FINLAND'S ECONOMY PERFORMED WELL during the 1980s, allowing the Finns to enjoy widespread prosperity. After suffering the effects of depression and war during the 1930s and the 1940s, the economy started to show steady gains in about 1950. During the 1980s, the country enjoyed above-average growth, stable prices, and relatively low unemployment. Nevertheless, Finland did experience many of the problems found elsewhere in the industrial world, including high unemployment among youth, expensive agricultural surpluses, and declining industrial sectors. Moreover, certain aspects of the country's economic performance, such as serious cyclical instability, endemic industrial conflict, and difficulties in foreign trade, may have troubled Finland more than such situations disturbed other countries. Despite these problems, which required attention from policy makers and from businessmen, economists could point with pride to Finland's strong work ethic and pragmatic tradition.
In a country lacking many raw materials, the tenacious Finns had learned to make the most of scarce natural resources. Although most of the country was not arable, farmers worked hard to keep the country self-sufficient in staple foods. The country's forests, carefully managed to increase long-term yield, provided raw materials for the wood-processing industries, the largest earner of foreign exchange. Metals and minerals were scarce, but the country had established competitive enterprises in basic metals and in chemicals. The metalworking industry, developed largely to meet reparations payments to the Soviet Union, continued to expand during the postwar period. This industry specialized in sophisticated products, such as icebreakers and paper-making machinery, in which the Finns enjoyed a comparative advantage. Faced with a serious energy shortage after the oil crisis of 1973, the Finns embarked on a comprehensive conservation program and shifted investments toward less energy-intensive, high-technology products.
Effective policies deserved much of the credit for the country's economic successes. In the early years of the republic, the government had carried out extensive land reforms, a precondition for agricultural modernization. State-owned enterprises channeled investments into key industries, allowing the country to process its own raw materials. The crises of the depression, war, and reconstruction led to government controls that provided an essential framework for production. By the late 1950s, once wartime bottlenecks had been eliminated, the government chose to pursue trade liberalization and deregulation. Following this basic orientation, Finland's leaders agreed to free trade in industrial products, thus forcing the country's industries to compete and to modernize. By the late 1970s, macroeconomic policies gave priority to fighting inflation and to dampening cyclical instability. During the 1980s, government policies pursued export competitiveness, in part through favoring industrial rationalization and financial deregulation. By the mid-1980s, some economists saw Finland as the most capitalist country in Europe.
To pay for needed imports, the Finns depended on export markets in Western and in Eastern Europe. To protect those markets, Finland had pursued economic integration with both Eastern and Western Europe. The Finns maintained good commercial relations with the Soviet Union, a strategy that had paid off handsomely in the 1970s, when rising petroleum prices increased the value of trade with the East, compensating Finland for declines in Western markets. After the mid-1980s, however, as world oil prices declined, the Finns shifted toward the West, especially toward the European Community (EC). Although balancing close economic relations with both marketoriented and planned economies posed special challenges, Finnish traders proved adept in both environments. In the late 1980s, industry and finance sought to build on earlier successes by internationalizing their operations, often in partnership with foreign firms.
In the late 1980s, the most important economic challenge was to keep both production costs and product quality competitive in international markets. This challenge would require hard work, as well as close cooperation among government, business, and labor. The government, industry, and the universities needed to increase spending on research and the development of new technologies. The Finns would also have to limit inflationary wage increases and improve labor flexibility without worsening labor conflict. Many economists believed, however, that the prevailing consensus in favor of modernization and stable, steady growth was strong enough to allow the country to face the future with optimism.
During the seven decades after the establishment of the republic in 1917, Finland made remarkable economic progress. At the time of the collapse of the Russian Empire in 1917, the Grand Duchy of Finland had the most backward economy in Nordic Europe. Situated at the outer edges of the spheres of influence of the major European industrial powers--Britain, Germany, and Sweden-- newly independent Finland appeared destined to remain a poor, peripheral area. By the late 1980s, however, the country had become one of the world's advanced industrial societies, the citizens of which enjoyed a high standard of living and the industries of which dominated world markets for significant hightechnology products. Finland was an industrial society, but it was self-sufficient in staple foods and produced a wide range of goods and services for domestic and export markets. Although the economy still depended on exports, the Finns had developed markets in both Eastern and Western Europe, avoiding excessive dependence on any single market.
Economic DevelopmentMaterial 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.
From 1950 to 1974, Finland's gross national product (GNP) 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 (OECD). 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 (GDP). 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.
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 EconomyBy 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.
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.
As in most European countries that were late in industrializing, the Finnish state played an important role in sponsoring economic development. Thus, in the interwar years, the government carried out crucial agricultural reforms and established pioneering industrial enterprises. During World War II, the government imposed comprehensive economic controls to support the defense effort, many of which remained in force during the reconstruction years. Starting in the 1950s, however, as economic growth overcame production bottlenecks and shortages of consumer goods, the government gradually relaxed the regulatory framework. Nevertheless, wartime intervention in the economy had left institutional legacies that influenced later economic policies.
The need to maintain export markets in Western Europe, itself engaged in a process of economic integration by the late 1950s, led the government to decide to liberalize trade in industrial products. Free trade, in turn, undermined the government's ability to isolate the domestic economy from world market conditions. Increasingly tied to the economies of the Nordic area and Western Europe, Finland was constrained to adopt policies similar to those in force elsewhere. Although the policy packages varied in response to domestic political developments and international market shifts, they all took into account Finland's position as a small, relatively open economy, in which fluctuations in raw material exports had a significant impact on the business cycle. By the late 1980s, when exports and imports each accounted for about one-quarter of GDP, export competitiveness had become the dominant policy concern.
Some analysts saw in Finnish economic management a liberal, noninterventionist variant of the economic polices of other Nordic states. Thus, Finland, less prosperous than its Western neighbors, did not develop a comprehensive welfare state until the late 1960s, and it held benefits below the Scandinavian average. Like other Nordic states, Finland had institutionalized wage and benefit negotiations, but the Finnish system of industrial relations involved substantially more conflict than the systems in the Scandinavian states. Along the same lines, Finland protected domestic agriculture, but generally avoided bailing out declining industrial concerns, favoring measures to facilitate structural adjustment. Finnish politicians, some of whom saw Sweden as a model, claimed that their neighbor's mistakes had taught them to avoid excessive welfare programs and industrial subsidies that would slow adaptation to new market conditions. Foreign analysts noted, however, that special factors, such as Finland's relatively late industrial development and the role of Finland's trade with the Soviet Union, also helped to explain deviations from the general Nordic pattern. By the 1980s, as austerity policies spread throughout the region, aspects of Finnish policy seemed to lead rather than to follow Nordic developments.
Despite the laissez-faire slant of Finnish economic policy, direct state intervention strongly influenced operating conditions in many sectors. In agriculture, for example, years of government support and tariff protection had sustained a relatively large rural population that expected continued aid regardless of the need to cut farm surpluses. Similarly, the state had established enterprises in capital-intensive, high-risk sectors, including energy, minerals, basic processing, and manufacturing in which private investment had proven inadequate. By the mid-1980s, private capital markets were relatively well-developed, but the twenty state enterprises still accounted for some 21 percent of industrial production, and they included many of the country's leading firms, such as the Kemira Group in chemicals, Enzo-Gutzeit in wood processing, the Valmet Group in engineering and shipbuilding, and Valvilla in textiles. Yet industrial policy no longer depended on state ownership, and these enterprises functioned much as private companies. Indeed, starting in the early 1980s, the Ministry of Trade and Industry, which was responsible for state enterprises, began to demand that they earn profits. The state maintained monopolies in alcoholic beverages, energy (Neste and Imatran Voima), and minerals (the Outokumpu Group and Rautaruukki) for political reasons, but divestment in other sectors was a possibility. In 1988 the government decided to allow certain state enterprises to sell shares. The Valmet Group was the first state firm to announce plans for a stock offering, and observers reported that Outokumpu, Kemira, and Neste were also candidates for partial privatization, depending on how well the Valmet stocks sold. The government planned to retain controlling interests in the companies for at least several years, but some politicians favored complete privatization.
Privatization and deregulation were ways to dismantle the relics of earlier economic policies and to release public resources for other purposes. In the late 1980s, government interest concentrated on speeding rationalization and restructuring, even at the cost of higher unemployment and greater industrial concentration. Industrial policy sought to foster a shift away from heavy engineering toward electronics and high-technology production. The state sharply increased expenditures for research and development, and it helped coordinate efforts among universities, private industry, and government research centers. The government and the Bank of Finland (BOF), Finland's central bank, gradually deregulated the financial sector in an effort to improve the efficiency of capital markets. Thus, although the state continued to control certain key sectors, such as agriculture, forestry, minerals, and energy, overall economic policy had shifted from sectoral intervention toward efforts to improve productivity and market efficiency.
During the 1960s and 1970s, government policy had pursued rapid economic growth and high investment in industry, often to the detriment of price stability. By the mid-1960s, the government, generally in concert with the BOF, which controlled monetary and exchange-rate policy, established a macroeconomic approach with fixed roles for monetary, fiscal, incomes, and exchange-rate policies. In general, monetary policy aimed at keeping interest rates low to favor domestic investment. The BOF imposed strict controls on capital exports, which made possible negative real interest rates, and rationed credit to the commercial banks, which controlled most investment. The perceived need to balance budgets, usually annually, handicapped fiscal policy. The government used incomes policy to influence wage settlements, often offering tax breaks in exchange for concessions from management and labor, but incomes policy was rarely coordinated with the general macroeconomic strategy. Exchange-rate policy was dedicated to safeguarding industrial competitiveness.
Although this policy package favored growth, high employment, and industrial development, the economy suffered from greater inflation and instability than those of other OECD countries. Public spending remained under firm control, but low interest rates and tax cuts fueled domestic inflation. At roughly ten-year intervals, Finland experienced export-led booms followed by major devaluations and severe recessions. Fluctuations in world demand for Finnish exports were largely responsible for the cycles, but economic policies magnified them. Typically, a period of overheating in the economy, occasioned by an upswing in exports and by the relatively inelastic supply of exportable commodities, led to sharp increases in wages and prices in the export sector as well as to greater imports of investment goods. Faced with declining export competitiveness and a worsening external balance, the authorities responded with major currency devaluations (24 percent in 1967; 10 percent in 1977-78) and with tighter macroeconomic policies, which dampened domestic demand but restored competitiveness. Output recovered following each devaluation, only to decline as domestic inflation rocketed higher, further eroding competitiveness in external markets.
Although Finland managed to avoid restructuring traditional policies until several years after the 1973 oil crisis, an especially severe downturn in the second half of the 1970s, caused largely by recession in West European markets, inspired a new policy approach. Starting in 1977, with the adoption of a five-year stabilization program, the government began to give priority to fighting inflation and to overcoming the devaluation cycle, even at the cost of higher unemployment and slower growth in the short run.
