All is not as it appears in frozen land
By David Ibison
Published: September 4 2007 11:10 | Last updated: September 4 2007 11:10
The film Frozen Land by director Aku Louhimies begins optimistically enough with a thoughtful quote about the Finns by one of the country’s most famous rock groups, Eppu Normaali: “Born pure into the future’s hands in these cold and northern lands”.
From this hopeful starting point the film descends into a gritty study of human weakness and the corruption of Nordic purity that embraces alcoholism, unemployment, a double murder, drug abuse, family violence and depression, all set in a darkened land of dirty, semi-frozen slush.
Sitting in one of Helsinki’s better restaurants on a bright spring evening alongside the capital’s well-dressed and well-heeled, a disarmingly easy going Mr Louhimies laughs when he recalls the premiere of his film in Oslo. “Afterwards the Finnish ambassador to Norway came up to me and told me that it was exactly the kind of film he didn’t want to show foreigners.”
Mr Louhimies’ gripping portrayal of modern Finland and the ambassador’s uneasy reaction to it capture the conundrum of 21st century Finland: here is a successful, welfare-based, competitive economy desperate to show itself as a modern European nation that is home to hip, young Nokia-clutching technological innovators, but which must also accept the reality that lies behind the stories in Frozen Land: mid-life unemployment breeding hopelessness, addiction, despair and deterioration. These issues are certainly not unique for Europe, but Finland is a harsh country where such contrasts come starker than most.
So it should come as no surprise that the economy – and by extension the country’s future – should also be exhibiting these dualistic tendencies.
The numbers tell a curious story. Finland has recovered from the recession of the early 1990s and its economy grew 6 per cent in 2006.
The country’s gross domestic product has grown by an average annual rate of 3.4 per cent between 1994 and 2005, well above the 1.8 per cent average for members of the Organisation for Economic Co-operation and Development and easily outstripping 2.1 per cent growth in the US and 2.5 per cent in the UK.
But despite this performance, employment growth is weak, hovering at 0.4 per cent, just over the OECD average of 0.3 per cent. This is far lower than it should be given the strong economy and reflects deep underlying structural problems that have been masked by growth, according to private sector analysis.
And prices are high, salaries low and income taxes punishing relative to most other western European countries, meaning that when Finland’s economic performance is adjusted to take purchasing power into account, a completely different picture appears. In terms of per capita GDP adjusted for purchasing power, Finland was ranked 17th in the OECD in 1970, and 17th again in 1998 before creeping up two places to 15th in 2004, the latest figure available. The worrying fact is that despite well above average economic growth, Finland is running to stand still.
As Mr Louhimies would no doubt delight in pointing out – things are about to get worse. According to troubling research by McKinsey, the consultancy, Finland is at a T-junction at which it can either take action to tackle a complicated assortment of structural weaknesses and stave off a possible crisis, or let the anaesthetic of steady economic growth numb it to the full extent of its future problems.
“Now is a good time to pro-actively implement the needed changes, through careful deliberation, not in reaction to a recession or a crisis,” McKinsey said.
At the heart of the problem lies the fact that Finland has Europe’s most rapidly ageing population. At the beginning of the 2010s, the structure of Finland’s demographics will shift in an unprecedented way when the proportion of the total population of working age starts to decline for the first time.
Simultaneously, life expectancy is going up, meaning people will be spending more time in retirement. According to Statistics Finland, the government agency, the percentage of the population over the age of 64 will increase from 17 per cent in 2010 to 27 per cent in 2035.
If nothing is done, this will create a financing problem. The Ministry of Finance’s 2006 Stability Programme paints a disturbing picture in which pensions- related expenditure rises from 11 per cent of GDP in 2010 to 14 per cent in 2030 and stays there until 2050. Public expenditure as a percentage of GDP will increase from 48 per cent in 2010 to 58 per cent in 2050.
Combined with a GDP growth rate that is expected to decline from 2.2 per cent in 2010 to 1.4 per cent by 2030 and stay there until 2050, public debt will rise from 35.8 per cent of GDP in 2010 to an unsustainable 117.5 per cent in 2050.
Paavo Väyrynen, minister for foreign trade and development, says the ministry’s forecast is too pessimistic, but does not deny there is a problem.
