Tag Archives: energy

Finnish competitiveness, trade balance and wrong-headed economic policies

[For more on Finland’s exports, see here. The data is until 2012 but as I tell here in Finnish, the picture has not changed much except that machine exports to China started to decline around 2012)

It seems the rest of the world finally starts to acknowledge Finland’s problems. On the one hand, it is vital to see what the problems are, but it is just sad that Finland has ended up in this ‘trap’, as Bloomberg calls it.

Those ‘in the know’ – to which I include myself, have known about this situation for quite a long time. Indeed, while originally I started this blog to write in English about the Finnish paper industry and industrial relations, I quickly moved to the impact of the eurocrisis.

Unfortunately to say, in my view there is a much longer story to what Bloomberg writes and it does very much relate to the euro. Nokia and the Finnish paper industry are in a way ‘collateral damage’. There are potentially many ways to explain the ‘slide downwards’ and especially on the centre-right and in business circles many blame high wage costs (and/or unit labour costs). These do have impact of course, but only (and especially!) in relation to Germany’s policies during the period 2000-2007, broadly. Another issue, which is entirely hidden from the discourse is the relevance of profit margins. In perfect competition (which especially in Finland does not exist) (marginal) profit tends to zero. But in the context of an economy with a relatively small number of big players – e.g. the paper industry but domestically also supermarket/retail chains – where the companies are on the stock exchange, the profit margin matters a lot and very roughly speaking one way to keep the profit margin steady is to cut other costs.

So if we accept this basic mathematical fact, it follows that in a ‘quarterly report economy’ companies would aim for quick profits in whatever way rather than for long term investment, at least domestically. And in this context, there is also a big difference between investing in Europe or domestically (which may be less profitable, given weak demand) and elsewhere in the world.

(There are of course many exceptions to this view – think of UPM-Kymmene, which greatly expands a pulp mill. But as Statistics Finland reported private investments have decreased, and in the pulp and paper industry the domestic investment has declined for a long time already, to quite a large extent to be replaced by foreign investments (which is true for many big Finnish firms). )

The main evidence I see in this regard, is the declining current account surplus. Here, at the site of the Bank of Finland you can see the development of the current account (and trade) balance for Finland since 1998. Earlier, I made a graph based on Eurostat data of the same development – although only goods – but with (probably) a different methodology. It looks like this:

Finland Goods Exports Balance

In the story which attributes a large part of the Eurocrisis to the imbalances within Europe, this is a good development, as it restores a bit of balance. But in the end Finland is a small player in this – the Netherlands and Germany are much more relevant.

But to return to the argument – the Finnish current account balance, and in particular the trade balance has weakened. The question is: why? Finland, in my view, has initially gained a lot through the favourable dollar/euro exchange rate, in which phase many Finnish companies (in particular the forest industry companies) could make investments abroad at a favourable moment. I have written about this in my dissertation regarding the paper industry. There it was simply a continuation of the fact that the domestic markets were ‘ready’ – no more consolidation could happen without the competition authorities interfering. Although this process had already started in the 1990s, nonetheless domestic investment declined even more now.

From 2003 onwards however, the exchange rate has been more unfavourable for Finland (and other euro-countries). Finland’s main trading partners are Russia, Sweden, Germany and China, all of with which Finland has had a trade deficit in 2012. Finland does have a trade surplus with the USA and the UK – regardless of the exchange rate. It is a topic for further research to find out what is imported from where, but Russia is at least mostly responsible for oil/gas and timber for the paper industry. Sweden also accounts for a lot of raw materials, including chemicals, and China exports many things to Finland (and the rest of the world). But on balance, still, Finland imports more than it exports. This is a graph with the major trade partners (excl. China):

Data by ULJAS/Finnish Customs

Data by ULJAS/Finnish Customs

The hard-to-see yellow line indicates Russia. My quick-and-dirty take on the “Finland’s wage costs are higher than Germany’s” is this: even though Finland’s unit labour costs have increases relative to Germany’s, and also Finland’s relative exchange rate within the eurozone has gone worse, this has not significantly affected trade with Germany. Basically, from 2003 onwards Finland has had a fairly stable trade deficit with Germany. But the deficit with Russia has worsened much more, while the trade balance with the USA and UK may have improved.

So what is really happening here? Why the obsession with Finnish wage costs? Finland always presents itself as competing with Germany on high-quality goods. But it can’t be (entirely) the issue of labour costs, because that picture looks like this:

RULC

Yes, Finnish unit labour costs have risen faster than Germany’s since 2007, but regardless of this, the trade balance with Germany has not significantly weakened. The trade balance with Russia nonetheless DID start to weaken around this time. So my take is that the whole competitiveness debate (at least in Finland) is based on completely the wrong indicators: the weakened trade balance doesn’t have to do with Finland becoming less competitive relative to Germany but has a lot to do with trade with Russia. And the following graph shows why. It shows the value (in euros) of imports of various categories of products (in the CN-nomenclature used by the EU).

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

So where does the worsened trade balance with Russia come from? Simple – a huge increase in the (euro) value of mineral fuels.

In terms of the Bloomberg story, where does that leave us? Unfortunately, in the light of the data presented here the conclusion must be that the Finnish government and the labour market organisations (very much including the unions) are looking at the wrong solution for the wrong problem. Aiming for wage moderation is simply not going to help with this problem of rising Russian energy prices. There may be a difference in relative labour costs between Finland and Germany, but as the graphs above show, it is unlikely that even similar labour costs would improve the trade balance with Germany.

