Road to
prosperity
Cathing-up
▪ The Finnish GDP per person grew 21-fold 1860-2000.
▪ A growth of 2,2 percent per annum
▪ In the 15 EU-countries, the growth was 17-fold, 1,7% per annum
▪ Finland moved from poverty to become one of the richest countries in the world.
▪ Japan, some South-East Asian countries and Ireland have experienced higher
growth rates during the 20th century
Cathing-up
GDP per person 1820-2001
100 000
10 000
1 000
100
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Finland
USA
World
Industrialisation started late
▪ In 1860 the share of industrial production of GDP was 7-8% and it employed 4%
of population. 50 years later it employed 10% of population and the share of GDP
was 20%.
▪ By 1938 mennessä the share of GDP of industrial production was nearly 25%, the
contribution to the growth of GDP 40%
▪ Secondary production increased its significance in 1920s.
▪ Services became the number one contributer to the growth of GDP not until the
mid 50s.
Structural change
▪ Economic activity takes place in three major sectors
▪ Primary production
▪ Agriculture, forestry, hunting, fishing
▪ Secondary production
▪ Mining, quarrying, manufacturing, electricity and water services, construction
▪ Services
▪ The rest
GDP in Finland in1860-2003
Hjerppe (1988) and Statistics Finland
100 %
80 %
SERVICES
60 %
SECONDARY
PRODUCTION
40 %
PRIMARY
PRODUCTION
1992
1980
1968
1956
1944
1932
1920
1908
1896
1884
1872
0%
1860
20 %
In 1860…
▪ Four out of five people were employed in primary production. As productivity was
low, the managed to generate only 60% of value added
▪ Less than 15% were employed in secondary production, their value added shares
about the same
▪ The labour share of services was just 7%,yet their share of GDP was 1/5 -
>ownership of dwellings, entrepreneurship in trade, civil servants, clergy,
teachers, doctors, lawyers, artists etc.
▪ Figures 2.7 and 2.8
In 1950…
▪ The share of agricultural production still almost half
▪ One quarter of production was in primary industries
▪ Remeber: industrialisation started late…
▪ High share of the primary sector is the role of forestry as a supplier
of raw material to the forest industry -> forestry being very labour
intensive long after WW2
▪ Low productivity of grain growing in Finland -> northern climate
conditions and late modernisation of agriculture
Decline of the primary production –
Kuznets (1966)
▪ 1. As income per capita grows, there might be a proportionally larger demand for
non-agricultural products
▪ 2. As an increasing agricultural output volume goes hand in hand with increased
population and incomes, the widening domestic markest provide more
opportunities for import competing industries
▪ 3. Declining primary production shares in developed countries (after they began
trading with less developped countries)
▪ 4. Technological change
”Productivity isn’t everything, but in the long run it is
almost everything.”
Krugman (1990)
▪ The standard of living can be expressed as the product of two components:
▪ 1 labour productivity (basic unit: GDP per house worked)
▪ 2 labour input per capita
▪ There’s an upper limit to the amount of work that can be done by a person
▪ Labour productivity can grow ”without bounds”
The engine of growth?
▪ During 1860-2004, GDP grew on average by 3%
▪ Value added of primary production by 1%
▪ Secondary production by 4%
▪ Services by 3%
▪ Of the overall average GDP growth only 0,7% was the result of increased labour
input while 2,2% came from labour productivity improvement
▪ Labour productivity reached the highest average growth rates in the 1950s and
1960s but slowed down from the 1970s
Labour productivity in the manufacturing
sector
▪ In 1900 the labour productivity in the manufacturing sector in Finland was far
behind from Denmark and Sweden The gap was narrowed in most industries by
the 1930s
▪ Fastest development in the paper industry
▪ In 1996-2000 Finland had labour productivity levels compared to those of
Netherlands, Belgium and the USA
▪ Shift from low productivity industries to high productivity industries
Labour productivity growth
▪ The most important reason for labour productivity growth is new technology and
production methods
▪ Growing investment ratios have secured an increasing amount of machinery and
equipment
▪ Adopting new inventions and thus saving the development costs
▪ Government has supported investments
▪ In 1995-2002 nearly 1/3 of GDP growth stemmed from ICT production
Labour productivity
Labour productivity, 1926=100
100
LN
10
1
1860
1880
1900
1920
1940
1960
1980
0,1
SECONDAY
PRIMARY
SERVICES
2000
Concluding
▪ From rags to riches
▪ Late industrialisation
▪ Cathing-up
▪ Structural change
▪ From a primary production economy to a modern welfare state with a large
service sector
▪ ”Labour productivity is almost everything”
Key elements of the so called Finnish model
1.
Solid institutional legacies, including a continuity in government
structures and policies, ethnic homogeneity and a strong
government role in regulating the economy
2.
The long-term utilisation of the key natural resource, namely forests,
as a source of energy and raw material in industrialization
3.
The ability to adapt quickly to structural changes and external crisis
4.
The strong emphasis on the creation of human capital
5.
The development of an egalitarian society -> welfare state
6.
Innovation