Trade in Thailand

COUNTRY

Mosjeed of Thailand

 

Formal Name: Kingdom of Thailand.
Short Form: Thailand (formerly Siam).
Term for Citizens: Thai.
Capital: Bangkok.
 

GEOGRAPHY

Thailand in map

 

Size: Approximately 514,000 square kilometers.
Topography: Chief topographic features include central plain dominated by Mae Nam (river) Chao Phraya and its tributaries. To northeast rises dry, undulating Khorat Plateau bordered on east by Mekong River. Mountains along northern and western borders with Burma extend south into narrow, largely rain-forested Malay Peninsula. Network of rivers and canals associated with northern mountains and central plain drain, via Chao Phraya, into Gulf of Thailand. Mae Nam Mun and other northeastern streams drain via Mekong into South China Sea. Soils vary. Topography and drainage define four regions: North, Northeast, Center, and South.
Climate: Tropical monsoon climate. Southwest monsoons arriving between May and July signal start of rainy season lasting until October. Cycle reverses with northeast monsoon in November and December, ushering in dry season. Cooler temperatures give way to extremely hot, dry weather March through May. In general, rainfall heaviest in South, lightest in Northeast.

ECONOMY

Salient Features: Mixed economy includes both strong private sector and state enterprises; government assumes responsibility for general infrastructure development. Basically capitalist, committed to free trade. Rapid economic development of 1960s and 1970s slowed by worldwide recession of early 1980s. Strong recovery by 1987. Bangkok metropolitan area faced problems of rapid modernization, including housing shortages and pressure on such basic services as water, sewage, and health care.

Statistic of Thai business

Agriculture:Food surpluses produced by dominant agricultural sector of enterprising, independent smallholders. About 69 percent of labor force engaged in sector, and nearly 80 percent of population dependent on it for livelihood in the mid1980s . Agricultural commodities accounted for some 60 percent of export values in late 1980s. Major crops included rice, maize, cassava, rubber sugarcane, coconuts, cotton, kenaf, and tobacco. Forest cover decreased from more than 50 percent in 1961 to less than 30 percent in 1987. Fisheries important for food supply and foreign exchange earnings.
Industry: Modern enterprises mainly concentrated in Bangkok and surrounding provinces. Majority Thai owned, but joint foreign ventures numerous; state enterprises form important segment. In late 1980s, sector accounted for roughly 20 percent of gross domestic product (GDP) and 30 percent of total exports. Main categories of manufacturing included food and beverages, textiles and apparel, and wood and mineral products. Mineral resources contributed about 2 percent to gross national product (GNP) and included tin, tungsten, fluorite, antimony, and precious stones, all significant foreign exchange earners.

Energy Sources: Exploited domestic resources include small oil fields, large lignite deposits, natural gas in Gulf of Thailand, and hydroelectric power. Extensive, largely unevaluated oil shale deposits also identified, but exploitation economically infeasible in 1980s. Thermal (oil, natural gas, and lignite) power generation accounted for about 70 percent of total 7,570 megawatt installed generating capacity in 1986; hydropower, which remained largely unexploited, supplied about 30 percent. Electricity generally available in Bangkok metropolitan area and in about 43,000 of nation's some 48,000 villages (mostly near Bangkok). Rural program under way for electrification of remaining villages by late 1990s.
Foreign Trade: Major exports primary and processed agricultural products, tin, clothing, and other manufactured consumer goods. Major imports capital goods, intermediate products, and raw materials; petroleum products largest single import by monetary value since mid-1970s. Largest trading partners Japan and United States; trade with Japan characterized by large deficit.

ECONOMIC AND FINANCIAL DEVELOPMENT

In the 1960s and 1970s, the country's abundant natural resources, an enterprising and competitive private sector, and cautious and pragmatic economic management resulted in the emergence of one of the fastest growing and most successful economies among the developing countries. Between 1960 and 1970, the country's average annual growth rate of gross domestic product was 8.4 percent, compared with 5.8 percent for all middle-income, oil-importing countries. Between 1970 and 1980, the GDP rate of growth was 7.2 percent, compared with 5.6 percent for the middle-income oil-importing countries.

Bridge of business

The world slowdown by the late 1970s was mainly caused by the rise in oil prices. The Thai GDP in 1982 was US$36.7 billion. It rose to US$42 billion in 1985. The projected rate of growth for GDP during the early 1980s was around 4.3 percent as a result of falling demand and prices for Thai exports despite a drop in oil price. It was apparent that in the 1980s Thailand had lost its momentum; its Fifth Economic Development Plan targets had not been met because of serious macroeconomic imbalances, such as decreasing savings and investment rates, increasing budget deficits, and increasing debt and debt- servicing obligations. Whether Thailand could regain its former momentum depended on the success of its Sixth Economic Development Plan (1987-91).
Between 1970 and 1980, investment represented on the average 25.2 percent of GDP, compared with 24.7 percent by the mid-1980s. This proportion was one of the lowest investment rates in Southeast Asia. The national savings rate had fallen even more, from an average of 22 percent during the 1970s to around 17.8 percent by the mid-1980s. Hence, the average current-account deficit of 7 percent of GDP during the early 1980s had been caused by a declining savings rate rather than by an increase in investment rate. This imbalance was more serious than one caused by rising investment because rising investment could pay for itself with increased output and, possibly, increased savings so that debt could be repaid. With falling savings, foreign borrowing was used not to raise investment but merely to fill the investment-savings gap, which was mirrored in the external debt ratio of 39 percent of GDP and 146 percent of exports by the mid1980s . The total debt service ratio went up from 17.3 percent in 1980 to more than 25 percent by the mid-1980s. The increase was an important factor in the decision of the government to sharply reduce authorization for new commitments of public debt.

