A remote and cold country’s success story

“It is a lottery prize to be born in Finland.” Coined in the 1970s, this saying gained currency during the 1980s when Finland experienced stable economic growth in a world troubled elsewhere by inflation, unemployment, exchange-rate volatility and chronic public deficits. After the revaluation of the markka in 1989, statistics showed that in terms of GDP per capita (uncorrected for differences in domestic price levels), Finland was among the leading countries in the world. A feeling of euphoria enveloped the business pages of our newspapers and journals. Finland had become the“Japan of the North.”

Then befell the suuri lama – the “great depression” of the early 1990s. Finland became the first OECD country to experience such a dramatic economic crash since the end of World War II. Euphoria turned into an almost tangible sense of crisis. Not until the glorious victory over Sweden in the 1995 world hockey championships did times become more cheerful. Also very encouraging was the remarkable success of Nokia. A few years earlier, this iconic national conglomerate had been on the brink of bankruptcy, but now it was a world leader in a rapidly expanding niche. By the late 1990s Finland had again become a success story.

The ongoing world financial crisis will change this rosy picture. The Finnish banks seem to have avoided the worst mistakes this time, but Finland is even more dependent on exports now than in the early 1990s, and as foreign demand dwindles, shutdowns and layoffs – especially in the paper industry – are daily news. And now that Finland belongs to the euro area, its ailing exports cannot be corrected by letting the currency depreciate. Domestic demand is, however, expected to increase as a result of rising real wages, tax cuts and accelerated public investment. All told, the economy is in better shape in Finland than in most European countries.

In this article I offer my take on the Finnish success story. The problem is to avoid bragging, since Finns are not supposed to brag. So I begin by citing some outsiders who in recent years have frequently cast Finland as a model for other countries.

In his 2005 book Finland, Cultural Lone Wolf, Richard Lewis asked why Finland is number one in global competitiveness and mobile phones, the least corrupt country in the world and the world leader in managing water resources, and why Finns are regarded as ideal peacekeepers.¹ The renowned Spanish sociologist Manuel Castells is another admirer. In their 2002 book The Information Society and the Welfare State: The Finnish Model, Castells and his Finnish co-author Pekka Himanen told the story of a country on the frontier of the information revolution that nevertheless managed to maintain an egalitarian welfare society.² Boris Kagarlitsky, director of the Institute of Globalization Studies in Moscow and a Marxist dissident in Soviet times, described Finland as “the northern exception” in his 2006 book The Revolt of the Middle Class. According to Kagarlitsky,

The “Californian model” builds the network as a gigantic supermarket, while the Finnish model builds it as a vast library. In the former case everything is about the purchase of goods; in the latter, about access to knowledge, information and socially necessary services.³

There are fennophiles on the other side of the Atlantic as well. Canadians Neil Brooks and Thaddeus Hwong compared the high-tax Nordic and low-tax Anglo-American countries. They singled out the United States and “another country Canada might wish to emulate: Finland,” and found:

This pattern, with the United States ranking about the lowest among industrialized countries and Finland near the top, is evident on most of the remaining social indicators we examine – relating to social goals such as personal security, community and social solidarity, self-realization, democratic rights, and environmental governance.⁴

According to the study, Finland is a good example of the high-tax Nordic model. Fascination abroad with the Nordic, Scandinavian or Swedish model is, of course, not new; what is new is that Finland is now sometimes regarded as the most interesting Nordic case.⁵

Even the Swedes have lately paid attention to Finland. During Sweden’s 2006 election campaign, the bourgeois parties – which won a historic victory over the Social Democrats – consistently praised the Finnish way of handling things. Among the examples they used were Finland’s educational system and its tax subsidy for hiring service workers. Some Swedish writers also cautiously referred to Finland’s membership in the European Economic and Monetary Union and its courageous construction of a new nuclear plant. That even the Swedes admire the Finns for reasons unconnected to the sauna, sisu or Sibelius can be taken as the ultimate sign of national success, comparable to the monster group Lordi breaking the long spell of humiliation at the Eurovision Song Contest. Finland – twelve points, douze points!

