OECD warns: Ageing population threatens Finnish standard of living

Organisation urges more competitiveness and wage flexibility

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The rise in the average age of the population threatens to lead to slower economic growth in Finland in the coming years, warns the Organisation of Economic Cooperation and Development in its recent economic survey on Finland.
      According to the OECD, the ageing population underscores the weaknesses of Finland’s labour market - for instance, that demand and supply of labour do not meet. In spite of a high level of unemployment, companies are finding it difficult to recruit the employees that they need. The OECD estimates Finland’s structural unemployment rate at 8.5%, which means that nearly all of Finland’s jobless are difficult to employ.
     
According to the survey, the wave of retirement among the members of the postwar baby boom generation could mean a decline of 0.25 percentage points in Finland’s economic growth in this decade, and growth could decline even more in the following decade.
      The OECD predicts that after 2010, growth in per capita GDP could go down by a full percentage point because of the problematic age structure of the population.
      In fields of new technology, Finland is not expected to reach the same levels of productivity that it was accustomed to in recent years. If the prices of new technology continue to decline, and if the domestic sector, which is protected from international competition, is only moderately successful, the rise in the Finnish standard of living could come to a halt.
     
The economic survey notes that in the 1990s Finland was one of the few European countries to reap the full benefits of the "new economy", involving a sharp increase in productivity from the extensive use of data technology.
      The OECD estimates that in the late ‘90s, growth in Finnish output and productivity was among the fastest in the industrialised countries. The recovery from the international slowdown has also been stronger in Finland than has been the average in the euro zone.
      However, if nothing is done, the OECD warns that Finland could lose its position as a top achiever, and face a long period of slow growth.
     
To avoid the grim scenario, the OECD recommends a number of radical reforms, including measures to increase competition in the Finnish economy. The proposals include cutting the number of state-owned companies, and reducing agricultural subsidies.
      Reforms promoting competition should also be implemented in transport and the retail trade. For instance, regulations on store opening hours should be re-examined.
      The OECD also recommends more flexibility in Finnish labour market practice. According to the organisation, Finland could follow the example of other Nordic Countries, where the implementation of centralised labour agreements is negotiated at the level of individual companies.
      According to the survey, wage agreements should give more room for differences in productivity and profitability. Changes are also recommended in the Finnish system of early retirement, and in unemployment compensation - mainly in the duration of unemployment benefits. The organisation sees the pension reform that is coming into effect in 2005 as a step in the right direction, but warns that it is insufficient.
     
In a previous survey released last spring, the OECD warned that Finland’s public finances could not tolerate new tax cuts, and stated that there were no cyclical reasons to implement such cuts.
      In the new survey, sharp spending curbs and tax cuts are seen as feasible. The organisation feels that the tax cuts should be directed primarily at earners of lower incomes.
      The tax cuts would require more efficiency in public services, cooperation among local authorities, and an increase in private services.
     
By implementing these reforms, the OECD says that the government could achieve its goal of a 75% employment rate, and the problems caused by an ageing population could be solved at least partially.
      Achieving the employment goal would lead to a doubling of the economic growth rate predicted by the OECD in this decade and the next.
      The forecast for Finnish economic growth is unchanged from last spring. The OECD predicts 2.5% growth for this year and 3.7% growth for next year.


Previously in HS International Edition:
  OECD warns Finland of consequences of lower taxes (12.5.2004)

Links:
  OECD: Economic Survey - Finland

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