Financial Institutions

Thailand had many types of financial institutions, subject to different laws and regulated by different agencies. Most of them were privately owned, but some were state owned. The primary state-owned facility was the Bank of Thailand, which had responsibility and authority for monetary control in its role as the central bank. It served as the fiscal agent and the financier of the government; regulated the money supply, foreign exchange, and the banking system; and also served as the lender of last resort to the banks. Other state-owned facilities included the Government Savings Bank, the Bank for Agriculture and Agricultural Cooperatives, the Industrial Finance Corporation of Thailand, the Government Housing Bank, and the Small Industry Finance Corporation of Thailand.

By the mid-1980s, the 30 commercial banks had 1,526 branches handling the majority of all financial transactions in Thailand. The 16 largest banks accounted for over 90 percent of assets, deposits, and loans of the commercial banks, indicating a high concentration and little competition in the banking industry. Moreover, despite the impressive growth of banks, entrance by new banks was limited.
Finance and security companies comprised the second largest group of financial institutions with assets equaling nearly 22 percent of those of commercial banks. Concentration also existed in the securities industry, the 5 largest companies (out of 112) holding 19 percent of all finance and security assets. The finance companies were created by many domestic and foreign banks to overcome banking restrictions. Although they were intended to increase competition with commercial banks, the objective was not met because many banks used the companies as an extension of their own activities.

INTERNATIONAL TRADE AND FINANCE

International Trade

Thailand sustained a trade balance deficit from the early 1970s to the mid-1980s. Although the trade balance had improved during the first part of the 1970s, it worsened after the oil shocks of 1973 and 1979. In fact the net value of oil imports went from US$52.5 million in 1970 to US$684.7 million in 1982, with dependence on foreign oil reaching 75 percent in 1980 and declining to 50 percent by 1985. Although there was a general decline in the export performance of developing countries in the early 1980s, Thailand's recovery from the oil shock was further delayed by a loss in export competitiveness, a slowdown in the economies of major trading partners, and a growing debt service obligation resulting in part from rising interest rates. The current account balance deficits were not as severe as the trade deficits as a result of improving service balances. By 1986 the balance of payments had moved into surplus on current account. The major contribution to the service balance surplus was tourism, which increased from 630,000 tourists in 1970 to 2.6 million in 1986. Tourism was the top foreign exchange earner from 1981 to 1986. The trade deficit was caused in part by a decreasing growth rate of exports between 1980 and 1983, which improved slightly by 1985. The growth rate of imports also declined, but at a slower rate. Despite an increase in tourism, the trade deficit reached a peak in 1983 of US$3.9 billion. In 1985 exports totaled US$7.1 billion and imports US$9.2 billion, leaving an unfavorable trade balance of US$2.1 billion. By 1986 the deficit had decreased even further, with some of the reduction a result of the lower cost of imported oil.

The composition or structure of merchandise exports changed substantially between 1965 and 1985. Primary commodities accounted for 95 percent of Thailand's exports in 1965, and manufactured exports accounted for only 4 percent. By 1986 manufactured products comprised 55 percent of total exports, with textile products increasing from less than 1 percent in 1965 to 13 percent by 1986. Other major manufacturing exports in the mid-1980s included rubber products, processed foods, integrated circuits, metal products, jewelry, footwear, and furniture. Although agricultural exports as a percentage of total exports declined during this period, rice and other agricultural exports remained important for the Thai economy. By the mid-1980s, rice took the highest share of total agricultural exports. Cassava products, maize, sugar, rubber, fruit, and marine products were the other main exports in this category.
Between 1965 and 1985, the destinations of merchandise exports shifted from 54 percent of 1965 exports destined for developing countries to 56 percent of 1985 exports going to industrialized countries. This increase in the percentage of exports to industrialized countries, in combination with the changing structure of merchandise exports from predominantly agricultural to manufactured products, has fueled Thailand's economic growth. Thailand's major industrialized trading partners included the EEC, the United States, Japan, and the Netherlands. Furthermore, Thailand has developed significant trade relations with the newly industrializing countries (NICs) of Singapore, Hong Kong, the Republic of Korea (South Korea), and Taiwan. Additionally, Thailand has developed trade relations with Malaysia, the Philippines, Indonesia, and China.
Tariff barriers on imports from the developing countries had dropped with the implementation of the Tokyo Round (1973-79) of the General Agreement on Tariffs and Trade. Rising nontariff barriers, resulting from domestic and international economic conditions in industrial countries, had more than offset the tariff reductions. In the United States the proportion of imports subject to such barriers more than doubled, and in the other industrial countries it rose by as much as 40 percent. Examples of nontariff barriers were quotas, voluntary exports restraints, the Multifiber Arrangements, sanitation rules, and subsidies.
Thai rice exports encountered the stiffest barriers in Japan, where the tariff rate was 15 percent and a global quota was in force. In the United States, tariff on rice was only 2.6 percent, and no explicit nontariff barriers existed except for stringent controls by the United States Food and Drug Administration. In the other industrialized countries, Thai rice exports faced varying levies. Thai agricultural exports to the developing countries met with stiff competition from subsidized United States cereal exports. Thailand entered into a voluntary export restraint with France for its cassava exports because of strong resistance to imports from the French producers of cereal-based animal feed. Rubber did not face major barriers except for quotas imposed by Japan. Maize exports did relatively poorly because of subsidized production and high tariffs in the industrialized countries. Sugar exports also faced subsidy problems in Western Europe and a 50 percent quota reduction by the United States. Despite nontariff barriers, Thai agricultural and manufactured exports faced less protectionism than the NICs in the early 1980s.

