This post is dedicated to Dario. He made a very valid point to this viral Economic post: “Finland is not for the ambitious”, saying that I should explain economic concepts to people without economics background. I agree. Since I have some attention now, let me take this opportunity to add on constructively to the current economic/social/political discourse on Finland in a more scientific manner–and invite constructive criticisms on my thoughts and arguments and have some solid evidence as to why I think Finland can consider moving towards a more open economy from the MACROECONOMIC PERSPECTIVE.
There are five globally acknowledged macroeconomic aims to any good governance in any country. These five macroeconomic objectives are:
- Low inflation rate;
- Low unemployment rate;
- Stable and sustainable economic growth (globally measured in terms of Gross Domestic Product and Purchasing Power Parity);
- A slight surplus in the balance of trade/ Stable exchange rate; and
- Low income gap disparity.
So, based on OBSERVABLE TRENDS, let’s see how the same macroeconomic objectives are prioritized in Finland, as a welfare state:
- Low income gap disparity;
- Stable exchange rate– since Finland joined EU, thereby giving up control on domestic monetary policy;
- low inflation rate
- sustainable growth rate
- low unemployment rate.
The point here is that not all nations have same macroeconomic priorities and this potentially can cause problems.
It is clear to me from this prioritization that when Finland first joined EU, the motivation is FIRST political (i.e. focused on ideologies), and next economics. This is why academics like American Paul Krugman had been so harsh on EU AND Finland, for instance, in this NYTIMES commentary titled “Europe’s Many Economic Disasters”. And I quote:
“It’s depressing thinking about Greece these days, so let’s talk about something else, O.K.? Let’s talk, for starters, about Finland, which couldn’t be more different from that corrupt, irresponsible country to the south. Finland is a model European citizen; it has honest government, sound finances and a solid credit rating, which lets it borrow money at incredibly low interest rates.
It’s also in the eighth year of a slump that has cut real gross domestic product per capita by 10 percent and shows no sign of ending. In fact, if it weren’t for the nightmare in southern Europe, the troubles facing the Finnish economy might well be seen as an epic disaster.”
In other words, Krugman here is alluding to the inevitable failure of the EU, because of the Euro. According to Krugman, the Euro currency is why Finland’s economy cannot recover well, and Krugman goes as far as to call it “The Finnish Disease”. You can check his post–it’s complete with a longitudinal graph. And I quote:
“Why can’t Finland recover this time? Debt is not a problem; borrowing costs are very low. But it’s all about the euro straitjacket. In 1990 the country could and did devalue, achieving a rapid gain in competitiveness. This time not, so that there is no quick way to adjust to adverse shocks.”
And guess what, I agree 100% with Krugman!
Let me now explain–in as simplistic a manner as possible–exactly how the exchange rate policy works when a country joins any sort of an economic union. I’d put it in the context of Finland.
In the 1990s, when Finland uses the national currency of the Markka, Finland has complete economic freedom to make use of monetary policy–in particular, via the mechanism of an exchange rate policy. The idea is simply to devalue the Markka.
So, let’s assume that due to some external shocks, the volume of Finnish exports started to decrease. Export revenue is calculated as “volume of export” multiplied by “prices of exports”. By this formula, the shock will decrease the “volume of export”, and assuming constant prices, it will decrease the overall export revenue. Export revenue is part of a country’s gross domestic product (alternatively known as “GDP”), so if your export revenue drops, your GDP drops, AND if your GDP drops for consecutive years, you get a recession.
Exactly how then, can a government prevent the export revenue from dropping too much? We have to go back to the formula of export revenue: The government can devalue the Markka, and this will result in a relative fall in external prices of exports. Because Finnish exports are now cheaper, more people will buy Finnish exports due to the law of demand, which states that prices and quantity demanded are inversely related. So you see, a devaluation of currency will cause an increase in export revenue.
This is a widely accepted economic theory in the domain of international economics. Now, when Finland joins EU, Finland has to give up the Markka and adopt Euro, correct? Due to the ideology of economic integration, most EU countries can adopt the same currency, because then it will be easier to trade, and you can hedge against this particular volatile risk called the “exchange rate risk”. Now, the political idea of the EU is a noble one–EU is created with the grand ideology of improving political and trade relationships of all countries within the union. It’s sort of like Finland’s protection against its ackward, isolated position in the world.
The only downfall is that now, Finland has to adopt the Euro, and when external shocks occur, the Finnish government can’t use the devaluation policy anymore to raise export revenue. Because while “Markka” is a currency which belongs to One Finland, the “Euro” is the sole currency adopted by 19 EU member states. So Finland can’t just use exchange rate policy at its sole discretion because it requires permission from the 18 other members, and anyway, Finland doesn’t have the main say–Germany does.
