Tag Archives: Balance of Trade

‘A return to Pulp-Finland’ & the current balance of trade

It is quite difficult to describe the various reactions to the sale of Nokia (or big parts of it) to Microsoft. One reaction in Tekniikka&Talous is that ‘Finland is going back from Electronics-Finland to Pulp-Finland.’

This is rather a short-cut, and given the many direct and indirect off-shoots from Nokia in the broad electronics sector, from Rovio to Jolla quite probably nonsense.

But the point the article wants to make is a valid one: the growth and size of pulp-exports is not insignificant. Still, it is much smaller than the electronics numbers from the ‘good’ period. Metals-exports on the other hand experienced a decline thanks to declining world prices.

This preliminary graph shows that the Finnish trade balance has moved in surplus again,


What should be done?

In reaction to this news item (‘the Confederation of Finnish Industries demands that all possible flexibility is taken into use’) – the point is that this confederation wants to do everything allowed by the framework agreement to increase competitiveness and (labour) productivity.
First, the quest for increased productivity is usually a codeword for redundancies or other reorganizations to reduce personnel or use it flexibly. The point is to save on personnel costs. Why? Labour productivity is Total Production/Personnel (or Personnel Hours, sometimes). Which means that labour productivity increases if you decrease personnel and somehow get the employees to do the same production with less people. Therefore, unfortunately, this call for flexibility and increased productivity usually goes hand in hand with increased pressure on employees, stress, absenteeism etc. The report of the Occupational Health Institute on the Finnish paper industry is instructive in this respect.
Still, the employers are paying the wages of the employees, and if the Finnish industry is going under, then it doesn’t bode well for employees either. Like I pointed out in this post and this post, there are two issues that are worrying for the Finnish (export) industry: an increase of Real Unit Labor Costs in comparison to Germany and a worsening trade balance (although the latter is possibly a result of the former in combination with weakening demand in Germany and elsewhere). Also the apparently increasing inflation in Finland is a fairly bad sign (at least regarding exports).
So, as far as I can see, for the good of the Finnish economy and its employees, something has to be done.  Like I said in the previous posts, it seems that domestic demand is holding up fairly well for now, although apparently consumer confidence is currently extremely low if not zero. But the more important issue is the condition of the export industry, since this is where Finland, like all small open economies, earns its money.

In my opinion, there are two border conditions for a new central agreement. First, wages are extremely sticky downwards, which is an empirically well-established element of Keynesian macro–economics (see e.g. this post by Paul Krugman on recent research). Note that this refers mainly to nominal wage rigidity. As the Finnish experience of the 1990s crisis has shown, wages may be sticky but a so-called ‘zero line’ is nonetheless (temporarily) effective in cutting real wages, at least if inflation estimates are more or less correct. Second, for Finland there is no use trying to compete in manufacturing with lower-wage countries. Finnish unit labour costs are simply relatively high, for a multitude of reasons, and simply trying to cut wages is not enough. Furthermore, Finland is where it is, so that there is always the extra burden of transport costs.

Here, I don’t want to discuss the potential of leaving the euro, because the only condition for when that is rational is when Finnish inflation is so high, that the negative effects on the exchange rate from leaving the euro are compensated by this. But since this is akin to throwing Finland’s financial credibility (AAA status etc) away, this is a completely insane idea. Only if Finland could credibly devalue against whatever currency Germany uses, without endangering the national economy, this might make sense but is extremely risky. If anything, currently Finland’s and Germany’s membership in the euro most likely represses their potential exchange rate against dollar and yen.

So, given these restraints, what can be done? Finnish companies in the export sectors can only compete on superior quality and the best service there is. These things do not reduce unit labour costs, but they make the price difference worth it. As for improving labour productivity, squeezing more work in less time is a kind of old-fashioned method. Re-organizing production processes, so that employees’ individual input can increase might be more effective and the trust endowed on employees might also reduce absenteeism and make for better well-being at work.

The truth is of course that Finland is a kind of post-national country when it comes to the value chains of the products Finnish companies sell. Pekka Yli-Anttila of ETLA had this presentation at some point, in promotion of a very good study of the value-added in the Finnish economy. The main point that he stressed, was that Finland shouldn’t be doing is the actual production of goods (like phones) – that should be done in lower-wage countries. For the Finnish economy this would leave design, R&D, sales, maintenance and branding.

To my idea, this very realistic scenario raises some very hard questions about the current system of industrial relations, the Finnish welfare-system and programs for re-schooling. If the ideas of Yli-Anttila are to be taken seriously, this would necessitate a great change away from the dominance of SAK and TEAM (as openers for collective agreement negotiations) and a very broad policy to move employees away from manufacturing to other sectors (or to other jobs within manufacturing that do not involve ‘making’ stuff).

