Finland in the Context of the Global Economy

 

Remarks by Angel Gurría, OECD Secretary-General

Helsinki, Finland
February 28, 2013

Mr. Prime Minister, ladies and gentlemen:

 

It is a privilege to take part in today’s Cabinet meeting and to discuss with you the Mid-term Review of your government’s programme. This is an important moment to take stock of what you have achieved, but it is even more important to decide where you want to go from here.

 

Let me begin with global economic developments, the background against which our assessment and recommendations for the Finnish economy are framed.

 

Sentiment has improved in recent months. The “fear of catastrophe” in Europe has receded thanks to decisive policy moves by our European colleagues. In the US, the “fiscal cliff” has been partly and temporarily overcome. And in Japan, the authorities’ resolve to end deflation was broadly welcome.

 

However, we are not yet out of the woods. Global prospects remain fragile. In the last quarter of 2012, activity contracted in the OECD area as a whole for the first time since 2009! And the dip was far worse in the euro area than in the US or Japan. The preliminary estimate for Finland – a fall, in line with the euro area and Germany at large – underlines its vulnerability to external shocks despite sound fiscal and financial sector fundamentals.

 

The persisting effects of this crisis are particularly visible in the social arena. 200 million people are now out of work worldwide. This number could rise by en extra 5.1 million in 2013 and by another 3 million in 2014. In OECD countries, unemployment is still at a record 8.0%. This translates into 48.2 million people out of work. Youth unemployment is even more alarming at 16.5%. And all this is happening in a context of growing inequalities, both in developed and developing economies.

 

Both the hesitant recovery and the persisting social crisis demand decisive policy action. With great part of the macro and monetary fire-power spent, structural reforms stand out as a “silver bullet”. The OECD has enough evidence to prove that structural reforms can restart growth and help countries build stronger, cleaner and fairer economies. In this crisis, we see a unique opportunity to reshape our economies. This is why we are working hard to help countries Go Structural, but also to Go Social, to Go Green and to Go Institutional.

 

How do we See Finland in This Context?

Finland has been among the OECD top performers since it recovered from the deep recession of the 1990s, on the back of major structural reforms and impressive success in the information and communication technology sector. This economic performance went along with social inclusiveness and relatively low socio-economic inequality.

 

Standards of living are among the highest in the OECD and Finland performs very well on many dimensions of well-being, ranging from work-and-life balance to environmental quality. Finland’s excellent education system breeds the skills needed to foster innovation, competitiveness and long-term growth.

 

But there is no room for complacency. Some of the most successful Finnish industries over the past decades, such as electronics and forestry, are facing heightened international competition. Overall, output is still below its 2008 level. Hence, Finland needs to speed up structural reforms to boost productivity, both in the private and public sectors.

 

If labour productivity in services and other non-exposed sectors, such as construction, electricity, gas and water, were at the OECD average, Finland’s GDP per capita would be 5% higher, almost making up for the productivity drop during the 2008-09 recession.

 

Finland has Great Opportunities for Wide-Ranging Reforms

Let me start with competition. Network industry regulations are still tight, reflecting a high share of public ownership in the transport and utilities sectors. Fostering competition in these sectors is a crucial challenge. Zoning and planning restrictions are also holding back the development of the retail sector and could be loosened without any significant impact on the environment. Construction regulations tend to increase costs and discourage entry into the market, limiting consumer choice and weakening housing supply responsiveness.

 

Government support for R&D, entrepreneurship and start-ups can also be improved. OECD experience shows that this support cannot bear best fruit if it comes in the form of direct support to firms, as identifying the most relevant projects to support is difficult and costly. R&D tax credits are a much more effective instrument to promote innovation.

 

It is also essential to ensure fiscal sustainability in the middle and long terms. Especially considering that a rapidly-ageing population will exert more and more pressure on public finances. This can be achieved by raising employment rates and lengthening working lives, as well as improving productivity in the public sector. Youth employment also needs to be promoted through enhanced active labour market policies, including earlier activation.

 

Finland’s tax structure could also be made more employment-friendly. Progress in this direction has been made by focussing recent tax hikes on VAT, green taxes and taxes on health-damaging items (such as alcohol, tobacco, sugar and soft drinks) rather than on taxes on labour income. Going forward, a better balance between tax increases and spending restraint would enhance the attractiveness of producing and creating jobs in Finland. Limiting public expenditure growth without affecting the quality of essential services such as education and health care and weakening social safety nets will require productivity gains in the public sector.

 

Finally, it will be crucial to ensure the sustainability of the provision of high-quality public services, especially in health care, where economies of scale and scope are required.  The ambitious plan for municipal reform can make a great contribution. We know that this is quite a challenging reform, not least in terms of political economy. But it is critical to the sustainability of the welfare system and the improvement of the health of Finns, which on average is not as good as in most other Nordic countries and is more unequal.

 

Health reform requires reorganising services, improving equality of access to primary care and bolstering prevention. This is not easy, but it is essential for improving well-being, reducing inequality and ensuring the sustainability of high quality service provision. Neighbouring countries, such as Denmark and Norway, have moved to address similar challenges, which provides opportunities to share experiences among OECD members.

 

Finland has grown into a very successful economy since the mid-1990s. Nevertheless, like many OECD countries, it is now facing new challenges in a tough international environment. High-quality human capital and social cohesion are strong assets in the global competition. But structural reforms to remove unnecessary obstacles to competition and growth and raise the efficiency of public services are necessary for the economy to reach its full potential. The OECD stands ready to support Finland in its endeavours to revive growth and ensure the sustainability of its welfare model, by helping it design, promote and put in practice better policies for better lives.

 

 

 

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