Download Lecture of Jakob Donner-Amnell - economic development of border

The border as a factor in the development of the forest
sector in Finland – past, present and future
Jakob Donner-Amnell
Researcher, Karelian Institute/UEF
18.11.2013
Background
The forest sector – forestry, forest industry and related activities – has had a central role in
Finland´s economic development for about 150 years
Between 1920s and 1970s, the forest sector was the biggest export sector, the motor of the
national economy and employed a lot of people in its production chain
After that period, the Finnish economy has developed into a more versatile direction, with
engineering, chemicals, electronics, metals etc in rather strong roles
But still today, forest sector´s share of total export is close to 20 % and its share of GDP is around
5 %.
This is very much for a developed country, especially when the global forest sector is going
through one of its biggest structural changes
Many studies have still estimated, that forest-based activities can be rather important for Finland
in the future
The border is a constant (f)actor – but in different roles over time
Because some resources are getting scarce on the global level, demand for products based on
renewable resources seems to be growing
Economic sectors built on a renewable basis should be well equipped to grab such an opportunity
The Finnish forest sector has been considered to have the necessary prerequisities for this
So if you are interested in the role of the forest sector in history or future, the Finnish case is
interesting to study
And when doing that, you soon notice that the border (and Russia) is clearly present in the story
– but the role is very different in different phases
At the end of the presentation, we will focus on
- what the future might bring with it for the forest sector
- what the role of the border might be in different scenarios
1809-1917: Finland develops as a society and as a major actor in saw milling
Finland was an autonomous part of Russia (a grand duchy) between 1809 and 1917
Without doubt, Finland gained from this position and developed rather strongly during this
period in many ways
Saw milling grew very big and affected economic and social development in Finland
Sawn timber was exported mainly to Western Europe, but the emerging production of paper
leant mainly on the Russian “inner market”
This is a main reason why South East Finland is a centre for forest-industrial production still today
The forest sector also caused some problematic issues in forest use and between different social
groups (uneven distribution of the benefits)
But despite many tries, it was not possible to solve these issues properly
1918-44: An independent republic, a strengthening but dependent economy
The revolution in Russia had many direct and indirect effects on Finland
The most evident one is Finland´s independence, which would not have taken place without that
(at least not then!)
Also the outbreak of the Finnish Civil War in 1918 was partly a consequence of the revolution in
Russia
Anyway, Finland suddenly found itself in a very different situation
The country had to build its own foundations, when the Russian-lead administration vanished
Russia closed its borders, so the big trade with Russia (also with paper) had to be redirected to
the west
Many sectors did not manage to do that – but the paper industry did
This was helped by the fact that forest industry suddenly dominated Finnish exports and the
national economy and had to be taken into account accordingly
Finnish policy focused strongly on building a solid economic, social and political basis
for its existence in 1920-40s
In the economic sphere, this meant strong support for developing the forest sector
This took place in many different ways, from building ports to enlarging relevant education and research
At the same time, agriculture was also developed, because it was seen as a basis for independence and
political stability
A piecemeal land reform was put through, which almost doubled the amount of farms
New legislation stopped forest companies from obtaining more forest land
These moves changed the relation between forest industry and land owners from partial suspicion into
interdependence
This was helped by the fact that foreign owners of forest industry left Finland because of the political
risks
So the forest industry turned also in this way into a national industry, with the state as a key owner
(Enso-Gutzeit and Veitsiluoto) and as a strong industrial actor also otherwise (energy, mining, metal
companies)
In the interwar years, the border was “high” – very little trade or contacts
(only notable exception: people moving from Finland to Soviet Republic of Carelia)
1945-1985: rapid growth of Finland and its forest sector