Of Thailand's manufactured exports, textiles were most affected by barriers because Thailand had to enter into bilateral agreements with industrial countries, which were similar to the voluntary export restraints under the Multifiber Arrangements. In addition, tariffs escalated with the degree of processing. For example, in the United States the average tariff for cotton fabrics was 9.6 percent, whereas it was 18 percent for garments. The United States imposed countervailing duties on Thai textile exports in protest against Thai government subsidies to textile exporters in the form of export packing credits, rediscount facilities for industrial bills, electricity discounts, and tax certificates.
Tariffs in Thailand before the 1970s were primarily used to generate revenues rather than to influence domestic production. The rates ranged from 15 to 30 percent, with higher rates applied to finished consumer goods imports. In the 1970s, however, tariff rates on finished consumer goods imports increased 30 to 50 percent. Rising protectionism continued in the late 1970s and early 1980s, with high tariff rates and the application of surcharges, quantitative restrictions, price controls, and domestic contents requirements.

External Debt

The Thai total long-term public and private debt grew from US$728 million in 1970 to US$13.3 billion in 1985. The external debt was increasing at a faster rate during this period than the growing gross national product. In 1970 the external debt was 11.1 percent of GNP, increasing to 36 percent of GNP by 1985. The ratio of debt payments or debt service to the total export of goods and services, one indicator of Thailand's ability to meet debt payments, increased from 14 percent in 1970 to 25.4 percent in 1985. The growth of external indebtedness averaged 25.2 percent between 1970 and 1980, compared with an average of 21 percent for Southeast and East Asian middle-income oil-importer countries. Public debt as a percentage of exports went from 47.9 percent to 75.9 percent between 1980 and 1983, but the proportion of public borrowing from foreign sources dropped from 52 percent to 42 percent during the same period. This was indicative of the growing concern of the public sector with the enlarged foreign debt and hence a higher reliance on domestic borrowing, which went from 48 percent to 55 percent during the same period. In the early 1980s, Thailand was characterized by high competition between the government and the private sector for scarce domestic savings, which forced private firms to rely more on external borrowing.

The composition of Thai indebtedness in terms of interest rates, maturity, and currency structure appeared to be better than that in most other developing countries. Because of its high credit rating, Thailand could borrow at about 8.4 percent in late 1983, compared with an average rate of 10.1 percent for other middle-income oil-importer countries. It had also the longest loan average maturity, 17.2 years compared with 12.2 years.
In terms of currency denomination, the Thai external debt consisted mostly of two currencies: the United States dollar and the Japanese yen, with increasing reliance on the yen because of the willingness of Japanese banks to lend at a lower spread than the other banks. Thailand was exposed to the risk of yen appreciation in the early 1980s because Japan received only 14 percent of Thai exports while accounting for 26 percent of imports. Meanwhile, the value of the yen had appreciated substantially relative to the baht. The baht was pegged to the United States dollar until 1984 when it had a fixed exchange rate of B23 per US$1. Thereafter, the baht was pegged to a basket of currencies and devalued by 14.8 percent against the dollar. According to some observers, Thailand needed to revise its external debt portfolio as well as limit its reliance on external debt. 

Trade in Kuwait

COUNTRY

Fatma Mosjeed of Kuwait

 

Formal Name: State of Kuwait.
Short Form: Kuwait.
Term for Citizens: Kuwaiti(s); adjectival form, Kuwaiti.
Capital: Kuwait (city of Kuwait frequently used to distinguish it from country).
Date of Independence: June 19, 1961.

GEOGRAPHY 

Size: About 17,818 square kilometers.
Topography: Almost entirely flat desert.
Climate: Hot, dry, desert climate; sandstorms in June and July; some rain, mainly in spring.
NOTE--The Country Profile contains updated information as available.
Boundaries: Mostly defined; United Nations post-Persian Gulf War 1992 boundary settlement accepted by Kuwait but rejected by Iraq.

Kuwait in map

ECONOMY

Gross Domestic Product (GDP): In 1990 United Nations Development Programme estimated US$15,984 per capita GDP.
Oil Industry: Provided 41 percent of GDP and 87 percent of government revenues in 1989, 58 percent of government revenues in 1990, and 11 percent of government revenues in 1991, showing effects of Persian Gulf War. Crude oil production in 1992 (after oil well restoration during year) about 41 million barrels, compared with about 387 million barrels in 1985.
Industry: About 14 percent of GDP in 1989. Largest industries petrochemicals and building materials.
Agriculture: Little farming--mostly vegetables and fruits. Most food imported. Some fishing.
Exports: US$11.5 billion in 1989; mostly crude oil and refined products. Asia and Western Europe main markets.
Imports: US$6.3 billion in 1989--largely such finished products as appliances and vehicles from industrialized nations, particularly Japan, United States, and Western Europe.
Currency and Exchange Rate: Kuwaiti dinar. On March 1, 1994, exchange rate US$1 = KD3.55.
Fiscal Year: July 1 to June 30.