The new macroeconomic framework involved changing the traditional assignments for each policy tool. Perhaps the most important innovation was a more active role for fiscal policy. Given the low level of Finnish state debt, policy makers stopped requiring that the budget balance each year, and they aimed instead for a balanced budget over the life of the business cycle. Fiscal policy became consciously countercyclical, and increased spending during the 1982-83 slowdown was followed by tax increases in the 1984-85 upswing. In addition, the authorities adjusted tax rates not only to moderate wage demands but also to affect investments and export competitiveness. The implementation of monetary policy shifted from offering negative interest rates in a protected capital market to using interest rates to dampen inflation and to influence the exchange rate. Monetary policy came to depend even more on market operations by the mid-1980s, as deregulation of financial markets eliminated the earlier system of capital rationing. The tighter monetary stance tended to reduce the volume of investment, but economists expected that the quality of investments would improve. After 1977, the BOF attempted to peg the external value of the Finnish mark to a trade-weighted "basket" of foreign currencies. The new exchange-rate policy was meant to curtail both domestic and imported inflation. Indeed, in 1979 and 1980, the currency was allowed to appreciate for the first time in the postwar period in response to greater export demand. Policy makers hoped that the stable exchange rate would eliminate distortions caused by an undervalued or overvalued currency and would allow market conditions to determine investment decisions.
The new approach to managing the economy still depended on negotiated incomes settlements to restrain wage growth and to dampen inflation. The government continued to try to influence agreements between capital and labor by means of fiscal or other incentives. Implementing such sophisticated policies required extensive coordination and cooperation among government ministers belonging to different parties, the BOF, and leaders in agriculture, industry, and labor. Although differences among interest groups continued to exist and sometimes resulted in serious conflicts, the country enjoyed widespread consensus regarding the desirability of medium-term stabilization. It was this consensus--and the macroeconomic policies it made possible-- that deserved much of the credit for Finland's relatively strong economic growth, low unemployment, and price stability.
As of 1987, public-sector spending amounted to about 42 percent of GDP, below the OECD average. Austerity policies had limited real budget increases to about 1.5 percent per annum from 1980 to 1987, substantially less than the rapid growth in government spending during the 1960s and 1970s. Total taxes amounted to about 36 percent of GDP in 1987, fluctuating by a few percentage points from year to year. Because of the gap between taxes and spending, government debt grew relatively rapidly during the 1980s, reaching almost 15 percent of GDP by 1987, but it was still low by OECD standards.
Each autumn the Ministry of Finance submitted to the Eduskunta, the country's parliament, the budget for the next fiscal year (which corresponded to the calendar year), accompanied by a survey of the economic situation. Early in the following spring, while the budget was being debated, the ministry published a revised version of the survey, which estimated the overall fiscal impact on aggregate demand, income, and money supply. After parliamentary approval of the annual budget, the government often responded to changing conditions by requesting supplementary appropriations, sometimes significantly modifying the original budget.
Starting in the late 1970s, as it sought to maintain tight limits on the growth of the public sector, the government, in its fiscal policy considerations, began to analyze social security funds and local spending as parts of the overall budget. The central government regularly transferred large sums to local authorities, which accounted for about two-thirds of publicsector operations. Local administrations levied a flat tax, which had reached about 16 percent in 1986, on earned income. The central government influenced local expenditures by regulating transfers and by negotiating multiyear spending limits. Nevertheless, current local government expenditures, many of which were required by law, sometimes exceeded targets. The central government also attempted to manipulate social security taxes as an instrument of fiscal policy, a technique that Finland had pioneered. The government lowered employers' contributions for health, accident, and unemployment insurance by about 2 percent of the wage bill between 1977 and 1987 in an attempt to encourage job creation.
National taxes absorbed about 26 percent of GDP, and local taxes, roughly 16 percent, in the mid-1980s. In 1986 the government introduced reforms of business income taxes, including a reduced value-added tax on energy, designed to improve export competitiveness. In 1988 the legislature enacted a comprehensive tax reform meant to reduce marginal rates of taxation after eliminating many deductions. Policy makers expected that the 1988 reform would reduce tax-induced distortions in investment behavior and would make the tax system fairer.
Government spending had changed significantly during the postwar years. In the late 1940s and early 1950s, temporary expenditures associated with the war dominated the budget. From the early 1950s to the early 1970s, the fastest-growing sectors in the budget were education, social welfare transfers, and capital investments. By the late 1980s, current expenditures remained roughly the same as in the 1970s, but investments had fallen. In 1987, for example, debt service led expenditures (at about 17.2 percent of total outlays), followed closely by social security (17.1 percent) and education, science, and the arts (16 percent). Government operations and defense amounted to about 14.7 percent, and health, to 8 percent. Except for agriculture and forestry (which absorbed 8.3 percent) and transport (8 percent), subsidies for different branches of the economy took relatively small amounts: housing, 4.4 percent; industry, 3.4 percent; and labor, 2.5 percent.
Finland's state debt, at about 14 percent of GDP in 1987, was low by international standards, as was the debt of local governments, which stood at roughly 3 percent. Nevertheless, during the 1980s the government tried to limit the growth of state debt to avoid increased interest expenditures. As of 1987, slightly more than half the state debt was in foreign currencies. When the state sought financing abroad, it avoided crowding out private borrowers in Finland's relatively shallow capital market, but foreign debt increased foreign-exchange risk. In 1986 and 1987, however, officials took advantage of their government's high credit rating to refinance much of the debt at lower interest rates. Although policy makers would have to manage the debt carefully, most analysts believed it was unlikely that Finland's state debt would seriously constrain government operations during the late 1980s and early 1990s.
Finland's work force was the country's most valuable economic asset; managing it posed the greatest challenges to both business and government. Like most European countries, Finland suffered from unemployment, but employers reported difficulties in finding qualified workers. Although the country boasted a consensual approach to industrial relations, strikes often interrupted production. Likewise, Finland's workers enjoyed a high standard of living, but regular wage increases contributed to domestic inflation, worsened unemployment, and exacerbated balance-of- payments difficulties. Business often granted seemingly excessive wage increases, yet alienated workers through adamant opposition to increased democracy in the workplace. Government policies addressed labor problems with only limited success.
In 1986 the civilian labor force numbered a little more than 2.5 million, of which about 5.4 percent were unemployed. Less than 11 percent of the workforce worked in agriculture and forestry (down from over 45 percent in 1950). Employment in industry and construction amounted to about 32 percent, while the service sector employed a little over 57 percent. Finland's employment structure resembled that of other European countries, except that agricultural employment was still higher than the West European average, and industrial employment had fallen more slowly in Finland after the 1973 oil crisis than it had elsewhere. Economists suggested that both phenomena reflected Finland's relatively late industrialization and that the country could expect further declines in the employment shares of agriculture and industry.
As in most European countries, general unemployment became a serious problem during the 1970s, rising from about 1.8 percent in 1974 to an average of about 5.7 percent between 1980 and 1986. Official statistics showed that unemployment had fallen to 5.5 percent for the first half of 1987, but this figure had resulted from redefining unemployed workers over 55 years of age as retired. The number of unemployed persons actually had barely changed between 1986 and 1987. Despite economic growth, during the early 1980s total demand for labor stagnated, but the working-age population increased by an average of 1.2 percent each year. Economists estimated that real GDP would need to rise by over 3 percent per year in the late 1980s and early 1990s just to keep up with the growing work force.
While unemployment was less severe in Finland than it was in most European countries, policy makers considered the job shortage to be the country's main economic problem. Young people suffered most from the rise in unemployment. In the late 1980s, the unemployment rate for people between the ages of fifteen and twenty-four was almost twice the overall average. The aging of the population would tend to reduce the youth unemployment rate in the 1990s, but observers predicted that the total population of working-age persons would continue to rise for at least a decade and that unemployment would be a serious problem.
Although many workers could not find jobs, some employers reported difficulties in finding skilled industrial workers; in particular, construction and service workers were hard to find in the booming Helsinki area. Although certain skills might be in short supply, the work force generally was competent and hardworking. Indeed, during the postwar years, the number of Finns with vocational training had increased fourfold, and the number of university graduates had increased fivefold. The graduates of Finland's management schools were well prepared to meet the challenges posed by an increasingly international business environment. Some managers argued that young Finns showed more initiative on the job than their parents.
The government tried to cope with unemployment, focusing on youth joblessness. Aside from expanding public employment, generally seen as a stopgap, state efforts included retraining programs for unemployed workers, advanced vocational training, travel and resettlement allowances, and subsidieq for housing in areas with labor shortages. A particularly effective mechanism was the nationwide employment exchange, which brought together people seeking employment with potential employers. In the long run, however, such measures could only serve as palliatives. Analysts believed that the state could best increase employment by following sound macroeconomic policies and by facilitating cooperation among the organizations representing labor and management.
Although trade unionization had started somewhat later in Finland than it had throughout the rest of the continent, in the 1980s the country's workers and employers were the most highly organized in Western Europe. According to the Ministry of Labor, about 80 percent of the work force belonged to unions, although the rate varied significantly among industries. Employers' federations also represented most enterprises.
Conflict between labor and management was fierce during the interwar years because tensions resulting from the civil war had soured industrial relations. Labor-management collaboration improved in 1940 when the Central Organization of Finnish Trade Unions (Suomen Ammattiyhdistysten Keskusliitto--SAK) and the Confederation of Finnish Employers (Suomen Työnantajain Keskusliitto--STK) recognized each other and agreed to cooperate during the national emergency. Industrial relations languished immediately after World War II, however, in part because government regulations tied wages to the cost-of-living index. Despite a general strike in 1956, occasioned by conflicts of interest among farmers, workers, and management, a spirit of compromise gradually developed in the late 1950s and early 1960s.
Finland's industrial relations took an important turn for the better in 1968, when a system of centralized incomes agreements was instigated by the government, which hoped to curb inflation and improve competitiveness after a major currency devaluation. After that date, regular negotiations, involving the government, labor, and employers, led to central agreements on wages, benefits, work conditions, and social policy. Negotiations usually started in the fall and ended in March. Senior civil servants acted as mediators between labor and management. The government often offered concessions, such as tax reductions, longer vacations, or reduced employer social security contributions, in exchange for wage restraint or increased investment. The central agreement among the national federations was not binding on individual unions. In practice, however, the central agreement provided guidelines for contracts made between unions and employers or, if necessary, between workers and management at individual factories. Contracts affecting civil servants and professionals were usually negotiated after settlements in industry, as were settlements concerning prices paid for agricultural commodities and lumber. In this way, wages in private enterprises exposed to international competition influenced the protected sectors of the economy.
Many observers feared renewed labor conflict during the 1980s as slower growth, stiff foreign competition, and austerity policies put pressures on the negotiation process. Strikes did occur, mostly during the spring negotiation season. In 1986, for example, unions representing salaried employees, technicians, and professional personnel accepted the central agreement, but SAK held out for shortened work hours. When the STK demanded greater flexibility in setting work schedules in exchange for the proposed reduction in work time, SAK responded with the first general strike since 1956. As a result, SAK gained a larger wage increase than the other federations and a provision that by 1990 would reduce the work week in industry to 37.5 hours. Moreover, a number of local unions refused to follow the central agreement, preferring to negotiate on their own.