OK–now comes another provocative part. I shall first disclaim that I might be stupid and that you are free to challenge me. But honestly when I read statements by the current Finance Minister Alexander Stubb, I really cannot agree. He basically said, and I quote—
“Devaluation is a little like doping in sports,” Stubb said. “It gives you perhaps a short-term boost, but in the long run, it’s not beneficial.”
Instead of a doping injection, Stubb argued, Finland is in need of structural reforms. “Just like anyone else, we need structural reform, structural adjustment; we need to increase our competitiveness, and a little bit of luck,” he said.”
How does this make any economic sense??!?!?!?
OK you have to remember this: No matter what economic theory you study, we operate in the short-term, but plan in the long term. I quote the very respected late economist John M. Keynes:
“In the Long Run, we are ALL dead.”
This means–back to Finance Minister Stubb’s statements–that even if devaluation is a “short-term boost”, it is still a boost, right?!?! I will argue that it is better than doing nothing, since there is no concrete evidence that doing nothing is effective. Furthermore, I completely reject his metaphor of comparing a legit economic devaluation mechanism of “devaluation in exchange rate policy” with “doping in sports”. The former is legit as I have earlier mentioned–it’s part of a legit economic theory under international economics, the latter isn’t. And here’s the best part: this “doping in sports” actually did work very well for Finland in the 1990s, when Finland still adopted Markka, as shown by Paul Krugman’s article. The latter of Euro as a common currency in addition, has very real and depressing consequences even today (Check this forum out).
If a finance minister can make statements like that, to be honest– I am worried! Again, this can be because I’m ignorant or stupid. And, to give the benefit of the doubt, Finland could have been operating on some other wisdom which I’d never been educated on.
BUT! What’s the best indicator of Economic policy? It’s results. Finland’s economy hasn’t been doing well for the past 8 years, and STILL isn’t doing well! What makes you think the next 10 years will be better…?? SO I thought, okay, according to my current economic understanding, the next ten years will NOT be better.
That’s why I think I should keep my sanity and just leave. I can’t fight powerful Finnish politicians, can I?!?!? And I’m super scared of death threats, what if someone tries to kill me because I spoke my mind on these issues? I still want to execute all my dreams you know?! And even if I had chosen to stay, I know for sure that I will be suspicious over the economic policies in Finland planned by the current government!
So, my basis of saying that “Finland is not meant for the ambitious” IS because personally I cannot agree on, or even see the logic behind how the Finnish politicians make their economic decisions in this country.
In addition, day after day, I read news like this–“Government in internal tug of war over proposed financial reforms“. This causes me to think, honestly, that Finland’s economic policy is sort of nonsense and in a huge mess, because even as someone who is reasonably trained in reading Economics, I don’t understand most of the economic logic! Even if I concur with the economic theory, the execution might be screwed up!! Because the current coalition of the 3 “S” have such different ideologies–here’s another indication that the Finns Party might leave the coalition. Then how do you expect government policies to be passed?
Having said that, I do acknowledge that I could just have been an ignorant, stupid person, so if you can explain the logic behind the current economic policy to me, I’d be quite grateful. Leave a comment!
So my logic when I say “Finland is not meant for the ambitious” from the economics perspective is this: IF as a reasonably trained person in Economics, I cannot see eye-to-eye with, or understand the logic behind the decision making process of the Finnish politicians in power on macroeconomic issues, then how can I see myself + my company growing in Finland, in an ethical and confident manner?
Since–due to my social conditioning and the way I was brought up, MY business and personal economic well-being are directly influenced by marco-economic factors. I can be completely honest with you, economic success is indeed quite an essential part of my identity as a Singaporean. In addition, from an investment perspective, I think it would be reasonable to expect a sound macroeconomic environment as the foundation of investor’s and consumers’ confidence, when you choose to do a startup/business here.
OK–let me give you one more example. It’s something close to my heart: Education. On the topic of education, you can follow the thoughts of my Croatian friend Tia–both of us think that no matter how terrible an economy is, you cannot do anything terrible to compromise on the quality of the education system, for reasons related to investment and ethics. When I was in Singapore, I used to think otherwise–but after meeting Tia, I am now convinced that education is an investment that the state should never scrimp on. I wrote here that I disagree too, with Prime Minister Juha Sipilä’s idea of cutting education funding in the name of “austerity”.