“The Ministry of Finance has to make as terrible predictions as possible because consciousness of a risk of a crisis can create a political will to do something,” he says.
The private sector sides with the MOF’s gloomy prognosis. McKinsey says: “Demographic developments will increase the costs of providing pensions, healthcare and care for the elderly, which must be met by improving the productivity of the public sector.
“At the same time, continuous global competition and its expansion into new sectors will make it more difficult to retain existing jobs and create new jobs.”
McKinsey believes the very survival of the welfare system requires policies that will generate annual economic growth of “well over 2 per cent – closer to 3 per cent” and concludes: “It is essential to strengthen . . . Finnish companies’ global competitiveness by improving productivity. Action must be taken to create new jobs in growth sectors. Financing of the country’s welfare services must be secured by raising the rate of employment.”
This promises to be no easy task. Leif Fagernäs, director general of the Confederation of Finnish Enterprises, says improving productivity and creating new jobs do not go hand in hand.
“The overall growth of productivity will in the future inevitably be slower than today due to the increasing role of services in the economy and due to the fact that many parts of the electronics industries are gradually moving their production out of Finland,” he says. Estimates put the number of jobs lost to outsourcing at about 100,000.
Once these countervailing forces have been taken into account, the solution to the challenges facing Finland can be reduced to one primary requirement: creating new jobs. Estimates of how many are needed vary, but most experts inside and outside government agree that the number is between 250,000 and 290,000. But where are these new jobs going to come from?
Alas, the bad news just keeps coming. Given that primary production jobs are going to be continually outsourced, most of the opportunities to generate new employment will lie in the private service sector – an area that accounts for just 45 per cent of employment in Finland compared to 54 per cent in the US.
But getting people into the service sector presents challenges as Finland’s labour market is notoriously rigid, partly because the welfare system has created disincentives to work, partly because it is difficult encouraging people to move to new job locations and partly because the labour force is not trained to work in the services sector.
“We have to raise the esteem of vocational training,” said Pertti Salolainen, a former deputy prime minister and member of the National Coalition party. “Everyone wants to be an academic, but we have a surplus of doctors and not enough plumbers and builders. We need to lessen the academic flavour of the educational system.”
There are also deeper mysteries. One is Finland’s unusual inability to commercialise innovations – and through this process create new companies to provide new employment. Finnish companies invest heavily in research and development, and their staff are well educated, but while “Finland has produced an abundance of internet-related innovations since the 1980s . . . their commercialisation and business success took place mainly in the US,” argues McKinsey.
According to UNCTAD, Finland did not make it into the list of the world’s top 33 attractive destinations for research and development by international companies, probably as a result of the difficulties in getting people to live in the country because of high income taxes, grim weather and a reputation for dourness and depression enhanced by films such as Frozen Land.
That said, there is a deep understanding of the problems the country faces on the part of the young and an even deeper appreciation of the upside of what it means to be Finnish. Katariina Styrman, chairman of the board of the student union at the University of Helsinki, says: “We can reform the welfare system and keep taking care of those who can’t support themselves. If not, what are we worth? Do we want the US model where everyone is for themselves?”
And Pekka Lampinen, a student board member at the school of economics, says: “We are eager for reform and the desire to preserve the welfare state is still there. Society does not have a better use for my money than to build society.”
This combination of civic mindedness and a preparedness to pay high taxes in return for the benefits of a welfare state is mirrored by Annika Sundbäck who works at Finland’s Centre for International Mobility. Faced with the question of whether she would be prepared to tell her children that they should be labourers and not doctors, she replies: “I would definitely tell my son to become a carpenter. I have a friend who is a carpenter who is booked up for six years.”
Such optimism on the part of the next generation is admirable. But the challenges Finland faces are severe. Luckily, it has recovered from the recession of the 1990s and its economy is growing strongly – meaning that the timing and circumstances are perfect to take corrective action. However, failure to take action now in such a benevolent economic environment would verge on the irresponsible.
According to Risto Pentilla, director of EVA, the business and policy forum: “Finland has time. The 1990s reforms bought us time. But if the government over the next four years does not instigate serious reform then we will approach the point where time is running out.”