So all that talk about improving competitiveness and getting exports going again: fine, but it doesn’t relate to the major problem Finland seems to have – which is a large fuel bill. And to me it sounds rather unreasonable to try to solve this problem by taking on wages – as these affect domestic demand also. And I have shown earlier, it seems that for a fairly long time, domestic demand has kept Finland floating.

The question of increasing investment is important, but it does not necessarily relate to the current crisis, especially Finland is still seen as one of the most innovative countries, thanks to its infrastructure, highly educated work-force and IT-qualities. If we combine these issues with the problem then now would be a very good time for Finland to make a transition to the Green economy/Green technology – something which is already happening in the pulp and paper industries.

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The use of wood as a renewable source of energy

Eurostat always has some kind of news. Today my rss-reader featured this press release on the use of wood and wood waste for renewable energy. Not surprisingly, Finland has a rather high share (21% of total gross inland energy consumption in 2010), and of renewables, wood and wood waste provides 85% of gross inland energy consumption from renewables in 2010.

What is interesting though is the difference in the  share of wood and wood waste of gross inland energy consumption from renewables between Finland and Sweden (85% vs 57%). One explanation is surely the relative abundance of hydropower in Sweden.

One thing is at least clear from this publication of Statistics Sweden – the paper industry approximately provides its own fuel as much as in Finland.

 

It would be interesting to compare the positions of the Finnish and Swedish paper industry companies regarding nuclear energy – in Finland both the industry federation and the labour union lobbied for nuclear energy (i.e. an expansion). Given the delays of Olkiluoto III and the disappearing appeal of the Fennovoima-project (German investors abandoned the project), in combination with the memory of Fukushima may have consequences for the future of nuclear energy in Finland as well as the position of Finnish paper industry companies as energy providers.

The situation of the Finnish forest industries – low labour costs are the only source of competitiveness?

The Finnish Forest Industries Federation published a kind of press release of the situation of the forest industries until September this year. The overall picture is both positive and negative, as a result of the economic crisis. But on the other hand, the accession of Russia to the WTO might be positive for the Finnish paper industry.

On the issue of labour, however, the federation is placing the blame for potential competitiveness loss on labour and the labour union.

Moderate labour costs enable the forest industry to retain its competitiveness

All employee categories of both the paper industry and the mechanical forest industry concluded collective bargaining agreements that were in line with the framework agreement negotiated between the central labour market organisations.

[…]

Finland’s cost competitiveness must be looked after. If labour costs are permitted to rise, Finland’s competitiveness will weaken further in relation to our rival nations, and this will have a negative impact on corporate willingness to invest in our country.

So, there is the statement that moderate labour costs help competitiveness. So far, so good – this is kind of standard Wolfgang Streeck -fare of responsible labour unions (wage moderation etc., also like in 1982 in The Netherlands’ Akkoord van Wassenaar (‘Wassenaar Agreement’), which help industries to remain competitive by not letting wage costs run out of hand. However, the deal in those cases was really a deal: in accepting only very moderate wage growth, labour unions in the Netherlands and Germany got for their responsibility employment security (and some other goodies related to co-determination). In this sense, it was really a trade-off for both employers and employees in which both parties benefited in the long term.

If we look at METLA’s statistics of real income development, then since 2005 real income (as an index) has increased fairly moderately, which is mostly due to inflation, which also explains the fairly large jump in 2008-2009, when inflation in Finland was nearly 3,5 percent. Nominal wage increases have been very moderate since 2005. So, in collective bargaining the labour union has been prudent, and historically the Finnish Paper Workers’ Union has commonly taken into account the industry’s competitive position.

And we must not forget, as I have also argued in my dissertation, that although  labour costs are not marginal, they are not a very great part of total costs. Energy, logistics and raw materials account for the major changes in costs. In particular the raw materials, which may be timber and chemicals etc., fluctuate in price and there is a whole separate discussion on how to improve the availability and price level of timber for the paper industry.

But in the context of the employers’ federation, labour costs are the primary ‘bad guy’, as these are the few costs that can somehow be moderated through collective bargaining, whereas costs for transport, raw materials and energy are much less in the control of the companies. So let’s look at the statement again:

If labour costs are permitted to rise, Finland’s competitiveness will weaken further in relation to our rival nations, and this will have a negative impact on corporate willingness to invest in our country.

This indicates a belief that only labour costs drive the competitiveness of the Finnish forest industries, which is plain wrong. Moreover, labour costs can easily rise if other parts of the cost equation decline! And the bit about investment is just the stuff that comes from male cattle’s behind, because investment is surely not only related to labour costs. Other issues are taken in account too: the skills of the workforce, tax levels, availability of a supportive infrastructure, a value-chain of related businesses…let’s not forget that Finland has a fairly unique capacity in know-how and scientific institutions related to the forest industries – the whole idea of the cluster of the forest industries is to show the added value of the whole of Finnish R&D, knowledge, resources etc.

Concludingly, it is rather misleading to single out labour costs as the only important driver of competitiveness, especially since the same press release mentions transport costs already in the beginning. Besides, it is kind of harsh in an environment where already more than 4000 people have lost their job in the paper industry, even after serious efforts to implement cost saving programs. The statement in the press release does not do justice to the men and women who work in the forest industries.

Furthermore, it is difficult to square the resistance to the Sulphur Directive with the statement that ‘The forest industry as the locomotive for a low-carbon society’ is an important future direction. See also this separate press release.