Statistic for Kuwait economy

Foreign Investment

From the very beginning, government officials were keenly aware that oil was a depletable asset, that the country had few other resources, and that preparations had to be made for the day when there would be no more oil. As soon as the government began to receive oil revenues, officials spent less than the treasury received, leaving a surplus in the state's general reserve to be invested. Because of limited domestic investment opportunities, most investments were made abroad. World Bank economists estimate that about 25 percent of revenues were placed in foreign assets during the 1950s, although the Kuwaiti government's published data have always been vague about reserves as well as about some other economic variables.
In the 1950s and 1960s, Kuwait began investing overseas in property and businesses in Britain. In 1952 Kuwait established an office in London, staffed with experienced British investment counselors who guided the government's placement of funds. In the same year, Kuwait created investment relations with a large New York bank. Because of the vastly expanded oil revenues of the 1970s, Kuwait's overseas investment program grew tremendously. In 1976 the government established the Reserve Fund for Future Generations, into which it placed an initial US$7 billion. It resolved to invest 10 percent of its revenues annually in the reserve fund. Money from the fund, along with other government revenues, was invested in overseas property and industry. In the 1970s, most of these funds were invested in the United States and in Western Europe: in German firms (such as Hoechst and DaimlerBenz , in each of which Kuwait owned 25 percent), in property, and in most of the United States Fortune Five Hundred firms. In the 1980s, Kuwait began diversifying its overseas investments, placing more investments in Japanese firms. By the late 1980s, Kuwait was earning more from these overseas investments than it was from the direct sale of oil: in 1987 foreign investments generated US$6.3 billion, oil US$5.4 billion. The Financial Times of London estimated Kuwait's overseas investments in early 1990 at more than US$100 billion, most of it in the Reserve Fund for Future Generations.

Relation map of Kuwait

The Iraqi invasion proved the importance of these investment revenues. With oil revenues suspended, the government and population in exile relied exclusively on investment revenues, including sales of investments for sustenance, for their share of ongoing coalition expenses and for postwar reconstruction and repair of the vital oil industry.

Foreign Aid and Trade

Foreign trade has always dominated Kuwait's economy. Before the discovery of oil, merchants developed large transshipment and reexport businesses that, along with the sale of pearls to foreign dealers, yielded a substantial part of the population's income. The discovery of large quantities of oil provided a new and increasingly important export because Kuwait needed only small amounts of oil products domestically. Nonetheless, even after the discovery of oil, Kuwait's merchants continued to develop transshipment and reexport businesses with neighboring countries. During the Iran-Iraq War, goods for Iraq passed through Kuwaiti ports. Oil, however, overwhelmingly dominated Kuwait's exports.
Kuwait's significant foreign-exchange earnings from oil exports and investment income largely removed any constraints on imports in the pre-invasion period. Almost any commodity could be imported, and most import duties were modest. Imports for Kuwait's high-income economy were mainly finished products because of the small domestic manufacturing sector. These imports came predominantly from Asian countries, followed by those from European countries. Imports of all kinds came primarily from Japan and the United States. After the Persian Gulf War, imports from the United States increased dramatically. Huge oil revenues, paid in foreign currencies, freed Kuwait for the most part from balance of payments worries. The government accumulated surplus funds that were invested abroad. A large part of these reserve investments abroad, however, were cashed in during the Iraqi occupation and the liberation period that followed in order to pay the expenses of Kuwait and the allied coalition.

Statistic

Historically, Kuwait also invested part of its revenues in foreign aid, primarily to Arab states. This foreign aid increased substantially as oil revenues rose in the 1970s. It took many forms, such as loans, joint financing, equity participation, and direct grants, particularly in support of Arab causes. In the 1960s, the government began placing funds in the Kuwait Fund for Arab Economic Development (KFAED), established in 1961. The best known of Kuwait's investment organizations and one that was used as a model by other oil exporters, KFAED functioned as both an investment and an aid agency, providing loans for specific projects, often on concessionary terms. KFAED's charter was changed in 1974, when capitalization was increased to KD1 billion, and the fund began expanding its provision of funds to developing countries worldwide. Most KFAED aid went to development projects, especially in agriculture, to provide basic services such as electricity, water, and transportation and to develop human resources through education and health care. A large amount of aid went directly from the government to other states. In per capita terms, Kuwait's aid program was one of the most generous in the world. In the early 1980s, when oil prices were high, nearly 4 percent of Kuwait's gross national product went to the aid program. But in the late 1980s, the levels of aid declined along with declining revenues. After the Iran-Iraq War started, in 1980, Kuwait increasingly directed its aid toward Iraq. During the 1980s, Kuwait lent Iraq an estimated US$13 billion. Kuwait's foreign aid slowed considerably after the Iraqi invasion in August 1990 and is expected to remain limited as Kuwait deals with the costs of reconstruction.

