Minister for Foreign Trade Jari Vilén: From bust to boom: the Finnish economic recovery in the 1990’s
Ladies and Gentlemen,
It gives me a great pleasure to take part in this occasion taking place here, in Frankfurt. I con-sider it a great honour to have been invited to address this audience. I would like to extend my thanks to the Finnish Honorary Consul, Dr. Alexander Riesenkampf, for his efforts to promote knowledge of Finland and organising the Finnische Woche, and providing us Finns with a plat-form to highlight some aspects of modern Finland and our society.
Ladies and Gentlemen,
At the current time of economic uncertainty, it might be useful to remind ourselves of the re-cent past when we experienced even worse times. As you recall, in the early 1990s, the Euro-pean economies were in a recession amid serious financial turbulences. Due to a number of unfortunate factors, the Finnish economy suffered a particularly acute recession. During three years, between 1991 and 1994, our economy shrank by some 13 per cent. But from the mid-1990s towards the end of the decade, Finland experienced a remarkable economic recovery.
Rather than just to review the Finnish experience, I will try to draw more general conclusions. Are there any lessons to be learned? Could any policy conclusions be transposed to today's economic situation? Could other countries benefit from our experience?
The causes of the Finnish depression of the early 1990s are well known. The liberalisation of our financial markets in the late 1980s resulted in a rapid rise in private sector indebtedness. The collapse of the Soviet Union caused an abrupt fall in our exports to the east. Moreover, Finland suffered badly from the financial turbulence at the time. Our national currency, the Markka, which had been unilaterally pegged to the ECU in 1991 at a rate which was soon found to be too high, was devalued in autumn 1992 and allowed to float in 1993. As a result, many debtors with foreign currency loans, which had become available some time earlier, were hurt. This led to a banking sector crisis with a heavy cost to society. Unemployment rose quickly, topping at almost 20 per cent of the labour force in 1994.
All of this was well covered in the international press at the time. Some years later, when you saw articles about the Finnish economy, you could read about strong economic growth with public finances stabilising and steadily decreasing unemployment as well as quickly increasing productivity. What had happened in the meanwhile?
Without doubt, the recovery of the international economy in the mid-1990s coupled with the sizeable devaluation of the Markka helped the Finnish economy to recover. Nevertheless, there were other factors at play as well. Already in the early years of the recession, it was considered of pivotal importance and as a key to recovery to restore confidence in the economy and achieve stability. These objectives were adopted as guiding principles of economic policy.
A comprehensive programme to cut public spending was implemented in the 1990s. This re-sulted in a gradual stabilisation of public finances. Needless to say, some of the cutbacks were painful to carry out and resulted in debates on whether it was possible in those circumstances to maintain a welfare society. With the benefit of hindsight, I can now claim that our welfare society survived the recession. Perhaps with a bit of trimming and rationalisation, but on the other hand, this only made the system more efficient.
What helped us to carry out such difficult decisions was the remarkable and widely felt sense of emergency throughout society, including the whole political spectrum from right to left. The Finnish people have experienced difficult times earlier in history, too. Perhaps this feature helped us weather the recession and to tight our belts in the wait for better times. I have to em-phasise that the wide-ranging support for the economic policy practised by the Government at the time was essential in steering the economy towards a recovery.
Another feature in the economic policies of the time was the resolve to ensure public confi-dence in the banking sector, albeit at a high price. The Finnish banking sector never experi-enced a total loss of confidence in spite of the collapse of one bank and the wide and difficult restructuring of the sector as a whole. As it was proven afterwards, this was essential in avoid-ing a deepening of the recession.
Consistent, stability-oriented economic policy with efforts to restore confidence paid off with time. Unemployment decreased gradually from 1995 onwards. Economic growth gained strength at about the same time, resulting in what proved to be the longest period of consecu-tive, strong growth in our recent economic history. Monetary conditions stabilised, and the banking sector, which had experienced a serious crisis, was soon restructured and back in con-dition.
Throughout the economy, there was a drive to increase competitiveness. This should be seen in the light of our previous record of attempts to bolster competitiveness by means of periodic major devaluations. It was widely agreed that we had reached the end of this road. Other means were needed to achieve competitiveness.