In 1988 the government was unable to implement a national agreement, largely because of opposition from employers. Unions and employers reached agreements industry by industry, generally following the settlement reached in the paper industry. In this industry, blue-collar workers had achieved wage increases of about 4 percent for the first year of their two-year agreement, while white-collar workers had received higher raises; the parties had agreed to delay negotiations for the second year. Although its proposals had been rejected, the government still intervened in the negotiation process by introducing legislation on retraining programs, security against dismissal, and worker representation on company boards. The fact that important service branches, such as banking, insurance, and trade, had opted for multiyear agreements in which wage increases were to be negotiated a year at a time, further indicated that the centralized negotiation process was becoming fragmented. Despite these apparent setbacks, most Finns supported an incomes policy as a way to restrain wages, thereby protecting real earnings.
Despite widespread consensus on incomes policy, Finland continued to experience more strikes and lockouts than other Nordic states. In principle, Finnish legislation blocked strike actions during periods governed by incomes agreements. Moreover, according to the law regulating strikes, unions were required to give two weeks' notice to both employers and the state before initiating a strike, and the government could delay a strike and could require mediation. Despite these controls, illegal work stoppages occurred regularly, often involving small, but wellplaced , groups of workers. In 1986, for example, air traffic controllers shut down the Helsinki airport for two weeks. The number of strikes had declined, however, after 1984, when the central incomes agreement had included a ninefold increase in the fines for illegal strikes.
The Finns traditionally earned their living from the produce of their soils and waters. Even though by the 1980s Finland had long been an industrial country, many Finns continued to see the hardworking farmer as an upright figure whose way of life should be preserved so the country would not lose contact with its rural roots. Agriculture, forestry, and fisheries had shrunk to less than 10 percent of GDP by the late 1980s, but these sectors remained crucial for the country's economic security. Although only 8 percent of its territory was arable, the country had been self-sufficient in basic foodstuffs since the 1960s--indeed, surpluses of dairy products and meat caused serious difficulties in the 1970s and the the 1980s. Seventy-six percent of the country was covered by forests, which supplied the country's most important raw material--lumber. Agriculture and forestry had long been closely linked: most farms included forestland, and most farmers supplemented their earnings by selling lumber or by working in the forest industries during the winter. Although rivers and lakes covered about 9 percent of Finland, and the country had extensive coastal waters, fishing was not an important source of food or employment.
The Ministry of Agriculture and Forestry was responsible for policies dealing with agriculture, forestry, and fishing. Recognizing the close links among these sectors, the government considered that policies should offer integrated solutions to the problems of managing the country's resources.
Finland's climate and soils make growing crops a particular challenge. The country lies between 60° and 70° north latitude-- as far north as Alaska--and has severe winters and relatively short growing seasons that are sometimes interrupted by frosts. However, because the Gulf Stream and the North Atlantic Drift Current moderate the climate, Finland contains half of the world's arable land north of 60° north latitude. Annual precipitation is usually sufficient, but it occurs almost exclusively during the winter months, making summer droughts a constant threat. In response to the climate, farmers have relied on quick-ripening and frost-resistant varieties of crops, and they have cultivated south-facing slopes as well as richer bottomlands to ensure production even in years with summer frosts. Most farmland had originally been either forest or swamp, and the soil had usually required treatment with lime and years of cultivation to neutralize excess acid and to develop fertility. Irrigation was generally not necessary, but drainage systems were often needed to remove excess water.
Until the late nineteenth century, Finland's isolation required that most farmers concentrate on producing grains to meet the country's basic food needs. In the fall, farmers planted rye; in the spring, southern and central farmers started oats, while northern farmers seeded barley. Farms also grew small quantities of potatoes, other root crops, and legumes. Nevertheless, the total area under cultivation was still small. Cattle grazed in the summer and consumed hay in the winter. Essentially self-sufficient, Finland engaged in very limited agricultural trade.
This traditional, almost autarkic, production pattern shifted sharply during the late nineteenth century, when inexpensive imported grain from Russia and the United States competed effectively with local grain. At the same time, rising domestic and foreign demand for dairy products and the availability of low-cost imported cattle feed made dairy and meat production much more profitable. These changes in market conditions induced Finland's farmers to switch from growing staple grains to producing meat and dairy products, setting a pattern that persisted into the late 1980s.
In response to the agricultural depression of the 1930s, the government encouraged domestic production by imposing tariffs on agricultural imports. This policy enjoyed some success: the total area under cultivation increased, and farm incomes fell less sharply in Finland than in most other countries. Barriers to grain imports stimulated a return to mixed farming, and by 1938 Finland's farmers were able to meet roughly 90 percent of the domestic demand for grain.
The disruptions caused by the Winter War and the Continuation War caused further food shortages, especially when Finland ceded territory, including about one-tenth of its farmland, to the Soviet Union. The experiences of the depression and the war years persuaded the Finns to secure independent food supplies to prevent shortages in future conflicts.
After the war, the first challenge was to resettle displaced farmers. Most refugee farmers were given farms that included some buildings and land that had already been in production, but some had to make do with "cold farms," that is, land not in production that usually had to be cleared or drained before crops could be sown. The government sponsored large-scale clearing and draining operations that expanded the area suitable for farming. As a result of the resettlement and land-clearing programs, the area under cultivation expanded by about 450,000 hectares, reaching about 2.4 million hectares by the early 1960s. Finland thus came to farm more land than ever before, an unusual development in a country that was simultaneously experiencing rapid industrial growth.
During this period of expansion, farmers introduced modern production practices. The widespread use of modern inputs-- chemical fertilizers and insecticides, agricultural machinery, and improved seed varieties--sharply improved crop yields. Yet the modernization process again made farm production dependent on supplies from abroad, this time on imports of petroleum and fertilizers. By 1984 domestic sources of energy covered only about 20 percent of farm needs, while in 1950 domestic sources had supplied 70 percent of them. In the aftermath of the oil price increases of the early 1970s, farmers began to return to local energy sources such as firewood. The existence of many farms that were too small to allow efficient use of tractors also limited mechanization. Another weak point was the existence of many fields with open drainage ditches needing regular maintenance; in the mid-1980s, experts estimated that half of the cropland needed improved drainage works. At that time, about 1 million hectares had underground drainage, and agricultural authorities planned to help install such works on another million hectares. Despite these shortcomings, Finland's agriculture was efficient and productive--at least when compared with farming in other European countries.
Finland's agriculture was based on privately owned family farms. This was especially the case after 1922, when the republic, anxious to reduce rural discontent, implemented the first of a series of land reforms that redistributed land to tenants and to landless farm workers. After World War II, the government resettled some 40,000 farm families displaced from areas occupied by the Soviet Union. The postwar resettlement program also transferred land to farms considered too small for efficient operations, many of which had been set up in the interwar period.
As a result of the resettlement program, Finland was one of the few industrialized countries in which the number of farms increased after 1945; by 1950 there were about 260,000 farms. The number of farms started to decline in the 1960s, however, falling to about 200,000 by 1981. The decrease in the number of farms caused an increase in average farm size, but large farms still remained rare. Thus, in the mid-1980s, about 60 percent of farms covered less than ten hectares, 25 percent included between ten and twenty hectares, and only 15 percent occupied more than twenty hectares. At that time, both large and small farms were disappearing, leaving an increasing number of farms that were between ten and twenty hectares. Observers predicted that this trend was likely to continue.
In the late 1980s, the average farm comprised twelve hectares of arable land and thirty-five hectares of forest. The relative proportions of field holdings to forest holdings varied from region to region; in the south, farmers tended to own more arable land but less forest, while in the north, the reverse was true. Farm families formed the basic production unit. Family members provided about 95 percent of farm labor; wage earners supplied the remainder. Most farms specialized in one or two activities, such as hog production, dairy farming, or grain cultivation. Although in the early postwar years most farms produced some milk, by the early 1980s only one out of three farms did so, and about half of all farms had no farm animals. This tendency toward specialization increased the efficiency of Finland's relatively small production units.
Farm incomes lagged behind those of the total population. For example, according to a 1984 study, the average income of fulltime farmers totaled only 70 percent of that of industrial workers. Nevertheless, income disparities between agriculture and other sectors were probably less severe than these figures indicate because many farm families supplemented their incomes with earnings from forestry and other occupations. In the mid1980s , only 62 percent of farmers' incomes came from agriculture, while another 26 percent was derived from wages and 12 percent was earned from forestry.
Farmers had a strong tradition of practical and political cooperation. In the late 1980s, some 90 percent of Finnish farmers belonged to agricultural unions, which were divided between those for Finnish speakers and those for Swedish speakers. More than 330,000 union members belonged to 430 Finnish-language locals or to 80 Swedish-language locals. Founded in 1917, the Confederation of Agricultural Producers (Maataloustuottajain Keskusliitto--MTK) served as an umbrella organization for agricultural unions, and it represented farmers in agricultural price negotiations with the government and with other producer groups.
In addition to joining unions that helped influence farm policy, farmers had established cooperative associations that provided farm supplies, shared marketing expenses, and arranged farm financing. The umbrella organization of farm cooperatives was the Pellervo Society, which had more than a million members. Each branch of agriculture organized its own cooperatives to handle sales of farm products and purchases of supplies. Cooperative banks provided about half of all money used to finance farming, and cooperative insurance associations handled farm and crop insurance.
Finland's agricultural policy has long been inspired by more than purely economic considerations. The need to maintain secure food sources caused the Finns to subsidize uncompetitive grain production rather than to allow further specialization in dairy and meat operations. Social concerns drove policies designed to maintain family farms and to give farmers incomes and working conditions more equal to those of other workers. The desire to maintain settlements in the sparsely populated northern provinces led to heavy subsidies for farmers in those regions. Other goals included stabilizing retail food prices and increasing farm size and efficiency.
In the late 1980s, agricultural policy making involved tradeoffs among these partially contradictory objectives. For national security reasons, the government gave priority to ensuring selfsufficiency in basic foodstuffs. But self-sufficiency, like other farm-policy goals, resulted in costly agricultural surpluses that had to be dumped on international markets. Structural reforms, designed to increase farm size, could improve efficiency, strengthen family farms, and increase farm incomes, but they were difficult to implement.
By the early 1960s, the first goal--self-sufficiency--had been achieved. By the late 1970s, however, surplus production had become a pressing problem. According to government estimates made in the early 1980s, crop productivity would increase by about 1.5 percent per year, and productivity in animal husbandry would increase by about 0.5 percent per year. Because Finland's consumption of agricultural products was stagnant, crop and animal surpluses would therefore continue to grow--unless agricultural prices were reduced.
In the late 1970s, the government stepped up programs designed to encourage farmers to shift production from products in surplus, such as eggs, milk, and meat, to products that replaced imports, such as wheat, sugar, and vegetables. Starting in the mid-1980s, worldwide agricultural surpluses depressed prices and made agricultural exports especially expensive. In response, the government redoubled its efforts to control output and to encourage reforestation of surplus farmland. This policy had begun to make a significant impact by 1987.
