In his fourth and final article on Finland, COLIN JAMES examines the dangers of high social spending and of relying too much on one major company.
When you tell people in Finland the New Zealand Treasury is looking the place over for some economic policy hints, the immediate, unprompted response is that a few years ago Finns were studying us.
In one respect they are still looking. From economists and people in business you are likely to hear that Finland may have got the micro right - and has Nokia and rapidly growing high-technology clusters and exports to prove it - but the macro is skewed.
Henrik Lax, who heads the Swedish-speaking contingent in the Parliament, is one who thinks there is much to fix yet. I was supposed to be discussing the position of the 6 per cent Swedish-speaking minority, which is protected under the constitution. But Mr Lax, whose wife runs a small business they set up and who was formerly a top executive of a large company, had a point he wanted to get across about business culture.
"We are still learning to do business," he said. Finns were used to a few "big old companies handled by a tiny number of people. Workers and subcontractors did not have to earn their living in a competitive market. There is not a tradition of small entrepreneurs."
He fears that Nokia's spectacular success risks leaving Finland too dependent on one company - again, a large company. If it falters, the economy will lose its cutting edge. In fact, as the OECD noted in its 1998 report on the Finnish economy, telecommunications, dominated by Nokia, accounts for 80 per cent of high-technology exports, the fastest growing major export sector (and now about a fifth of the total). By one estimate, Nokia's expansion is adding 1 per cent to gross domestic product each year.
Is Mr Lax perhaps out of date? Anu Nokso-Koivisto, director of the state venture capital organisation SITRA (the National Fund for Research and Development), insists that the culture is changing and an entrepreneurial spirit is emerging, evidenced in the number of start-ups it funds - though a very low failure rate of its ventures has it wondering whether its criteria for support are too stringent.
But the Government appears to agree: its programme for this four-year term aims to "strengthen entrepreneurship and the growth of SMEs (small and medium enterprises). ETLA (the independent Research Institute of the Finnish Economy) has some support for Mr Lax. Its study of Finland's competitive advantage revealed strength in engineering know-how but "hundreds of case studies confirm that the development of marketing, financing and strategic skills did not quite keep up with the expansion of technical knowledge".
Not that you would notice. Since 1993, Finland has been an impressive success story. The collapse in 1991 of the Soviet Union, which had taken 15-20 per cent of exports, and the simultaneous bursting of the financial bubble that resulted from capital deregulation, caused severe difficulties. GDP dropped 11 per cent and unemployment soared from 4 per cent to 17 per cent. Gross Government debt tripled to 60 per cent of GDP.
The recovery has been nearly as spectacular: an average of 4.5 per cent - though this appears to be slowing now that the huge excess capacity left by the recession has evaporated. The current account is in surplus by 5-6 per cent of GDP and net foreign debt, having rocketed from 20 per cent to 55 per cent, is back below 30 per cent and falling. Unemployment is down to 10 per cent. Overall Government spending is down from a peak of 60 per cent of GDP in 1993 to 54 per cent in 1998. But that last figure represents an important qualification on Finland's long-term prospects, economists say.
General Government taxation is 46-47 per cent of GDP, including social security contributions and taxation by municipalities which deliver most health care and education. What the OECD calls the "average marginal tax wedge on labour income" is 70 per cent. The nominal corporate tax rate is 28 per cent (about to be raised to 29 per cent) but with the requirement to contribute 40 per cent of the unemployment and pension insurance, the total goes well above 30 per cent. Dividends are still double-taxed.
All of which adds up to a tax bill that is, says Pertti Laine, of the Finnish Forest Industries Federation, "too high to be sustainable in the long run". The federation complains of still other taxes, on energy and for environmental purposes. The Government agrees: it aims to cut $3.5 billion out of taxes in its four-year term.
Wage negotiations are centralised, which critics say penalises small companies who have no say in the rates - studies have found SMEs' labour demand more wage-elastic than larger companies. This factor may be a contributor to the fact that overall foreign-owned companies operating in Finland have since 1993 performed substantially better than locally-owned ones in expanding employment and adding value.
Peter Boldt of the Central Organisation of Finnish Trade Unions naturally enough defends the arrangement as helping social cohesion and forcing bad employers to rationalise instead of resorting to low wages. He also says there is a strong consensus supporting high taxes among the 80 per cent of workers who are union members.
But the combination of the two policies leaves the low-skilled with very limited work opportunities. What Robert Reich calls "in-person services", a rapidly expanding sector in flexible-wage countries such as United States and this country, are underdeveloped in Finland. And the OECD says labour productivity remains well below the United States and even the European Union average levels.
Moreover, there are some perverse incentives. Unemployment benefits and pensions are generously earnings-related. A worker over 50 has an incentive to stay on unemployment if the alternative is a lower-paid job because that would reduce the pension. In 1998, one in four of working age was on a social security benefit.
In the past two years the Government, which is led by the Social Democrats, has begun to wind back the generosity of the benefits and up the contribution by individuals. The Social Democrats paid a price for this with a 5 per cent drop in their vote share.
So Finland is not an automatic pilot for New Zealand. There are pointers in its research and development and venture capital policy approaches but not in its macroeconomic stance.
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