Blogs I Follow
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:
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):
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).
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.
Lähetyksessä on haastattelu pääministeri Kataisen kanssa, missä hän antaa hänen (ja hallituksen) näkemyksiä eri Suomen talouden kehityksistä. Siinä on hyvät ja erittäin huonot pointit.
Hyvä ja kiitettävä on mitä Katainen sanoo asenteistä “vanhojen ihmisten” kohtaan työelämässä. Vaikka en ole täysin vakuuttunut siitä, että työurien pidentämistä on kaikkien ratkaisu, on pakko olla mahdollisuudet “vanhemmille” työnhakijoille.
Erittäin huono ajatus on taas tässä: ” Katainen myöntää myös, että valtionvelan kasvua ei nykymenolla saada taittumaan. Keinoksi hän mainitsee lisäsäästöt.”
Valtion velka kasvaa koska talous menee alamäkeen ja enemmän ihmiset turvautuvat Suomen sosiaaliturvaan. On täysin normaalia että valtion velka kasvaa (muistakaa miten meni laman aikana).
Sen lisäksi vaadin että Kataisen neuvonantajat tutustuvat jo tutkimuksiin, alkaen Keynesista, jotka näyttävät että taantuma on täysin väärä aika leikata budjettia. Tähän lisäisin tutustua Raha ja talous- blogiin, jossa Lauri Holappa ja Jussi Ahokas kirjoittavat hyvin selkeästi eri politiikkien hyvistä ja huonoista puolista, mm. Elvytyspolitiikasta.
Nokka kohti tulevaisuuden työelämää!
Maailma rasisminvastaisten tutkijoiden silmin
Anwar Shaikh - Capitalism: Competition, Conflict, Crises (2016)
Catching all manner of thought
blogging from a marxist economist
Mish's Global Economic Trend Analysis
Vihreä yrittäjä, äiti, kaupunginvaltuutettu Helsingissä
The place to find random cool things
Miia Kosonen | KTT, tietojohtaminen, verkkoyhteisöt, sosiaalinen media | Ruokolahti, FI