Prime Minister Vanhanen in Jyväskylä at the Anniversary of the Regional Organization of Enterprises

GROWTH INITIATIVE 2020

The current economic crisis originated outside Finland’s borders. Consequently, it is the only place where the recovery can start. However, we have to be fully prepared and competitive when the economy picks up again. We have kept the Finnish economy in shape, and this is helping us absorb blows better than many other countries.

The world has slammed into the on-going crisis like a train without brakes. In the summer of 2007, we had the first indications that the US subprime debacle will grow. When the government budget session convened in August 2007, I invited an expert from the Bank of Finland to brief all Cabinet members on what was known about the position of US banks in order to flesh out the forecasts prepared by the Ministry of Finance. On this occasion, we got a foretaste of their difficulties. Within a short period of time after the session, I paid two visits to the United States and met a number of economists. Their message, exactly one year ago last winter, was that a recovery would start towards the end of 2008. While there were no other indications to lend support to such assumptions, nobody in the world seemed to have any idea of what would happen in the economy.

Even so, we in Finland started planning ahead for a turn of the business cycle, and by the time we were getting ready to prepare the budget last summer, it had become clear that this was the right time to try and stimulate the economy. Since August, the Government has launched stimulus packages in four stages. The main focus of these efforts has been to stabilise the money market, secure financing for businesses, maintain consumer confidence, stimulate construction in carefully selected areas and allocate resources for re-training employees who are laid off or made redundant. These measures target the immediate effects of the crisis, and I know that we will not stop here. At the moment, we are closely monitoring the impact of the crisis on municipal finances.

I will not delve into the logic underlying the stimulus policies in more detail, as I believe that the present audience is able to understand it very well. In the domestic political debate, it is only natural that the Government is criticised for not doing enough. However, with the decisions we have made so far, Finland ranks third among the EU Member States even though, to begin with, our position with a view to dealing with the crisis was one of the best in Europe. What we are trying to do is to prevent unemployment from getting out of hand – a lesson brought home by the recession in the 1990s in no uncertain terms.

Another specifically Finnish challenge that we have been keenly aware of for a long time is the ageing population. As we know, economic forecasts predict that per-capita growth of production will slow down and the relative share of the employed in the population decline. Productivity growth will slow down slightly as the average age of the working population rises and the pace of the economy slackens.

The equilibrium of government finances will be eroded primarily because of the declining share of the working population. There will be fewer taxpayers. There will be more pensioners and people depending on public services. Pressures to raise taxes and cut public spending will accumulate. The promises of general wellbeing that we politicians have voiced over the past decades will be called into question.

A special challenge to Finland is the increasing demographic differences between regions, which may lead to a widening gap in the capabilities to finance and provide public services.

From the point of view of the provision of services, the key mission is to uphold the general government finances. To accomplish this, it is necessary to improve the employment rate and, in particular, to enhance productivity in the provision of publicly-funded services. At the same time, it is important to improve the state of health and the working ability of the population. This applies to everybody, especially those who are socially disadvantaged.

Improving the productivity of the whole Finnish economy will offer some relief in the efforts to safeguard the resilience of public finances. If the material standard of living is to be raised, it is necessary to maintain or even boost the current productivity growth. Fast technological advancement is required to respond to the environmental challenges. We have to take care of the whole of Finland.

How can we get on the right track and adopt an active approach?

We have to able alleviate, or better still, eliminate the long-term negative effects of the economic recession and ageing population on the productivity growth and employment rate and, ultimately, the resilience of general government finances. We have to be able to give due consideration to the need to address climate change and other long-term environmental problems.

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A couple of weeks ago I announced a Growth Initiative, a programme called ‘Work for Finland’ that will respond to ageing and economic uncertainty throughout the 2010s. Left-wing policies and free-market liberalism, in their present form, have come to an impasse. A new ‘third way’ is needed.

If we do nothing, all studies suggest that we will get stuck with a basic scenario in which the average GDP growth would level off at 1.7 percent in the 2010s. Everybody in this room knows that such a slow rate of growth would leave us behind the rest of the world and we would wither away.