Kuwait -- FOREIGN RELATIONS

As the Iraqi invasion demonstrated, Kuwait's large oil revenues and inherently small defense capabilities gave it tremendous vulnerability. Historically, until the Iraqi invasion, Kuwaiti leaders had always dealt with that vulnerability through diplomacy, trying to find allies that would protect them while maintaining as much independence as possible from those allies by playing them off against each other. Historically, the most important ally was Britain. Kuwait's relationship with Britain came about at the bidding of the early Kuwaiti leader Shaykh Mubarak in an effort to deter a still more troublesome actor, the Ottoman Empire. As one consequence of the 1899 treaty, which gave Kuwait a better status than was the case in British treaties with other possessions, the British presence remained somewhat distant, and British officials meddled less frequently in local politics.

GDP of Kuwait

The relationship with Britain continued beyond independence on June 19, 1961, and the new agreement between independent Kuwait and Britain promised continued British protection as necessary. That protection proved necessary when Iraq, six days after Kuwait's independence, declared Kuwait a part of Iraq and sent troops toward the amirate in support of that claim. Because Kuwait's army was too small to defend the state, British troops arrived, followed soon after by forces from the League of Arab States (Arab League), in the face of which Iraqi forces withdrew.
As Britain increasingly withdrew from the gulf in the 1970s and 1980s, Kuwait was forced to look for other sources of support. Although Kuwaiti leaders tried to maintain a degree of neutrality between the superpowers--Kuwait had an early and sustained economic, military, and diplomatic relationship with the Soviet Union--in the end it was obliged to turn to the United States for support. The Iran-Iraq War was the decisive factor in consolidating closer ties with the United States. Although at the outset of the war Kuwait was an outspoken critic of United States military presence in the gulf, during the war this position changed. When Kuwaiti ships became the target of Iranian attacks, Kuwait's security situation deteriorated, and Kuwait approached the Soviet Union and the United States with requests to reflag and thus protect its beleaguered tankers. As soon as the Soviet Union responded positively to the request, the United States followed. The ground was thus laid for subsequent United States support.

Economic Reconstruction

Despite the devastation of the Kuwaiti economy during the invasion and occupation, recovery has proceeded with surprising speed. This was partly because some damage, particularly of the infrastructure, was not as serious as first feared and partly because the government, anxious to restore the population's weakened confidence in its ability to administer, has given reconstruction and recovery of basic services a high priority.
The oil industry, which was badly damaged, has been a top priority because it is the source of revenues to sustain other government spending programs. The most dramatic economic reconstruction effort went toward capping the more than 700 oil wells set afire by retreating Iraqi forces. In addition to an estimated 2 percent of the country's 100 billion barrels of reserves lost in the oil fires, Kuwait had to pay for putting out fires and repairing damaged refineries, pipelines, and other oil infrastructure. By January 1992, oil output had risen to 550,000 bpd. By June 1992, it was back to nearly 1 million bpd. Nineteen new wells were drilled to replace those damaged by the occupation.
The government hoped to raise production to 2 million bpd by the end of 1993. During the invasion, Iraq destroyed or incapacitated Kuwait's entire 700,000 bpd refining capacity at its three refineries. But by April 1992, production levels rose to 300,000 bpd. Nonetheless, there was concern that the rapid return to production might have damaged Kuwait's oil reservoirs beyond the damage done by retreating Iraqi forces, lowering its total future reserves. Accordingly, KOC contracted with several international companies to assess reservoir damage. However, the government also has been under tremendous pressure to increase oil production quickly to pay for war and postwar expenses. In the mid-1980s, overseas investments outstripped oil as the primary source of revenues. The expenses of war, postwar reconstruction, and investment irregularities that were being uncovered in late 1992 have forced the government to use substantial portions of its investment principal, and in the 1990s oil is again expected to be the major revenue source.

