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OECD
ECONOMIC SURVEYS
FINLAND
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ORGANISATION FORECONOMICCO-OPERATIONANDDEVELOPMENT
Pursuanttoarticle 1 oftheConvenlion signed in Parison 14th December
1960,andwhichcameintoforceon30thSeptember1961,theOrganisationfor
Economic Co-operation and Development (OECD) shall promote policies
designed:
- loachievethehighestsustainableeconomicgrowthandemploymentand
a rising standard of living in Member countries, while maintaining
financialstability,andthustocontributetothedevelopmentoftheworld
economy;
- to contribute to sound economic expansion in Member as well as
non-membercountries in the processofeconomicdevelopment; and
- to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordancewith international obligations.
The original Member countries of the OECD are Austria, Belgium,
Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United
States. The following countries became Members subsequently through
accession atthedatesindicated hereafter:Japan (28thApril 1964), Finland
(28thJanuary 1969), Australia (7thJune 1971) and New Zealand
(29th May 1973).
TheSocialistFederalRepublicofYugoslaviatakespartinsomeofthework
ofthe OECD (agreementof28thOctober 1961).
Publicégalementen français.
©OECD, 1989
Application forpermission to reproduce ortranslate
all or part ofthis publication should be made lo:
Head of PublicationsService, OECD
2, rue Andre-Pascal, 75775 PARIS CEDEX 16, France.
Contents
Introduction 9
I. Policy, current trends and short-term prospects 10
The policy environment 10
Current trends 22
The outlook for 1989 and 1990 29
II. Saving, investment and the current-account deficit 32
The trend of the current account 32
Should the present trend ofthe current account be considered
as a serious problem for policy? 39
Is the level and allocation of savings optimal? 43
Is the size and quality of investment sufficient? 52
Demographic influences, household savings and investment 60
Is international competitiveness sufficient? 62
Some reflections on economic policy 66
III. The public sector: Growth and structural change 68
Introduction 68
Organisation of the public sector 68
Decomposing the growth ofgovernment 72
Controlling the supply of public goods and services 79
Expenditure pressures in the medium term 84
Taxation: distortions, disincentives and the tax reform 85
The ageing population and social security contributions 92
Is the public sector crowding out private activities? 95
IV. Conclusions 98
Notes and references 103
Annexes
I. An extended Scandinavian model of inflation 107
II. The demand for public expenditure 1 11
III. Supplementary material 1 15
IV. Chronology of main economic measures 1 18
Statistical annex 124
Tables
Text
1. Activity and the fiscal policy stance 13
2. Public sector income and expenditure 15
3. Demand and supply 24
4. Labour supply, employment and unemployment 26
5. The growth of labour productivity 27
6. The balance of payments 28
7. The short-term outlook 30
8. Debt dynamics 39
9. The private saving ratio in international comparison 46
10. Investment activity in manufacturing 55
11. Investment shares and ratios in main sectors 56
12. Costs and benefits of agricultural price support, 1986 57
13. Trade barriers against clothing exported from Hong Kong, 1981-84 57
14. General and sectoral measures affecting inward direct investment 59
15. Demographics and the private saving ratio 61
16. Terms of trade, import propensities and competitiveness 65
17. General government outlays 69
18. Gross public debt 70
19. Elasticity estimates of government growth 76
20. Tax-price and income elasticities, relative productivity and the
economies of scale in the public sector 78
21. Taxes and State aids by size of the municipality 81
22. The trend of social transfers, 1983-88 82
23. Concentration measures of some social transfers 84
24. Broadening of the income tax base 88
25. Highest marginal tax rates in OECD countries 89
26. Tax arbitrage after the tax reform 90
27. Wages in public, sheltered and open sector 97
Annexes
Al. The estimated extended Scandinavian model of inflation 109
A2. Average social security contributions 115
A3. The importance ofState-owned companies 115
Statistical annex
Selected background statistics 124
A. Supply and use of resources, current prices 125
B. Supply and use of resources, 1985 prices 126
C. Gross domestic product by industry of origin 126
D. Central government revenue and expenditure 127
E. Balance of payments 128
F. Labour market 129
G. Imports: Prices, volume and value by commodity group 130
H. Exports: Prices, volume and value by commodity group 131
I. Foreign trade by area 132
J. Prices and wages 133
K. Interest rates, money and credit 134
Diagrams
Text
1. The challenge for economic policy 11
2. Indicators offiscal and monetary policy 12
3. Convergence of inflation rates 16
4. Monetary policy indicators 17
5. Wage settlements and incomes policy 21
6. Growth of real domestic demand and GDP 23
7. The current account and activity 33
8. The current account and sub-balances 34
9. Export performance, competitiveness and capacity utilisation 35
10. Import penetration and export performance, 1970-85 36
11. Import penetration 38
12. Savings/investment balances 41
13. Gross savings and investment in international comparison 42
14. Net savings and investment in international comparison 44
