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«Abstract This paper reviews Finland’s growth strategy in the postwar decades. Finland was able to initiate an impressive mobilization of resources ...»

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In the period until the first oil crisis, public saving was in Finland higher than in most comparable countries: its share of GDP hovered around 8 per cent in the 1960s and 1970s (Kosonen 1992), and it was even higher in the 1950s. The structural budget surplus did not fade until the 1980s, and public savings accounted for as much as 30 per cent of aggregate savings during the 1950s and 1960s. This surplus was channelled partly to support private investments in capital equipment throughout the country, and partly to start public companies in some key sectors of the economy. State companies were established in the basic metal and chemical-fertilizer industries as well as the energy sector.3 As late as in the 1980s, state-owned companies contributed about 18 per cent of the total industry value-added in Finland (Kosonen 1992). It is noteworthy that this interventionist attitude to selective and ad hoc industrial policies was accompanied by a conservative stance to fiscal management in general. Fiscal deficits were abhorred and the public sector had a structural economic surplus throughout the 1950s and 1960s (Pekkarinen and Vartiainen 1995).

3.2 Credit rationing

Another instrument for capital accumulation was the administrative rationing of credit.

This took the form of interest rate controls as well as a policy of selective loan approvals for capital equipment investment. In many ways, this area of policy predates from even the 1950s. In the 1920s, when banks were faced with bankruptcies among the farmer debtors, and market interest rates were on the rise, the central bank initiated a collusive interest rate agreement among the main banks to limit the competition for depositors, since competition among banks was perceived to be the force driving interest rates up. By the same token, the banks were to offer more advantageous credit to their business customers, the overwhelming majority of whom at that time were farmers. Formally, the contract was a voluntary cartel on deposit interest rates, which proved to be remarkably long-lived, since it persisted in one form or another until the mid-1980s. At the same time, the policy rhetoric of the central bank was quite conservative and wary of other forms of economic interventionism.

During the 1939-44 war economy, selective rationing of credit to military production purposes was made easier, since the main banks and the central bank were accustomed to talking to each other and the government. Lending interest rates were established through direct regulation, and the ministry of finance was authorized to approve larger credit decisions suggested by the banks. Similarly, trade in foreign currencies became subject to the central bank’s approval, and the bank had the right to freely deliberate whether a currency trade was justified in the name of national interests. Once the war was over, this administrative steering of interest rates was continued and was flexibly adopted for industrial policy purposes. Of course, at that time, Finland was hardly alone in its endeavours to regulate the credit market. In the 1950s in particular, monetary policy was seen in many countries as a poor demand management instrument.

Instead, it was often believed that interest rates were to be structurally and permanently low, so that the economy would have room to expand, and the growth rate in turn was to be steered by fiscal demand management.4 This perspective eventually gave way to a more balanced view of the roles of monetary and fiscal policy. In Finland, however, the emphasis was again clearly on structural growth issues. The aim of credit rationing was to generate advantageous loans for businesses. Borrowing by households in general was not possible, with the exception of housing mortgages. Mortgages, in turn, usually required a lengthy period of ex ante savings at low interest rates, and until the 1980s households had no access to any form 3 An important example is Neste, which established a monopoly on oil refining and then continued into different lines of petrochemicals and plastics.

4 These policy strategies are described by Thygesen (1982) in general and, for Sweden and the UK, by Lindbeck (1975) and Dow (1964), respectively.

of market rent-bearing investment assets. Thus, a form of forced savings from depositors to debtors was sustained.

This setup, together with the state’s role in savings, helped to sustain the economy’s high investment rate. In the period 1960-84, gross fixed capital formation was 26.3 per cent of GDP, a figure exceeded in the OECD area only by Norway (Kosonen 1992).

Figure 3 depicts the dramatic rise in the investment-GDP ratio over the period from the Second World War through the 1980s. Thus, inasmuch as sustaining a high investment rate was the main aim of Finland’s policy model, it certainly achieved its objectives.

Figure 3 The ratio of investments to GDP in Finland Source: Statistics Finland.

4 The role of international linkages It is also clear that the Finnish policymakers always pushed for greater international exposure. Since the starting point was a small economy with a resource base linked to forestry and mining, it was apparent from the outset that the desired accumulation of wealth could succeed only if the Finnish firms were able to sell on the international market. This international orientation is duly reflected in the growth of exports, as shown in Figure 4.

Consequently, throughout the postwar period Finland was keen to enter free trade agreements. With the exception of the agriculture sector, protectionism never had strong political support.

The fragile international position of Finland during the cold war (see below) may have enhanced this trend. In many countries, powerful lobbies of domestic industries or domestic unions have tried to obstruct foreign firms from penetrating the domestic market. Instead, in the case of Finland, the main political parties and main societal actors like business organizations and unions were concerned with the need to open up the economy in all directions as a condition for the country’s political survival. Closer economic cooperation with the Soviet Union was a political necessity after the Second World War, as well as economically attractive for many sectors. Yet the authorities were also well aware of the political need to maintain many economic options and not to become over-dependent on the Soviet Union. Thus, political opposition was minimal to the strategy of openness: expanding international trade with the Soviet-EasternEuropean bloc while ascertaining at the same time that Finland would be a part of the Nordic, European and global trade agreements.

Figure 4 The ratio of exports to GDP in Finland Source: Statistics Finland.