Kuwait business center

Restoring oil operations was expensive. In January 1992, the minister of oil announced Kuwait had already spent US$1.5 billion for putting out fires and planned to spend another US$8 to US$10 billion to repair further damage. A National Bank of Kuwait report in mid-1992 estimated that reconstruction expenses in the oil sector for the 1992-95 period would reach US$6.5 billion.
The rest of the economy also suffered, although the effects were not as severe as the oil-well fires. The banking sector, suffering the shock waves of the Suq al Manakh stock market crash in 1982, recovered slowly from the combined effects of that crash and the invasion. The agenda of the returned government included bank reform. In December 1991, the government announced a comprehensive settlement plan for bad debts, the outstanding issue of the Suq al Manakh crash. The plan involved government purchase of the entire domestic loan portfolio of the country's local banking system. The government agreed to buy US$20 billion of domestic debt from eleven commercial banks and investment companies in exchange for bonds. This plan removed the concerns of Kuwaitis, who would be obliged to repay debts, if at all, on more modest terms, and of banks, concerned about nonperforming loans. Although Shaykh Salim al Abd al Aziz Al Sabah, governor of the Central Bank of Kuwait, said the plan is needed to prevent the collapse of banks, it clearly also is intended as part of a series of government payments to Kuwaiti nationals and businesses aimed at restoring confidence in the government prior to the October election. The plan, announced but as yet incomplete, left the entire banking system in a state of limbo in late 1992.
Banks have suffered less from the physical damage of the war and more from the sudden reduction in the number of employees, many of whom in the prewar period were foreigners. Some banks reported postwar staff levels at half that before the invasion. Although there has been speculation that postwar reform will include mergers involving state-controlled banks (notably the Kuwait Investment Company, the Kuwait International Investment Company, and the Kuwait Foreign Trading, Contracting, and Investment Company, known together as the three Ks) and privatesector banks, no formal action had been taken as of late 1992. The bank that survived the invasion in the best shape was the largest commercial bank, the National Bank of Kuwait. It handled the exiled government's finances during the crisis.
According to a National Bank of Kuwait report issued in mid-1992, several additional factors hurt the private sector's recovery. The first was the government's decision to restrict the number of nonnationals, which hampered efforts to import skilled and unskilled labor and left Kuwait with a smaller market. The second was the lower level of government investment in industry as a result of reduced government income and the government decision to invest more in defense and focus in the short run on restoring basic services. The non-oil manufacturing sector, although small, was hurt by the looting and damage done by Iraqi troops. The government has been in no position to subsidize industries at the level it had in the past. Infrastructure projects incomplete before the invasion have not been resumed or have been delayed.
The only sector of the economy to prosper in the immediate postwar period is trade because of the need to replace inventory emptied during the occupation. Returning Kuwaitis and the government have created a small boom for investors. By mid-1992, however, the return demand largely had been met, and many goods, notably automobiles and consumer durables, were available in excess supply. In an effort to boost the private sector, the government approved an offset program in July 1992 requiring foreign companies to reinvest part of their government-awarded contracts locally. Companies with contracts valued at more than US$17 million have been obliged to reinvest 30 percent of the contract sum.
Despite some speculation that the government would turn more functions over to the private sector following its return, widespread privatization has not occurred. In February 1992, the government announced plans to start privatizing the public telecommunications network, a move that was expected to generate US$1 billion for the government. In May the government announced it would privatize seventy-seven local gas stations. There have been, however, no indications of more substantial denationalizations.
Reconstruction costs, which some foreign observers initially put as high as US$100 billion, appear to be more modest, perhaps in the range of US$20 to US$25 billion. The largest postwar expense the government faces is not reconstruction, but the debt it incurred to coalition allies to help pay for Operation Desert Storm, an amount that came to at least US$20 billion, and continuing high defense expenditures. Reconstruction costs have been met largely from Kuwait's reduced investments (the Financial Times estimated in February 1992 that Kuwait had lost as much as US$30 billion of its prewar investment portfolio); from returning oil revenues, which for fiscal year 1992 were only expected to generate US$2.4 billion; and from borrowing on international money markets. In October 1991, the government announced plans to borrow US$5 billion for the first phase of a five-year loan program. The loan would be the largest in history. In mid-1992 one study indicated that as much as 30 percent of 1993 revenue will be needed to pay interest on various government debts, which were expected to exceed US$37 billion by the end of 1992.
Despite the apparently dire economic situation, the government has felt politically obliged to sustain insofar as possible the prewar standard of living. Some of the largest domestic postwar government expenditures have gone directly to Kuwaiti households. The banking debt buyout was but one of a series of measures taken by the government to help nationals hurt by the invasion. The government decided to pay all government employees (the majority of working nationals) their wages for the period of the occupation. In March 1992, the government raised state salaries. The government also agreed to write off about US$1.2 billion in consumer loans, a measure benefiting more than 120,000 Kuwaitis. It wrote off US$3.4 billion worth of property and housing loans made before the invasion. Each Kuwaiti family that stayed in Kuwait through the occupation received US$1,750. In July 1992, the government exempted Kuwaitis from charges for public services due as a result of the occupation, such as bills for electricity, utilities, and telephone service and for rents on housing.

Trade in Finland

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.

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.

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

Export rate

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.
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.

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.

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.

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.

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.

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.

Trade in Russia

Russia

Formal Name: Russian Federation.
Short Form: Russia.
Term for Citizen(s): Russian(s).
Capital: Moscow.
Flag: Three equal-sized horizontal bands of white (top), red, and blue.

Beautiful Russia

RUSSIA IS THE LARGEST of the fifteen geopolitical entities that emerged in 1991 from the Soviet Union. Covering more than 17 million square kilometers in Europe and Asia, Russia succeeded the Soviet Union as the largest country in the world. As was the case in the Soviet and tsarist eras, the center of Russia's population and economic activity is the European sector, which occupies about one-quarter of the country's territory. Vast tracts of land in Asian Russia are virtually unoccupied. Although numerous Soviet programs had attempted to populate and exploit resources in Siberia and the Arctic regions of the Russian Republic, the population of Russia's remote areas decreased in the 1990s. Thirty-nine percent of Russia's territory but only 6 percent of its population in 1996 was located east of Lake Baikal, the geographical landmark in south-central Siberia. The territorial extent of the country constitutes a major economic and political problem for Russian governments lacking the far-reaching authoritarian clout of their Soviet predecessors.