During this period, Finland rebuilt itself, prospered and changed into an industrial welfare-state
Until the late 1960s, the forest sector was the central economic actor in this development
The forest industry grew very rapidly and modernized a lot during this period
It changed its structure to strongly rely on paper production in big efficient units
This development was helped by European recovery in the post-war decades until 1970s
For the forest industry, it meant strong demand for sawn timber, pulp and paper
The border was one key element in the story
Because of the peace treaty with Soviet Union, Finland had to put much more effort on
engineering and metal industry
This added strongly to the development of a Finnish “metal and technology cluster” with strong
links to forest industry:
- ship building, production of paper machines, equipment for pulping and saw milling and
machinery for logging
As a part of the special relation with Soviet Union, Finland´s trade with its neighbor was extensive
It was based on a barter principle, so it was important to find suitable goods in both directions
Especially when the price of oil and gas was high, it meant that Finland could export a lot of
different products to Soviet Union
Also timber started to be imported from Soviet Union in bigger volumes in the 1970s (after a long
pause)
The forest companies gained from this, as it kept the price of domestic timber down
1986-2006: wind of change
During this period, Soviet Union fell in pieces and Russia was re-established
Finland experienced a boom in late 1980s, a heavy recession in early 1990s and a long boom after
that
Because the export to Soviet Union dropped and the eastern neighbor seemed unstable,
Finland decided to apply for membership in EU and also EMU, which soon happened
From mid-1990s, the Finnish economy thrived for a decade
This was unusual and also one main reason was unusual – a Finnish company as global market-leader
Also the Finnish forest industry grew and internationalized both in production and ownership
Still, it was rather dependent on paper markets, on Finland and on imported Russian timber
(1/3 of roundwood was imported)
Risks attributed to these factors were brought up by some critics, but were ignored
2007-13: risks get real in the global economy and the forest sector
On the global level, this short period is dominated by two themes:
- the global recession, starting 2008 and still firmly on the scene, with some variation between
areas
- the importance of resources has been on the rise, reflected in rising price levels and a “resource
rush”
In Finland´s perspective, there are some more nuances:
1. the prolongued recession in Europe affects an export-dependent economy such as Finland
strongly
2. Nokia´s failure to keep any position in the market for mobile phones is a blow against the strong
ICT-identity and national pride linked to it
3. to some extent, this has been compensated by success of Finnish companies in other segments,
such as electronic game companies (Angry Birds, Super Cell), clean tech (Outotec, Kemira, Wärtsilä)
or bio refining (Neste Oil, UPM)
For the Finnish forest industry, this period has until now consisted of the biggest peacetime
decrease of production, turnover and personnel
Why has the forest industry run into structural problems?
The global recession is one part of the story, but the most important factor is the rapid decline of
printed media and advertisement
It started in North America after 2000, reached Western Europe some years later and is starting to
affect media and markets for printing paper everywhere
Canada has until now faced the biggest decrease, followed by Finland
Of the Finnish companies, UPM and Stora Enso have suffered heavily, closing many factories and
reporting losses or poor results for most of the period
One additional hardship for the Finnish forest companies came from Russia´s decision to impose export
duties on timber
As a big part of their production was dependent on timber import, this lead to higher costs and
contributed to temporary or permanent closures
In a few years´ time, the Finnish forest industry has made a major restructuration of its production
The main goal has been to be less exposed to the risks linked to the paper market and to timber import
Practically, it has meant scaling down production in Finland and Western Europe and investing only in
growth markets – but not in Russia
DEVELOPMENT CAN ALWAYS TAKE MANY DIFFERENT DIRECTIONS IN THE FUTURE
- There are many alternatives – despite the dominating rhetorics in economy and politics
- Our interpretation of the future has a strong influence on the decisions and plans
we make: WHAT KIND OF FUTURE ARE WE PREPARING FOR?
-Any single future is unsufficient as a basis for planning or decision-making.
