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The Finnish Miracle: Explaining economic growth in Finland since 1900


civil war 1918. 2nd world war 1939-40, 1941-44 ... MFP in the non-ICT sector will grow at the same rate as it did in 1990-2003 ... – PowerPoint PPT presentation

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Title: The Finnish Miracle: Explaining economic growth in Finland since 1900

The Finnish Miracle Explaining economic growth
in Finland since 1900
Matti Pohjola HSE Helsinki School of Economics
Brief history of Finland
  • Swedish colony, 1155-1809
  • autonomous Grand Duchy of Russia, 1809-1917
  • independent republic since 1917
  • civil war 1918
  • 2nd world war 1939-40, 1941-44
  • joined the UN in 1955, the OECD in 1969, the EU
    in 1995, the EMU in 1999

Finnish economy
  • population 5,3 million
  • fertility rate 1.74
  • GDP per capita 30 000 in 2005
  • Gini coefficient between 20 and 30 depending on
    the income concept used
  • exports
  • wood and paper products
  • electronics
  • metal and engineering products
  • main trading partners Sweden, Germany, Russia,
  • public sector
  • average tax rate 44
  • public debt 40 of GDP
  • budget surplus 2.5 of GDP
  • unemployment rate 8.4 , inflation rate 0.9

Finland in international rankings
  • Standard of living 13th to 15th in the world
  • Human development index 13th
  • Happiness 4th or 5th in Europe
  • but mens suicide rate among the highest in
  • Competitiveness 2nd (WEF), 10th (IMD)
  • Quality of schools 1 (PISA study)
  • Quality of universities no university among the
    the top 50 in the world
  • Football 30th in Europe (UEFAs ranking for the
    EC in 2008)

The miracle Rapid growth in the 20th century
GDP per capita, 1900-2001 (PPP, log scale)
Second fasted growth in Europe In 1900 GDP per
capita was 41 of the U.S. level, 73 in 2001
Source Maddison (2003)
Deep depression in the early 1990s
Unemployment rates in Finland and the United
States, 1920-2005 (per cent)
GDP per capita growth based on rapid growth of
labour productivity
GDP per capita and its components (indices 1900
  • During 1900-2005
  • GDP per capita has increased 13-fold
  • although hours worked per capita have declined
    by 10
  • because GDP per hour worked has increased

Finnish labour productivity (value added/ hours
worked) in international comparison
  • high in manufacturing
  • at about the same level as in the US
  • the highest in EU in the following industries
  • Paper and pulp
  • Wood and wood products
  • Basic metals
  • Telecommunication equipment
  • low in other services than telecommunication and
    finance and insurance
  • The price competitiveness of Finnish
    manufacturing is excellent by EU standards

Explanation of rapid growth Capital
  • Soviet-type industrial policies after WWII
  • it was believed that heavy manufacturing
    industries are the drives of economic growth
  • state-owned companies played a large role
  • tripartite centralized wage bargaining
    established in 1969 to keep wage increases
    moderate, i.e. to increase savings
  • unions demanded increases in social wages in
    return for wage restraint
  • gt welfare state
  • Massive investment in
  • physical capital
  • education
  • technology

The share of investment in GDP, 1900-2003 ()
Finland is one of the most capital intensive
countries in the world according to the Penn
World Table
Number of high-school graduates (thousand),
Share of RD investment in GDP, 1983-2003 ()
About one third is public and two thirds are
private RD
Third highest share in the world after Sweden and
Problem The declining trend of labour
productivity growth
The annual growth rate of GDP per hour worked,
1901-2004 ()
Governments policy objective to reverse the
trend as has been done in the United States
Trends of labour productivity growth, 1970-2004
Accounting for the sources of growth,
1900-2005(non-residential market sector,
percentage points per year)
Jalava and Pohjola (2006)
Comparing two general purpose technologies
electricity and ICT
  • Finland was one of the first countries to adopt
  • electric lighting was first demonstrated in 1877
  • a cotton mill installed incandescent lights in
  • all 38 towns had one or more electric utilities
    in 1914
  • well as the telephone
  • the telephone was patented by A.G. Bell in 1876
  • the first telephone line was built in Helsinki in
  • The Helsinki Telephone Association as established
    in 1882
  • cooperative company owned by the subscribers
  • the telegraph was operated by the Russian
  • there were already 3.4 lines per 1 000 people in
  • The diffusion of IT was not equally rapid
  • the first computer (IMB) was purchased by the
    Post and Savings Bank in 1958
  • the first Finnish computer was built in 1960
  • Nokia started manufacturing computers and digital
    telephone exchanges in the 1970s

Finland adopted electricity very rapidly...
Shares of electricity in total motive power in
the U.S. and Finnish manufacturing, 1900-1939
(per cent)
...but is not a leading country in the use of IT
Share of computer software in private,
non-residential fixed assets, 1975-2004 (per cent)
The three phases of productivity improvement
resulting from the arrival of a GPT
  • Multi-factor productivity growth in the
    manufacturing of the new technology
  • product and process innovations
  • Labour productivity growth from the use of the
    new capital goods
  • capital deepening the new capital goods are
    substituted for the old ones
  • increasing capital intensity improves labour
  • Spillovers from the reorganization of work
  • which the new technology makes possible
  • Example the reorganization of factories made
    possible by the electric unit drive and the
    assembly line