Agricultural policy centered on target prices set by the Ministry of Agriculture and Forestry each spring and fall, after negotiations with the MTK. Administered under the periodic farm income acts, which defined general rules for setting farm prices, the negotiations included two phases. In the first phase, farmers received compensation for increases in input costs according to a formula laid out in the applicable Farm Income Act. In the second phase, the negotiations addressed how much farm labor would be paid. In general, farm pay settlements reflected nonagricultural wage agreements, and they were based on estimated hourly wages in agriculture. For example, in the spring of 1986 farmers received no compensation for input costs, which had been stable (largely as a result of falling world energy prices), but they did achieve a 6.1 percent increase in income, much higher than the 2.4 percent agreed to in the 1986 framework agreement for other workers. Observers considered the settlement to have been generous, but perhaps justified, because agriculture remained a low-wage sector.
Once the negotiation process had determined overall farm income, the Ministry of Agriculture and Forestry fixed target prices for individual crops. In response to overproduction problems, the ministry reduced prices for surplus products and required that farmers pay part of the costs of subsidizing exports. Programs to reduce surpluses by lowering target prices achieved only limited results, however, because increases in productivity often outweighed declines in target prices. The ministry established a dual-price system for milk and eggs, which made production beyond output quotas unprofitable, and implemented a number of voluntary production controls, including contracts to increase fallow land or to limit production of milk, beef, pork, and eggs. In the summer of 1987, the government prohibited clearing fields, introduced measures to encourage reforestation, and began considering heavier taxes on the agricultural earnings of part-time farmers as well as increased pensions for farmers who agreed to retire early.
Subsidies for agricultural consumption were partially effective in increasing demand for surplus products. Health concerns, however, apparently limited consumers' willingness to eat more dairy and meat products. Surplus-reduction measures were having some effect by the late 1980s, but in 1987 farm surpluses remained a serious problem.
Structural reforms also received considerable attention. To slow the growth of large, "industrial" farms, the government required licenses for farms that exceeded certain production levels, hoping that limiting the size of farms would both reduce surpluses and help maintain family farms. The Agricultural Development Fund provided low-interest loans and subsidies for investments in farm infrastructure; most of the loans from this fund went to farmers in northern Finland. Small farmers who wanted to enlarge their farms could also receive low-interest credits. In an effort to keep new farmers from falling into debt, the government also allowed farmers under the age of thirty-five to apply for state grants when they established a farm. Moreover, the state tried to make farming more attractive to young people by providing outside helpers to take over farm operations temporarily. This arrangement facilitated maternity leaves and even annual vacations.
Farmer training programs, crop research, and extension services helped farmers to improve agricultural practices. Local schools provided agricultural training for youths who could later attend specialized schools; university students could major in agriculture. The Ministry of Agriculture and Forestry and the universities undertook research projects that emphasized the development of frost-resistant crop varieties. The ministry also administered extension services that gave technical advice and communicated research findings to farmers. These training and research programs deserved much of the credit for the progress that farmers had achieved during the postwar period.
During most of the twentieth century, Finnish farmers have favored raising animals over growing plants for human consumption. These preferences resulted in part from the country's climate and soils, which were more suitable for the production of feed for animals than for the production of crops for human consumption. The small size of many farms also encouraged the emphasis on milk, eggs, and meat; only on a large farm could a family earn sufficient income from less laborintensive field crops. Thus, in the late 1980s, about 40 percent of farm income came from milk; 30 percent, from meat; 9 percent, from grain; 5 percent, from eggs; and 16 percent, from other products.
Regional ecological variations influenced the distribution of agricultural production. In the southern and western parts of the country, where the climate is more favorable and soils are richer, farmers generally produced grain, poultry, and pigs, while in the north and the east they specialized in hardier root crops and in dairying. It was in the north, too, that the country's 200,000 reindeer, one-third of which were owned by Lapps were raised.
In the late 1980s, cattle operations remained the mainstay of farming, but Finland's farmers also raised pigs, poultry, and other animals. Most pigs were raised on relatively large, specialized farms. Poultry production increased after the mid1960s to accommodate an increased demand for meat. A more recent development, a response to the oversupply of traditional animal products, was a shift to fur farming. By the mid-1980s, about 6,000 farms, especially those in Vaasa Province along the coast of the Gulf of Bothnia, were producing a substantial share of the world's mink and fox furs. The Finns exported most furs, but some were used domestically in luxury clothing.
About 85 percent of Finland's arable land supplied feed for farm animals. Farmers dedicated more than 30 percent of their land to hay, silage crops, and pasture. Grains, the most important field crop, took up slightly more than half the country's arable land. The most widely planted grain crops--barley and oats--were used primarily to feed livestock. Rutabagas and mangels, particularly hardy root crops, also served as animal feed.
Despite the emphasis on producing feed for livestock, the Finns made substantial efforts to ensure supplies of basic human foodstuffs. By the 1980s, the annual wheat and rye crops, used for making bread, met domestic demand in years with normal harvests. Potatoes produced high yields even in the north, and the potato crop was usually large enough for domestic needs. Domestic sugar beets provided about half of the sugar consumed in the country. Some farmers, especially those with small holdings near large cities, specialized in growing vegetables; they managed to raise as much as 80 percent of the vegetables consumed in Finland.
Forests played a key role in the country's economy, making it one of the world's leading wood producers and providing raw materials at competitive prices for the crucial wood-processing industries. As in agriculture, the government had long played a leading role in forestry, regulating tree cutting, sponsoring technical improvements, and establishing long-term plans to ensure that the country's forests would continue to supply the wood-processing industries.
Finland's wet climate and rocky soils are ideal for forests. Tree stands do well throughout the country, except in some areas north of the Arctic Circle. In 1980 the forested area totaled about 19.8 million hectares, providing 4 hectares of forest per capita--far above the European average of about 0.5 hectares. The proportion of forest land varied considerably from region to region. In the central lake plateau and in the eastern and northern provinces, forests covered up to 80 percent of the land area, but in areas with better conditions for agriculture, especially in the southwest, forests accounted for only 50 to 60 percent of the territory. The main commercial tree species--pine, spruce, and birch--supplied raw material to the sawmill, pulp, and paper industries. The forests also produced sizable aspen and elder crops.
The heavy winter snows and the network of waterways were used to move logs to the mills. Loggers were able to drag cut trees over the winter snow to the roads or water bodies. In the southwest, the sledding season lasted about 100 days per year; the season was even longer to the north and the east. The country's network of lakes and rivers facilitated log floating, a cheap and rapid means of transport. Each spring, crews floated the logs downstream to collection points; tugs towed log bundles down rivers and across lakes to processing centers. The waterway system covered much of the country, and by the 1980s Finland had extended roadways and railroads to areas not served by waterways, effectively opening up all of the country's forest reserves to commercial use.
Forestry and farming were closely linked. During the twentieth century, government land redistribution programs had made forest ownership widespread, allotting forestland to most farms. In the 1980s, private farmers controlled 35 percent of the country's forests; other persons held 27 percent; the government, 24 percent; private corporations, 9 percent; and municipalities and other public bodies, 5 percent. The forestlands owned by farmers and by other people--some 350,000 plots--were the best, producing 75 to 80 percent of the wood consumed by industry; the state owned much of the poorer land, especially that in the north.
The ties between forestry and farming were mutually beneficial. Farmers supplemented their incomes with earnings from selling their wood, caring for forests, or logging; forestry made many otherwise marginal farms viable. At the same time, farming communities maintained roads and other infrastructure in rural areas, and they provided workers for forest operations. Indeed, without the farming communities in sparsely populated areas, it would have been much more difficult to continue intensive logging operations and reforestation in many prime forest areas.
Finland's government monitored and influenced all aspects of forestry. The Ministry of Agriculture and Forestry was responsible for preparing and implementing forestry legislation. Subordinate to the ministry, the National Board of Forestry supervised private forests and managed state-owned forests. The national board also maintained liaison with the two central forestry boards, which in turn controlled a total of nineteen district forestry boards. The central and the district boards were self-governing bodies comprising representatives of the forest owners, wood-processing industries, and forestry workers. The boards supervised forest operations, often working in cooperation with the local forest management associations, which were entirely controlled and financed by forest owners.
The ministry carried out forest inventories and drew up silvicultural plans. According to surveys, between 1945 and the late 1970s foresters had cut trees faster than the forests could regenerate them. Nevertheless, between the early 1950s and 1981, Finland was able to boost the total area of its forests by some 2.7 million hectares and to increase forest stands under 40 years of age by some 3.2 million hectares. Beginning in 1965, the country instituted plans that called for expanding forest cultivation, draining peatland and waterlogged areas, and replacing slow-growing trees with faster-growing varieties. By the mid-1980s, the Finns had drained 5.5 million hectares, fertilized 2.8 million hectares, and cultivated 3.6 million hectares. Thinning increased the share of trees that would produce suitable lumber, while improved tree varieties increased productivity by as much as 30 percent.
Comprehensive silvicultural programs had made it possible for the Finns simultaneously to increase forest output and to add to the amount and value of the growing stock. By the mid-1980s, Finland's forests produced nearly 70 million cubic meters of new wood each year, considerably more than was being cut. During the postwar period, the annual cut increased by about 120 percent to about 50 million cubic meters. Wood burning fell to one-fifth the level of the immediate postwar years, freeing up wood supplies for the wood-processing industries, which consumed between 40 million and 45 million cubic meters per year. Indeed, industry demand was so great that Finland needed to import 5 million to 6 million cubic meters of wood each year.
To maintain the country's comparative advantage in forest products, Finnish authorities moved to raise lumber output toward the country's ecological limits. In 1984 the government published the Forest 2000 plan, drawn up by the Ministry of Agriculture and Forestry. The plan aimed at increasing forest harvests by about 3 percent per year, while conserving forestland for recreation and other uses. It also called for enlarging the average size of private forest holdings, increasing the area used for forests, and extending forest cultivation and thinning. If successful, the plan would make it possible to raise wood deliveries by roughly one-third by the end of the twentieth century. Finnish officials believed that such growth was necessary if Finland was to maintain its share in world markets for wood and paper products.
Unlike other Nordic countries, in the late 1980s Finland had few fishermen, and the fishing industry was small. Finland's coastal waters offered poor fishing grounds because of their low salt content (caused by the heavy flow from the country's many rivers). Rivers and lakes were often relatively unproductive because stream runoff often contained insufficient nutrients. In addition, those inland waterways that did support exploitable fish populations were often located too far from market centers to make commercial fishing profitable. Log-floating operations and hydroelectric installations disrupted some fishing grounds, and the paper industry polluted others.
The poverty of Finland's waters explained why, despite considerable government aid, relatively few Finns were Fishermen. In 1985, for example, only 2,200 fishermen worked full-time, while another 5,000 worked part-time; they used a fleet of about 530 boats. That same year, the fish catch totaled some 111,000 tons, of which roughly two-thirds were salt-water fish, and onethird were fresh-water fish. Baltic herring was the most valuable catch, followed by salmon. A share of the catch came from Soviet and Swedish waters, to which Finland had gained access under bilateral agreements.
Unable to meet domestic demand, Finland had to import about 300,000 tons of fish each year, including large amounts of fish offal that was used as feed on fur farms. Demand for fish was thus relatively strong, but observers believed that, given the country's poor fisheries, it was likely that the small fishing industry would become even smaller.
