Sweden’s example encouraging Finland

The fortunes of Estonia’s two main export partners – Finland and Sweden – have diverged in recent years. Whereas Sweden’s economy has grown eight per cent since 2008, Finland’s economy has contracted six per cent during the same period. The last time Finns witnessed significant economic growth was in the first half of 2011, whereas Sweden’s gross domestic product is increasing 2% to 3% quarterly, an excellent result given the high welfare levels in the country and the weakness of the economy in Europe. Also, the 2009 recession was significantly deeper in Finland than in Sweden, whereas Sweden’s recovery from it was much more vigorous. Why has Sweden done so much better than its neighbour to the east? How should Finland revive its economy?

Sweden’s advantage is its strong labour market

One of the main reasons why Sweden’s economy has achieved such success in international competition is its efficiently functioning labour market. In 2014, 80% of Sweden’s population aged 20 to 64 was employed, making it the country with the highest employment levels in the entire EU. By comparison, the average employment levels were 69% for the 28 Member States, 73% for Finland and 74% for Estonia. To increase the labour market participation of people, Sweden has also carried out several important reforms. Labour market legislation has been updated, with benefits tied to working, training for the unemployed improved and overly generous benefits curbed. A thing of the past is centralised wage bargaining, which significantly restricted the freedom of employers and employees to collectively reach a reasonable agreement. In addition to high employment levels, Sweden is also an attractive place to live for people from many other countries, which has supported population growth in reaching one per cent in recent years. In Sweden, domestic consumption has been helped by vigorous measures to ease the tax burden. Whereas in 2000 the tax burden in the country reached nearly 50% of the gross domestic product, according to the OECD, it has now been successfully lowered to about 42%.

Finland unable to remain competitive

Despite the difficult economic times, labour costs in Finland have grown quite a bit in recent years. Given that in the meantime the added value created by businesses has decreased, it does not come as a surprise that the competitiveness of the country has been seriously affected. According to 2013 data, in Finland, labour costs per unit, which express a relationship between productivity and wages, were 26% higher than in 2005. In countries competing with Finland’s exporting industry, such as Sweden and Germany, this indicator rose just 13% and 10%, respectively, during the same period. For Finland, a significant roadblock consists of high expenditures on its social protection system and state administration: according to the OECD, expenditures on the central government accounted for 58% of the gross domestic product in 2013, being higher than even that of France, the red beacon of Europe. A major concern in Finland is the complex centralised wage bargaining system between trade unions and employers, which prevents wages from adjusting to the actual market situation. A curious fact for Estonians, the Finnish government is only now planning to grant a number of service companies the freedom to decide when to open or shut their doors for business. It used to be that a hairdresser, for example, would have to apply to a relevant agency for special authorisation to be able to do business on the anniversary of the Republic of Finland. However, Finns have already been able to implement some changes to improve their competitiveness. In order to rein in social protection expenditures, a pension reform was pushed through last year and will, upon taking effect in 2017, raise the retirement age to 65 and tie any subsequent increases to the increase in Finns’ life expectancy.

What is the advice for Finland?

In a challenging economic situation, Finns have not shied away from asking their neighbours for advice. Whereas a bold think piece by Gunnar Okk, about the challenges facing Estonia’s education system, recently kicked up a dust storm in Estonia, a similar reaction among its neighbours to the north was caused by a report commissioned from the former Swedish Minister of Finance, Anders Borg, about Finland’s international competitiveness. According to the analysis prepared in tandem by Borg and the Finnish economist Juhana Vartianen, the price levels in Finland are 15% to 20% too high when compared to its nearest competitors, which indicates a need to get any further growth in labour costs under control. Unlike Joseph Stiglitz, the doyen of economics with a controversial reputation, who gave a talk in Finland last week, Borg thinks that due to rapid growth in public debt Finland lacks the tools to stimulate its economy through increased public sector spending. Instead, Borg recommends reforming the wage bargaining system, increasing the labour market participation of people and growing the productivity of the economy.

Similar views were put forward by the International Monetary Fund (IMF), which assessed the situation of the Finnish economy in mid-September. The IMF welcomes Finland’s current initiatives to cut back on various benefits and increase the efficiency of its public sector, but considers them insufficient for the purposes of restoring competitiveness. The IMF considers the biggest problem to be the centralised wage bargaining system, which artificially restricts wage distribution and curbs workers’ motivation to move into fields of activity with higher productivity levels. Furthermore, in the IMF’s assessment the system raises the minimum wage to excessively high levels, as a result of which lower-paid jobs are not created, whilst people who could potentially fill those jobs remain a burden on the social protection system. In other important recommendations, the IMF advises Finland to reform unemployment benefits, tying them more to a requirement of activity, improve labour mobility through more affordable housing, and increase the productivity of both the private and public sectors, including through investments in research and development.

Despite opposition from trade unions, it seems likely that the Finnish government will be able to implement the necessary reforms and restore growth to the economy over the longer term thanks to an educated population. Nonetheless, no rapid growth can be expected in Finland, as a result of which the gap between its economy and Sweden’s will widen significantly. According to estimates by SEB, the growth of Sweden’s economy will reach nearly 3% in the next few years, whereas Finland will have to settle for stagnation this year and growth stuck at 1% going forward.

Mihkel Nestor
Economic Analyst, SEB


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