Accounting for the contributions of a GPT
Production function Y A F(K, L) A(AGPT, AO)
F(KGPT, KO, L) Growth accounting dY/Y vGPT
ß dAO/AO ? dKGPT/KGPT GPTs growth
contributions vICT dKGPT/KGPT -- use of
GPT a dAGPT/AGPT -- production of GPT ?
dKGPT/KGPT --- spillovers from GPT
Measuring the impacts of electricity
  • Electrical capitals contribution
  • growth of electrical utilities capital stock and
    the stock of electrical capital goods
  • multiplied by their income shares
  • Multi-factor productivity in production
  • MFP growth in electric utilities and electrical
  • multiplied by their output shares
  • Spillovers from the use of electrical capital
  • panel data estimation by regressing MFP growth on
    the growth in the capacity of electric motors for
    manufacturing industries in 1921-38
  • multiplied by the output share of manufacturing

Electricitys contribution to output growth
(percentage points per year)
Sources Jalava and Pohjola (2006), Crafts
(2002), David and Wright (1999)
Electricitys and ICTs contributions to output
growth in Finland (percentage points per year)
Source Jalava and Pohjola (2006) Note the ICT
numbers are being revised
  • ICT has had a much larger impact than electricity
  • Electricity had large spillover impacts in the
    United States
  • ... but not in Finland
  • data problems?
  • Spillover impacts for ICT are not yet observable
  • gt The best of ICT is yet to come!

Projecting the future Could the growth rate of
labour productivity pick up?
  • Three scenarios for 2004-2015
  • optimistic, basic, pessimistic
  • Assumptions common to all three scenarios
  • Forecast for the growth rate of labour input
  • Capital stock assumed to growth at the same rate
    as GDP (i.e. the economy is at a steady state)
  • MFP in the non-ICT sector will grow at the same
    rate as it did in 1990-2003
  • Scenario-specific assumptions made on the growth
    rate of MFP in ICT manufacturing industries
  • Optimistic the same as in 1995-2000
  • Basic the same as in 1990-2000
  • Pessimistic the same as in 1973-1990

Projections based on growth accounting
Growth accounting dY/Y vGPT dKGPT/KGPT vO
The results
Annual growth in labour productivity in Finland
1901-2003 and projections for the years 2004-2030
Note OECDs projection is 1.7 per year for all
OECD countries!
Will the labour productivity growth rate pick up?
  • Growth and technology policies in Finland
    emphasize the roles of
  • research and development
  • more attention will be paid on the impacts of RD
  • education
  • 45 of the labour force will have obtained
    tertiary level education by 2010
  • information and communication technology
  • production rather than use
  • But does the structure of the Finnish economy
    reflect this new comparative advantage?

Value added shares in 1999,
FIN EU-15 USAICT producing
industries 10,3 6,2 7,7 ICT using
industries 24,3 30,2 34,6Other
industries 65,4 63,6 57,7
2nd highest in EU higher in Ireland 2nd
lowes in EU lower only in Spain
Source OMahony and van Ark (eds) (2003), EU
Productivity and Competitiveness
Value added shares in 1999,
FIN EU-15 USAHigh skilled
industries 27,9 33,2 39,9High-intermedia
te skilled 19,4 17,3 16,7Low-intermediate
skilled 35,8 29,7 28,1Low skilled
industries 16,9 19,9 15,3
3rd lowest in EU lower only in Greece and
Spain highest in EU
Source OMahony and van Ark (eds) (2003), EU
Productivity and Competitiveness
Shares of manufacturing in the value added of all
industries, 1979-2001,
The challenges
  • Offshore outsourcing of ICT manufacturing
  • Employment in electronics industry is already
  • Export prices are declining because of the
    decline in ICT prices
  • Manufacturing workers will paid what they are
    worth in the world market
  • Offshore outsourcing of knowledge work (i.e.
    business services)
  • 10 of all service jobs will be offshored (a
    Finnish estimate)
  • 20 of all jobs are offshorable (OECD)
  • Knowledge workers will paid what they are worth
    in the world market

  • Crafts, N. (2002) The Solow Productivity
    Paradox in Historical Perspective, Centre for
    Economic Policy Research, Discussion Paper No.
    3142, January.
  • David, P.A. and Wright, G. (1999), Early
    Twentieth Century Production Growth Dynamics An
    Inquiry into the Economic History of Our
    Ignorance, Discussion Papers in Economic and
    Social History, University of Oxford.
  • Jalava, J. and Pohjola M. (2006), The roles of
    electricity and ICT in growth and productivity
    Case Finland (under preparation)
  • Maddison, A. (2003) The World Economy
    Historical Statistics, Development Centre
    Studies, Paris OECD.
  • OMahony, M. and van Ark B. (eds) (2003), EU
    Productivity and Competitiveness, European