Finland lacked petroleum, gas, and coal reserves, but it had significant mineral deposits. As in many industrial countries, low-cost imported petroleum fueled economic growth from the end of World War II until the 1973 oil crisis. Finland's forest industries, which were heavy energy users, had developed in the context of low energy prices. Even the achievement of agricultural self-sufficiency owed much to energy imports, in the form of either fuel for tractors or chemical fertilizers. From the 1970s, Finland's economy had to adjust to high energy costs. Finnish policy makers therefore had to ensure that the country used its other resources, including its mineral deposits, as efficiently as possible.
Even before the 1973 oil crisis, energy was a major concern, and Finland had started energy-saving programs meant to cut dependence on imports and to maintain export competitiveness. Nevertheless, the country had one of the world's highest per capita rates of energy consumption. The cold climate required that the Finns expend about a quarter of their energy supply for space heating, while the relatively long distances separating Finland's settlements required heavy fuel use for transportation. The importance of energy-intensive processing industries, including not only the lumber, pulp, and paper sectors but also the minerals and basic metals sectors, further expanded the country's energy needs. In the late 1980s, Finland consumed about 30 million tons of oil equivalent per year, distributed among solid fuels (15 percent), liquid fuels (40 percent), and electricity (45 percent), which put annual per capita consumption at 0.6 tons of oil equivalent--about 50 percent higher than per capita consumption in the United States.
Domestic sources could cover only about 30 percent of total energy demand, and imported energy supplied the remainder. In 1986 the government estimated that, even assuming continued efforts at conservation, energy demand would grow by at least 1 percent per year during the 1990s and that demand for electricity would grow even faster. By the late 1980s, policy makers faced important choices in their efforts to maintain secure supplies of electricity and other forms of energy. Four major goals governed policy decisions: increasing the use of domestic energy sources, providing for possible import shortages, expanding electricity production, and improving conservation programs.
The state played a strong role in energy management. The government used state-owned energy enterprises and price controls to influence both production and consumption. The state owned the most important energy supply enterprises, including Imatran Voima, the largest electricity producer, which managed the national electricity distribution grid; Kemijoki, a hydropower concern; Neste, which controlled the import, refining, and distribution of petroleum and natural gas; and Vapo, a producer and distributor of peat and other domestic fuels. Another major policy tool was the control of energy prices, either directly or by means of taxes and tariffs.
Finland's main domestic energy sources were hydroelectric power, peat, and wood. By the late 1980s, the country's large hydroelectric potential had been thoroughly tapped, except possibly for the rivers protected by environmental legislation. Nevertheless, hydroelectric production could still be increased by renovating existing installations and by building additional plants at secondary sites. Encouraged by investment subsidies and by the results of state-funded research, Finland had begun systematic exploitation of its peat reserves. Peatlands covered more than one-third of Finland's surface area, but in the mid1980s only about 5 percent of this area was being used. The government hoped to more than double peat output by the year 2000. Wood was widely used for heating in rural areas, especially after the oil price increases of the 1970s; it was even more important for the forest industries, which used waste wood to supply about 60 percent of their energy needs.
Despite increased use of domestic energy sources, the economy depended on imports of petroleum, coal, natural gas, uranium, and electricity. Observers expected that this dependence would get worse in the 1990s and beyond as consumption increased. Moreover, the fall in world petroleum prices, starting in the early and mid-1980s, had made oil imports more competitive and thus might delay investments in domestic energy sources.
The Soviet Union was traditionally Finland's main energy supplier, providing petroleum, natural gas, electricity, uranium, and even nuclear fuel reprocessing services. Energy products played an important role in Finnish-Soviet trade, accounting for about 80 percent of Soviet exports to Finland. The decline in world petroleum prices in the 1980s meant that Finland had to increase the volume of petroleum imports from the Soviet Union in order to maintain the level of sales to the Soviet market. To respond to the resulting oversupply of crude petroleum, Neste began refining oil for export. Finland's imports of Soviet natural gas transited a pipeline to the southeastern part of the country, with branches leading to the Helsinki and the Tampere areas. In the late 1980s, Finland participated in discussions regarding the construction of a Nordic gas pipeline network that was designed primarily to transport Soviet gas to other Nordic countries but that might also carry Norwegian gas to Finland.
The Finns reduced their dependence on Soviet energy by patronizing other suppliers. For example, during the late 1980s, the Finns began importing coal not only from Poland and the Soviet Union but also from the United States, Colombia, and Australia. Coal imports had declined in the late 1970s as a result of rapid increases in the generation of electricity from nuclear plants, but they rose again by the mid-1980s to some 5 million tons per year. Finland also purchased electricity from Sweden, and the Finns were interested in finding other sources for electricity imports.
To reduce further their vulnerability to cutoffs of foreign energy supplies, the Finns also undertook an energy stockpiling program. Informed observers believed that the country maintained stocks sufficient to supply it for six months, which compared favorably with stockpiles held by other industrial countries.
Experts predicted that Finland would face an electricity shortage by the mid-1990s, unless additional generating capacity came into operation by then. Electricity consumption had grown faster than energy use as a whole during the 1980s, largely because more and more households had switched to electric heating. In the late 1980s, most observers expected that demand would rise by 2 to 3 percent per year until the year 2000. Finland's growing needs for electric power spurred attempts to increase domestic generating capacity, which in early 1986 had reached 10,700 megawatts. In the late 1980s, hydroelectric plants supplied approximately 30 percent of total electric power. Finland produced about 41 percent of its electricity at four nuclear power plants built between 1977 and 1980: two Swedishmade , 660-megawatt, boiling-water reactors on the island of Olkiluoto; and two Soviet-made, 440-megawatt, pressurized-water reactors at Loviisa. Conventional thermal plants accounted for another 22 percent of electricity production, and imports from neighbors covered the remaining 6 percent.
In early 1986, the Ministry of Trade and Industry prepared a plan for the 1990s that called for increasing installed electrical capacity by about 2,700 megawatts by the year 2000. About 1,200 megawatts of the new capacity was to come from small plants scattered around the country. Another 1,500 megawatts would have to come from large plants--peat-fired, coal-fired, and nuclear. According to the plan, Finland could either import another 500 megawatts from the Soviet Union or further expand nuclear capacity.
In the spring of 1986, the Eduskunta almost approved the plan, including the construction of a fifth nuclear plant. Public reaction to the nuclear disaster at Chernobyl in the Soviet Union froze consideration of nuclear power, however, and induced a complete review of energy policy. Public pressure caused the government to replace the proposed plant with coal-fired plants. Despite this setback to the nuclear industry, informed observers believed it probable that Finland would increase its nuclear capacity in the 1990s, once public opposition had died down.
Since the 1970s, the government has made considerable efforts to spur energy conservation. Domestic energy prices have been maintained at realistic levels--gasoline prices were among the highest in all European countries--encouraging the public to conserve. The government raised energy efficiency standards for home construction and renovation, cutting energy use for heating by 30 to 40 percent over a decade. Finland pioneered the development of district heating, which used otherwise-wasted energy from power plants. Observers predicted that this efficient source of domestic heat would supply half the country's homes by the year 2000. Environmentalists believed that further energy savings could be achieved that would reduce the need for building more power plants, but mainstream opinion supported continued increases in energy production to support economic growth. Yet no matter how much Finland conserved, the country would still need to import large amounts of energy and would face difficult tradeoffs between the benefits and the risks and costs of various energy options.
Finland contained only limited mineral deposits, and it coninued to be only a modest producer of minerals. The country's most important deposits were located at Outokumpu in eastern Finland. Discovered in 1910, the Outokumpu area contained commercially exploitable deposits of copper, iron, sulfur, zinc, cobalt, nickel, gold, and silver. In 1953 prospectors discovered a major source of iron ore at Otanmaki in central Finland. Other sites yielded nonmetallic minerals, including pyrites and apatite (a low-grade phosphoric ore used for fertilizer production), and stone for building. The mineral industry employed more than 60,000 people, but only 500 of them were in mining and quarrying; the others worked in mineral processing.
The government intervened directly in the mineral sector. Under Finnish law, the Ministry of Trade and Industry controlled prospecting and mining rights. The ministry's Geological Survey dominated prospecting, and it had made most major mineral discoveries. The ministry controlled most production through joint-stock companies, in which the state owned most or all of the shares, but in which the management ran the companies much like private firms. The industry comprised two large, statecontrolled companies, the Outokumpu Group and Rautaruukki, and a number of smaller, generally private companies. The Outokumpu Group, by far the largest producer, operated the Outokumpu mines, as well as others producing cadmium, chromite, ferrochrome, mercury, pyrite, and zinc. The company also invested in foreign mines and produced mining equipment. Rautaruukki controlled the Otanmaki iron mine, other mines producing cobalt, quartz, and vanadium, and Finland's largest steel plant.
By the mid-1980s, Finland had exploited most of its limited mineral deposits and had to work hard to supply its processing industries. The Geological Survey had undertaken an extensive exploration program to find new resources. Finnish firms had purchased interests in mineral operations in other Scandinavian countries, and they had participated in joint ventures with Soviet enterprises to exploit the rich mineral deposits on the Kola Peninsula. The leading companies had also developed vertically integrated structures, investing in all stages of metal production from the design and production of mining equipment to metal processing. The Outokumpu Group, for example, was one of the few firms in the world that controlled all aspects of the production of stainless steel. Industry leaders hoped that, as mining output fell during the later years of the twentieth century, overseas investments and vertical integration would make it possible to maintain employment despite the exhaustion of domestic mineral resources.
Although industrial development began later in Finland than it did in many other European countries, by the 1950s manufacturing and processing had replaced agriculture and forestry as the leading sectors of the economy. By the late 1970s, the service sector had surpassed industry in total production and employment, but industry remained the main export earner, allowing the country to pay for needed imports of energy and raw materials. Labor efficiency was greater in industry than it was in the economy as a whole--the one-third of the work force employed in industry produced about 40 percent of GDP--and it continued to grow at a higher rate here than it did in other sectors. In turn, industrial wages tended to be higher and to rise faster than the national average, making industrial jobs attractive. Thus, although some observers categorized Finland as a postindustrial society, the Finns strove to maintain industrial competitiveness, which they saw as the foundation for their high standard of living. By the early 1980s, however, as a result of the oil crises of the 1970s and the increased competition in world markets for manufactured goods, Finnish industry faced serious challenges. Many observers argued that to maintain industrial exports, the Finns would have to shift from heavy industry to high-technology products.
The geographical distribution of industry had been strongly influenced by the relative shortage of raw materials (other than lumber) and by the small size of the domestic market. The woodprocessing industries had grown up on rivers near the coast of the Gulf of Bothnia and the Gulf of Finland, in locations that offered sources of both lumber and hydroelectric power as well as access to foreign markets. As many raw materials were imported and most industrial production was exported, other industries had grown up in the four southern provinces, especially near Finland's main harbors along the southern coast. Although the government had implemented policies that favored development in the north during the postwar period, in the late 1980s more than 70 percent of industrial jobs were still located in the south. In the long run, the development of high-technology industries, less dependent on transportation and energy supplies, might facilitate efforts to decentralize industry, but such development would be gradual.