By David Ibison
Published: September 4 2007 11:10 | Last updated: September 4 2007 11:10
The film Frozen Land by director Aku Louhimies begins optimistically enough with a thoughtful quote about the Finns by one of the country’s most famous rock groups, Eppu Normaali: “Born pure into the future’s hands in these cold and northern lands”.
From this hopeful starting point the film descends into a gritty study of human weakness and the corruption of Nordic purity that embraces alcoholism, unemployment, a double murder, drug abuse, family violence and depression, all set in a darkened land of dirty, semi-frozen slush.
Sitting in one of Helsinki’s better restaurants on a bright spring evening alongside the capital’s well-dressed and well-heeled, a disarmingly easy going Mr Louhimies laughs when he recalls the premiere of his film in Oslo. “Afterwards the Finnish ambassador to Norway came up to me and told me that it was exactly the kind of film he didn’t want to show foreigners.”
Mr Louhimies’ gripping portrayal of modern Finland and the ambassador’s uneasy reaction to it capture the conundrum of 21st century Finland: here is a successful, welfare-based, competitive economy desperate to show itself as a modern European nation that is home to hip, young Nokia-clutching technological innovators, but which must also accept the reality that lies behind the stories in Frozen Land: mid-life unemployment breeding hopelessness, addiction, despair and deterioration. These issues are certainly not unique for Europe, but Finland is a harsh country where such contrasts come starker than most.
So it should come as no surprise that the economy – and by extension the country’s future – should also be exhibiting these dualistic tendencies.
The numbers tell a curious story. Finland has recovered from the recession of the early 1990s and its economy grew 6 per cent in 2006.
The country’s gross domestic product has grown by an average annual rate of 3.4 per cent between 1994 and 2005, well above the 1.8 per cent average for members of the Organisation for Economic Co-operation and Development and easily outstripping 2.1 per cent growth in the US and 2.5 per cent in the UK.
But despite this performance, employment growth is weak, hovering at 0.4 per cent, just over the OECD average of 0.3 per cent. This is far lower than it should be given the strong economy and reflects deep underlying structural problems that have been masked by growth, according to private sector analysis.
And prices are high, salaries low and income taxes punishing relative to most other western European countries, meaning that when Finland’s economic performance is adjusted to take purchasing power into account, a completely different picture appears. In terms of per capita GDP adjusted for purchasing power, Finland was ranked 17th in the OECD in 1970, and 17th again in 1998 before creeping up two places to 15th in 2004, the latest figure available. The worrying fact is that despite well above average economic growth, Finland is running to stand still.
As Mr Louhimies would no doubt delight in pointing out – things are about to get worse. According to troubling research by McKinsey, the consultancy, Finland is at a T-junction at which it can either take action to tackle a complicated assortment of structural weaknesses and stave off a possible crisis, or let the anaesthetic of steady economic growth numb it to the full extent of its future problems.
“Now is a good time to pro-actively implement the needed changes, through careful deliberation, not in reaction to a recession or a crisis,” McKinsey said.
At the heart of the problem lies the fact that Finland has Europe’s most rapidly ageing population. At the beginning of the 2010s, the structure of Finland’s demographics will shift in an unprecedented way when the proportion of the total population of working age starts to decline for the first time.
Simultaneously, life expectancy is going up, meaning people will be spending more time in retirement. According to Statistics Finland, the government agency, the percentage of the population over the age of 64 will increase from 17 per cent in 2010 to 27 per cent in 2035.
If nothing is done, this will create a financing problem. The Ministry of Finance’s 2006 Stability Programme paints a disturbing picture in which pensions- related expenditure rises from 11 per cent of GDP in 2010 to 14 per cent in 2030 and stays there until 2050. Public expenditure as a percentage of GDP will increase from 48 per cent in 2010 to 58 per cent in 2050.
Combined with a GDP growth rate that is expected to decline from 2.2 per cent in 2010 to 1.4 per cent by 2030 and stay there until 2050, public debt will rise from 35.8 per cent of GDP in 2010 to an unsustainable 117.5 per cent in 2050.
Paavo Väyrynen, minister for foreign trade and development, says the ministry’s forecast is too pessimistic, but does not deny there is a problem.
