Warning! Painful Recovery Ahead

By Juhana Rossi
     
      “The night is not so long that it would not be followed by a day.” This is how Prime Minister Esko Aho (Centre) concluded his New Year’s Day speech in 1993.
      Aho was trying to encourage Finns who had been crushed by recession. The encouragement was sorely needed.
      In January 1993 the recession had continued for two years. During this time the Finnish economy declined by more than 10%, and it was to shrink another per cent in 1993.
      The nosedive gave Finland a questionable distinction: it became the only Western industrial country to have experienced what amounted to a full-blown, flat-out depression since the Second World War.
     
In the midst of the awful economic news and unemployment figures, Aho’s optimism was nevertheless well-founded.
      The first reason was quite simple.
      The downturn reduced Finnish GDP by so much that at some point it simply had to start growing again.
      Also promoting recovery was the devaluation of the Finnish currency, the markka, which made Finnish export industry competitive for a long time.
      There were also two unanticipated factors that helped put Finland back onto its feet. Mobile phone manufacturer Nokia, and in a broader sense, the rise of the data communications industry brought Finland work and prosperity.
      At the same time, conditions in the world economy became suitable for intense economic growth again.
     
Aho’s predictions rang true. A new period of economic growth began, which proved to be as long and sunny as a bright summer day in these latitudes.
      From 1994 to 2007 the Finnish economy grew an average 3.8 per cent a year.
      These were serious numbers. In 1993-2006 average economic growth was 2.6 per cent among the developed industrialised countries.
     
The recollection raises the inevitable question: what will happen to Finland now?
      First, the good news. If we take as a starting point the present situation, and present information, and the quite dark forecasts that were made on their basis, the present decline will probably treat Finland easier than what happened in the 1990s.
      The economy is shrinking and unemployment is rising to a lesser degree than the last time things hit the skids.
      Then the bad news: the decline will be followed by a painful, slow recovery - if there is a recovery.
     
The difference will eventually be shown in a graph describing Finnish economic growth.
      Instead of the letter V - indicating a decline in economic growth, followed by a rapid rise, the slump now is more likely to resemble a mis-shapen letter L.
      To elaborate on the image used sixteen years ago by Esko Aho, the night of the slump will be followed by a grey and cold midwinter morning.
      The slower economic growth in Finland will result from developments in the number of people working and in the productivity of work.
      In the coming years, the amount of work that is done, or in the language of economics, "the labour input", will inevitably decline in Finland, as the postwar baby-boomers head into retirement.
     
Forecasting productivity is more difficult, because productivity as a concept is open to many different interpretations.
      But if we simplify matters, we can say that after the 1990s, productivity in Finland has grown more quickly than in the industrialised countries in general. This kind of positive development is unlikely to continue in the future.
      Last year an all-time record was set in the number of people employed in Finland: during the year, an average 2,531,000 Finns went to work.
      A similar level was reached only once before - it was just before the 1990s collapse. The decline brought crushing and long-term structural unemployment to Finland.
     
Now the number of people who are working is declining every day. People are being left unemployed because of the slump, but above all, people are leaving work permanently through retirement.
      From 2010 to 2025, the working-age population - those aged 15 to 65 - will decline by 265,000 individuals. That is 17,000 people out of the potential workforce each year.
      The number of people in the prime of their working lives - between the ages of 20 and 49 - will go down by 5,000 a year.
      In other words, the continually-declining corps of those with jobs will have to sustain a growing population.
     
A possible answer to this might be that it is not just the quality, but the quantity that matters in all this.
      The amount of work does not decide everything. Productivity is also a factor.
      In the past, Finns have managed to boost the productivity of work considerably.
      In 2007 the Finnish standard of living was 5.7 times what it was in 1950, even though Finns worked 20 per cent less on a per capita basis.
      Prosperity increased and work declined, because the productivity of Finnish work grew sevenfold from 1950 to 2007.
     
In the past ten years growth in productivity has been good in Finland. It boosted economic growth, which has exceeded that of the other industrialised countries.
      Productivity grew, thanks to Nokia and the entire data and communications cluster.
      Now growth in productivity in information and communications technology is slowing down, and there are no sectors of industry in sight that could become the same kind of engine of growth for Finland that the ICT sector was until recently.
     
Slower growth in productivity and the decline in labour input constitute a combination that will shackle Finnish economic growth in the future as surely as kryptonite will kill off Superman.
      Consequently, the majority of economists are assuming that when the recession is over sometime in 2011, the Finnish economy will start growing by an average 1-2% a year.
      If the economy grows more slowly than before, then tax revenues to the state will also grow more slowly.
      At the same time, costs will certainly grow, resulting from the greying age-structure of the population.
     
As more Finns grow older, they will need more health and care services, which are financed by the state.
      The state is prepared for this development. The Ministry of Finance has earlier considered ways of dealing with the inevitable expenses.
      Now the recession is putting these moves to the test at a single blow. The state is expected to take on an additional debt of EUR 30 billion by 2012.
      Finland’s burden of debt will thus have expanded tremendously in 2012, and it is just about then that paying the costs of an ageing population will really begin to bite.
     
The state debt entails a further chilly fact: it will have to be paid, with interest, by the taxpayers.
      This means that more taxes will have to be collected from the people. At worst, the growth in the tax burden will encourage people to reduce work and consumption. Hence Finnish economic growth can be limited by yet one more structural factor.
      The decline can be extended, and can be reflected on a graph with a U-shaped curve rather than a V. Or then, a short recovery can be followed by a new decline, producing a scrawled W on the page.
     
The slump can also end up being milder than expected.
      What is decisive is how stimulus measures around the world will affect export demand.
      If the decline in exports continues, Finland’s recession will only get deeper. If the collapse in exports is fixed by demand arising from stimulus measures, the grim forecasts will not materialise.
      The recession should not be downplayed, but ultimately it is a fairly small worry. A big worry is the time that comes after the recession, when Finland faces what economists call a sustainability gap.
     
A sustainability gap means that public finances chronically live beyond their means. On an annual level we are talking about a deficit of several billion euros, which needs to be covered by borrowing.
      There is plenty of will to fix the gap. The problem is that limitations linked with the amount of work and productivity make it difficult to make up the difference.
      Finland could undergo the fate of Switzerland, Japan, and Germany. In these countries, the economy grew by a maximum average of 1.5 per cent in 1993-2006. The countries remained prosperous, but their ability to help the weakest through income redistribution and transfers declined, and few new jobs were created in those countries - and new jobs are the best way to alleviate poverty.
     
Helsingin Sanomat / First published in print 22.2.2009


Previously in HS International Edition:
  Parliament starts work, set to tackle economic slump next week (5.2.2009)
  Government stimulus measures aimed at halving growth in unemployment (2.2.2009)
  Government unveils stimulus package (30.1.2009)
  Government agrees on “gigantic” support package for corporate finance (28.1.2008)