Once dominated by the forest industries, Finnish industry underwent rapid structural change after World War II. A boom in metalworking began in the immediate postwar years in response to the need to ship capital goods, including machine tools, ships, rolling stock, and chemicals, to the Soviet Union. By the mid-1950s, heavy industry had taken over the leading role traditionally held by wood products. Beginning in 1957, Finland began to liberalize its trade policies, forcing domestic industry to compete in world markets and bringing new industries to the fore, especially metalworking and engineering, but also petroleum refining, chemicals, plastics, and high-technology goods.
Guided by domestic and foreign tastes and by fierce international competition, industrial firms had developed a wide range of products and had maintained quality standards that were often higher than those typical of industry in the United States. Aware of the relatively small size of their industry, industrial leaders and government officials aimed successfully for technological leadership in narrowly defined subsectors in which Finland enjoyed comparative advantages. Since the 1950s, Finnish firms have been able to dominate world markets for products such as icebreakers, wood-processing and paper-processing machinery, and environmental protection equipment. Buyers of such products were often less sensitive to price increases than they were to technical innovations, quality, and durability. At the same time, Finland had avoided some of the structural weaknesses, such as excessive investments in declining product lines, that plagued the other Nordic economies.
Finland's industrial structure traditionally was polarized between large and small firms. In the early 1980s, the vast majority of Finland's 15,000 industrial firms each employed fewer than 100 people. These small firms accounted for only about onefifth of the industrial work force and for slightly more than one-fifth of the value of industrial output. The approximately 130 firms that employed more than 500 people apiece commanded about 60 percent of the labor force and produced about two-thirds of industrial output. During the mid-1980s and the late 1980s, a wave of mergers further reduced the market share of small firms. Although industry was thus quite concentrated, the flexibility and innovativeness of small firms had often proven crucial, and observers believed that small firms would continue to serve important entrepreneurial functions.
Despite many notable successes, industry faced new difficulties in the 1970s and the 1980s, in addition to increases in world energy prices. By the late 1970s, industrial firms faced tougher foreign competition and had to scramble to maintain their shares of export markets. To ensure competitiveness, industry needed to renovate existing plants and to increase sharply investments in high-technology product lines that could supplement traditional specialties.
Industrial capital formation was a major priority. Although Finland's relatively recent industrial development meant that many industrial facilities were still relatively new and efficient, the drive to develop high-technology production required massive investments. Industrial firms carried a debt load that averaged about 80 percent of total assets, making further investment difficult. In the late 1980s, however, a number of developments promised to improve industrial financing. Helsinki's financial markets were becoming more innovative, and informed observers expected that the state would cut taxes on corporate profits, would eliminate taxes on industrial energy consumption, and would increase tax credits offered for research and development expenditures. Despite these positive developments, however, industry needed to attract more resources from abroad if it were to remain competitive in world markets.
Finland's industry had long depended on world markets, but until the 1980s direct foreign investment in Finland had played only a minor role. The country hosted significantly fewer foreign firms than its Nordic neighbors, partly as a result of limitations on foreign ownership of Finnish assets. Such regulations had been relaxed after 1980, but foreign firms still controlled only about 5 percent of industrial capacity. Finnish firms likewise began to invest abroad in the 1970s. Thus, whereas in 1970 only 5 Finnish firms had invested in the United States, by 1987 about 250 had done so. By the late 1980s, internationalization had begun to supplant the traditional strategy of specialization, as more and more firms entered joint ventures with foreign partners and built plants in countries to which they exported. The trend toward internationalization offered the prospect that Finland would be able to attract additional capital and up-to-date technologies.
The state had played an important role in Finland's industrial development, but it did not intervene directly so much as many other European governments. Intervention in industry began in the mid-nineteenth century, and it increased over time. Tariff policy and government procurement, the latter being especially important during the two world wars, furthered the development of manufacturing. The government's influence was probably most important in the years after 1944, when Finland struggled to make reparations payments to the Soviet Union. Partially as a legacy of this period, the state controlled companies that owned about 15 percent of manufacturing capacity, employed about 14 percent of the work force, and contributed about 25 percent of industrial value added. The state was especially active in sectors requiring heavy investments, such as basic metals and shipbuilding. These state-owned firms, however, did not receive government subsidies; if unprofitable, they failed. Thus, while the state controlled most prices and implemented long-term sectoral plans in agriculture, forestry, energy, and minerals, state-owned firms in manufacturing remained largely free to manage their own affairs.
In the late 1980s, Finnish industrial policy continued to be considerably less interventionist than the policies of most West European countries. The government's strategy for industries that were having difficulty favored rationalization and restructuring instead of subsidies. Industry was encouraged to step up investments to increase productivity and to arrange mergers with domestic and foreign interests to increase efficiency. Policy makers argued that industry, as a small sector (compared with that of many other countries) open to private investment but dependent on exports, must adjust to international conditions.
Despite this hands-off approach, the government did subsidize the research and development of new industrial technologies. Research and development expenditures had remained low until the 1980s, reaching only slightly more than 1 percent of GNP in 1980. After that time, however, the government increased such spending, which exceeded 2 percent of GNP by the late 1980s. The State Technical Research Institute in Otaniemi, founded in 1942, played an important role in providing industry with up-to-date information on new technologies; its maritime engineering laboratory was one of the largest and best equipped in the world. In 1984 the Ministry of Trade and Industry initiated a four-year program of research on target technologies, including applications of laser technology to machine engineering, advanced measurement techniques, and offshore construction techniques for arctic conditions. The government also sponsored technology parks, such as the one at Oulu, that provided facilities for cooperative research projects involving industry and local universities. In addition, investments in technical training promised a continuing supply of workers able to maintain the quality, durability, and dependability of Finnish industrial goods.
Wood processing has long been the mainstay of the Finnish economy. Facilitated by extensive timber supplies, convenient transportation, and abundant water power, lumbering and papermaking developed rapidly after 1860 to meet growing European demand for paper products and lumber. Production and export patterns established before 1900 lasted until the second half of the twentieth century; in the 1950s, wood and paper products accounted for some 80 percent of total exports. By the 1980s, however, although the sector had continued to expand in absolute terms, its share of exports had fallen to about 40 percent as a result of the rapid growth of the metalworking sector, which had surpassed woodworking in both value added and employment in 1969.
Despite this relative decline, forest products were still the country's most important earner of foreign exchange in the late 1980s. Roughly four-fifths of wood and paper production was sold abroad, while most raw materials--including energy--were produced at home; and, although the sector contributed only about onefifth of industrial value added, it still accounted for about one-quarter of industrial employment.
Analysts conventionally divided the woodworking industries into two branches, mechanical and chemical, depending on the primary means of processing in each branch. The mechanical branch comprised milling, manufacturing of plywood and particle board, and fabrication of furniture and building components. In 1986 the branch included some 200 large sawmills that produced most exports and some 6,000 small mills that met local needs. Products of the chemical branch included pulp and paper, cardboard, and packaging materials. In 1986 the chemical branch encompassed twenty-four pulp mills, thirty paper plants, and sixteen cardboard factories. The division between the two branches was somewhat artificial, however, as many leading firms operated integrated plants in which sawdust, waste wood, and chemical byproducts of mechanical processes served as raw materials for such chemical products as pulp and turpentine. Industrial waste also supplied a large share of the industry's needed energy, making the chemical branch self-sufficient and reducing the energy demands of the mechanical branch.
Finnish manufacturers had long been leaders in developing new wood-processing technologies. Several firms had developed their own shops for machine building, and their highly efficient papermaking equipment had captured an important share of world markets.
In the 1980s, Finland's wood industries experienced increasing difficulties in exporting, largely as a result of rising input costs. Wages and stumpage (value of standing timber) rates were traditionally higher in Finland than they were in many competitor countries. Moreover, by the early 1990s analysts believed that the mechanical branch, which consumed about onethird of Finland's electricity, might face an energy shortage because of the 1986 decision not to build a fifth nuclear plant. In response, firms modernized their plants and shifted to higher-value-added products.
In the mid-1980s, interfirm cooperation and a wave of mergers resulted in concentration of production at a smaller number of centers, and observers expected that industry restructuring would continue into the 1990s. An increasing tendency to build plants overseas, which improved access to Finland's main markets, complemented the merger drive. The government had stepped in with the Forest 2000 program and with a system of tax incentives for logging, both of which were designed to allow wood harvests to increase by about 3 percent per year until the end of the century. By 1986, moreover, representatives for workers and landowners, apparently recognizing some of the difficulties faced by the industry, had negotiated decreases in both wages and stumpage prices.
The metal industries led Finland's postwar economic development, and they were crucial to the country's economic health. Until World War II, Finland generally produced relatively unsophisticated goods for domestic consumption. The country's shortages of energy, basic metals, and capital accounted for the sector's slow development. Although Finland had produced ships and other capital goods for the Russian market since the late nineteenth century, the real breakthrough came after 1944. Then the metalworking industry, goaded by Soviet reparations demands, overcame its handicaps, sharply increasing both the the quantity and quality of output. Reparations deliveries ended in 1952, but the Soviet Union continued to absorb Finnish metal goods. By the late 1950s, Finland had built an efficient and innovative metalworking sector.
In the 1960s, the metalworking sector, stimulated by the effects of trade liberalization, embarked on an export drive in Western markets. Domestic demand rose as a result of both the expansion of the forest and the chemical industries and major infrastructure projects. Throughout the 1960s and the 1970s, the sector prospered, growing at an average annual rate of over 6 percent, higher than the rates of other industrial sectors. The strategy of specializing in a small number of products in which the country already possessed a comparative advantage paid off in export markets. Finnish design, which integrated ergonomics, durability, and attractive appearance, also helped maintain sales. Thus, the sector was relatively well prepared to respond in the 1970s, when rapid increases in energy prices, competition from newly industrialized countries, and worldwide improvements in capital-goods technologies threatened profitability.
Beginning in the mid-1970s, metalworking, like the forest industries, underwent a period of intense rationalization and restructuring--with only limited state help. By the late 1980s, it appeared that the sector was well on the way to transforming itself to meet the conditions of high energy costs. Indeed, metalworking grew faster in Finland than it did in most industrialized countries, and it remained Finland's leading industrial sector.
Finnish analysts divided the sector into four branches: basic metals, machine building, transport equipment, and electrical equipment. Although many companies were active in more than one branch, the categories provide a useful framework for reviewing industrial developments.
Domestic ore could not meet industrial demand, but the efficient metal-processing branch, which had developed some of the world's most advanced technologies, provided a firm foundation for the production of more advanced goods. State-owned firms (and firms in which the state owned a majority interest) led the development of metals production. The Rautaruukki works at Raahe in northern Finland, for example, was the main producer of iron and steel. The state and major engineering firms jointly owned the enterprise, an arrangement that ensured that the works responded well to the needs of industries using their products. The works remained profitable during the late 1970s and the early 1980s, a period marked by the decline of the European steel industries. This success was due not only to adept management but also to good labor relations. Likewise, the state-owned Outokumpu Group, which possessed flash-smelting technology that gave it a major advantage during the mid-1980s, controlled much nonferrous metals production. While most of Finland's iron and steel were used at home, most of its copper, zinc, and nickel were exported.
