Finnish foreign trade history and structural changes in

export Lassi Nummi,

International economics, TSEBA, 2009

Contents:

  General information about Finland’s economics

  History

  Statistics

  Conclusions

General information, figures Finland

History, from tar to mobile phones

History, - 1800

  Agrarian country

  70% of people in agriculture and forestry

  ½ of value of production came from agriculture and forestry

  Industry:   Some iron works at southwestern part   Tar burning   Sawmilling   Fur trading

  Export and trade concentrated on coastal areas, small towns

  The income from tar and timber shipping accumulated capital for the first industrial plants.

Finland part of Sweden – All export has to go trough Stockholm – Industrialization begins in UK / Europe

1800-1900   Beginnings of industrialization in Finland

  Already started in Europe

  The first modern cotton factories started up in the 1830s and 1840s, as did the first machine shops.

  The first steam machines were introduced in the cotton factories and the first rag paper machine in the 1840s.

  The first railroad shortened the traveling time from the inland towns to the coast in 1862

  First telegraphs around 1860

  Some new inventions, such as electrical power and the telephone, came into use early in the 1880s, but generally the diffusion of new technology to everyday use took a long time.

  Own currency, Markka

  Trade partners : Russia, Germany, England. Import : Grain

1809 – Finland under Russian government, autonomy. First steps of industrialization reach Finland.

… until First world war

  The export of various industrial and artisan products to Russia from the 1840s on, as well as the opening up of British markets to Finnish sawmill products in the 1860s were important triggers of industrial development.

  From the 1870s on pulp and paper based on wood fiber became major export items to the Russian market

  GDP grew at a slightly accelerating average rate of 2.6 percent per year, and GDP per capita rose 1.5 percent per year on average between 1860 and 1913.

  The population was also growing rapidly   1860 : 2 000 000   1918 : 3 000 000   About 10 % of population lived in towns

  The investment rate was a little over 10 percent of GDP between the 1860s and 1913 and labor productivity was low compared to the leading nations.

  Economic growth depended mostly on added labor inputs

Strong exports to Russian market, Russia blooming on Tsar era. 1914 – Word war I begins

World war 1 to world war 2 (1918-1939)

  1917:   First steps on metal and shipbuilding industry   Revolution in Russia – Soviet union   Finland became independent

  Russian trade cut off:   Short term effects:

  The food situation was particularly difficult as 60 percent of grain required had been imported.

  Loan from USA to help on food situation

  Indstry : New markets were found, exports started to grow.

On the eve of World War II, almost half of the labor force and one-third of the production were still in the primary industries

1917 – Revolution in Russia – Finland became independent – Civil war in Finland 1917-1918

1919-1939   After world war 1

  Finnish sawmill products, pulp and paper found old and new markets in the Western world. (need of timber in europe, after war)

  The structure of exports became more one-sided

  More than 80% of exports were based on wood, and 1/3 of industrial production was in sawmilling, other wood products, pulp and paper.

  Other growing industries included mining, basic metal industries and machine production (shipyards) , but they operated on the domestic market, protected by the customs barriers.

  Economic recession had little impact to Finnish economy

  1938 GDP already higher than Europe average.

Global economic recession 1930s

World war II (1939-1945)

  International trade practically 0

  Industrial production collapsed during first 2 years

  Industrial production focused on weapon industry to domestic market.

Post war era : 1946 -   After war, economy was in crisis

  Finland had to pay reparations to USSR, the compensation was paid in form of industrial products   Examples:

  Ships (over 500)   Electrical engines (52 500 pcs)

  Locomotives (over 700)   Timber

  Special products

  …

  Reparations done after 8 years, 1952 last reparations paid

  Influence on economy :   Benefits:

  + Investments in R&D and domestic industry

  + Education / training of workforce   + opening of sales channel to USSR

  Downsides:   - Loan capital from US and sweden

  - Industry (Paper and metals) focused only on reparations

  Because of land-losses to USSR, over 400 000 inhabitants were re-located to Finland   Affected on labor availability and construction industry

Post world war 2   Timber exports to west started again

  Productive capacity modernized, industry reform

  1948 Finland joins:

  World Bank

  International Monetary Funch (IMF)

  Bretton Woods

  1950:

  GATT (General Agreement on Tarrifs and Trade)

  Tariffs were eased and imports from market economies liberated from 1957

  1961:

  Finnefta (an agreement between the European Free Trade Area (EFTA) and Finland)

Fast development after world war 2

  The labor-force growth stopped in the early 1960s, and economic growth has since depended on increases in productivity rather than increased labor inputs.

  GDP growth was 4.9 percent and GDP per capita 4.3 percent in 1950–1973

  Bilateral trade agreements with the Soviet Union started in 1947 and continued until 1991

  Building of Nordic welfare model since 1960s

  Government policy favoring investments.

First signs of structural change   Structure of export industries were diversified by

Soviet and, later, on Western orders for machinery products including:   paper machines,   cranes,   elevators,   special ships such as icebreakers.

