If Finland is the best Europe can do we should be worried; The country’s plummeting productivity is down to bad luck and bad policies

June 23, 2014 7:11 pm

If Finland is the best Europe can do we should be worried

By Risto Penttila

The country’s plummeting productivity is down to bad luck and bad policies, writes Risto Penttila

Either the World Economic Forum is wrong or Europe is in deep trouble. The latest competitiveness rankings from the Swiss think-tank list Finland as the most competitive country in the EU. At first, the country’s business leaders thought someone was pulling their leg. But the news was real. If Finland is the best the EU can offer, we should all be very concerned.

For a start, Finland’s economy has not grown in five years. The unemployment rate is 9 per cent. The flagship company, Nokia, was forced to sell its handset business to Microsoft last year. Its shipyards are in trouble; its forestry companies are cutting costs and closing plants. Public expenditure is expected to reach 58 per cent of gross domestic product this year – a larger share of output even than France. Its middle class pays one of the highest income tax rates in Europe. Its public debt is growing. And matters will only worsen: the Finnish population is ageing faster than that of any other European country.

It is easy to see why Finland is widely admired by aficionados of the equal society. There are hardly any capitalists left there. Nokia is no longer producing millionaires, and those who come from “old money” have seen the value of their investments decline. Viewed through the lens of the Gini index – the most common indicator of income inequality – that looks like a big success. Finland registers about 25, far lower than the European average of about 30.

It is much more difficult to fathom why the WEF has ranked Finland as the world’s third most competitive country, after Switzerland and Singapore. Perhaps it is because of Angry Birds or Clash of Clans, extremely popular mobile games created in Finland. Perhaps it is because Klaus Schwab, the WEF’s founder, trained in Finland as a young man. Perhaps it is because of his organisation’s heavy emphasis on institutions.

The report’s authors define competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country”. But Finland’s experience shows that having well-functioning institutions is not a cure-all. The country ticks all the boxes: well-protected property rights, good schools, reliable infrastructure, predictable macroeconomic policies. It is one of the biggest spenders on research and development in the world. Yet the productivity of Finnish industries has plummeted since 2009.

In part, this is down to bad luck – which came to Finland in the form of Steve Jobs. The iPhone erased Nokia’s lead in mobile phones, while the iPad decimated Finland’s paper industry as people discarded newsprint for digital news. But it is also the result of bad policies. Until recently the country was governed by a coalition of no fewer than six parties spanning the ideological spectrum from conservatives to former communists – with the Greens, and the representatives of the Swedish-speaking minority, thrown in for good measure. No wonder Jyrki Katainen, the former prime minister, decided to seek a Brussels job instead.

Unlike Sweden, the country has resisted introducing sticks and carrots for the unemployed that are needed to make its labour markets work. The result is a yawning gap in labour participation rates – of almost 5 percentage points in Sweden’s favour. Nor has Finland answered calls from the European Commission and the International Monetary Fund to restructure its inefficient local government and cut public spending.

There are two lessons from this sorry story. First, well-functioning institutions do not always translate into competitiveness. It seems that there is a point where further investments in public institutions become counterproductive. At that point the emphasis must be on reducing the size of the public sector and easing the tax burden.

Second, leadership matters. Had Nokia been more successful in responding to the iPhone challenge the country might be able to afford its very large public sector.

Had the Finnish government introduced reforms immediately after the shockwaves of the financial crisis hit in 2009 we might deserve to be ranked the most competitive country in the EU – but that is not where we are today. The incoming government of Alexander Stubb has bolder plans than its predecessor. It must see them through.

The writer is chief executive of the Finnish chamber of commerce