Finland in global rankings

Several factors – the information revolution, the proliferation of international organizations and investors’ need to monitor suitable locations for investment – have caused a boom in international ranking lists. Institutions such as the OECD, the World Bank, the United Nations Development Programme and the World Value Survey have specialized in creating new indicators for different purposes. According to the country statistics database NationMaster, Finland is number one on many of them: technological achievement, literacy, Summer Olympic medals, freedom in decision-making, growth competitiveness score and communication-technology patents (see table 1).⁶

Among OECD countries, the rankings show Finland as a mixed bag. It is a country with high educational levels (no. 2), but students report high noise and disorder levels in class (no. 2). Finns think that they are quite happy (no. 2), but the number of reported crimes per capita is high (no. 3). There are relatively many rape victims (no. 3, along with Sweden), but also many female parliamentarians (no. 3). Finns are heavy consumers of coffee (no. 2), spirits (no. 3) and energy (no. 3). Taxation is high (no. 3), but so is the will to fight for their country (no. 4). Finns trust others (no. 4) and they feel safe walking in the dark (no. 4). They tend to own their houses (no. 5), but relatively many of them see people of a different race (no. 2) or drug addicts (no. 3) as undesirable neighbours.

Among the bottom rankings we find that Finland has the smallest number of hours of instruction for pupils aged 9 to12, that it has the smallest proportion of houses with more than five rooms, that Finns produce less waste per capita and that municipal waste-treatment expenditures per capita are the smallest. We also find that growth in health expenditures was the smallest and that the lowest proportion of people who have signed a political petition is found in Finland.

Other low rankings are “consultation with doctors” (second last), “discuss politics frequently” (second last), not thinking of political extremists as undesirable neigbours (second last). There are few property-crime victims (third last), few children living in poor families (third last) and few immigrants per capita (third last). Finns tend not to drink bottled water, soft drinks (fourth last) or wine (third last). There are few abortions and asylum seekers per capita. Life satisfaction inequality is low, and so are crime victims as a proportion of the population. The proportion of pupils disliking school is low, and so are church attendance, cannabis use, daily smoking, the proportion of taxes paid by the richest 30 per cent and the number of cars per inhabitant.

In a 2006 article, Juho Saari and Raija Sailas presented a more systematic review of the most important economic and social rankings.⁷ Table 2 shows the different indicators and the rank given to Finland on each of them. In these rankings Finland is the only country with three first positions. It is also the only one that appears among the 15 best on all the rankings.⁸

Effort and performance

In their comparative study of high- and low-tax countries, Brooks and Hwong present an early-21st-century snapshot of 19 countries, arranged in four groups: the “social democratic” Nordic group (Denmark, Finland, Norway and Sweden); Anglo-American “liberal” welfare states (Australia, Britain, Canada, Ireland, New Zealand and the United States); “corporatist” continental European regimes (Austria, Belgium, France, Germany and the Netherlands); and “Mediterranean welfare states,” in which pensions are generous but other state support systems are less prominent, giving family and church a greater role (Greece, Italy, Portugal and Spain).

The picture they present is made up of 90 economic and social indicators, and we can use these indicators to try to spot the ways in which Finland is particular. I’ve grouped the indicators into four categories labelled effort (table 3), culture and institutions (table 4), economic performance (table 5) and social performance (table 6). I compare Finland to its own Nordic group (Finland is included in the Nordic averages) and to the three other groups. Typically the Nordic countries, including Finland, are distinct, though sometimes Finland would fit better into another group – most often the continental European.

In comparison with other Nordic countries, the distinctive aspects of the Finnish model are the central status of export competitiveness and the peculiar constellation of interest mediation. This was one of the findings of a project comparing the economic and social policy models of the Nordic countries.⁹ These characteristics still hold true, but instead of high investments and timely devaluations the emphasis has now been shifted to the development of a national system of innovation, involving all sectors of society. The effort indicators therefore reflect education, research and development, and creativity. Two indicators are chosen to reflect Finland’s distinctive interest mediation: the Economic Security Index compiled by the International Labour Organization and the degree of unionization.