Based on sophisticated technologies and on careful specialization, machine building was an essential complement to other industries, but it was growing slowly by the late 1980s. Employing about one-third of the metalworkers, the sector concentrated on such product lines as sawmill and papermill machinery and mining equipment. By the late 1980s, Finland had captured about one-fifth of the world market for papermaking equipment, and it led in selected metal-processing technologies. The branch also had increased its capability to produce cranes, lifts, hoists, forklifts, and cargo-handling vehicles. Another strong point was agricultural and forestry machinery, including tractors, combines, and logging machines, of which Finland was the largest producer in Nordic Europe. As Finland's economy matured, however, investment in capital goods declined, forcing the sector to search for markets abroad. Although Finnish equipment enjoyed a strong reputation abroad, demand for the country's specialties was limited.
Shipbuilding, which had led the development of heavy industry, continuing to be the most important branch of the transport sector, and it determined the sector's health. The land transportation branch, however, led by exports of railroad locomotives and rolling stock to the Soviet Union, provided a valuable supplement to shipbuilding. Finland first began to produce automobiles in 1969, and it had developed a full range of vehicles.
By the late 1980s, Finland's shipbuilding industry ranked fifteenth worldwide. The country boasted eight major shipyards, which employed about 14,000 highly skilled workers. Unlike many other countries (including nearby Norway), Finland had avoided large investments in petroleum tankers, a choice that proved to be a blessing when the world tanker market slumped in the late 1970s. Instead, Finland had specialized in high-priced vessels such as icebreakers, luxury liners, car ferries, ocean exploration vessels, and container ships. Starting in the 1970s, shipbuilders also had branched out into offshore oil-drilling platforms and equipment. Finnish icebreakers were world-famous-- the country had produced about 60 percent of all icebreakers in service by the late 1980s. Finland also specialized in vessels designed to operate in arctic conditions. Such projects were well suited to Finnish expertise, and they yielded higher-value-added products that compensated for high input costs.
Shipyards exported up to 80 percent of their production, which made them heavily dependent on world market developments. The shipbuilding industry had survived the difficult years following the 1973 and the 1979 oil shocks without subsidies from the government (except for occasional favorable financial packages); these years had seen a wave of mergers and large-scale investments that had improved competitiveness. Above all, the industry owed its success to continued orders from the Soviet Union in a period when demand lagged in Western markets. Finland was thus the one European country in which the number of shipyard workers had increased after 1975. During the same period, the Finns built two new shipyards for oceangoing vessels, established a heavy engineering works for oil-drilling rigs, and modernized older yards.
By the late 1980s, however, it appeared that shipbuilding was entering a crisis. The decline in the price of oil in the middle of the decade caused a reduction in Soviet purchasing power, limiting new orders for ships. Moreover, Soviet buyers, who had long preferred Finnish ships, had started to place orders with other countries, including East European firms that enjoyed lower labor costs. At the same time, certain Finnish specialties, such as icebreakers, were attracting competition from more advanced shipbuilding countries such as Japan.
The crisis in shipbuilding led to a decline in employment and to further restructuring. In July 1986, two of Finland's four major shipbuilding companies, Wartsila and the Valmet Group, merged their shipbuilding divisions and planned to eliminate about 40 percent of their 10,000 jobs. Another several thousand workers were out of work, and the increased competition from the new firm threatened the two remaining firms, Rauma-Repola and Hollming. Indeed, competition had already undermined an arrangement under which each firm specialized in a particular field: Wartsila in icebreakers and luxury liners, the Valmet Group in cargo ships, Rauma-Repola in offshore oil equipment, and Hollming in high-technology research vessels. As the crisis continued, industry analysts began to question whether the industry could survive without government bailouts.
Production of electrical equipment had started somewhat slowly, but during the 1970s and the 1980s the branch grew rapidly. The branch produced both heavy goods--such as power plant generators, heavy-duty electric motors, and equipment for icebreakers--and lighter goods--such as household appliances, lightbulbs, and building components. By the mid-1980s, however, the heavy electrical engineering producers were experiencing stagnant markets and fierce competition. Electronics, however, grew rapidly, expanding its product range from consumer electronics to include computers; communications equipment; and monitoring, control, and measuring equipment. The Finns developed particular competence in control systems for the mining, metallurgical, and forestry industries; computers for hospitals and laboratories; patient-monitoring machines; meteorological installations; and telephone equipment. Finland, which included many areas that were too sparsely populated to allow the construction of a comprehensive telephone network, also was one of the world's leaders in the production of mobile telephones.
Although electronics was still small compared with other industries, many Finns believed that it had good prospects and that it might eventually make up for the impending decline of shipbuilding and other traditional industries. Thus, in the mid1980s , both industry and government began to pay increasing attention to the development of high technology, especially in the electronics industry. The Finns seemed intent on specializing in high-value-added products in which the country had a comparative advantage, an approach similar to that which had proved so successful in other sectors.
The leaders of the electronics industry, aware that the small sizes of their firms made it difficult to compete, banded together to share research and development expenses. The government facilitated cooperation among firms through the Technology Development Center (Teknologian Kehittamiskeskus-- TEKES) established in 1983. Electronics firms were also willing to join international research and development consortia that offered access to foreign technologies. However, despite the rapid development of high-technology electronics in Finland, by the late 1980s it was still too early to predict how well Finnish producers would be able to compete in world markets.
Several smaller sectors contributed significantly to industrial output. Food processing--concentrating on dairy products, baked goods, and preserved meats--grew during the postwar period, as rapid urbanization heightened reliance on processed foods. Indeed, as late as 1970 food processing was the largest sector in terms of gross value of production (but in terms of value added, food processing ranked only third that year, behind wood and metal processing). Nevertheless, during the 1970s and the 1980s, food processing suffered a relative decline.
In the 1980s, the food industry undertook an ambitious research program aimed at foreign markets. Finnish firms hoped to develop special foods for the cafeterias of hospitals, mines, and oil rigs as well as to develop delicacies, such as fresh berries and fresh-water fish. New technologies, such as plant and animal genetics, freeze-drying, irradiation, aseptic production, and methods to limit food oxidation, promised to improve the attractiveness of Finnish products. Another export was highly automated equipment for bakeries, dairies, and slaughterhouses. Although Finland's high production costs limited exports of staple foodstuffs, observers believed that the industry could expect to sell special products in Europe and in North America.
Finland's chemical industry, established at the time of independence, had come a long way by its seventieth anniversary in 1987. By the late 1980s, the sector ranked fourth after wood, metal, and food processing. Oil refining accounted for about half the gross value of chemical production, followed by fertilizers, plastics, fibers, rubber products, and other chemicals. Two large, state-owned firms controlled more than half of chemical production. Neste, established in 1948, was the only oil-refining enterprise. Its chemical operations had grown out of refining, while its rival, the Kemira Group, had developed interests in many products, including fertilizers, paints, fibers, and industrial chemicals. During the 1980s, both companies had purchased production facilities abroad in an attempt to remain on top in an international market that suffered from overcapacity in many basic product lines.
Construction, which accounted for almost 10 percent of GDP in 1950, declined to less than 8 percent of GDP during the postwar period, as the country completed its transportation and energy infrastructure and established heavy industry. In the short term, construction activities depended on the overall health of the economy. Thus, new building slumped from 1984 to late 1986 because of a recession and because many industries invested more in new machines than in new buildings. Residential construction was also slow in the mid-1980s, but it responded to financial stimuli after 1985. By late 1986, both commercial and domestic building were on the rise, increasing by an estimated 3 percent in 1987. Finland also exported construction services, especially to the Third World and to the Soviet Union, usually to complement exports of machine goods. The industry was able to offer clients all types of planning, engineering, and building services for turnkey factories.
Textiles and ready-made clothing, two of the country's oldest industries, concentrated on cotton, wool, and knitted goods. During the postwar period, this sector had declined in relation to other industries; however, in the 1980s, Finland still produced high-quality fabrics and fashions for export, especially to Europe. Likewise, Finnish fur and leather designs had carved out export markets in the developed countries.
Although the Finns continued to place a high value on agricultural and industrial employment, by the 1980s the economy had already entered an era characterized by the development of services. While in 1950 services accounted for only 35 percent of total domestic output, the sector provided over 55 percent in 1985. The postwar development of a welfare state stimulated growth in the state sector, and other activities, such as financial and engineering services, expanded as the economy industrialized. Services traditionally remained insulated from international markets, but during the 1980s the government encouraged the development of service exports and even allowed foreign enterprises to enter such previously protected markets as those in financial services. In line with this liberalization, the government repealed regulations that hampered the working of markets in services, causing the important branches of the sector to become efficient enough to compete in world markets.
Under the regulatory structures that had developed since the mid-nineteenth century, banks had dominated the financial scene, leaving the stock market and insurance companies to play secondary roles. Control over investment capital gave a few large banks great power. Distinct laws for each type of bank contributed to the development of a fragmented banking structure in which separate types of institutions served different purposes. Closely regulated by the central bank, the operations of which depended less on market mechanisms than on capital rationing, the traditional financial system served Finland's postwar reconstruction and industrialization well. This same system, however, appeared outdated in the dynamic international markets of the 1970s and the 1980s. As a consequence, a process of deregulation and internationalization was begun, which led to rapid changes in the financial sector. Observers expected further changes during the late 1980s and the early 1990s. In mid-1988 the process of liberalization was still incomplete, however, and many institutions retained their customary roles, making Finland's financial system a peculiar mixture of new and old.
Founded in 1811, the Bank of Finland (BOF) first provided the services of a true central bank in the 1890s. Formally independent, the BOF's management comprised bodies responsible to both the executive and the legislative branches of government. The governor and a board of directors, who were appointed by the president of Finland, controlled day-to-day operations. A nine- member supervisory council, named by and responsible to the Eduskunta, reviewed bank policy and made most fundamental decisions, especially those regarding monetary policy. The BOF served as the lender of last resort, and it regulated the currency and the financial markets. It also determined monetary policy and participated in the formulation of government economic strategies.
Although BOF policy originally had concentrated on maintaining the value of the currency, during the Great Depression of the 1930s the influence of Keynesian theories began to modify bank policies. After World War II, the BOF developed regulations designed to favor reconstruction and the development of manufacturing, and these remained in force almost unchanged throughout the 1960s. The regulations were part of a comprehensive government scheme for financial markets that included foreign-exchange restrictions, regulation of bank lending rates, a quota system for bank borrowing from the BOF, and an interbank agreement on deposit rates. At the heart of the system were tax rules that made interest earnings on bank deposits tax-free and interest charges paid by companies on loans fully deductible. These two measures combined to favor bank deposits and to facilitate debt financing for industry. The BOF used this panoply of regulations to hold borrowing rates artificially low--generally at negative real rates--to favor investment. As money markets were not in operation, the BOF resorted to distributing specific quotas of credits to commercial banks. Strict limits on the foreign-exchange market protected the system from international competition.