Geography

Russia map

 

Size: 17,075,200 square kilometers.
Topography: Broad plain with low hills west of Urals in European Russia and vast coniferous forests and tundra east of Urals in Siberia. Uplands and mountains along southern border regions in Caucasus Mountains. About 10 percent of land area swampland, about 45 percent covered by forest.
Climate: Ranges from temperate to Arctic continental. Winter weather varies from short-term and cold along Black Sea to long-term and frigid in Siberia. Summer conditions vary from warm on steppes to cool along Arctic coast. Much of Russia covered by snow six months of year. Weather usually harsh and unpredictable. Average annual temperature of European Russia 0°C, lower in Siberia. Precipitation low to moderate in most areas; highest amounts in northwest, North Caucasus, and Pacific coast.
Land Boundaries: Land borders extend 20,139 kilometers: Azerbaijan 284 kilometers, Belarus 959 kilometers, China 3,645 kilometers, Estonia 290 kilometers, Finland 1,313 kilometers, Georgia 723 kilometers, Kazakstan 6,846 kilometers, Democratic People's Republic of Korea 19 kilometers, Latvia 217 kilometers, Lithuania 227 kilometers, Mongolia 3,441 kilometers, Norway 167 kilometers, Poland 432 kilometers, and Ukraine 1,576 kilometers.
Water boundaries: Coastline makes up 37,653 kilometers of border. Arctic, Atlantic, and Pacific oceans touch shores.
Land Use: 10 percent arable, 45 percent forest, 5 percent meadows and pasture, and 40 percent other, including tundra.

Economy

Business area of Russia

 

Salient Features: After years of double-digit declines, gross domestic product (GDP) shrank by only 4 percent in 1995. GDP per capita in 1995 US$4,224. Unemployment rising steadily, to estimated 8.5 percent in 1996; official Russian numbers about half that amount. Inflation, very high in 1994, under much better control under new government policy in 1995-96; April 1997 rate 1.2 percent. Economy increasingly dependent on foreign investment, multilateral loan agencies, and rescheduling of foreign debt. Privatization nearly complete but meeting political opposition to transformation of large state firms. Most prices determined by market. Role of organized crime significant, and much economic activity officially unaccounted for.
Agriculture: 6.3 percent of GDP in 1994. Major products grain, sugar beets, sunflower seeds, vegetables, fruits, meat, and milk.
Manufacturing: 28.3 percent of GDP in 1994. Principal products machine tools, rolling mills, high-performance aircraft, space vehicles, ships, road and rail transportation equipment, communications equipment, agricultural machinery, tractors and construction equipment, electric-power generating and transmitting equipment, medical and scientific instruments, and consumer durables.
Services: 50 percent of GDP in 1994. Tourism important source of foreign currency. Expansion of financial, communications, and information enterprises contributes to growth. Shipping services also major foreign-exchange earner.
Mining: Considerable mineral wealth, especially iron ore, copper, phosphates, manganese, chromium, nickel, platinum, diamonds, and gold. Production declined steadily 1990-95.
Energy: Russia self-sufficient in fuels and energy production. Natural gas and oil main fuels exploited, coal production declining but still significant; long-distance fuel transportation a significant problem. Main electricity sources: coal 18 percent, nuclear 13 percent, hydroelectric 19 percent, and natural gas 42 percent. Industry consumes 61 percent of energy production. Generation capacity 188 gigawatts. Energy exports most important source of foreign exchange.
Foreign Trade: Trade liberalization ongoing, abolishing export duties, restructuring import tariffs, and ending export registration in 1996. Main trading partners Germany, Italy, the Netherlands, Switzerland, Britain, the United States, Ukraine, Kazakstan, Belarus, China, and Japan. Exports for 1995 estimated at US$77.8 billion, imports US$57.9 billion. Balance of payments US$13.1 billion in 1995. Capital flight expected to drop to US$1 billion in 1996. Foreign investment strongly encouraged in some sectors, but unpredictable commercial conditions hinder growth. Outstanding Soviet-era debt by Third World countries, between US$100 and US$170 billion, could make Russia creditor country on balance.

Foreign Economic Relations

Integrating the Russian economy with the rest of the world through commerce and expanded foreign investment has been a high priority of Russian economic reform. Russia has joined the IMF and the World Bank and has applied to join the World Trade Organization (WTO--see Glossary) and the OECD. It also has been included in some functions of the Group of Seven (G-7; see Glossary).

Foreign exchange is easy

Foreign Trade

By the end of 1993, the Russian government had liberalized much of its import regime. It eliminated nontariff customs barriers on most imports, although it still requires some licenses for health and safety reasons. In mid-1992 the government took control of imports of some critical goods, including industrial equipment and food items, which it sold to end users at subsidized prices. In the early 1990s, government-controlled imports constituted about 40 percent of total Russian imports, but by 1996 most such controls had been phased out.
Russia also established a two-column tariff regime in harmony with the United States and other members of the General Agreement on Tariffs and Trade (GATT), which in January 1995 became the WTO. Russia differentiates between those trade partners that receive most-favored-nation trade treatment and, therefore, relatively low tariffs, and those that do not.
Although Russia has eliminated many nontariff import barriers, it still maintains high tariffs and other duties on imports of goods to raise revenue and protect domestic producers. All imports are subject to a 3 percent special tax in addition to import tariffs that vary with the category of goods. Some of the high tariffs include those of 40 to 50 percent on automobiles and aircraft and 100 percent on alcoholic beverages. Excise taxes ranging between 35 and 250 percent are applied to certain luxury goods that include automobiles, jewelry, alcohol, and cigarettes.