15. Age structure and age-dependent financial savings 47
16. Social transfers as a share of household disposable income 48
17. Households' gross debt and prices ofdwellings and shares 49
18. Relative size of fixed investment categories 53
19. Rate of return on fixed capital 54
20. Profit margin in manufacturing 63
21. Open and sheltered sector wages 64
22. Division of tasks in the public sector 71
23. Structure of public expenditure 73
24. Public sector as a share of GDP 74
25. Targets and outcomes of public expenditure control 80
26. Gini-coefficients of incomes in 1960-85 83
27. Tax structure in Finland and OECD 86
28. Effective marginal tax rates in personal income taxation 87
29. Pension expenditures in different pension systems 93
30. Numbers of days in in-patient care, 1980-2030 94
31. Crowding-out effects offiscal policy 96
Annexes
Al. Cost efficiency of public services 116
BASIC STATISTICS OF FINLAND
THELAND
338 Populationinmajorcities, 1985:
ofwhich: Helsinki 485795
Cultivatedland 27 Tampere 169026
Forests 187 Turku 161 398
Lakes 32 Urbanpopulation(percentoftotal) 60
THEPEOPLE
Totalpopulation(1987),thousands 4939 Manpowerbyindustryin 1987(percentoftotal):
Persq.kmoflandarea 15.8 Agricultureandforestry 10
1987(perthousand): Industryandconstruction 31
Livebirths 12.2 Commerce 15
Deaths 9.7 Transportandcommunication 8
Netnaturalincrease 2.4 Services 36
Netincreaseofpopulation 2.6
PARLIAMENTANDGOVERNMENT
CompositionofParliament,numberofseats(1987): Government,numberofministers
SocialDemocraticParty 56 from:
NationalCoalition(Conservatives) 53 NationalCoalition (Conservatives) 7
CentreParty' 40 SocialDemocraticParty 7
DemocraticUnion(includingCommunists) 16 SwedishPeople'sParty 2
SwedishPeople'sParty 13 FinnishRural Party 1
RuralParty 9 (cid:9)
ChristianUnion 5 Total 17
"Greens" 4
Democraticalternative 4 Lastgeneralelection: March 1987
Nextgeneralelection:March 1991
Total 200
1. IncludesformerLiberalPeople'sParty
PRODUCTION
GrossDomesticProduct 1988(Mk.million) 374717 GrossDomesticProductbyindustryin 1988
GDPperhead,USdollars, 1988 18050 (percent):
Grossfixedcapitalformation 1988(Mk.million) 92408 Agricultureandforestry 5
Industryandconstruction 32
Commerce 9
Transportandcommunication 7
Services 47
THEPUBLICSECTOR
Publicconsumption 1988,percentofGDP 20.2 Generalgovernmentrevenueandexpenditure, 1988
Grossfixedcapitalformation 1988,percentofGDP: (Mk.million):
Generalgovernment 3.1 Currentrevenue 176372
Currentexpenditure 159590
ofwhich:
Consumption 89766
Transfers 51656
Subsidies II 132
Interestonpublicdebt 7036
FOREIGNTRADE
Exportsofgoodsandservices,percentofGDP, Importsofgoodsandservices,percentofGDP,
1987 25.2 1987 24.8
Mainexportsin 1987(percentoftotal Mainimportsin 1987(percentoftotal
merchandiseexports): merchandiseimports):
Agriculturalproducts 2.2 Agriculturalproducts 5.5
Woodproducts 8.3 Rawmaterials 5.7
Pulpandpaper 30.3 Fuelsandenergy 13.5
Machineryandtransportequipment 26.9 Machineryandtransportequipment 36.6
Othergoods 32.3 Othermanufacturedgoods 38.7
THECURRENCY
Monetaryunit: Markka CurrencyunitsperUS$,averageofdailyfigures:
Year 1988 4.19
June 1989 4.43
Note:Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable.
ThisSurveyisbasedontheSecretariat'sstudypreparedfor
theannualreviewofFinlandbytheEconomicandDevelopment
ReviewCommitteeon 30thJune 1989.
Afterrevisionsinthelightofdiscussionsduringthereview,
final approval ofthe Surveyfor publication was given by the
Committeeon 18th July 1989.
Theprevioussurvey ofFinlandwasissuedinApril 1988.
Introduction
Finlandhasenjoyedhigh andrelativelystableeconomicgrowththroughoutthe
1980s. Most of the time, growth was balanced in the sense that relatively low
unemployment was compatible with a sustainable inflation performance, public
budgets were closeto balance and the external current account showed a relatively
stable, small deficit. However, in the last few years, domestic demand growth has
considerablyexceeded growthofproduction, which in turn hasexceeded the growth
ofproductive potential. As a result, inflationary pressures have increased and the
external balance has deteriorated.
The strengthening of domestic demand has principally been supported by
acceleratinginvestmentsand lowersavingsin theprivatesectoroftheeconomy.The
questionthusariseswhetherbalancewillberestored viaself-correctingforcesin the
private sector or whether structural deficiencies will inhibit speedy adjustment,
involving costs in terms of higher unemployment and lost production. In this
connection, it is important toassess the public sector's role in respect of, on theone
hand,itsresponsibilitiesforexistingdistortionstoprivatesectordecisionsand,onthe
other, its capacity for contributing to a proper balance between savings and
investment at the macro level.
PartI of this Survey describes the short-term policy response to increasingly
unbalancedgrowth and thequantitativeoutcome, aswell astheshort-termoutlook.
PartII takes up the question of whether the external deficit should be a cause for
concernsince, inviewofbalanced public budgets, it istheoutcomeofprivatesector
savings and investment decisions. In this context, distortions to private saving and
investment decisions are discussed. Part III describes longer-term developments in
the public sector and discusses the contribution this sector can make to balanced
growth. Finally, policy conclusions are presented in Part IV.