Culture and institutions – factors that greatly influence a country’s performance – are reflected in some of the indicators collected by Brooks and Hwong. How much can you trust people? How much confidence do you have in political and judicial institutions? To what degree are women emancipated and empowered? The level of taxation and fiscal responsibility is also an important aspect of the spirit of a nation. In our earlier studies of the Nordic models, my colleagues and I found that “the Finnish welfare state has adopted many Nordic characteristics, but social policy has been more subordinated to ‘economic necessities’ than in other Nordic countries.”¹⁰

Economic and social performance indicators are used to assess the results apparently due to the efforts and to the cultural and institutional settings. Table 5 lists typical economic performance indicators, such as growth, productivity, inflation, trade, jobs and competitiveness. Table 6 contains indicators related to well-being, poverty, income-distribution, health, long-term unemployment, violence and self-realization.

Education and innovation

Belief in the importance of education, research and innovation as means to a good economic and social performance is very strong in Finland. Interestingly enough, educational results are much better than would be expected from looking at the input indicators. Finland’s expenditures on education are only about average for the whole sample, and clearly lower than in the other Nordic countries. As mentioned above, Finnish children spend fewer hours at school than do pupils in other OECD countries. Despite this they score high in the PISA studies in reading, science and math. Finnish schools also seem to be relatively effective in reducing differences that arise from parents’ status.

Finland’s input effort in research and innovation is conspicuously strong. It has the highest proportion of researchers in the sample, and the second highest percentage of GDP directed toward R&D (It now just surpassed Sweden to become highest). This significant input corresponds to high values for different output indicators: innovation, creativity, patents and royalties.

The Finnish institutional setup for innovative activities is actually rather extraordinary, with a distinct division of labour among state-funded institutions. The Academy of Finland supports academic research. The Finnish Funding Agency for Technology and Innovation, Tekes, is concerned with applied research explicitly directed toward innovation. The Technical Research Center of Finland, VTT, engages in the development of new technologies in cooperation with companies and the public sector. The Finnish Innovation Fund, SITRA, acts as a public venture company, financing quite different innovative projects. This systematic effort to develop into a high-tech economy and society is certainly one reason why Finland stands out when it comes to different measures of innovative capacity. The Nokia saga would be incomplete without reference to the Finnish system of innovation.

Investment and social mediation

In savings and investment, Finland’s effort no longer differs markedly from that of other countries, in contrast to the years before 1990 when Finnish investments in fixed capital were exceptionally high. In those years, an ambitious developmental state, playing a significant direct role in economic development, made room for a high level of nationally funded projects. Foreign direct investment continues to play a relatively small part in the economy in Finland, as in the other Nordic countries.

The high score on the International Labour Organization’s Economic Security Index is particularly important for understanding the Finnish effort.¹¹ In the ILO study of the socioeconomic security of workers in more then 100 countries, Finland was ranked second after Sweden, ahead of Norway, Denmark and the Netherlands. Finland was on top in two dimensions, the degree to which employees could influence their work and protection against illegal firings. It was second in the extent to which people could develop working skills and third in possibilities for making one’s voice heard, through trade unions and other avenues.¹²

This ranking explains why, despite strong trade unions, Finnish industry has been able to introduce new technologies rapidly. Through systematic cooperation, with unions accepting rapid introduction of new technology and companies giving some guarantees that workers would be involved and reeducated, there has been less resistance to change than in the continental corporatist nations, for example. In most international studies of competitiveness, strong trade unions are regarded as a drawback for Finland, but this is probably an error. On both the national and the firm level, strong union participation in economic decisions can improve competitiveness. In the Finnish case moderate national income policies have kept relative unit-labor costs in check. At the firm level, openness to innovations has been enhanced.

Social trust, gender relations and fiscal policy have been referred to the cultural and institutional “infrastructure.” These are almost taken for granted in the Finnish case. Trust in the public sector and certain forms of solidarity are almost built into Scandinavian culture. The link between the state and civil society has been extraordinarily strong since the start of the national project in the 19th century.