- Also the forest sector/use of natural resources should be studied in a broad perspective
World development might turn into many different directions
World economy
Growth triggered by new
economies
Indebtness and high resource
prices as obstacles
World trade
Globalisation deepens
Trade blocs/regional solutions
Geopolitics
Common interests dominate
Own interests dominate
Climate measures
Rapid development
Modest progress
Energy
Low price, old forms of
production dominate
High price, renewables dominate
Land use
No scarcity, no price hike
Scarcity and conflicts between uses,
land price hikes
Food security
Guaranteed by effectivity
Endangered by many factors
Technology
Incremental development
Breakthroughs and /or failures
Consumption
Direct consequence
Active process, surprises possible
Citizens
Stay calm, because
wealth is spreading
React , because of unsecurity and
lacking influence
The future is different – a major update should be made
A return to strong growth of the global economy will not take place soon; many
economies are heavily indebted and there is much unsecurity
Trade liberalisation has not progressed rapidly, trade restrictions have been in use
The world is multipolar and interconnected, but global cooperation to solve growing
challenges (climate, food etc) has not developed strongly
States have been necessary in solving economic and other crises, but the market has not
been changed to take a more responsible role in safeguarding stability and trust
Climate and environment issues have a strong impact on many spheres of life
The price of food, energy and many other resources has risen to record levels
The ”Arab spring” is one clear example of dissatisfaction of citizens
The world economy has undergone clear change since 2000
The western economies have experienced very slow growth – but not the new ones
Some economic sectors and products have suffered from decreasing demand because of
changes in technology and consumption habits – printing industry is a good example
Many activities that can be labelled as ”clean tech” or ”green economy” have experienced
strong growth throughout the globe – their market value is over 1.500 mrd USD
Renewable energy, environmental technology, waste and water treatment, energy efficiency,
logistics and traffic, production replacing use of oil/coal belong to these
Growing pressure on land and forest has occurred, especially in tropical countries
The production of pulp, food and bioenergy has grown, states and companies have acquired
land areas from other countries, also use of land for carbon sequastration and
conservation has increased. Meanwhile, forest loss still continues in many areas.
New mineral and energy sources are looked for and taken into use all over the globe
Many political processes at different levels (states, EU, international agreements) have
contributed to these developments (together with other factors)
The ”resource boom” has both positive and negative effects – but it is strong signal
The resource prices have been on the rise since 2002
(Source: Jeremy Grantham/GMO 2011)
What can be said about the future with some certainty?
Mankind is facing very big challenges this century
World population is growing, more energy and food is needed, also other human needs
exist – demand is growing
Oil is getting expensive and the use of fossil fuels should anyway be decreased
To increase energy and food production a lot can prove to be difficult, because important
resources such as oil, phosphate, water and arable land are scarce
Industry, agriculture, traffic/transport, construction/housing should be transformed into a
low carbon, energy efficient direction - this a huge task!
Renewable resources are essential in the future and products based on them have very
good prospects in the long run
The biocapacity of the globe does not suffice to meet all present or future needs
The ”coping capacity” of world´s ecosystems might be endangered, if use is too big and
harsh
This poses big challenges for economic, political and cultural institutions: how govern such
a development? How strike a balance between different interests and needs? How
secure wellbeing and trust of citizens?
A ”green” economy is different – but there is no lack of demand
To produce bio-based materials and solutions for nearly all activities in society
contains a huge economic potential
Bioeconomy moves into the core of many sectors
- energy production (present value 7.000 mrd USD)
- food production (present value 4.500 mrd USD)
- construction
- retail industry (cars, tires, aeroplanes, machines, textiles)
Biochemicals and -materials have been estimated to have a potential of 200 billion USD in 2015
New products and
biomass-based energy
2015
505 billion USD
2020
776
2030
1309
(source: FPAC 2011)
Traditional forest products
495 billion USD
512
545
In a bioeconomy, the use of all resources must be efficient and intelligent, because they are expensive
and there are many competing forms of use
How is economic activity based on renewable resources affected?