Busy road in Russia

The Government has used licensing and quotas to restrict the export of certain key commodities, such as oil and oil products, to ease the effect of price differentials between controlled domestic prices and world market prices. Without such restrictions, Russian policy makers have argued, the domestic market would experience shortages of critical materials. The government finally eliminated quotas on oil exports in 1995 and export taxes on oil in 1996. In addition to customs restrictions, the government imposes other costs on exporters. It charges a 20 percent VAT on most cash-transaction exports and a 30 percent VAT on barter transactions. It applies additional tariffs on the exports of industrial raw materials. By the mid-1990s, much of Russia's foreign trade, even that with the former communist countries of Central Europe, was conducted on the basis of market-determined prices. Immediately after the dissolution of the Soviet-dominated Comecon in 1991, the Soviet Union sought to maintain commercial relations in Central Europe through bilateral agreements. But as market economies developed in those countries, their governments lost control over trade flows. Since 1993 Russian trade with former Comecon member countries has been at world prices and in hard currencies.
In the mid-1990s, Russia still maintained hybrid trade regimes with the other former Soviet states, reflecting the web of economic interdependence that had dominated commercial relations within the Soviet Union. The sharp decrease in central economic control that occurred just before and after the breakup of the Soviet Union virtually destroyed distribution channels between suppliers and producers and between producers and consumers throughout the region. Many of the non-Russian republics were dependent on Russian oil and natural gas, timber, and other raw materials. Russia bought food and other consumer goods from some of the other Soviet republics. To ease the effects of the transition, Russia concluded bilateral agreements with the other former Soviet states to maintain the flow of goods. But, as in the case of the Central European agreements, such arrangements proved impractical; by the mid-1990s, they covered only a small range of goods. Russia now conducts trade with former Soviet states under various regimes, including free-trade arrangements and most-favored-nation trading status.
The volume of Russia's foreign trade has generally declined since the beginning of the economic transition. Trade volume peaked in 1990 and then declined sharply in 1991 and 1992. Between 1992 and 1995, however, exports rose from US$39.7 billion to US$77.8 billion, and imports rose from US$34.7 billion to US$57.9 billion. Many factors contributed to the decline of the early 1990s: the collapse of Comecon and trade relations with Eastern/Central Europe; the rapid decline of the domestic demand for imports; contraction in foreign currency reserves; a decline in the real exchange value of the ruble; the Government's imposition of high tariffs, VATs, and excess taxes on imports; and the reduction of state subsidies on some key imports. Russia's declining production of crude oil, a key export, also has contributed significantly. Until 1994 Russia's arms exports declined sharply because the military-industrial complex's production fell and international sanctions were placed on large-scale customers such as Iraq and Libya (see Foreign Arms Sales, ch. 9).
The geographical distribution of Russian foreign trade changed radically in the first half of the 1990s (see table 21; table 22, Appendix). In 1985 some 55 percent of Soviet exports and 54 percent of Soviet imports were with the Comecon countries. By contrast, 26 percent of Soviet exports and 28 percent of Soviet imports were with the fully developed market economies of Western Europe, Japan, the United States, and Canada. By the end of 1991, Russia and its former allies of Central Europe were actively seeking new markets. In 1991 only 23 percent of Russian exports and 24 percent of Russian imports were with the former Comecon member states. In 1994 some 27 percent of Russian imports and 22 percent of exports involved partners from Central Europe, with Poland, Hungary, and the Czech Republic generating the largest volume in both directions. Western Europe's share of Russian trade continued to grow, and in 1994 some 35 percent of Russia's imports and 36 percent of its exports were with countries in that region. Germany was by far the West European leader in exports and imports, and Switzerland and Britain were other large export customers. In 1994 the United States accounted for US$2.1 billion (5.3 percent) of imports and US$3.7 billion (5.9 percent) of exports; however, United States purchases of Russian goods had increased by more than 500 percent between 1992 and 1994. The total value of trade with the United States in 1995 was US$7 billion; trade for the first half of 1996 proceeded at virtually the same rate (see table 23, Appendix).
Russian trade with the so-called near abroad--the other former Soviet states--has greatly deteriorated. This trend began before the final collapse of the Soviet Union as Russian producers sought hard-currency markets for raw materials and other exportables. As Russia raised fuel prices closer to world market levels, the other republics found it increasingly difficult to pay for Russian oil and natural gas. The RCB extended credits to these countries to permit some shipments, but eventually the accumulation of large arrearages forced the Russian government to curtail shipments. At the end of 1995, Russian trade with the near abroad accounted for 17 percent of total Russian trade, down from 59 percent in 1991. Belarus, Kazakstan, and Ukraine remained Russia's largest partners, as they had been in the Soviet era. The failure to restore inter-republic trade was an important factor in the economic collapse that gripped the region around 1990.
Raw materials, especially oil, natural gas, metals, and minerals, have dominated Russia's exports, accounting for 65 percent of total exports in 1993. Exports as a whole are heavily concentrated in a few product categories. In 1995 ten commodities, all of which are raw materials, accounted for 70 percent of Russian exports. By contrast, for the United States the top ten export commodities account for only 37 percent of its exports.
The lack of diversity in Russian exports is a legacy of the Soviet period, when the central planning regime called for production of manufactured goods for domestic consumption with little consideration for the export market. Given this priority, most of the Soviet Union's consumer goods were of low quality by world standards. Post-Soviet concentration of Russian exportables in a few categories restricts Russia's potential sources of foreign currency to a few markets. And the frequent price fluctuations typical of world raw materials markets also make Russia's export revenues vulnerable to unforeseen change.
Manufactured goods dominate Russian imports, accounting for 68 percent of total imports in 1992. The largest categories of imported manufactured goods are machinery and equipment (29 percent of the total); foods, 16 percent; and textiles and shoes, 13 percent.