Cultural and institutional indicators

Gender equality is less of an issue in Finland than in the other Nordic countries. Prudent fiscal policies have always been a characteristic of the Finnish system. In comparison with the other Nordic countries, Finnish government finances have been “cameralistic” rather than “Keynesian.” That is, during good times, social benefits have been developed on the basis of corporatist interest mediation, and in recessions reductions in social expenditures have been agreed to as economic “necessities.”

The indicators confirm that social trust, gender equality and stern fiscal policies are typical for Finland, although not exceptional when compared to other Nordic countries. However, the indicator labelled “having frequent political discussions with friends” sets Finland apart. On this indicator, Finland is at the opposite end of the scale from the other Nordic countries, and lower than any other country in the set. How can this be explained? Do Finns discuss little in general? Have consensual policies permeated society so much that there is little cause for political discussions? Are the Finns so satisfied with how things are going that they do not bother with politics?

Economic and social performance

Growth and competitiveness have been Finland’s central economic goals for a long time. As can be seen from table 5, Finland has continued to be successful on both accounts. Its multifactor productivity growth has been impressive, surpassed only by Ireland’s. Thanks to cautious national income policies, changes in unit labour costs have been moderate and the surplus on current account substantial. In the World Economic Forum rankings of competitiveness, Finland has occupied top positions for many years. It is fascinating that when the United States is set as the standard other countries should emulate, Finland ranks third after Australia and Canada. The Finnish effort has clearly been successful on this score. The only dark spot is the high rate of unemployment. Despite more than a decade of impressive economic growth, the mass unemployment of the 1990s has been agonizingly slow in receding.

Well-being, equity and health are Finland’s most prominent social goals. Finnish social performance is mixed. It trails behind both its Scandinavian siblings and several other countries in public social and health expenditures. Homicides and suicides are highest in Finland, and male life expectancy is still relatively low. Relatively few are very happy. On the other hand, Finland scores high on several indicators: there is less income inequality between richest and poorest than in any other country in the sample; infant mortality and low birth weight are least common; sense of freedom and life satisfaction rankings are remarkably good. The use of cannabis is infrequent – but, although not included in this set of indicators, the misuse of alcohol is notorious. In relation to the money spent on social problems and health, Finland’s performance is astonishingly good.

Geohistorical luck and intercultural coping

So how can we account for the success of a remote and cold country that in its national anthem praises itself for being poor and remaining so? We have already encountered three different explanations: culture, gender and the role of the state. I return to these, and then add a fourth: geographical-historical position and how the Finns have managed it.

According to Richard Lewis, who is an expert on cultural differences and conflicts, Finnish culture is unique:

This remarkable people speak a language unique in its origins and have kept their cultural identity intact despite the influences of powerful neighbors, Sweden and Russia. Pursuing a “Lone Wolf” policy, Finland raised itself from a struggling, war-battered state in 1945 to one of the most developed countries in the world.¹³

The long coevolution with Sweden and the maintenance of Nordic traditions (such as Lutheranism) even while being part of the Russian Empire were crucial for the development of Finnish culture and institutions. The Swedish language still has a significant role. The coexistence of two language groups and the large proportion of Finns who are bilingual have been quite fruitful. Solutions to language conflicts have been unique and relatively successful.

Turning to the strong position of women, this year we celebrate the 100-year jubilee of full political rights for Finnish women (and men). While the women of New Zealand were the first to get the right to vote, in contrast to Finland it took several decades before they got the right to stand as candidates.

In The Wealth and Poverty of Nations: Why Some Are so Rich and Some so Poor, the American economic historian David S. Landes emphasizes this factor when he explains why certain cultures have not been able to develop:

In general, the best clue to a nation’s growth and development potential is the role and status of women … The economic implications of gender discrimination are most serious. To deny women is to deprive a country of labor and talent, but even worse – to undermine the drive to achievement of boys and men.¹⁴

There are several studies of early female emancipation in Finland. Already by 1905–7 almost a third of university students were women, and today Finnish women are the most educated in Europe.¹⁵ According to the 2002 Human Development Report, the ratio of women’s incomes to men’s is highest in Finland, along with Denmark.

