The success of Finland is a fascinating subject for scholars. It is a country with limited range of natural resources and small population. It has literally had to reinvent itself after the WWII. It is distant from any of the lucrative markets. It has a mammoth neighbor right next door whose presence has forced Finland to invent its own brand of neutrality – it is called Finlandization.
And yet, Finland for decades is one of the most prosperous, most peaceful, most stable, most progressive, most innovative, most educated, and the happiest country in the world. The unemployment rate is among the lowest, and the social security network is among the best in the world.
What is the secret of success of Finland? What makes Finland tick?
Scholars have come up with different explanations and the Internet is full of material with theories.
One of the most comprehensive yet compact elucidations is provided by Jordi Franch Parella, an economist at the Manresa University in Spain. His paper, titled ‘The Success of the Finnish Model: An Economic Analysis’ was published by the Journal of Management Policies and Practices (American Research Institute for Policy Development) in its issue of June 2019.
Parella has written with economy of words, connecting the dots in a logical and convincing manner.
Instead of trying to summarize the paper of Parella, we are presenting here the Introduction and the Conclusions from his superb work:
Finland, the most northerly country in the European Union (EU), disposes of an inhospitable and extreme climatology. The low temperatures and the cold Baltic wind make life in public outdoor spaces unattractive. The differences with the southern European countries are very noticeable from the first moment (Franch, 2017). The Nordic economies are usually seen, not only in Europe but also in the USA (Aleem, 2015) as an example of efficient Welfare States where the government provides a large range of social benefits.
What are the lessons that Finland offers to other countries? A common belief is that the Nordic model is a successful example of how interventionist policies work. Focusing on Finland, the Nordic country can be considered a success under many of the most common and significant socio-economic standards.
Finland holds one of the best basic education systems in the world, it is the happiest country in the world, one of the least corrupt countries and among the top 10 most-competitive in the world. From social indicators like inequality and crime to economic indicators like productivity and innovation the Nordic country gathers near the top.
With a population of 5.5 million, Finland had in 2018 a total GDP of €224 billion or €40,618 GDP per capita. The unemployment rate stands at 8.6 percent and the CPI inflation at 0.8. The fiscal deficit is limited to 0.6 percent of GDP and the public debt arises to 61.4 percent. The current account has a surplus of 0.7 percent of GDP.
From its declaration of independence in 1917 until the current year, Finland GDP has grown by an annual average of 2.4 percent. In the early 20th century the country endured a civil war and, during World War II, Finland fought an incredible set of wars against both the Soviet Union and Nazi Germany.
In the mid-20th century had to build an industrial base practically from scratch to pay its war debts. It is striking how this remote and thinly populated region, with its freezing winters and myriads of wild lakes has proved so successful.
The objective of this paper is to inquire into the causes of the Finnish economic success, ascertaining which is the role of the Welfare State and public sector in it. In fact, is the country a socialist Valhalla or is more a free market economy that has developed a functional Welfare State within a context of liberalisation and free choice?
The Finnish model is a success under most significant socio- economic standards. From social to economic indicators the Nordic country gathers near the top. Anders Chydenius (1729-1803), a Finnish leading classical liberal, is a distinguished forebear of the Nordic model. He outlined a laissez-faire society, in which the power and size of the government are limited. Sweden and Finland had the fastest economic and social development between 1850 and 1970 when, under the influence of Chydenius’ ideas, his followers adopted free market policies. Public expansion only came later, in the 1970s, when Nordic countries had consolidated a prosperous society. In other words, generous public policies and the growth of the Welfare State were the consequence and not the cause of the successful Nordic model.
We highlight five notable reasons for this success in continuously providing citizens with some of the highest standards of living.
First, the culture of social and economic integration. The degree of social cohesion and income equality is very high. Gini index in Finland was reported at 27.1, according to the World Bank collection of development indicators and poverty gap at $1.25, $1.90 or $3.20 a day (PPP) amounts in all cases to 0% of the population.
The second reason is the existence of a very high level of trust that gives Finland a competitive advantage. Social trust is the lubrication of the engine that makes societies work. In economic terms, social trust reduces transaction costs. Deals are made quickly, execution is flexible and litigation is rare. Otherwise, deals are complicated, contracts are long, execution is rigid and litigation is high. Low-litigious societies like Finland have a trust-related competitive advantage over high-litigious societies like the United States and the United Kingdom, because it has an impact on the cost of insurance and the general fluidity of contractual business processes. The rise of litigation imposes a heavy tax on the workings of the market and a significant drain on national work. In other words, a litigious working culture reduces the level of work efficiency and work utility.
Another key factor is the liberalisation of the economy, in spite of a heavy Welfare State. Although taxes and public spending is high, decentralization and close proximity to the citizen are the guidelines of welfare. The state simply administers and promotes choice between private and state-run services and most have co-payment schemes. Finland leads the privatization of inefficient state-owned entities and applies private company corporate governance in semi-state owned companies.
The Nordic country has carried out successful privatizations of state sectors, from telecommunications to electricity generation and distribution. Even some forests have been privatized. Choice, freedom and private initiative is the cornerstone of Finnish welfare state. Its system is based on civil society and competition, individual initiative and responsibility and it is far from being based on state control of the economy. As a result, it occupies a top position in the economic freedom index (Heritage Foundation) and the ease of doing business (World Bank). And Finland is one of the least corrupt nations in the world. Instead of the easy resource to family and friends (crony capitalism), the Nordic country is meritocratic and values competence over family status or social role.
The fourth reason is education. An excellent education achieved efficiently and without wasting public money. Although the basic curriculum is uniform throughout the country, the schools have a high degree of autonomy to adapt to the different circumstances of each locality. The decentralization of decision-making power to the local authorities, i.e. municipalities and schools, which are responsible for curriculum planning, implementation and the assessment of educational policy at the local level, is key in the effectiveness of the system. The system is comprehensive and no child is left out. Representatives of the world of work and business life play an important role in vocational studies, and teaching enjoys immense prestige and trust, as much as medicine, advocacy and other careers of the same reputation in terms of social value.
Finally, research and competitive labour training sustain a developed national ecosystem of high-performing technology companies. Finnish companies have led the way, in terms of scientific and technical experimentation, on a global scale in many industries. The fully fledged welfare state is not incompatible with technological innovation and with a dynamic and competitive economy. In fact, Finland has been a hotbed for global innovations in the area of digital gaming and has extremely good access to the latest technologies, as well as venture capital, and its businesses are highly connected.
The complete text of Parella’s paper can be found here:
* * *
The relevance of Finland for Central Asia goes far beyond the social and economic sectors. It is an all-inclusive role model. /// nCa, 5 February 2020
To be continued . . .