Economic growth and the structure of the Finnish economy

by Tuulia Hakola-Uusitalo

Photos by Lauri Rotko

Ageing of the population alters the way industrialized economies work, and in the Finnish case, the big structural change in the dependency ratio happens relatively early. The Finnish baby-boom cohorts were born already at the end of the 1940s, and, by now, have already retired. This naturally affects adversely the size of the labour force – one of the key components of economic growth. Therefore Finnish governments have set targets for the employment rate and implemented measures to increase its level. The second key component of economic growth – namely productivity – has also been a topic of keen discussion, for which policy makers have set explicit goals. There have been reforms both in the public and private sector that aim to increase productivity, and hence, work to enhance economic growth.

As a direct countermeasure to the ageing on the labour force, Finland implemented two major pension reforms in this millennium. Both reforms addressed the need to extend working lives and make the pension system more resilient as people live longer. The reforms introduced automatic mechanisms where both the benefit level and retirement age are indexed to the changes in life expectancy. Therefore, without a need to make further decisions, the pension system internally includes pension costs and fosters employment even when people live longer.

Major reforms in health care and social services

Ageing increases also health care and social services costs. In order to tackle this as well as address uneven cost pressures within the country, the current government has been working on health care and social services reforms. The reforms are intended, among other things, to make health care and social services more productive. This is done by changing two basic principles in how the public sector works.

First, Finland will get a new layer of public sector. This layer will be responsible for the organization of a number of public services. For example, the responsibility for providing health care to the population is transferred from 311 municipalities to 18 counties. This shifts the responsibility for providing services to a larger entity, and therefore seeks to exploit greater economies of scale in order to enhance productivity. The second principle alters the definition of public services. In the future, an increasing amount of publicly funded welfare services can be provided by the private sector and non-profit institutions, in addition to the more traditional public sector. Allowing the entry of different types of service providers introduces competition to the provision of welfare services.

Emphasis on productivity of the private sector

Increased productivity of the private sector is a key to welfare enhancement when the labour force is shrinking. The Finnish governments have been working on private sector productivity enhancement by removing regulation that is deemed unnecessary. Opening hours of retail stores have been liberalized over time and in 2016 all remaining restrictions on them were removed, allowing shop owners to choose their opening hours as they see fit. Zoning laws have also been changed in order to allow for larger shopping malls to be built according to the envisaged customer demand. These reforms and greater emphasis on e-commerce are intended to increase the productivity of the trade sector.

In the transport industry, there have been a number of initiatives and new bills deregulating the sector and seeking productivity increases via an innovation friendly framework as well as cheaper transport. Entry into the transport sector will be eased, bundling of different transport products will be allowed, use of the transport data will be liberalized to make new innovations possible, and restrictions on the producer criteria will be revised. All of these aim to make the transport sector more productive and supportive of productivity increases also in other sectors.

Tuulia Hakola-Uusitalo

Tuulia Hakola-Uusitalo

Tuulia Hakola-Uusitalo is a Director at the Ministry of Finance. She has headed a Structural Policy Unit at the Ministry since 2007 – first at the Economics Department and later at the Budget Department. Previously she worked for the Finnish Centre for Pensions, the Government Institute for Economic Research, the World Bank, the OECD and the Universities of Uppsala as well as Chile. She was a member of the EU’s Economic Policy Committee for 10 years – serving as a chair of the euro formation for the final two. Ms Hakola-Uusitalo has a PhD in Economics, most of her research focusing on pensions and the labour market.

Wide scale of measures aiming to foster employment

In the employment frontier, a number of reforms have been implemented to support its increase. The government and the confederations of trade unions and employers have negotiated the Competitiveness Pact, which is aimed at boosting labour demand by decreasing the labour costs of producers. Cutting the maximum length of the earnings-related unemployment insurance benefits has been aimed at cutting down the amount of long-term spells of unemployment and bolstering the labour supply. Moreover, in order to further increase the labour supply, all unemployed jobseekers will be interviewed once every three months, monitoring their job search and providing assistance in seeking employment. Employment of young mothers is supported by a reduction of the child care fees. The student grant system was reformed in order to facilitate faster graduation and entry to the work force. The vocational education system has been reformed so that it better reflects the employers’ skill demands. So, most of the social security and education system has been reformed in order to spur employment.

In conclusion, it cannot be denied that because of ageing, Finland has structural concerns that can adversely affect economic growth. Yet, there has been a political will to seek solutions to these concerns. The government has shown initiative to address issues that hold back economic growth. Assuming this initiative is kept up also in the future, Finland can still be expected to grow in a stable and sustainable path despite the fact that the effects of ageing are weighing on the economy.