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Wednesday » July 5 » 2006 Europe should look to Finland for economic inspiration Matti Aaltola The Ottawa Citizen Wednesday, July 05, 2006 There is no doubt that Finland -- Nokialand -- has gained from globalization. Since 2000, the World Economic Forum's annual competitiveness comparison has ranked Finland No. 1 three times and No. 2 three times. The forum's forward-looking growth competitiveness index has place Finland in top spot four times, second once and sixth once. Finland also scores well in education and in other public services, as well as in taking care of the environment. Last month, the Organization for Economic Co-operation and Development noted that Finland's growth performance has been among the best in the OECD area, underpinned by a strong innovation performance and high educational attainment. Especially noteworthy is that, for several years, Finland has been running budget surpluses, in anticipation of future claims on the budget associated with the aging of its population. Given Finland's northern location (between the 60th and 70th latitudes) and its small population (5.3 million), these are remarkable achievements. To be fair, many other smaller European Union countries -- such as Finland's Nordic neighbours Denmark and Sweden, as well as Ireland -- have also shown the same kind of dynamism. Rapid growth rates in new member states such as Estonia, Hungary, Slovakia and Slovenia prove that they know how to catch up. Despite wars and other disruptions, Finland's economy has maintained a relatively high growth rate for a very long time. According to economist Angus Maddison of the OECD, Finland was among the top performers globally throughout the 20th century. Long-term investment in education, research and well-functioning, corruption-free government institutions, not just in equipment and machinery, has paid off handsomely. The EU has had a hugely positive influence on Finland's extraordinary economic success over the past decade. Full participation in European integration, including adoption of the euro, has helped to diversify Finland's economy and make it more competitive. Finland has come to be seen as a country that is investing heavily in future growth -- by way of human capital and innovation --while relying on free trade and fighting for even freer trade. A key objective for Finland's six-month presidency of the EU, which began on Saturday, is to enhance Europe's competitiveness. In general, Canadians do not fully understand the EU's economic performance. The image is one of stagnation, strongly coloured by the relatively poor performance of major continental member states. In reality, the EU continues to be the world's largest common internal market and the biggest trader. The problems of some overshadow the successes of others. Globalization requires nimble adaptation to change. In general, small countries tend to accept change better than large ones, as they have less choice. In Finland, globalization is viewed as an opportunity rather than as a threat. For Finns, the country's wartorn history has taught that to adapt is to survive. Finns have also learned the hard way that sudden and drastic change can happen in peacetime. In the early 1990s, the Finnish economy was hit by a banking crisis at home, recession in the West and the collapse of the Soviet trade to the East. Finnish GDP fell more than 10 per cent in three years and unemployment rose from three per cent to nearly 20 per cent. In hindsight, however, the severe recession of the early '90s turned out to be a necessary and long overdue shakeup that forced Finland to adapt and to find new products and markets. By 2000, information and communications technology had become the driver in an economy previously dominated in manufacturing by the lumber, pulp and paper, metal and engineering industries. A key to the willing acceptance of change by all stakeholders is close co-operation among government, employers and employees. Multiyear incomes and policy agreements at the national level are negotiated between the Confederation of Finnish Industries and the Central Organization of Finnish Trade Unions, with the government providing tax breaks or other inducements to facilitate agreement. This typically Nordic model of consensus-building may sometimes work slowly, but constant dialogue among the labour market partners and the government has undoubtedly led to better and more predictable labour relations than would otherwise be the case. Admittedly, this kind of centralized system has its weaknesses, including that real wages often fail to adequately reflect productivity differentials at the company level. A recent report by the Brussels-based European Policy Centre concludes that the Nordic countries have successfully challenged the mainstream economic dogma that high tax rates, a large public sector, moderate wage levels, a more egalitarian distribution of incomes and generous social services and benefits are harmful to economic growth. For the European publics, acceptance of the economic change wrought by globalization hinges on maintaining an acceptable level of social protection. And such protection can only be afforded in the long term if economic change is embraced, not rejected. Europe must achieve a better balance between flexibility and security in the labour market. Ideally, combining the two ("flexisecurity") could mean mutual inclusiveness with no trade-off between, as has traditionally thought to be the case. One size does not fit all, in Europe or anywhere else, but the Finnish model certainly fits a small, open and innovation-minded economy in the far north of Europe -- even if Finland's unapologetic embrace of globalization has meant that its shoe industry has long gone the way of the dodo. Matti Aaltola is deputy head of mission of the Embassy of Finland in Ottawa. Before joining the Finnish foreign service, he was senior economist in the Ministry of Finance in Helsinki. © The Ottawa Citizen 2006 Copyright © 2006 CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.