EDAS Research
The Finnish Experience
National Context
Just under a year and a half ago the Scottish Government published its new Economic Strategy (GES). The economic climate was harmonious and the document/Govt reflected this with its core aim to increase sustainable economic growth.
The Government set out numerous ‘purpose targets’ within the area of economic growth, namely:
- “To raise the GDP growth rate to the UK level by 2011”.
- “To match the GDP growth rate of the small independent EU countries by 2017”.
It is this latter target that concerns us, notwithstanding the importance of the Government’s Economic Recovery programme.The GES explicitly:
...draws on the lessons and approaches of the of the successful small independent economies of Norway, Finland, Iceland, Ireland and Denmark – henceforth referred to as the Arc of Prosperity countries – which are similar to Scotland in scale and geographically close.
This document - as well as the Council of Economic Advisers - was and still is highly influenced by the experiences of the Arc of Prosperity despite the recent plight of Iceland and Ireland. Indeed, the Scottish Govt looks out to the Arc – particularly Scandinavia – and measures itself against these small, independent nations that are ‘all stable, secure and prosperous’.[1]It is only natural, then, to look further at the Arc of Prosperity and highlight some examples of best practice.
Global Context
Since the dawn of the ‘credit crunch’ and the ensuing economic recession the misfortunes of stalwart economies like America, Japan, the UK, Ireland, and Iceland have been widely reported. A recent OECD economic outlook painted a bleak picture with output predicted to drop between 4% and 7% this year and a period of stagnation the following year.[2]
Examples of ‘economic haemorrhaging’ abound. One in ten workers in advanced economies will be without a job next year with ‘practically no exceptions’[3]while in the UK debt is to exceed £1 trillion.
Case study: Finland
For our purposes we will focus purely on Finland. Theirexperience (and others) in the current downturn, in direct contrast, have been rarely, if at all, reported. They are whispers that they are weathering the storm better than their compatriots but little coverage. What follows is a brief attempt at uncovering the Finnish experience.
To provide some context, the table below outlines the relative national performance of Scotland and Finland. In some cases Scotland performs well but they are areas where Finland outperforms them – education and income inequality being the two notable examples.
Relative National Performance: Scotland and Finland[4]
HealthierLife Expectancy (years) / Fairer
Income Inequality
(Gini Co-efficient) / Wealthier
GDP per capita
($) / Smarter
Educational Attainment (PISA Scores) / Safer
Offences per 100,00 population (total) / Greener
Municipal Waste Recycled
(%)
Scotland / 76.8 / 0.30 / 30,816 / 518 / 9,639 / 23
Finland / 78.8 / 0.26 / 31,400 / 545 / 10,343 / 31
As we are all awareFinland is often held up as an example that the UK should aspire to. This is not surprising. Finland, as the table briefly depicts, tops the list in many social and economic indicators with ‘one of the highest GDP per head of the world ($50,540).[5]
Across numerous categories - higher education attainment, R&D, public finances, e-government to name but a few – they lead OECD tables. What is the secret behind this successand what can Scotland learn?
From bust to boom
Clearly it did not happen overnight and clearly, as the OECD General Secretary Angel Gurcia states, there are ‘valuable lessons’ to be learned.
In the early 1990’s Finlandwas an ‘inward looking agricultural economy’ and was enduring a deep economic crisis due in large part to the deregulation and culminating collapse of financial markets. Its situation was also exacerbated by the collapse of the Soviet bloc, an important trading partner. Productivity and unemployment were affected badly (the latter rising to 20%); its GDP fell by c15% in just three years; and by 1994 Finland’s external debt peaked at c60% of GDP.[6]
Its solution was straightforward albeit painful: tackle the structural long term economic and social challenges that had plagued their economy head on. Central to this strategy was a strong focus on - and investment in - Research and Development (R&D) and cohesion between government (and opposition parties), industry and workers. This unity of purpose proved remarkably successful in pursuing sustainable economic development which created years of strong growth.