  Soviet Union provided good markets for clothing and footwear

  The modern chemical industry started to develop often led by foreign entrepreneurs, the first small oil refinery was built by the government in the 1950s.

  The government became actively involved in industrial activities , with investments in mining, basic industries, energy production and transmission, and the construction of infrastructure, and this continued in the postwar period.

  Government also active on developing the welfare model (investing on education etc)

1970

  The oil crises of the 1970s put the Finnish economy under pressure.

  Oil price started to climb

  Inflation high in Finland

  Bilateral trade agreement with the Soviet Union helped on this matter (agreement had to be followed by both parties). This boosted export demand and helped Finland to avoid the high and sustained unemployment

  Between 1978 and 1979 Finnish currency was devaluated 3 times, with total effect of 19% to boost export industry

1980s

  Electronics industries started to rise

  Economic growth in the 1980s was somewhat better than in most Western economies

  2 devaluations in 1982 (total of 11 %) due to high inflation

  End of the 190s Finland caught up with Swedish GDP

  Finland caught up with the sluggishly-growing Swedish GDP per capita for the first time.

  Re-valuation of Finnish Currency 1989

  Banking system was liberated late 1980s (free capital movements from and to foreign markets)

1990s

  Collapse of Soviet Trade   No more bi-lateral agreements

  Liberal capital movement   Currency loans   Banks needed support from governments

  Depression   GDP fell over 10 % in 3 years   Unemployment up to 18 %   The banking crisis triggered a profound structural change in the Finnish financial sector.

  Devaluation of currency (2 times at 1991)   Exports started to raise already from 1992

  1995 EU membershio

  1998 EMF, Euro-zone

  1997 – Annual growth already over 6 %

EU-era : 1995

  Many factors have influenced the Finnish economy in the past 10-15 years:   EU Membership 1995   Monetary union membership

  Improved credibity of monetary policy,   Lower intrest rates, more stable intrest rates   No more inflation-devaluation cycles

  Strong growth of Electronics and IT-sector (Lead by Nokia)

  Growth of metal and engineering industry (Together with global economic growth)

Statistics

GDP development

Volume index of Finnish industry

Industrial production in Finland

Productivity increase

0,0

20,0

40,0

60,0

80,0

100,0

120,0

1960 1973 1987 1996 1998 2000*

ICOP Estimates of levels of labour productivity in manufacturing, 1960–1996 (value added per hour,

USA=100)

Netherlands

Belgium

Finland

USA

Sweden

Japan

UK

Labour productivity in manufacturing by branch

0

50

100

150

200

250

1925 1938 1960 1974 1990 2000

Number of employed in manufacturing industries, 1925–2000

Textile, clothing and leather

Saw-milling and other timber

Paper and pulp

Metal industries

Electric and electronic applies

Other industries

0

5

10

15

20

25

30

35

40

45

1925 1938 1960 1974 1990 2000

Distribution of industrial value added by major branches, 1925–2000 (%)

Textile, clothing and leather

Saw-milling and other timber

Paper and pulp

Metal industries

Electric and electronic applies

Other industries

R&D Plays important role

Conclusions   Forest industries has always played high role on exports, but it is

changing it’s form   Changing from manufacturing to services

  Strong cluster feeding other branches   Share of Forest industries still remarkable

  Electronic industries has been the rising star in last 20 years.   Strong cluster driven by Nokia   Feeding subcontractors, and service providers   Manufacturing non important in Finland

  Development of Finnish industries in general has been fast since 1950s, especially at 1990s   Key points :

  Second world war   Collapse of trade with Soviet union 1990   -> Domestic crisis, concentration on electronics and services   Lead by global growth of Nokia and IT cluster   High investments to R&D   Changing from manufacturing to services

  Metal and engineering cluster together with chemical industries has been gaining trough global economic situation.

  All industry clusters / segments suffers on global economic situation

  Economy is highly depending on exports

  Investing to R&D is beneficial, and it has proven effects

  Changing from Labor driven to Capital driven ?

Sources   Website, Statistics Finland (www.stat.fi)

  Research paper: Technology and structural change: productivity in the Finnish

  manufacturing industries, 1925 - 2000

  Jukka JALAVA1, Sakari HEIKKINEN2 & Riitta HJERPPE3

  Journal of Economic Development   Volume 15, 2 December 1990

  Growth and Structural Change of the Finnish Economy, 1860-1980.

  Hans C. Blomqvist

  Website, Bank of Finland (www.bof.fi)

  Website , Confederation of Finnish Industries (www.ek.fi)

  Research Paper: Trade-flow Based Industrial Clusters in the Finnish Economy   Growth Through National Synergies

  Outline version for the OECD Cluster Focus Group Workshop 8-9.5. 2000

  Tuomo Pentikäinen , Sakari Luukkainen   VTT Group for Technology Studies

  Website : Wolfram Alpha (www.wolframalpha.com )