“The Ministry of Finance has to make as terrible predictions as possible because consciousness of a risk of a crisis can create a political will to do something,” he says.
The private sector sides with the MOF’s gloomy prognosis. McKinsey says: “Demographic developments will increase the costs of providing pensions, healthcare and care for the elderly, which must be met by improving the productivity of the public sector.
“At the same time, continuous global competition and its expansion into new sectors will make it more difficult to retain existing jobs and create new jobs.”
McKinsey believes the very survival of the welfare system requires policies that will generate annual economic growth of “well over 2 per cent – closer to 3 per cent” and concludes: “It is essential to strengthen . . . Finnish companies’ global competitiveness by improving productivity. Action must be taken to create new jobs in growth sectors. Financing of the country’s welfare services must be secured by raising the rate of employment.”
This promises to be no easy task. Leif Fagernäs, director general of the Confederation of Finnish Enterprises, says improving productivity and creating new jobs do not go hand in hand.
“The overall growth of productivity will in the future inevitably be slower than today due to the increasing role of services in the economy and due to the fact that many parts of the electronics industries are gradually moving their production out of Finland,” he says. Estimates put the number of jobs lost to outsourcing at about 100,000.
Once these countervailing forces have been taken into account, the solution to the challenges facing Finland can be reduced to one primary requirement: creating new jobs. Estimates of how many are needed vary, but most experts inside and outside government agree that the number is between 250,000 and 290,000. But where are these new jobs going to come from?
Alas, the bad news just keeps coming. Given that primary production jobs are going to be continually outsourced, most of the opportunities to generate new employment will lie in the private service sector – an area that accounts for just 45 per cent of employment in Finland compared to 54 per cent in the US.
But getting people into the service sector presents challenges as Finland’s labour market is notoriously rigid, partly because the welfare system has created disincentives to work, partly because it is difficult encouraging people to move to new job locations and partly because the labour force is not trained to work in the services sector.
“We have to raise the esteem of vocational training,” said Pertti Salolainen, a former deputy prime minister and member of the National Coalition party. “Everyone wants to be an academic, but we have a surplus of doctors and not enough plumbers and builders. We need to lessen the academic flavour of the educational system.”
There are also deeper mysteries. One is Finland’s unusual inability to commercialise innovations – and through this process create new companies to provide new employment. Finnish companies invest heavily in research and development, and their staff are well educated, but while “Finland has produced an abundance of internet-related innovations since the 1980s . . . their commercialisation and business success took place mainly in the US,” argues McKinsey.
According to UNCTAD, Finland did not make it into the list of the world’s top 33 attractive destinations for research and development by international companies, probably as a result of the difficulties in getting people to live in the country because of high income taxes, grim weather and a reputation for dourness and depression enhanced by films such as Frozen Land.
That said, there is a deep understanding of the problems the country faces on the part of the young and an even deeper appreciation of the upside of what it means to be Finnish. Katariina Styrman, chairman of the board of the student union at the University of Helsinki, says: “We can reform the welfare system and keep taking care of those who can’t support themselves. If not, what are we worth? Do we want the US model where everyone is for themselves?”
And Pekka Lampinen, a student board member at the school of economics, says: “We are eager for reform and the desire to preserve the welfare state is still there. Society does not have a better use for my money than to build society.”
This combination of civic mindedness and a preparedness to pay high taxes in return for the benefits of a welfare state is mirrored by Annika Sundbäck who works at Finland’s Centre for International Mobility. Faced with the question of whether she would be prepared to tell her children that they should be labourers and not doctors, she replies: “I would definitely tell my son to become a carpenter. I have a friend who is a carpenter who is booked up for six years.”
Such optimism on the part of the next generation is admirable. But the challenges Finland faces are severe. Luckily, it has recovered from the recession of the 1990s and its economy is growing strongly – meaning that the timing and circumstances are perfect to take corrective action. However, failure to take action now in such a benevolent economic environment would verge on the irresponsible.
According to Risto Pentilla, director of EVA, the business and policy forum: “Finland has time. The 1990s reforms bought us time. But if the government over the next four years does not instigate serious reform then we will approach the point where time is running out.”
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