Demand for products and services based on world´s biocapacity will be big
The resource base is a necessity, but its value potential is realized only through use and
consumption – resources not in use have no practical economic value/price
When biomass and biocapacity are used in a wide range of products and activies, the
typical borders between biomass from different sources (forest, field, water etc) will be
blurred
The biomass source is not that important, but the usability of raw material for different
purposes
So the use of biomass will depend on its suitability for different end uses, demand, prices,
logistics, policy etc
Food and fodder, bioenergy, fibre, construction, chemicals, medicine, carbon storage,
tourism, biodiversity, water compete about the use of land and forest
It is likely that traditional forest–industrial use to some extent will give way to other forms
of forest use, especially in areas with population pressure, big demand for food and
good soil
What might be the effects of changes of demand for products
based on natural resources? (based on an estimate made by Don G. Roberts 2007)
If the predicted changes of demand come true, they might have big consequences:
- especially paper production, but in 10-20 years also pulp production might lose its present strong
position in land use
- the role of wood for construction, food, fodder and energy production, wood-based production of
chemicals and materials, carbon sequastration, water protection and tourism might grow
These developments in land use and forest demand can have different effects for different countries,
social groups and companies
Actors possibly gaining from the development: countries that have the capacity to increase their
resource use in a sustainable way, land owners, producers of technology, companies capable of
integrating new activities with old activities (wood industry?)
Actors possibly losing positions: social groups with no clear land ownership, biodiversity and ecosystem
services of forests, companies not capable of integrating new activities with old ones (paper and
pulp industry?)
The effects might be the biggest where there is big pressure on land (part of the tropical countries) and
where paper and pulp production has been in dominating role (Finland, Sweden and Canada)
Forest usage in the future
Decrease of paper production will continue in the West, which will advance structural
change of the forest sector
The timber use of the forest sector might decrease in countries, where paper
production has had a pronounced role (such as Finland, Sweden and Canada)
Many present forest-industrial products (such as board, pulp, certain paper grades,
hygiene products, sawn timber and engineered wood products) have good future
prospects
Bioenergy and new biobased products have a much higher growth potential
This will change forest and business practices – present sector structures will erode
Other forms of renewable energy (solar and geothermal energy, energy based on
waste, side streams or algae) might grow more rapidly than forest-based
bioenergy)
A big part of new bio-based production will take place close to end users (and big side
streams of raw material) = the geography of production will change
Changed setting and use = a different model?
In the future, the character of forest use will change considerably.
Globally, rising demand for food, energy and other forms of land use
competing with fibre for forest industry is the main driver
We have seen only the beginning of the process, much more will evolve
Actors with resources and skills to change focus to activities with good
prospects can gain
A further diversification of forest-related activity will take place, because its
conditions are very different (population density, local and global demand,
resource base etc)
Forest use and processing might turn into a relocalised direction (less
trade/transport, more local use)
A change of the forest use model (cont.)
The effects of the change are different in different areas
Some forest-related activities are more important than today (value and societal
esteem)
To a big part, they are operated by other actors and sectors (energy,
construction, chemical, medical, food and tourism industry)
Forest use is very important in a multiple of ways, but its physical volume might
be smaller than today
These developments will lead to a clearly different power dynamic in forest use
and governance = a different model
What might evolve until 2050:
”Super cycle”, ”Zero sum game” - or something very different?
The direction of many factors and their impact are loaded with unsecurity
Predictions and views about the future get often some numerical things right
– but often they do not catch political and cultural change/dynamics
Futurists can now be divided into two very different ”camps”
- The optimistic ”Super cycle” leans strongly on bioeconomy and mankind´s ability to learn/change
- The pessimistic ”Zero sum game” stresses conflicts of interests and the absence of functioning
international mechanisms for steering development
But some factors having a great impact in 2050 can be stated:
population growth, the growing importance of renewable resources
– and surprises (in technology, economy, culture, politics, climate etc)
The future is unwritten – different paths are possible
What might be the role of Finland, the forest sector and the border in different alternatives?
Let us give this a thought together!
World development:
a spirit of cooperation
Renewable resources:
play a key role in
development
Renewable resources:
have no major role in
development
World development:
a spirit of competition