Besides the central bank, the banking system included a small number of commercial banks based in Helsinki, many local branches of cooperative and savings banks, and a small number of state- owned banks. The commercial banks differed from the others because they could borrow directly from the BOF, and they controlled most corporate banking. The networks of savings and cooperative banks primarily served households, which provided a solid deposit base. The split between the two banking networks was not absolute, however, as the savings banks and the cooperative banks had formed their own so-called central banks, which enjoyed commercial bank status.
Finland's commercial banks were the real leaders of the financial industry, and they controlled most lending to Finnish corporations. Although about ten banks were considered to be commercial banks, only two--the Suomen Yhdyspankki (Union Bank of Finland--UBF) and the Kansallis-Osake-Pankki (KOP)--were national banks with extensive branch networks. The four foreign-owned banks active in Finland also operated as commercial banks.
The cooperative and savings banks served a wide range of regional and local customers, but usually exercised relatively little economic power. They tended to specialize in providing home and farm banking services in rural areas. The savings banks were nonprofit banks designed to promote saving, and they served small-scale trade and industry as well as households.
Although private banks formed the backbone of Finland's financial structure, state-owned banks still accounted for about one-quarter of bank assets in the mid-1980s. The most important of these, the Postipankki, had about 40 branches of its own and made its services available at windows in more than 3,000 post offices throughout the country. Other state banks included the Industrialization Fund of Finland, Finnish Export Credit (partially owned by commercial banks and private industry), and the State Investment Fund and Regional Development Bank, both of which invested in underdeveloped regions and in industries with capital requirements that were too large for private firms.
Finland's commercial banks traditionally were allowed to hold as much as 20 percent of the total assets of Finnish corporations, and the leading banks had substantial holdings in the largest corporations. A 1987 law reduced the cap on bank ownership of corporate assets, but the banks' real power derived from their control over capital supplies. During the long postwar period of negative real interest rates, banks controlled the supply of capital--much of which was imported from abroad by the BOF. The two largest banks, KOP and UBF, built up rival spheres of influence that extended to many of Finland's largest industrial firms.
The crises and the restructuring of the late 1970s and the early 1980s provided the leading banks with further opportunities to strengthen their hold on Finnish industry. Starting in the late 1970s, KOP and UBF arranged many mergers among the wood- processing companies; by the mid-1980s, they had turned their attention to rationalization in the metal-processing industry. Several banks also engaged in takeover battles through the Helsinki Stock Exchange.
In the 1970s, several developments combined to reshape the operations of the postwar financial system. First, many corporations began to search for investment opportunities that offered both liquidity and higher rates of return than those offered for bank deposits. Second, as Finland shifted from importing capital to investing abroad, the old restrictions on foreign-exchange transactions became burdensome. Finally, a number of major Finnish corporations, having large shares of the domestic market, sought to expand abroad. Some, intent on foreign acquisitions, wanted to sell stocks on world exchanges in order to build assets sufficient for world-scale operations.
By the late 1970s, in response to the increasing internationalization of corporate life, the BOF management became convinced of the need to liberalize the regulatory system. The bank relaxed controls on borrowing abroad, and it allowed the establishment of an interbank money market; at the same time, the banks began to compete on interest rates for large deposits. These two developments caused Finnish interest rates in the corporate market to float up toward world levels, while the rates for most small depositors remained controlled. In 1982 the BOF allowed foreign-owned banks to open branches in Finland. In 1984 the BOF permitted Finnish banks to establish branches abroad, abolished bank-specific credit allocation, and began to levy identical reserve requirements on all banks. In 1987 legislation on bank deposits eliminated their traditional tax-free status. And in early 1988, the government proposed new banking laws that would put all major banks on the same legal footing.
The BOF had thus been willing to deregulate corporate banking partially, but important aspects of the regulatory system remained unchanged. The BOF continued to watch closely both foreign long-term borrowing and investments abroad by Finnish corporations. Retail banking continued much as before: small deposits placed at the regulated rates were tax-free, and the banks maintained their interest-rate cartel. The Finns had become accustomed to low and stable interest rates; proposals regarding interest were politically sensitive and might influence incomes agreements. Most observers thus expected that the BOF, ever cautious, would not rush toward further deregulation.
One effect of the liberalization of financial regulations and the internationalization of Finnish commercial life was the revival of the Helsinki Stock Exchange. Turning away from debt financing, more and more corporations issued stocks and bonds in the 1980s. Starting in 1982, the stock exchange attracted foreign investors, who accounted for about one-third of turnover in 1985. Younger, more prosperous Finns showed increased interest in stocks. As a result, although the market suffered a major slump in the second half of 1984, by late 1986 the stock index had increased tenfold compared with its 1980 level.
Incorporated in 1984, and almost immediately shaken by allegations of insider trading, the stock exchange in 1985 issued new regulations that were intended to increase the openness of its operations, thereby increasing its attractiveness for small investors. In 1987 the government reduced restrictions on foreign investors and passed a law allowing banks and insurance companies to set up mutual funds. In the fall of 1987, options exchanges opened, offering new instruments to stock traders. Also likely to enliven the market was legislation of the same year that eliminated the tax-free status of bank deposits. As Finnish equities continued to offer better rates of return than those on many markets, stock brokers had good reason to be optimistic.
Insurance companies, once marginal actors in capital markets, became Finland's largest institutional investors, after the establishment of compulsory insurance schemes in the early 1960s. After that time, insurance grew faster than the economy as a whole, and it contributed some 5 percent of GNP in the mid-1980s. As the result of restructuring in the early 1980s, there were about fifty insurance companies, associated in five large groups. The insurance companies placed about two-fifths of their investments in industry and an additional fifth in commerce. Other investments included other insurance firms and real estate.
Tourism was a small industry in Finland, accounting for only 4 percent of total exports in 1987. Since 1982, however, Finns had spent more abroad than foreigners had spent in Finland, and economic policy makers sought to foster tourism to reduce this deficit. Tourists found many attractions, both natural and cultural, in Finland; moreover, facilities for vacationers were well developed. Public transport--including tourist buses and ships plying scenic interior waterways--offered easy access to the country's main tourist areas. In the mid-1980s, Finland had about 550 hotels and 230 boarding houses. During the 1980s, the number of rooms in hotels rose, as did the number of places in youth hostels. Campers found plentiful sites, including some with firewood and even shelters, along an extensive network of trails. Information offices in major cities in Finland and abroad offered information and orientation for visitors.
Despite manifold attractions and excellent facilities, the tourist industry lagged during the 1980s. Tourist earnings declined by about one-third during the early 1980s, perhaps as a result of Finland's relatively high cost of living, which made the country somewhat expensive for tourists.
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.
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.
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.
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.
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.
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 (EC), 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.
Although trade with Western Europe developed slowly in the early postwar years, by the 1980s it was more important than trade with the East. During the early and mid-1950s, when the West European countries liberalized trade and exchange regulations under the OEEC, Finland maintained import and export controls inherited from World War II and the reparations years. Conducting almost all trade under bilateral agreements (except for occasional trilateral deals worked out with the Soviet Union and another East European country), Finland saw its trade grow only slowly. Thus, although the forest industries were competitive, the economy as a whole remained isolated. The Finns did participate to a limited extent in international economic organizations, joining the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT) in the late 1940s. The country also became a member of the Nordic Council and agreed to a Nordic labor market, but did not favor a Nordic common market because of Soviet opposition. Faced by the growing movement toward West European economic integration after 1955, Finland ran the risk of remaining on the sidelines, not only because of Soviet pressures but also as a result of domestic protectionism.
It was not until 1957 that the Finns first shifted their policy toward Western Europe in a move designed to protect access to traditional export markets, especially in Britain, and to shift economic activity to branches in which the country had a comparative advantage at a time when extensive economic growth was reaching its limits. The new policy package combined an austerity program, a sharp currency devaluation, and multilateral tariff reductions for trade in industrial goods arranged through the Helsinki Club, which was a model for further trade agreements. In effect, Soviet opposition had blocked Finnish membership in the OEEC, leading the Finns to set up the Helsinki Club, which the OEEC countries, agreeing to apply their liberalized import lists to Finnish goods, then joined. In 1958 Finnish authorities further liberalized trading conditions by making the Finnish mark convertible in European markets.
Since the late 1950s, Finland has consistently pursued freer trade in industrial products with the members of EFTA and the EEC, while protecting domestic agriculture to maintain food supplies and while controlling oil imports to safeguard trade with the Soviet Union. Under the FINEFTA agreement, signed in March 1961, Britain and other EFTA states extended associate membership and free-trade arrangements to Finland. In 1969 Finland joined the Organisation for Economic Co-operation and Development (OECD), the successor to the OEEC. Although the OECD played a minor role in commodity trade, its recommendations regarding cooperation among industrialized free-market economies touched on issues such as freer trade in services and liberalized capital transfers. When two important trading partners, Britain and Denmark, switched from EFTA to the EEC, Finland (like the other EFTA states) negotiated with the EEC an industrial free-trade agreement that came into effect in 1974. In 1986 Finland became a regular member of EFTA, the Soviet Union's finally having recognized that the organization posed no threat to its security or its trade interests. Under these freetrade agreements, virtually all Finnish industrial goods entered West European markets duty-free (but they sometimes faced troublesome nontariff barriers). These arrangements led to rapid increases in trade with Western Europe, stimulating specialization and improving economic efficiency in Finland.
Finnish business intensified its interest in Western Europe during the mid-1980s and the late 1980s, as falling oil prices led to a curtailment in trade with the Soviet Union. In 1986 and 1987, the Finns managed to shift trade smoothly from Eastern to Western markets, a development that soothed trade worries. Despite this success, in early 1987 prominent Finns voiced fears that the EC's plan to unify its markets by 1992, a plan approved in June 1985, might harm Finnish trade interests. According to this line of thought, the elimination of the remaining hindrances to trade in commodities, the establishment of free markets in services and capital, and the further harmonization of European macroeconomic policies would favor EC products, reducing Finnish access to EC markets. Commentary became especially heated after reports that other EFTA states, including Norway and Austria, were considering joining the EC, as Portugal had done in 1986. Moreover, the tendency for EC countries to expand cooperation from economic matters to security questions made Finnish membership in the EC politically impossible.
Informed analysts noted that, as it had in the years after 1957, Finland could maintain access to European markets without undermining its independent foreign policy. Although deepened integration among the EC countries would tend to reduce EC-EFTA trade, Finland and the other EFTA countries were not defenseless. As a group, the EFTA countries formed the EC's largest trading partner and could exert considerable pressure on EC harmonization decisions. Indeed, the EC had demonstrated some willingness to cooperate with the EFTA countries in April 1984, when representatives of the two trading groups issued the Luxembourg Declaration, which called for reduced technical barriers to trade, for common norms in information technology and telecommunications, and for greater cooperation in multilateral research and development programs. Even if EFTA efforts lagged, Finland could maintain trade ties with the EC by aligning national technical norms, commercial practices, and economic policies with those chosen by the EC. Other arrangements were also possible. For example, in 1986 Finland joined the ESA (which included other non-EC countries), participating in the group's earth observation satellite program as well as in basic research efforts. In effect, expanded technical cooperation offered the prospect that, while integration with the EC countries would extend far beyond commercial agreements during the 1990s, Finland could participate without sacrificing political neutrality.