Credible and stability-oriented public economic policy was one way to improve competitive-ness. Another was the attempts of the corporate sector to strengthen their balance sheets and to increase competitiveness by real means, that is, not relying on devaluations any more. What followed was a remarkable trend of productivity increase during the 1990s. Thirdly, the soci-ety-wide sense of crisis helped us achieve moderate wage agreements throughout the critical years of economic recovery. Furthermore, an important structural reform in labour markets, namely increased flexibility in working times, was carried out.
What's more, continued strong input into research and development activity helped the technol-ogy sector gain strength. R&D activity in relation to GDP remained strong throughout the diffi-cult years. The best example is the success story of Nokia, which I need not recount here. What is worth mentioning is that the growth of Nokia to the world-leading telecommunication firm contributed to the rise of the whole IT-sector, with wide-ranging positive impacts on the econ-omy as a whole. In this context, it should be borne in mind that the private sector input into R & D activity and understanding of the importance of research for competitiveness was essen-tial.
One important factor behind competitiveness in the longer term was to maintain high standards of basic education. In spite of spending cuts in this sector, high-quality education survived. These efforts paid off and have recently achieved international recognition. The results of the PISA-study are well known here in Germany, so I shall not dwell on that issue now.
In addition, our determination to take part in the European integration was an important ele-ment in our recovery. Since the early 1970s, there had been sustained efforts to integrate our economy more closely with the rest of Europe. From the early 1990s, these efforts gained mo-mentum. At the time of the accession to the European Union, we made clear our determination to participate in the single currency from the outset. The perspective of participation in EMU lent support to our efforts to stabilise public finances and the macroeconomic climate more generally. Therefore, the legal requirements for EMU participation were in line with our own longer-term objectives, such as those due to population ageing.
For Finland this unfaltering determination to integrate with Europe was essential. For a small, peripheral economy, the benefits from joining a global economic player were clear.
To return to my earlier question, what lessons can be drawn from the Finnish experience? Some thoughts come to my mind.
First, the widespread feeling of emergency and a strong national consensus that prompt meas-ures needed to be taken helped a great deal. Many of the cuts in public spending were quite tough. In spite of this, a remarkable social calm prevailed in Finland at the time. Two factors I mentioned earlier contributed to this: maintaining welfare society in spite of cutbacks and guaranteeing the functioning of the banking sector.
Secondly, sustained efforts to increase competitiveness proved to be a success. This was an essential feature of our recovery in the context of integrating European markets and globalisa-tion.
Finally, our resolve to participate in the European integration strengthened our position as part of a bigger economic zone. This added to our credibility and helped us shed our reputation as an unstable, peripheral economy.
It is clear that today we are in a different situation. Many issues I have raised are not applicable to our current challenges. However, some basic factors are still valid.
The point I want to emphasise first and foremost is that credible economic policies are essential in restoring confidence. I understand this is exactly what the new German government has set out as one of its priorities. We are responsible for creating the conditions for economic activity to thrive.
An essential feature in this respect is to maintain stable public finances. Within EMU, we have agreed upon rules in this respect. In order to maintain the credibility of our economic policy strategy, we have to abide by the rules. As we all know, we have recently entered a discussion on whether there is a need to relax the rules of the stability and growth pact. Some interventions in the discussion have raised serious concerns.
I don't even want to speculate on the market response if we were to dismantle the construction of the pact in which we have invested so much political clout. Therefore, I feel it is necessary to maintain the current framework and comply with the rules. Economic and monetary union has only just been made operational, let's not change the rules of the game.
At a more general level, the Finnish experience points toward sustained and consistent efforts to improve the economic climate. This consistency is important from the point of view of creat-ing a track record of implementing stability-oriented policies. The situation we don't want to find ourselves in, I dare say, is that there would prevail uncertainty as to the economic policy strategy of the EU.
Ladies and gentlemen,
I have spoken at length about economic policies from the Finnish experience. Some aspects of my account are not applicable to other countries. However, some, like consistency and credibil-ity, are relevant factors.
Before I finish, I would like to, once again, emphasise that we should make every effort to preserve the construction that we have built with such pain. Our single currency, an remarkable achievement in itself, requires closely co-ordinated economic policies to support it. We have to continue to work together in strengthening the framework around the euro.