In their book on the Finnish information model, Manuel Castells and Pekka Himanen also stress culture and national identity, but to them the state has played a crucial role in forming Finland’s culture and national identity. The public sector has provided free education at all levels. And, as noted above, the role of the state in the innovation system has been crucial. The system of progressive taxes and universal social security redistributes incomes and thus mitigates poverty. Daycare and public social and health services have been relatively efficient, and have thus enabled women not only to work full-time but also to find jobs in the public sector.

The Finnish state has been quintessentially developmental, and the relationship etween the state and civil society has been close and built on mutual trust. This is probably the result of Finland’s location between two remarkably different historical powers, Sweden and Russia. A developmental state in close cooperation with civil society was a necessary condition for creating a Finnish nation sandwiched between them.

This leads us to the fourth factor behind Finland’s success story: geographical-historical position. Finland’s close cultural links with Sweden have facilitated its emulation of Swedish technological and social advances. Before 1917, Finland’s special relationship with Russia allowed it to export processed goods to the Russian Empire – especially to St. Petersburg. A similar relationship arose after World War II: Finland was then the only “Western” country that traded extensively with the Soviet Union. It was able to provide its eastern neighbour with a large range of goods, some of them technically quite advanced.

The peasantry managed to avoid serfdom both during the Swedish era (before 1809) and subsequently, when Finland became a grand duchy under the czar. Under the Swedish constitution, the peasantry constituted a “fourth estate” alongside the nobility, the clergy and the bourgeoisie. This constitution was adapted to the new situation when Finland was annexed to Russia. Thanks to the dominant Lutheran influence and a nationalist movement that relied on education as a major tool, the peasantry was largely literate. And peasant ownership of the forests was shielded by the state. In the northeastern parts of the country, with few peasants but with large, remote forest areas, the state controlled the resource.

Avoiding the extractive economy trap

Finland’s economy has traditionally been based on wood, and an economy based on the extraction and export of raw materials runs several risks. The source may be depleted or the price of the raw material may collapse as a result of changes in technology or consumption patterns. The stream of income from exploiting the natural resource may crowd out the development of other productive sectors. Politics in the country may focus exclusively on the dictates of the particular resource sector and on the control over the income stream it enables. And an extractive economy often misses out on the kind of learning-by-doing that an industrial economy normally experiences. The resource extraction sector itself is liable to become dependent on knowhow and machinery produced in the developed centre. Countries experiencing a combination of these risks may fall into an “extractive economy trap.”¹⁶

Finland, however, has managed to avoid such a trap. Forests are a renewable resource, and they have a variety of potential uses: they have been an important energy source; houses, tools and ships have been made of wood; and wood can be refined into necessities such as tar or paper. Cutting trees is best done in wintertime, when there are few other employment opportunities for a rural labour force. Forestry is therefore a good complement to farming. A peasant household could finance small investments and the education of its children by cutting and selling some of its forest. The well-organized forest-owning peasantry (involved in cooperative manufacturing based on wood) and the exporters of tar and of sawn products or paper jointly influenced the regulations concerning forestry. Instead of falling into a resource trap, Finland was thus able to use its forests in ways that promoted cooperation among independent producers and between those producers and the state.

Learning from the Finnish success story

If the reasons for Finland’s apparent success are complex and unique, then it would be a mistake to try to copy it. However, I do think there are some lessons to be learned from Finland’s experience:

• Development is strongly dependent on persistent characteristics such as geography and culture. Each nation must find solutions that fit its specific situation. You can learn from your neighbours, but you should not try to copy them. Even more, you should not try to implement a universalist blueprint (such as Soviet-style communism, Washington-consensus neoliberalism or even the “Nordic model”).
• The character of the state is crucial. There needs to be a certain persistence that can take the shape of a conscious or unconscious “model.” In the Finnish case, the emphasis on “international competitiveness” goes relatively far back in time. Today’s system of innovation is largely due to state policies.
• Gender relations matter a lot. The welfare state, properly implanted, is an economic asset since it is a condition for the emancipation of women, which in turn is crucial for national economic development.
• Economic security is a precondition for dynamism “with a human face.” If workers and citizens feel that they have a degree of economic security even if firms restructure, they are prepared to accept changes associated with new technologies or with international openness. They are also prepared to invest in education.
• Educating the whole population and educating the educators well is a first-rate investment. Probably the main reason for Finnish success in education is that its teachers are more educated than in other countries.
• Sustainable solutions to conflicts yield many advantages. Finland lies on the edge between two cultures, and has therefore had more than its fair share of conflicts. There have, however, been some good examples of solutions to these conflicts, such as the liberation of the crofters, the treatment of the Swedish and Orthodox minorities, the integration of Communists and consensual income policies.

