Tag Archives: Innovation

“A crazy idea about Italy”


In some way, Finland used to be a lot like Italy – using devaluations to boost export competitiveness. But of course Finland is seen as one of the core countries, even though its economy is in tatters. Finland is also much smaller and has a much less diverse economy than Italy. Nonetheless, it is interesting to think more about Finland in the context of differences between Finland and Italy in e.g. labour market participation, education, innovation capacity and labor market relations.


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:


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.

The perils of post-closure support

[This is a draft, I try to get my thoughts straight, originally published 27.2.2012]

This story started with the closure of the Kemijärvi pulp mill in 2008. Although it was argued by some that it was pure destruction of capital and knowledge, as this mill had a very advanced testing lab, Stora Enso closed the mill ostensibly because it did not want competitors to buy it.

Kemijärvi is in the very north of Finland, and the loss of an employer of this size has tremendous local consequences. A local protest movement, including businessmen and employees alike, was formed and tried to pressure politics and Stora Enso not to close the mill. Alas.

Something did happen though after the mill was closed. The (then) Anaika Group informed that it would buy the mill to produce laminated wood products. According to this news it was a project driven by the state and Stora Enso to help the region. Both Stora Enso and the state (through Finvera) borrowed substantial sums of capital to Anaika Group, which by then had changed its name to Arktos Group.

However, the project was never completed and production never started. In 2011 there were co-decision procedures and a few weeks ago the production was stopped. Rather incredibly, Arktos Group got in 2010 a ‘Success certificate’ from the research and analytics division of Kauppalehti Oy.

Without further facts, it is not entirely clear what happened in this episode, but the owner of Arktos Group mentioned problems with technology conversion and deficient skills of the personnel regarding producing laminated wood products. The failure of the laminated wood factory can be explained sociologically as well as economically. Both explanations more or less amount to the same, though. Sociologically, it can be said that the Kemijärvi pulp mill was embedded in its surroundings (physical and business-wise). It got its raw materials locally but apparently also did international work thanks to its advanced lab. The Arktos laminated wood factory was not embedded in the same environment, although it also would procure wood locally. Its products (had there been products) were finished products ready to sell through hardware stores or furniture makers. The lack of connection between what was to be done at Arktos Group in Kemijärvi and the rest of its relevant market was too big. This is where we switch to economic explanation: the transport of pulp, due to its bulk nature, is most likely much cheaper than laminated wood transport. Pulp from Kemijärvi most likely went to the mills in Kemi and Oulu, whereas the sale of laminated wood products would have been national and non-bulk. From the point of view of the end-product, the physical location of a factory of (nearly) consumer products in Kemijärvi was not very well chosen. Local demand would not have been enough, at least.

The owner of Pölkky Oy, mentioned in the first link, has some critical words for state interference in investments. He especially criticized that the state came in so early, before there was a ‘product’.

A similar situation exists in Voikkaa, where the planned business center in the former paper mill has not yet materialized, despite optimistic sounds in Melin and Mamia’s (2010) Tapaus Voikkaa. On the other hand, the Hamina region was lucky when Google bought paper mill real estate to house a server park. This, however, did not necessarily benefit the former paper mill employees.

Reschooling programs should be studied for effectivity to re-employ, but a study for the Confederation of Finnish Trade Unions shows that re-employment programs have not worked very well.

The problem is simply stated: Finland is an ‘archipelago of paper communities’, and if a mill closes, not only is this a personal catastrophe for the employees, it is also a big problem for the community, which one way or the other depends on the spill-over effects of paper mill employment (employees shop, buy houses, drive cars, eat in restaurants, participate in politics, etc).

It is really difficult to replace lost demand for jobs in the paper industry. When a mill closes, all of a sudden a lot of employees with relatively similar work experience find themselves competing for jobs. They might not find work in their own sector and have to re-school. The laminated wood production planned for Kemijärvi was possible the kind of new investment that had possibilities to employ former mill employees in work close to their own experience, but the Google server hall or Voikkaa Business Park companies might not have the same effect.

This is really one of the hazards of capitalism for society: in regions where employment is heavily dependent on a single sector (or employer), its employees are left in the cold when the work disappears. In the case of Stora Enso, the Finnish state has a rather responsible position, as it partially owns the company.

Why do Finnish paper companies prefer to close mills rather than sell them? – Some thoughts

(Originally posted 9.2.2012)

Today in the Finnish news a surprising win for the French labour movement of the M-Real mill in Alizay. Through a wide range of resistance, the local section of the French CGT labour union pressured M-Real into re-considering the possibility to sell the mill.

This blue-print of what to do with ‘unprofitable’ or ‘undesirable’ mills is well-known in Finland. The Voikkaa paper mill was closed in 2006 (the first non-bankruptcy closure in Finland) and subsequently dismantled. The Summa paper mill was closed in 2008, its factory halls sold to Google for the use of servers and two of the three paper machines were dismantled and scrapped, the third on sale. Also in Kajaani the paper machines were dismantled and one was sold to India. The most recent case, the Myllykoski mill, also follows the same blue-print: the machines are in the process of being dismantled. Currently, they are planned to be stored locally, no other plans for the machines are known publicly. Also in the case of the Kemijärvi pulp mill, Stora Enso rather closed the mill than sell it.

Why do these companies prefer to dismantle working mills rather than sell them? The examples of Lohja Paper and the Kirkniemi paper mill (bought respectively by Mondi Ltd and Sappi Ltd) show that it can happen differently. At least for the former the explanation might be that it was a family-owned mill, with relatively old paper machines and lowish annual production volumes of special paper.

One thought, which is expressed also in the news article, is that paper companies don’t want production capacity falls in the hands of competitors. The apparent reason for this is that the production capacity might be used against the former owner. As also expressed in the previous post, in a situation of near-oligopoly (in Europe), it is not beneficial for company X to divest of a mill by selling it to Y, which means that either X has less advantage of the competitive restructuring relative to total production capacity on the market or that Y might gain an advantage for when demand is stronger.

There is, however, a problem with that argument (even if the market situation is more competitive than presumed) – if company X doesn’t want that a certain paper mill does not benefit a competitor, e.g. through a sale of the mill to that competitor, then it must mean that the paper mill has more potential than the company X wants to admit. True, it might be that a mill needs additional investments or some other reorganization, but perhaps in the not-so-immediate future paper mills that are not competitive to company X might be so for company Y.

One big question of course is the existence of overcapacity in (Western-) Europe. This does provide something of a rationale to permanently remove capacity from the market. However, this overcapacity is also the Finnish companies’ own doing in part.

So are Finnish companies doing their competitors a favour by closing paper mills? This is impossible to say without serious analysis (for which there might not be sufficient data). In any case, this is not the creative destruction advocated by Joseph Schumpeter; it is just capital destruction. A sale of a mill to a competitor might in the end seal the fate of a paper mill, but Finnish paper companies are not the sole possessors of wisdom, and especially considering the nature of Finnish paper industry communities, these companies have to show more responsibility for the fate of their employees. If the sale to a competitor in the somewhat longer term leads to the conclusion that the mill is not, in fact, economically viable, then that is the end of the story. But the social responsibility of the paper companies demands that a sale of ‘unwanted’ paper companies is at least seriously considered (especially regarding Stora Enso, in which the Finnish state has a majority stake through an investment company and the the Social Insurance Instution (KELA)).