A central objective of the Growth Initiative is to create a more favourable framework for economic growth throughout Finland in the tough conditions waiting for us in the next decade. Under the changed circumstances, the policies pursued in the past will not be able to drive economic growth. The current recession does not make the job any easier.

Market economy, the sustainable use of natural resources and social responsibility should be reconciled to formulate a new policy.

We are seeking to secure and develop a high standard of living and availability of services throughout Finland. The employment rate must be pushed higher than foreseen in the basic scenario. Finland must be attractive to creative businesses and qualified labour. Natural resources must be used in a sustainable manner more effectively than in the past. Finland must remain a market economy conducive to private ownership and a spirit of enterprise. We should strive for the number one position in climate and energy technology.

Finland needs effective public investments. Success calls for leverage. We need a strong commitment to entrepreneurship and internationalisation that permeates all sectors of the economy. Productivity must be improved by making use of new ideas and by creating new technology. Innovations have to be adopted quickly. The labour force must be highly qualified and work wisely organised.

After my speech, I received mostly positive feedback from experts while some critics argued that we already had a sufficiently high investment rate, and that investments do not guarantee an increase in productivity. To this, I want to respond as follows: for years now, investments in machinery and equipment in Finland have clearly lagged behind those of competing countries. There is a tangible risk that our means of production will become obsolete and break down on us. Over the past 15 years, we have, on average, invested 2.5% points less of the GDP in machinery and equipment than the USA. The difference is nearly the same relative to Sweden and the EU area. The comparison reveals a merciless reality. Over a period of ten years, we have invested some EUR 40 to 50 billion less in machinery and equipment in this country than would be required to match the European average. Others have more modern equipment than we do. What will happen to our productivity under these circumstances? More than anything else, the statistics show that Finnish companies have invested, but away in the world – for understandable reasons.

The Government will not start investing in production machinery and equipment – this is up to the private sector. What the Government must do, however, is to create favourable conditions for economic activity. To do so, extensive projects are called for across the country. More resources must be allocated to education – from primary school to university. Research and development funding must be increased to 4% of the GDP. Roads and high-speed rail connections must be constructed from Helsinki to northern Finland.

High-speed broadband access must be made available to all in Finland. Even though the Internet has been with us for over ten years, the market forces have failed to provide fast connections throughout the country. The Government will take a firmer grip of things. The information society will become part of daily life. The infrastructure required for the mining industry must also be built. A number of surveys rank Finland among the world’s three most interesting countries in terms of mining potential. While it may mean investments worth billions of euros, to achieve this would entail taking bold steps to build roads and railways to where the ore is.

Finland enjoys two relative advantages. The biggest is the high standard of competence of the labour force. For this reason, education and research top my list of priorities in the Growth Initiative. It is one way of boosting productivity - provided that Finland’s production structure is adapted to draw upon this competitive edge more efficiently. The other relative advantage relates to our natural resources which are being under-exploited.

Many people have questions and doubts. What will it cost? How will it be funded? The doubters think that we should pursue the same policies as in the past. My answer is: the programme will cost tens of billions of euros over the next few decades. It will be financed by government funding, pension funds and private capital. It will be financed by exports, enhanced productivity and self-sufficiency, restructuring and tax reforms. We will build on our existing strengths and sectors of the economy. In the short term, we may have to cut back on consumption in order to reap a greater harvest in the future. We will give up on what is not necessary. We will overhaul social structures. Finally, we will create new expertise, technology and jobs throughout Finland. What we aim at is a Finland that offers equal opportunities for all both socially and regionally.

I call upon you all to accept this challenge to re-think. While a planned economy instantly reminds us of our old neighbour the Soviet Union, many of its aspects were adopted in the West as well. This was followed by excessive market liberalism under Reagan and Thatcher which was adopted practically everywhere. There was great confidence in the ability of the markets to solve problems. In finance, this freedom led to a collapse that is playing havoc among all the peoples of the world from pole to pole. It will not be without consequences. The world needs a new financial architecture, rules, transparency and better regulatory oversight – a bit more government. And it will be no skin off the backs of free entrepreneurs – the idea is to ensure that an investor buying financial instruments would no longer have to buy junk instead of the real thing.