Notes

1   London: Nicholas Brealey Publishing, 2005. Accoring to the book, Lewis “lectures and consults worldwide with clients that include Mercedes-Benz, Nokia, Rolls Royce, Volvo, Deutsche Bank and Unilever.”

² Oxford, UK: Oxford University Press, 2002.

³ Boris Kagarlitsky, The Revolt of the Middle Class (Moscow: Cultural Revolution, 2006), pp. 294–95. The book brings to mind the early Russian fennophiles such as Peter Kropotkin, the noble anarchist who wrote Finland: A Rising Nationality (1884) and Grigory Petrov, whose Finljandija, strana belykh lilij (1907) was to be used as a schoolbook in Kemalist Turkey.

⁴ Neil Brooks and Thaddeus Hwong, The Social Benefits and Economic Costs of Taxation: A Comparison of High- and Low-Tax Countries (Ottawa: Canadian Centre for Policy Alternatives, 2006), p. 10. Retrieved February 3, 2009, from here.

⁵ Denmark also has been identified as a good Nordic model for countries striving to attain “flexicurity.” Denmark was the first country to experience a tax revolt after World War II and suffered massive unemployment in the 1970s, but since then it has managed to adapt to the challenges of globalization and the information revolution in a way that has attracted attention to the “Danish model.”

⁶ Retrieved January 2007 from www.nationmaster.com. Finland is also tops for suicide rates (in most age groups) among the OECD countries. When the selection of countries is made somewhat broader, however, it loses its top position in this regard, trailing behind a handful of countries among which Russia, the Baltic states and Hungary are prominent.

⁷ Juho Saari and Raija Sailas, ”Suomi – moniulotteinen menestyjä,” Hyvinvointikatsaus 2/2006, p. 41–47.

⁸ Norway, however, has more “medals” than Finland. Finland has 3 “gold” and 2 “bronze,” Norway 2 “gold,” 2 “silver” and 2 “bronze.” Norway also beats Finland in Winter Olympic medals per capita.

⁹ See Lars Mjøset, “Nordic Economic Policies in the 1970s and 1980s,” International Organization Vol. 41, No. 3 (1987); Jan Otto Andersson, Pekka Kosonen and Juhana Vartiainen, The Finnish Model of Economic and Social Policy: From Emulation to Crash (Turku, Finland: Meddelanden från Ekonomisk-statsvetenskapliga fakulteten vid Åbo Akademi, 1993).

¹⁰ Andersson, Kosonen and Vartiainen, Finnish Model of Economic and Social Policy, p. 9.

¹¹¹ This indicator could also be referred to the cultural and institutional background variables, but since there have been strong forces promoting income policies and innovative cooperation at the firm level, I chose to put it on the effort list.

¹²Helsingin Sanomat, September 2, 2004.

¹³ Lewis, Finland, Cultural Lone Wolf, cover.

¹⁴ David S. Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some so Poor (New York: W.W. Norton, 1998), pp. 412–13.

¹⁵ Mirjam Kalland, “I dag kolumnen,” Hufvudstadsbladet, March 23, 2003.

¹⁶ See, for example, Stephen G. Bunker, “Natural Values and the Physical Inevitability of Uneven Development under Capitalism,” in Alf Hornborg, ed., Rethinking Environmental History (Lanham, MD: AltaMira Press, in press). I raised this question in my previous article in Inroads, “Our Full, Unequal World: Ecological Footprints and International Trade,” Summer/Fall 2005, pp. 48–57.