in the late 1980s these categories still accounted for roughly twothirds of all imports. The commodity structure of imports responded both to structural changes in domestic production and to shifts in world markets. Thus, the heavy purchases of raw materials, energy, and capital goods up until the mid-1970s reflected Finland's postwar industrial development, while the subsequent period showed the influences of unstable world energy prices and Finland's shifts toward high-technology production. Imports of investment goods climbed from about 15 percent in 1950 to almost 30 percent in the late 1960s and early 1970s, only to fall again by the 1980s to about 15 percent. Foodstuffs and raw materials for the textile industry accounted for about half of all raw material imports during the 1950s, but by the 1980s inputs for the chemical and metal-processing industries took some 75 percent of raw material imports. World energy prices had strongly influenced Finnish trade because the country needed to import about 70 percent of its energy. After rising slowly until the early 1970s, the value of oil imports had jumped to almost one-third of that of total imports in the mid-1970s, then had fallen with world oil prices to about 13 percent by the late 1980s.
Like its export markets, Finland's import sources were concentrated in Western Europe and the Soviet Union. The country usually obtained raw materials, especially petroleum, from the East and purchased capital goods from the West.
Finnish service exports had exceeded service imports until the early 1980s. Up until this time, shipping and tourism earnings had generally exceeded interest payments to service the national debt. In the mid-1980s, however, the balance was reversed as the earnings of the merchant marine declined and Finns began to spend more on tourism abroad. Although Finnish businesses tried to compete in these labor-intensive sectors, the country's high wage levels made shipping and tourism difficult to export.
Like other Nordic countries, Finland's trade was concentrated in the Nordic area and in Europe. Unlike the others, however, Finland had, as its most important trading partner, the Soviet Union. During the postwar years, trade with the Soviets had expanded and contracted in response to political developments and market forces. During the immediate postwar period, the Soviet share of Finland's trade, spurred by reparations payments, rose to over 30 percent. However, the following two decades saw this share gradually decline as Finland expanded exports to Western Europe. A second cycle began after the 1973 oil crisis, when recession in Western markets cut demand for Finnish products while the increased value of Soviet oil deliveries to Finland allowed expanded exports to the East. Finnish exports to the Soviet Union rose sharply during the years after 1973, only to fall--along with world petroleum prices--by 1986.
By the late 1980s, the geographical distribution of Finland's trade was moving back to the pre-1973 pattern. In 1986, for example, although the Soviet Union continued to be Finland's single largest trade partner, trade with West European countries, which together accounted for about 61 percent of Finnish trade, was much more important than trade with the Soviet Union. Finland's main trade partners in Western Europe were Sweden, which took the biggest share of Finnish exports, and the Federal Republic of Germany (West Germany), which supplied the largest slice of Finnish imports. East European countries other than the Soviet Union accounted for only slightly over 2 percent of trade. Non-European countries were responsible for some 19 percent of trade. The United States, Finland's main non-European trade partner, accounted for over 5 percent of Finnish exports and imports in 1987.
As in many small European countries, the postwar trade policy of Finland had been to pursue free trade in industrial products while protecting agriculture and services. During the 1980s, strict quotas still blocked imports of most agricultural commodities (except for tropical products that could not be produced domestically), but liberalized regulations allowed increased imports of services, especially financial services. Most industrial imports and exports were free of surcharges, tariffs, and quotas under multilateral and bilateral agreements between Finland and its major trading partners. Health and security concerns, however, inspired restrictions on imports of products such as radioactive materials, pharmaceuticals, arms and ammunition, live animals, meat, seeds, and plants. With a few exceptions, Finland discontinued export licensing in the early 1960s. The State Granary, however, controlled all trade in grains, while the Roundwood Export Commission reviewed all lumber exports.
Finnish Direct Investment Abroad
From the end of World War II until the 1970s, Finland imported large amounts of capital to finance infrastructure investment and industrial development; however, by 1987 Finnish capital exports exceeded capital imports by about six to one. During the earlier period, foreign firms had set up subsidiaries in Finland, but few Finnish enterprises had established branches abroad. In the 1970s, the forest industry led a shift toward capital exports by founding sales outlets in the most important foreign markets, especially in Western Europe. The metalworking and chemical industries did not begin to expand overseas until the late 1970s, but they made up for lost time during the following decade. These industries first invested in Sweden, Norway, and Denmark, important markets sharing Nordic culture. Next came subsidiaries in the United States, which by the mid1980s became the second-largest recipient of Finnish investments after Sweden and which hosted more than 300 Finnish manufacturing and sales firms. In the late 1980s, some firms targeted markets in the rapidly expanding economies of the Pacific basin. Beginning in the late 1980s, the service sector began to follow industry abroad. Banks, insurance companies, and engineering and architectural firms established branches in major business centers worldwide. By the late 1980s, Finnish firms owned more than 1,600 foreign concerns, of which some 250 were engaged in manufacturing; more than 900, in sales and marketing; and 450, in other functions.Businessmen had many motives for setting up overseas operations. In general, the Finns wanted to deepen ties with industrialized countries where consumers and businesses could afford high-quality Finnish goods. Maintaining access to important markets in an era of increasing protectionism and keeping up with new technologies had become crucial. Finnish enterprises, generally small by international standards, needed additional sources of capital and know-how to develop new technologies. Analysts believed that, despite their small size, Finnish firms could succeed abroad if they followed a comprehensive strategy, not only selling finished products but also offering their services in the management of raw materials and energy, development of new technologies, and design of attractive products.
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| GDP of Finland |
Government policies helped achieve greater international integration of productive facilities. During the 1980s, legislation relaxed limits on foreign investment in Finnish firms, allowing foreigners to hold up to 40 percent of corporate equities; likewise, the BOF loosened restrictions on capital exports. The Technology Development Center (TEKES), under the Ministry of Trade and Industry, sponsored international cooperation in research and development. The government also arranged for Finnish participation in joint projects sponsored by the European Space Agency (ESA) and the European Community, including the EC's Eureka technology development program. Although it was still too early to predict how Finland would perform in international joint ventures, many observers felt that such enterprises were the best way for the country to achieve industrial progress.
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