Political Leadership
The political commitment made by all parties is worth noting and indeed contrasting with developments north and south of the border in the UK. A clear delineation of responsibility - Government focused on support actions while Parliament focused on the ‘financial resources and oversight of crisis management’ [7] - ensured a collegiate and open approach to crisis resolution which notably lacked political squabbling. In effect they put the country’s economic woes before their political ambitions and created a general economic policy ‘centred on the growth of [its] telecommunications cluster.’[8]This laid the foundations of Finland’s remarkable transformation into an:
…open, internationally competitive and technology oriented economy, with a solid macro-economic stability and an exemplary social safety net.[9]
Clearly this is something the UK and Scottish Government should recognise whilst recognising that such an arrangement results in a decision-making process that can at times be slower to respond.[10]Scotland, with its growing experience in minority administrations, could be well placed to import such a model.
Investing in Intellectual Capital
Likewise, the emphasis on R&D is worth elaborating on. The Finnish experience of the 90s demonstrates that one of the most effective ways of tackling a downturn is by heavily investing in ‘intellectual capital’.[11] This also ensures that Scotland, or indeed the UK, is in good condition to ‘ride the wave of growth when the upturn happens.’[12]Of course short term action is paramount in economic distress but such measures should be complemented by what the ‘European Economic Recovery Plan’ [13] labels ‘smart investment’:
…investing in the right skills for tomorrow's needs; investing in energy efficiency to create jobs and save energy; investing in clean technologies to boost sectors like construction and automobiles in the low-carbon markets of the future; and investing in infrastructure and inter-connection to promote efficiency and innovation.[14]
Thus the temptation to cut R&D and education investments, while understandable in a climate of growing budgetary restraints, should be resisted as increased expenditure in these areas lay the basis for a strong position in innovation. Today Finland continues to heavily invest in R&D and has the highest number of researchers in relation to population.[15] Also, since 2000 R&D expenditure has averaged c3.4% of GDP[16] while the UK’s rate is on average 1.7%.[17]
The reforms and commitment to an innovation based economic strategy has ensured that Finland will be in a better shape to weather the current economic difficulties. This does not mean that they will not suffer; of course they will - the unemployment rate, for e.g., is set to rise to 9%[18] - but their recovery will be more swift and effective than many Western economies.
Conclusion
The Scottish Government’s economic strategy recognised that the total gross expenditure on R&D as a proportion of GDP was markedly lower than Finland (and Denmark)[19] and recognised the long-term challenges facing the economy and society. That was in the good times. The challenge now facing the Scottish economy is bleak.
The financial services, once at the heart of our economic growth over the past decade, ‘will not save us in the future.’[20]What then will provide the growth to fuel the Scottish economy? Looking at the Finnish experiencethe approach must be innovation based and demand led. And importantly, it must be formulated and delivered by a cross-party political consensus.
1
[1] See First Minister’s speech to TrinityCollege, Dublin, 13 February 2008 -
[2] See: ‘OECD Economic Outlook: An Interim Report, March 2009’ -
[3]See:
[4] Adapted from the Government’s economic strategy, page 16.
[5] Angle Gurcia, OECD Secretary-General, “Solemn Seminar to celebrate 40 years of peer learning by Finland in the OECD” -
[6]Michael O Cinneide, ‘Local Employment Partnerships in Finland’, p5 - . See also NESTA (National Endowment for Science, Technology & the Arts), ‘Attacking the Recession’ -
[7]See Liisa Halme, Rahoitustarkastus, Financial Supervision Authority, ‘The 1990s banking crisis in Finland: main causes and consequences, lessons for the future’. Also see a Ministry of Finance paper on ‘recession, economic policy and banking’ -
[8] NESTA: ‘attacking the recession’.
[9]See ref 5.
[10] Ibid.
[11]NESTA.
[12]European Commissioner for Science and Research, Janez Potočnik -
[13] See -
[14]Ibid, p2.
[15]See ref 5.
[16]See OECD Statistical Profiles: Finland:
[17] See OECD Statistical Profiles: UK:
[18]Ministry of Finance, ‘Economic Survey Spring 2009’ -
[19] See page 14.
[20]NESTA (2009), ‘Demanding Growth in Scotland’ -