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Where shall Finland compete?

By Dan Steinbock, March 2011

Photo: Thierry Charlier/AFP/LehtikuvaEU Commission chair Jose Manuel Barroso (on screen and third from right) speaks about Europe 2020 at a recent conference held by Eurostat, the EU statistics office.

The key to success is not just how a nation competes, but where it competes, writes Dan Steinbock, research director of international business at the India, China and America Institute.

As the past decade has demonstrated, Finland’s competitiveness has experienced erosion. At the same time, long-term projections indicate that Europe’s role in the world economy shall significantly decline in the next decades.

Since Finland’s trade is highly eurocentric, this does not bode well for the future.

Europe’s decline

About a year ago, the Europe 2020 strategy acknowledged that the global crisis had wiped out years of economic and social progress and exposed structural weaknesses in Europe’s economy.

While coping with the immediate post-crisis pressures, Europe would also have to prepare for the intensification of long-term challenges, including globalisation, pressure on resources, and ageing.

Even Europe 2020, though more focused and actionable than the previous Lisbon Strategy (2000), was dead on arrival. By May 2010, far more pressing fiscal, monetary and economic priorities surfaced in short order. In late fall, the turmoil returned, as it did in early spring 2011. Europe’s problems are not cyclical and isolated, but structural and systemic; today, they are also taxing Europe’s competitiveness.

As the recent Lisbon Review demonstrated, the EU-27 ranking is well behind both the US and East Asia, which is now the leading region, in average.

According to long-term projections, by 2050, the share of the four leading EU economies in the G-20 GDP will be more than halved to about 10 percent.

Finnish dilemma

Photo: Elke Schnabel/Tekes
Click to enlarge the picture
Shanghai scene: Finland will need to become less eurocentric in its exports and investments, and look increasingly to trade with countries such as China, says Dan Steinbock.

During the past decade, there has been much debate on the “internationalisation” or even “globalisation” of the Finnish economy. Still, the current future prospects of Finnish mobility, exports, foreign direct investment and innovation are almost embedded with those of Europe.

In the aftermath of the Cold War, the Finnish effort to participate in the European integration made sense. In the coming decades, this quest will be less beneficial.

In the coming years, the Finnish future should be shaped by the opportunities in the leading advanced economies, but even more by the largest emerging economies and the potential future emerging economies.

Today, most of Finland’s trade is with the other Baltic Sea Region economies (41 percent) and the advanced economies (30 percent), as measured by the G-7 nations. Together, these two sets of countries account for over 70 percent of Finnish trade.

Finnish orientation is highly eurocentric. Europe dominates about 82 percent of the incoming student mobility, more than 80 percent of all Finnish direct investment abroad and almost 60 percent of all Finnish exports.

Only 16 percent of Finland’s trade is with the BRIC economies (Brazil, Russia, India, China) and just 5 percent with a set of other potential emerging economies. In the near and medium terms, these countries have relatively high growth prospects.

Capitalising on new opportunities

Finnish trade is focused on proximate nations that have relatively prosperous economies, but diminishing growth prospects. Conversely, Finland’s trade is far less voluminous with more distant nations that have relatively poor economies, but great potential growth prospects.

And that, in a nutshell, is the Finnish dilemma.

Due to the fragile and multispeed global recovery, Europe’s sluggish and uneven recovery will contribute to the continent’s relative decline in the global economy. In the absence of significant refocus, the Finnish export-led growth model will erode accordingly.

In order to optimise competitiveness, it is vital to protect fading sources of strength, while building emerging sources of strength. Currently, the focus is too little on the past – and not adequately on the future.

This article is based on Dan Steinbock’s forthcoming book Where Shall Finland Compete? (TEM, 2011)


Dan Steinbock at the India, China and America Institute

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