It took Finland years to admit it has a competitiveness cost problem, says Vihriälä

Photo: Heikki Saukkomaa – Lehtikuva

 

Vesa Vihriälä, the managing director at the Research Institute of the Finnish Economy (Etla), has expressed his concern about the lacklustre growth of Finland after 2007.

The Finnish economy, he highlights, has grown very sluggishly after the collapse of Lehman Brothers in September 2008, with the country’s gross domestic product only rebounding to pre-crisis levels in the second quarter of this year.

“The growth has been notably weaker than the EU average,” he summarises in a column published on Sunday.

Although Finnish exports were more vulnerable to the global financial crisis due to their focus on investment and intermediate products, Vihriälä views that the sluggish growth cannot be attributed to the crisis because all financially stable countries were affected relatively similarly.

“The impact was only temporary,” he says. “The Finnish export markets outpaced average growth in the EU and Sweden, for example, as early as in 2011, according to calculations made by the OECD.”

Vihriälä believes the main reason for the slump was contrastively the multiyear decline in the output of the information and communications technology sector – particularly in that of Nokia. The production, he highlights, decreased by as much as 7.5 per cent between 2008 and 2015.

The decline coincided with another domestic shock: the erosion of cost competitiveness.

Vihriälä explains that poor cost competitiveness undermined the preconditions for export growth in industries where labour costs are higher than in the information and communications technology, such as certain areas of the technology industry and forest industry.

“These sectors had a negative contribution of almost four percentage points to the GDP between 2008 and 2015,” he tells.

“It took us years to acknowledge the cost competitiveness problem. It has been even more difficult to acknowledge the general fact that in circumstances characterised by the monetary union and fierce international competition, the functioning of the labour markets and wage formation must be more flexible than what we grew accustomed when we had our own currency,” adds Vihriälä.

Improving cost competitiveness and labour market flexibility did not become a national priority until the start of the tenure of the government of Prime Minister Juha Sipilä (Centre).

“The competitiveness pact forced through by the government has indeed improved our cost competitiveness, but it cannot be the main solution to the adjustment needs of the labour markets,” says Vihriälä.

He also draws attention reforms affecting the functioning of the labour markets, such as shortening the eligibility period for unemployment security, introducing measures to encourage activity among job seekers and adjusting the protection of employees against unilateral termination. These reforms, he views, should have a positive impact on the adaptability of labour markets.

“But to what extent, it remains to be seen,” he adds.

Finnish policy making, however, has been rather been incongruous when it comes to enhancing the preconditions for growth. Vihriälä highlights that while the government has promoted investments by slashing the corporate tax and reduced tax and cost pressures by reforming the pension system, the cuts in public funding for education, research and development have undermined the preconditions for innovation.

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