Finland Inc. is saving too much money
Money has flowed into Finnish national economy for ten years
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By Jyrki Alkio
According to advance information released on Thursday by Finnish Customs, Finland’s balance of trade was EUR 830 million in surplus.
Yawn! Couldn’t care less, or what?
The figure does not even interest economists whose business it is to follow economic developments. The balance of trade has been in surplus every month of the year so far. This was the case every month last year, as well as the previous year, and the year before that.
We would have to go back to 1990 to find a year when Finland’s balance of trade would have been in deficit.
The balance of trade reveals the amount of goods that Finland exports and imports. If the balance is positive, exports exceed imports.
Finland’s long-standing surplus in the balance of trade suggests that Finnish products have sold better abroad than foreign goods have sold in Finland.
As a result of the surplus in trade, more money is flowing into Finland every month. In addition to trade in goods, money moves across borders when people travel, or when companies pay dividends to foreign owners. The gauge, known as the current account, which takes all of these cash flows into consideration, has been in surplus for ten years.
For the sake of simplicity, we could use the name Finland Inc. for all of Finland - its citizens, companies, municipalities, and the state. Usually the entity is called the national economy.
During the past ten years, the national economy, Finland Inc, has been getting richer every day!
Congratulations Finland! Applause, please!
But just a moment. Why is everything so quiet in the front row? Economic experts are certainly not cheering. Isn’t this surplus a wonderful thing?
According to Jaakko Kiander, research professor at the State Research Institute of the Finnish Economy (VATT), it is actually not a good thing. The surplus - specifically the surplus in the current account - means that every day Finland Inc. is putting money under its mattress. Finland Inc. is not using all of its money for day-to-day consumption and investments - for instance for the construction of roads or factories. Instead, some is put in savings or invested abroad.
But surely there can be nothing wrong with saving money, can there? It is good to prepare for a rainy day. The problem is that Finland Inc. has been saving for a rainy day for the past ten years, and apparently seems to be planning to continue to do so for the next ten years - at a time when unemployment remains high.
If a larger amount of the money flowing into Finland were used in this country, consumption and investments would increase, and new jobs would be created.
According to Kiander, who wrote a report published in Wednesday by the Council on Economic Affairs, Finland still has a significant shortage of employment caused by weakness in overall demand.
In plain language, this coded message means that we are still not going to restaurants, or replacing our old cars often enough.
Kiander calculates that Finnish families consume about ten percent less than people in other countries of a similar standard. The reason is not that households in Finland would be putting away more money than those in other countries - on the contrary: Finns have more housing loans and other debts than they have savings.
The problem is that in spite of the growth of recent years, the Finns’ net earnings have not reached the Western European level.
Kiander proposes a tax cut for all wage earners. If all Finns had more money to spend, they would go to bars, buy clothes, and build homes more than they do now.
Not all economists agree. A tax cut would not eliminate unemployment, says Jukka Pekkarinen, head of the Labour Institute for Economic Research. Pekkarinen blames unemployment on the lack of investments. Kiander also does not believe that a cut in income taxes would generate more export industries in Finland, but it would increase investments in the service sector.
According to a study by the Government Institute for Economic Research, a tax cut would be more efficient if it were directed at those with low wages.
Be that as it may, the growth of consumption would help create more retail stores, more services, and more construction. This would take place at the expense of the state and municipalities, because tax cuts would not completely pay for themselves.
So would tax cuts be Finland’s salvation?
Industrial enterprises do not want to make investments, and it is precisely the shortage of investments that creates the surpluses in Finland’s balance of trade and current account.
From the point of view of Finland Inc, ever since the recession of the early 1990s, companies have focused on amassing money and paying off debt.
If Finnish companies build factories, they build them in China or other foreign countries. Foreign companies do not bring new production to Finland. If anything, they buy existing Finnish companies.
Someone somewhere should understand that Finland is a good place for the design and manufacture of high technology products. Would that person also understand that labour in Finland is inexpensive and skilled?
Helsingin Sanomat / first published in print 13.6.2004
JYRKI ALKIO / Helsingin Sanomat
jyrki.alkio@hs.fi
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| 15.6.2004 - THIS WEEK |
 Finland Inc. is saving too much money |
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