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Canada's Hot Northern Sisters

World's most competitive economy? Finland, whose foreign minister reveals 'the Nordic secret'.

Erkki Tuomioja 24 Nov
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In October, Finland was, once again, rated the world's most competitive economy by the Global Competitiveness Report of the World Economic Forum. Such a rating should not be taken too seriously, and we in Finland are certainly aware that we are not perfect in this or any other respect.

On the other hand, given the consistency of such top ratings in recent years, and given our top or upper ranking in similar surveys estimating such quantities as lack of corruption, freedom of the press, state of the environment, educational standards, equality of income distribution, and human security, there may actually be something to learn from Finland.

We face tough competition from such low-tax business paradises as the United States, Singapore, and Hong Kong. But the fact that not only Finland but all of our Nordic neighbours - Denmark, Iceland, Norway, and Sweden - are usually to be found in the top ten raises an obvious question: why have these welfare states defied the judgments pronounced over twenty years ago that they had outlived their purpose and were ripe for dismantling?

Can it be that these generous, high-tax welfare states, with their strong labour unions and old fashioned social-democratic values, have achieved their relative success not in spite of being welfare states but because of it?

Keys to Nordic success

This success can be attributed to four factors: knowledge and education, entrepreneurship, cooperation and solidarity, and the Nordic model of the welfare state.

Regarding knowledge and education, Nordic leadership is most conspicuous regarding research and development: Sweden and Finland lead the world in the proportion of GNP devoted to R&D. Equally important, though, is the well-functioning, comprehensive, and free system of universal education up to the university level, without which there would be no high-tech success stories.

Entrepreneurship is not a field where the Nordic countries are recognised leaders, but we still are at the top of the charts for favourable conditions for starting new enterprises. This is essential for meeting the most difficult challenge that Finland faces: restoring full employment. While we certainly hope that Nokia, UPM, and other major multinationals will remain global successes, they are not going to increase the number of jobs in Finland. The new jobs will be created by small-to-medium enterprises.

Being competitive does not require a belief in cut-throat competition or across-the-board deregulation. Almost everyone would subscribe to the view that while we are for a market economy, we do not want a market society. There is clear need to respect non-market spheres of human life and cooperation -- including, by the way, competitive co-ops, which are still to be found in the Nordic countries. Non-market does not mean only or even primarily the public sector, but also the so-called third sector: civil society.

Labour's major role to play

Strong labour-market organisations was a central factor in establishing negotiating procedures between the social partners and a wide network of collective agreements -- which may cover all wage-earners, including non-union members, but still leave considerable flexibility at the branch, company, and even work-place levels.

The social partners were also fathers of our national pension system, which covers all wage-earners as well as entrepreneurs. They have, moreover, been able to agree on the small continuous adjustments to the system which are needed to ensure its sustainability as our population ages. As a result Finland is about the only European country not threatened with a so-called "pension bomb" in the foreseeable future.

All of the above are central features of the Nordic welfare model, with the result that our countries have a significantly more equal distribution of income and a smaller proportion of people falling below the poverty line than any other country in the world.

'Welfare state' stays local

In analysing the success of the Nordic systems, it is important to note that despite the use of the term ''welfare state'', it is the local communities which have the main responsibility for providing services. Benefits are established by national legislation, but local authorities have significant freedom in deciding how to provide them.

Although Finland and all the Nordic countries are relatively high-tax societies, this need not be a hindrance to competitiveness. More important than the level of the taxes is how they are imposed. The tax system needs to provide more incentives for creating and finding jobs and more disincentives for activities that are not compatible with sustainable development.

It is equally important that people get real value for the taxes they pay. Politicians promising tax cuts are regarded mostly with suspicion by a population which, according to polls, is actually ready to accept higher taxes provided they are guaranteed to go to financing clearly needed improvements in services.

Democracy vs. 'well financed lobbies'

How sustainable is all this in our globalising world? The success of the Nordic countries, which are all small economies highly dependent on global trade, indicates that it is very sustainable. But there is no room for complacency. Constant adjustments are necessary.

At the end of the day what will decide the future of our welfare states is still our own political will. If this is decided through democratic procedures, there should be no problem. But we are very much aware that well-financed lobbies are hard at work trying to introduce neoliberal policies to the Nordic countries as well.

Erkki Tuomioja is minister of Foreign Affairs of Finland.

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