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Welfare State, version 3.0

By Kimmo Laukkanen, May 2011

Photo: Mika Latvanen/Tekes
Enter the new generation: Finland is going to go in a new direction.

Central Chamber of Commerce CEO Risto E.J. Penttilä believes that Finland finds itself at a critical juncture.

He divides Finland’s economic history after the Second World War into three eras: Welfare State version 1.0 in Finland was a closed model. This was followed by the rise of Nokia and Finnish globalisation − what Penttilä calls version 2.0.

Now Finland is once again undergoing a transition. Before we move on, however, Penttilä is quick to point out that despite Finland’s tradition of underestimating its potential during times of crisis and change, the country has actually come through difficult periods of transition very well.

How to build Welfare State 3.0? Where to find the proper fuel to feed growth in the current decade?

Finnish business networks diversify

Photo: Anton Kalland/Tekes
Click to enlarge
Retirees make up a growing percentage of Finland’s population; this may change the way the welfare state operates.

To Penttilä, it is clear that Finland’s business networks will become more diversified. The homogenous and uniform Finland of yore will be forced to give way to a more variegated landscape.

“Finland will become more like Denmark,” he says. “Services and small- and medium-size enterprises will be increasingly recognised as the engines of our domestic economy.” No new Nokias loom on the horizon – but perhaps we aren’t in need of any.

Penttilä feels that this new era will be marked by a unique factor – it will be increasingly difficult to pinpoint specific sources of growth. “Attaining and maintaining a competitive edge remains the key, assisted by other factors like reasonable tax practices, functioning logistics and a first-class advanced infrastructure.”

“Nokia may be facing challenges, but it seems that small businesses in Finland are showing even greater success,” says Penttilä. Business cycle forecasts for Finnish business are currently high.

“The farther one moves away from Helsinki, the more favourable things look. Good examples include the once-troubled area of Northern Karelia and also Finnish Lapland, which will soon require a new scale for assessment because it has already reached the top.”

Russia holds important potential

Photo: Markku Ulander/Lehtikuva
Click to enlarge
The Russian market offers Finland significant opportunities in the 2010s, says Penttilä. Finnish department store Stockmann opened a new flagship in St Petersburg in November 2010.

In terms of its economic orientation, Finland has oscillated over the years between directing its efforts towards East or West. The current decade finds Finland focused on Russia and the rising Asian economies beyond it. Penttilä foresees noteworthy opportunities in Russia in the 2010s:

“We have been very fortunate in our trade relations with Russia. During the 1990s, while Finland was focused on the West, many other Western countries got burned in former Soviet areas. Now in the 2010s, Finland stands to gain more than it ever has before on the Russian market.

“Russia’s WTO membership is fast approaching, but even more important is the potential of Russia’s own growth − not to mention the functioning networks Finland already maintains and today’s young Russian business leaders, who are not only very willing but also supremely capable of fruitful cooperation with Western countries. All this means increased business and investment possibilities for Finland.”

Retirement age and more

How will private sector demand develop in the 2010s? This discussion quickly turns to the challenges and opportunities presented by an ageing population. Pensions are not particularly high in Finland, but the accumulated assets of the retiring generation are nonetheless considerable. Yet all this capital is currently dormant, waiting for the day when it will be dealt out as inheritance.

If we seek to enliven the older generation’s consumption, we have to offer retirement and insurance solutions that are more flexible.

Penttilä believes that Finland may be threatened with the kind of development that has been seen in Japan. Japan was the first country in the world to experience en masse ageing and Finland will the first country in Europe to meet the challenge.

“Finland has to come up with the right inducements and incentives and implement them accordingly,” says Penttilä. “It is a matter of choice: Do we want to impose taxes that stimulate or stifle? Can we develop working life so people are happy and satisfied in their work longer?

Making the right choices

Photo: Seppo Samuli/Str/Lehtikuva
Click to enlarge
Business leaders met at Finlandia Hall in March 2011 in Helsinki for a panel discussion entitled Finland Post-Welfare: (from left) Jorma Ollila (Nokia, Shell), Petteri Koponen (Lifeline Ventures), Björn Wahlroos (Sampo Bank, UPM-Kymmene), Tina Aspiala (Eat.fi, Hyperlocal) and Risto Siilasmaa (F-Secure).

Penttilä feels that there is a risk that erroneous domestic decisions in Finland may threaten economic development in the coming decade. The importance of appropriate and proper choices when it comes to economic policy cannot be overemphasised. Penttilä takes this opportunity to reproach critics of Ireland’s corporate tax rate:

“There was a time when Finland was recovering from its own recession and this country was a real tax menace. Tax breaks stimulated growth and were well founded and necessary economic policy. Of course, the crucial role of fiscal discipline must be underscored as well.”

Finland’s political system has continued virtually unchanged since the years of the Cold War, functioning relatively well. There is a risk that changes to the system may take place during the 2010s that may weaken the decision-making ability of political bodies.

Penttilä presents the cautionary example of New Zealand, where changes to the political system shattered a prosperous welfare state and reversed a marvel of economic upswing that dated back to the 1980s.

A version of this article was originally published in the journal Kauppapolitiikka (Trade Policy).

 

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