The Finnish Economic Depression of the 1990s: Causes, Consequences and Cure
Osman, Jack W., Scandinavian Review
Following World War II and the payment of massive reparations in physical goods and commodities to the former Soviet Union, Finland was transformed from an agrarian society to a modern technologically advanced economy. The 1980s were characterized by sustained economic growth. The expansion was so robust during this decade that the expression "Nordic Tiger" was used to describe the Finnish economic performance. This expression was, of course, a pointed reference to the rapidly growing "Tigers" of the Far East.
The growth of production averaged 3.7% during the 1980s and reached a high of 5.7% in 1989. Unemployment had fallen in the 1980s and by 1989 was but 3.5% of the work force. By the end of the 1980s Finland, along with her fellow Scandinavian countries, had one of the world's highest standards of living and lowest rates of joblessness. All of this came to an end near the start of the current decade. What is not widely understood is the speed and severity of the collapse of the Finnish national economy. Following a zero growth performance in 1990, Finland's output of goods and services, corrected for price changes, fell over 11 % by 1993. Unemployment in 1994 was over 18%. Finland was in an economic depression.
Table 1 (page 18) shows the sudden surge in joblessness in the early 1990s and the painfully slow recovery that is far from complete. As severe a picture as these numbers depict, the total extent of the economic collapse is understated. Many workers, discouraged by the inability to find work, retired, or otherwise stopped actively looking for the nonexistent jobs. In addition, counted among the employed were persons undergoing paid training or subsidized employment. By one estimate (Professor Jouko Yla-Liedenpohja of the University of Tampere) the "true rate of effective unemployment was 28.3% at the end of 1996." This rivals that of the United States during the "Great Depression" of the 1930s.
Costs of the Finnish Depression
In economic terms the direct and most immediate cost of the Finnish depression was the production and income that was lost when workers and equipment were employed at far below capacity. In 1993 alone, this loss was about $15 billion in today's terms or just under $3000 per person.
During the depression, investment in new machinery and infrastructure by both private firms and the government fell. This, together with the curtailed spending for schools and colleges, reduced Finland's capacity to produce. Thus, the effects of the depression will continue well beyond the period of downturn.
The costs of the depression have not been borne evenly. Youth unemployment exceeded 30% in both 1993 and 1994. For three years beginning in 1993, the construction industry recorded over 30% unemployed. Finally, the effects of the depression have not been felt evenly across the land. Generally, the northern and eastern provinces have had higher rates of unemployment than those in the south and west. In 1994, for example, Lapland had 25.0% of its labor force unemployed, while Uudenmaa - the province in which the capital city Helsinki is located - had a much lower, but still very high, 14.9% jobless. The western island and semi-autonomous province of Ahvenanmaa (Aland in Swedish) had but 3.1% unemployed in that year. The result of these differential rates of unemployment among the Finnish provinces has been an acceleration in internal migration as people seek jobs in the less depressed areas. Generally, the pattern of migration has been from north to south and east to west.
With rising unemployment and lower incomes, government revenues fell sharply. But with increased joblessness, expenditures for social welfare programs shot up. The result was a burgeoning annual government deficit and increase in government debt. Whereas Finland had a general government surplus (revenues exceeded spending) in 1990, the budget deficit was about 8.0% of gross domestic product (total output) in 1993. …