5 The corporatist nature of the growth model Finland is an example of a developmental state, but the relationship between the state and other societal actors was not one-sided. The very notion of a strict separation between ‘state’ agents and ‘private’ agents, so central to modern economics, becomes anachronistic when applied to Finland’s policy experiences. In this respect, the country’s growth strategy bears surprising similarities with those of the Asian tiger economies.5 In Korea and Taiwan as well as in Finland, a pragmatic cooperation between organized private agents (bankers and business leaders), on the one hand, and government officials and civil servants, on the other, has played a key role in enhancing economic growth. As is typical in such corporatist regimes, many key decisions have been taken in a kind of twilight zone between private and public functions. Much of this policy set is hard to describe with well-established categories such as fiscal policy, monetary policy or industrial policy. Is it industrial policy, monetary policy, fiscal policy or incomes policy when civil servants and industrialists agree that bank loans be channelled to some particular new plant projects? Or when trade unions, business organizations and the government agree that the price of milk will be subsidized but that in return workers will refrain from excessive wage claims and thereby boost the competitiveness of the open sector? These examples are amusing, but the economic 5 This resemblance has been more systematically described and analysed in Vartiainen (1999).

logic of this policy regime can in many ways also be regarded as quite sophisticated: it was an attempt to exploit growth externalities and put the economy on a high growth path through direct intervention, but without infringing on private property rights or formally reverting to economic planning, which would have been interpreted as a challenge to the capitalist order.

6 Understanding the model’s political preconditions: nationally and internationally To sum up, we see a curious combination of conservatism and supply-side interventionism. Without wishing to question the market economy’s legitimacy per se or fundamental private property rights, the Finnish business elites colluded to distort the markets in a way that sustained a high investment rate. This is reminiscent of the conservative interventionism of the Asian tiger states. It also illustrates the point that economic planning can be quite effective to some extent if presented as a means of accelerating certain stated economic policy goals, rather than a challenge to market economy per se.

With hindsight, such conservative dirigisme can be legitimized with thoroughly modern economic ideas. If authorities adopt interventionist policies, it is all the more important to be clear on the ultimate values of capitalism. With these means, private investors and entrepreneurs can be made much more tolerant of activist interventionism. This point is nicely borne out by many of the success cases of late industrialization. The accounts by Wade (1991) and Amsden (1989) show that Taiwan and Korea were not much behind the German Democratic Republic in overall dirigisme. Katzenstein’s work shows that at times there was more effective planning in the Austrian economy than in some of its nominally (formerly) socialist neighbours (Katzenstein 1985, 1987). Yet, whatever their dirigisme, all of these economies were committed to becoming successful capitalist economies. A contrasting failure is evident in Peru during the years of Alan Garcia’s presidentship (1985-88). Even Garcia wanted to mobilize investors for a broad programme of industrial restructuring, but his leftist political orientation and his antiIMF rhetoric aroused the suspicion of the national business elites, and his economic policy resulted in failure, even though its overall degree of interventionism was less ambitious than those of the Asian tiger economies.

Another modern economic idea concerns growth externalities. It is one thing for the government to force the rate of growth for purely geopolitical considerations, but if there are important externalities between the various channels of economic growth, such an intervention might even be Pareto improving. This assumption is the backbone of modern concepts of endogenous growth. Models of endogenous growth can often have multiple equilibria. In such models, economic policies can make the economy ‘jump’ from one equilibrium growth path to another. The ‘exploitation of economic externalities’ probably would have seemed to be an intelligent characterization of the policymakers’ action at the time. According to such a view, many production processes are interdependent in such a way that investments of individual firms and workers in machinery and human capital could appear profitable only if complementary investments were undertaken by other firms.6 In the Finnish context, this was obvious after the Second World War, since the country’s two economic pillars, the forest industry and the metal industry, were obviously interdependent. For a long time, the forest industry, with its paper and pulp sectors, was the main motor for export income, and the metal industry grew in a symbiotic relationship to that sector. It was typical in the 1950s and 1960s that the ten largest export firms generated almost half of the country’s export income.

Some other historical contingencies probably contributed to the favourable outcome. There was a nationalistic and meritocratic civil service in place, and the prestige and strength of this bureaucracy was largely due to the country’s period of autonomy under Russian rule.

At that time, its legalistic tradition provided a protective shield against the imperialistic aspirations of Russian politics. This provided a meritocratic self-esteem within the bureaucracy, so that it regarded itself as the bearer of national success, something that probably weakened any aspirations for individual optimization through corruption.

Finally, as was emphasized in the introduction, there was the remarkable external challenge in the form of the Soviet Union that sharpened the will and minds of all concerned. For investors and capital owners, this implied that any strategy for growth would also have to cater to the workers, lest the appeal of communism increased to a dangerous extent, while for policymakers, it was clear that the country could not afford economic failure. In game theory terms, it might have changed the payoffs in a way that made today’s sacrifices for tomorrow’s high prosperity a preferred alternative.

We illustrate this with a game theory argument that captures the effect of this external challenge.7 Suppose there are two industries in the economy and suppose that both can either invest a lot or just seek short-term rents by influencing policymakers. If there are productive externalities in investment, the payoff table might look like those depicted in Table 1.

Table 1 Payoffs of two industries, no external threat

–  –  –

6 The successful South Korean and Taiwanese experiences are analysed precisely from this perspective by Rodrik, Grossman and Norman (1995).

7 This argument is based on Vartiainen (1999).

We assume that the outcomes are ranked by both parties in the same way: ‘excellent’ is the best, ‘miserable’ is the worst and ‘good’ is in between. The Nash equilibrium of such a game is ‘seek rents’—‘seek rents’, which does not yield a Pareto efficient outcome.

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