In fact, the required changes do to some extent tie in with labour market shortages in some sectors, due to changing demographics. But simply said, I do not believe current politicians (of any party) have either the vision or the courage to promote the (admittedly radical) policies that are needed to keep Finland’s social, environmental and economic welfare intact. Now is the time – not to cut wages to keep manufacturing alive a bit longer,but to ensure that employees can get out before it is too late (I am not suggesting ALL manufacturing should disappear from Finland, I only suggest that a realistic view should be taken to industries in difficulties on the world market).

Updated – The state of Finland in the Eurocrisis

UPDATE: these graphs are already outdated, I have to see what Eurostat can give in terms of newer data. A year is a long time in economies! And maybe in particular the stuff about the housing bubble is not accurate – I have a newer post about that here.


Something slightly different this time. In a reaction to this news, which says that Finnish exports suffer from the eurocrisis, I would like to present some data (all from Eurostat) on how Finland has fared since around 2007. The idea came from posts like this one by Edward Hugh, most recently about Slovenia. I haven’t managed to get completely similar data graphs, but these will do.

First of all, Finland is one of the few Eurocountries left with a triple-A status, which apparently gives it some clout regarding its wished in the ongoing resolution of the crisis (recall the demands for collateral on Greece, now repeated for Spain?). The triple-A status derives ostensibly from Finland’s low government debt, which is show below since 2007.

Finnish and German Government Debt

Although it is still much lower than Germany’s level, it is creeping upwards. But Finland is clearly one of the ‘good boys’.

Does the low interest rate of the ECB fuel a housing bubble in Finland? It does not appear to be so, at least for the aggregate, it is nonetheless a slowly upwards trend which has its own problems. But there might be a distinction between the capital area around Helsinki and the rest of Finland. I will try to figure that out using Eurostat data.

Also construction output is remarkably stable, not much affected by the eurocrisis. or showing signs of a bubble. One reason for this might be the pull of the Helsinki area, where there is a shortage of affordable housing.

But the low rates of the ECB may seem to lead to increasing inflation in Finland. This is in itself not so surprising at this moment, but it is part of the explanation of Finnish reluctance to go ‘all-in’ regarding interest rates, because these would lead to increasing inflationary pressure. A more detailed investigation of the various components of Eurostat’s inflation indicator will give a hint of the sources for the inflation, but I expect that these are mostly related to imported products (but that is an educated guess, will follow up).

This may also be seen in Finland’s worsening position on exporting goods:

As can be seen, this is a long term trend, although the crisis from 2007 onwards may have worsened this position. In a different graph, exports and imports to the EU show nonetheless that the balance is more positive, but barely so.

Finally, the primary balance of government budget shows that things have been slightly bad, but with the current government’s focus on getting the budget balanced, the budget deficit will probably soon disappear.

All in all, this is a very quick and dirty post about the current status of the Finnish economy- There are two things in particular that are worrying: inflation and the trade balance. The first has to do with the interest rate set by the ECB at a very low level, and the second with (presumably) declining demand in especially Germany and the rest of the world. Considering retail, domestic demand seems to be holding up quite well.

At least after the worst of the initial economic crisis, retail has recovered to its 2007 peak.

Many aspects of the economy are left outside this post, especially concerning unemployment and various export sectors, but the Finnish economy seems to be doing quite well still. It remains to be seen what happens to inflation and the balance of trade, though. For a small export-oriented economy it is not a good development that it might be importing more than it is exporting.


I toyed around with Eurostat some more and I extracted more statistical information. First up is GDP per head, which does look good still for Finland:

Source: Eurostat

Two things do stand out however: the financial crisis in the early 1990s was indeed very severe and not unlike the present one (a lot could be learned from how Finland and Sweden dealt with their banking crises). Second, although the path of growth has been resumed it nonetheless looks like the Finnish economy is performing under its full potential (if we’d extrapolate the trend from pre-2007, it is clear the current growth track is at a lower level). But not bad at all.

Unemployment then. Finland has a union-managed system of unemployment funds, which means there is a large incentive to belong to a union (you get up to 500 days of a certain percentage of your last salary, more or less). This does not affect the level of unemployment, but it does reduces the human suffering.

Source: Eurostat

As can be seen, in the early 1990s the unemployment rate reached very high levels, not unlike what is seen in Spain or Greece (although those are worse in the present time). But although the unemployment rate has dropped since then, it is still quite high and seems to have stabilized around 7-8 %. Furthermore, the present crisis has again sent the rate upwards, at least temporarily. Behind this relatively high unemployment rate lies a complex story of economic restructuring which has to be told elsewhere, but basically it is from manufacturing to high-tech services (think Nokia, F-Secure). This has led to a large proportion of long-term unemployed, that is unable to find work since their jobs don’t exist anymore.

Source: Eurostat

This graph, which also shows the seasonal variation, shows that in Finland, even nowadays some 20% of unemployment is long-term unemployment. This is a potential problem in terms of the welfare-state but also politically, because these people are not so likely to have confidence in the current political parties, which, after all, haven’t managed to create policies that get them back to work.