Because, like Michael Halila mentioned and has convincingly shown, there is NO austerity in Finland!! If you are interested in reading up on why some governments want to give a delusion of austerity, here is another Paul Krugman’s piece, referring to the UK context. My point is: from the economic perspective, this isn’t a new trick, and I won’t be surprised if Finnish politicians use it. I think the Finnish media likes to confuse the term “austerity” with “recession”, when economically speaking, both are extremely different.
OK, let’s go back to the textbook definition of austerity. According to Wikipedia:
“In economics, austerity is a set of policies with the aim of reducing government budget deficits. Austerity policies may include spending cuts, tax increases, or a mixture of both.“
Now, I quote from the Finnish Prime Minister’s recently televised speech:
- Statement that austerity measures is NOT the point: “Finland will not rise simply through spending cuts or tax increases.”
- Disapproval over increase in value-added tax. “It would have cost every Finn if value-added tax would have been increased by several percentage points. Value-added tax is a flat tax and it would impact people’s finances insidiously.”
- Statement that there will be an increase in government expenditure, which goes against austerity. “We are investing in key Government projects, because change also needs investment.” Also, note that these “key Government projects” are not specified in any way.
And I quote from Bank of Finland Governor Liikanen’s Statement that there would be large immediate spending on refugees, but in the long term refugees will contribute to the welfare state IF they can assimilate well. (Source: “Liikanen: Asylum applicants will help finance the welfare state one day”. )
OK–so now as seen, we clearly understand that there would be increases in government expenditure AND no increase in value-added taxes, which directly go against the definition of austerity, correct?! These are anti-austerity, not austerity measures!
If there are increases in government expenditure on refugees (which is definitely humanitarian and positive), and those unspecified “key government projects”, then exactly why, pray tell, is it OK to cut educational expenditure?
“Broken Promises: IS also followed the outrage on social media as students looked into the 600 million euros of cuts to the education budget. These come in stark contrast to election promises from both Alexander Stubb and Juha Sipilä that education would not be cut.
Many of those outraged students and academics were also chewing on comments from the new Education Minister Sanni Grahn-Laasonen, who said on 1 May that education funding should not be reduced.
“We have to make a value choice,” Grahn-Laasonen had said in her May Day speech delivered in Pori and Lahti. “The best investment in the future is to put money in children and young people’s education.”
She’s now responsible for delivering a 600 million euro reduction the education budget.”
I agree 1000011% with the esteemed Jukka Kola, rector of University of Helsinki—
“The steps proposed by the coming Government are at odds with its goals. The Government wants to make Finland a leading country in education and to increase both the quality and impact of research. The drastic cuts proposed to education would have the complete opposite effect,” Jukka Kola states.”
Can you tell me then, how any sane, ambitious person interested in the pursuit of knowledge would want to stay in Finland for long?
OK–in case you call me names again, let me ask you for a viable alternative. Even if I am willing to stay and willing to “fight”, I am NOBODY. How do I fight? Logically, the smarter alternative to contribute to Finland would be to leave Finland and do good PR for Finland overseas!
And one very important last point–let me quote the very esteemed economist Joseph Stiglitz on the point that the government should consider being growth-focused, not debt-focused.
And I quote his advice for prime minister Juha Sipilä:
” GDP has no intrinsic value. There is only one good reason to increase GDP and that is to improve peoples’ standard of living,” he pointed out…Don’t be so obsessive about government debt. Think more about how to get GDP growing because at the same time it will improve the state’s debt sustainability,” he advised.
A second recommendation from Stiglitz also related to government debt. The economist stressed that it’s acceptable to have debt. “Taking debt to invest in people, infrastructure and technology is a good investment. After all, you’re still able to borrow at low interest rates,” he observed.”
Education is an obvious investment in people. Spending more on education, research and a sound infrastructure such as good buildings and transport systems (NOT LESS, like what the government is currently planning to do!) will lead to a higher equilibrium growth and output, which will get Finland out of its recession. This will also lead to greater innovation, which might lead to the next big economic driver/ next NOKIA of Finland, won’t it?
And, by the way, even the smartest Finnish researchers and academics are thinking of leaving /have left Finland because of these educational funding cuts. I’m definitely not the only one of the opinion that Finland is not for the ambitious, due to macroeconomic factors.
So all in all, this sums up the reasons as to why I think Finland is not for the ambitious, from the macroeconomic perspective. Please do challenge my framework and thinking, I HOPE TO BE PROVEN WRONG TOO.
Okay got to go do a bit of work, talk to you later. 🙂 Oh by the way if you have some ideas of how the economic situation can improve, feel free to leave a comment too. I’d love to learn from the way you think.