Finland - Economy Role of Government

Role of government

As in most European countries that were late in industrializing, the Finnish state played an important role in sponsoring economic development. Thus, in the interwar years, the government carried out crucial agricultural reforms and established pioneering industrial enterprises. During World War II, the government imposed comprehensive economic controls to support the defense effort, many of which remained in force during the reconstruction years. Starting in the 1950s, however, as economic growth overcame production bottlenecks and shortages of consumer goods, the government gradually relaxed the regulatory framework. Nevertheless, wartime intervention in the economy had left institutional legacies that influenced later economic policies.

The need to maintain export markets in Western Europe, itself engaged in a process of economic integration by the late 1950s, led the government to decide to liberalize trade in industrial products. Free trade, in turn, undermined the government's ability to isolate the domestic economy from world market conditions. Increasingly tied to the economies of the Nordic area and Western Europe, Finland was constrained to adopt policies similar to those in force elsewhere. Although the policy packages varied in response to domestic political developments and international market shifts, they all took into account Finland's position as a small, relatively open economy, in which fluctuations in raw material exports had a significant impact on the business cycle. By the late 1980s, when exports and imports each accounted for about one-quarter of GDP, export competitiveness had become the dominant policy concern.

Some analysts saw in Finnish economic management a liberal, noninterventionist variant of the economic polices of other Nordic states. Thus, Finland, less prosperous than its Western neighbors, did not develop a comprehensive welfare state until the late 1960s, and it held benefits below the Scandinavian average. Like other Nordic states, Finland had institutionalized wage and benefit negotiations, but the Finnish system of industrial relations involved substantially more conflict than the systems in the Scandinavian states. Along the same lines, Finland protected domestic agriculture, but generally avoided bailing out declining industrial concerns, favoring measures to facilitate structural adjustment. Finnish politicians, some of whom saw Sweden as a model, claimed that their neighbor's mistakes had taught them to avoid excessive welfare programs and industrial subsidies that would slow adaptation to new market conditions. Foreign analysts noted, however, that special factors, such as Finland's relatively late industrial development and the role of Finland's trade with the Soviet Union, also helped to explain deviations from the general Nordic pattern. By the 1980s, as austerity policies spread throughout the region, aspects of Finnish policy seemed to lead rather than to follow Nordic developments.

Despite the laissez-faire slant of Finnish economic policy, direct state intervention strongly influenced operating conditions in many sectors. In agriculture, for example, years of government support and tariff protection had sustained a relatively large rural population that expected continued aid regardless of the need to cut farm surpluses. Similarly, the state had established enterprises in capital-intensive, high-risk sectors, including energy, minerals, basic processing, and manufacturing in which private investment had proven inadequate. By the mid-1980s, private capital markets were relatively well-developed, but the twenty state enterprises still accounted for some 21 percent of industrial production, and they included many of the country's leading firms, such as the Kemira Group in chemicals, Enzo-Gutzeit in wood processing, the Valmet Group in engineering and shipbuilding, and Valvilla in textiles. Yet industrial policy no longer depended on state ownership, and these enterprises functioned much as private companies. Indeed, starting in the early 1980s, the Ministry of Trade and Industry, which was responsible for state enterprises, began to demand that they earn profits. The state maintained monopolies in alcoholic beverages, energy (Neste and Imatran Voima), and minerals (the Outokumpu Group and Rautaruukki) for political reasons, but divestment in other sectors was a possibility. In 1988 the government decided to allow certain state enterprises to sell shares. The Valmet Group was the first state firm to announce plans for a stock offering, and observers reported that Outokumpu, Kemira, and Neste were also candidates for partial privatization, depending on how well the Valmet stocks sold. The government planned to retain controlling interests in the companies for at least several years, but some politicians favored complete privatization.

Privatization and deregulation were ways to dismantle the relics of earlier economic policies and to release public resources for other purposes. In the late 1980s, government interest concentrated on speeding rationalization and restructuring, even at the cost of higher unemployment and greater industrial concentration. Industrial policy sought to foster a shift away from heavy engineering toward electronics and high-technology production. The state sharply increased expenditures for research and development, and it helped coordinate efforts among universities, private industry, and government research centers. The government and the Bank of Finland (BOF), Finland's central bank, gradually deregulated the financial sector in an effort to improve the efficiency of capital markets. Thus, although the state continued to control certain key sectors, such as agriculture, forestry, minerals, and energy, overall economic policy had shifted from sectoral intervention toward efforts to improve productivity and market efficiency.

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