Prime Minister Vanhanen at Japan-Finland Business Seminar

Public policies in an ageing society

Ladies and Gentlemen,

I take great pleasure to be able to speak to you on this occasion on a major challenge that is common to our two countries, Finland and Japan, namely ageing society. In fact, I believe that our two countries are sort of record-holders in an unfortunate world-wide contest. The problem is worst in the world in Japan and, I fear, the worst in Europe in Finland.

Addressing this challenge requires multi-faceted public policies. But ageing society also offers new kinds of business opportunities for the private sector. I believe we need a much stronger contribution from the corporate sector to manage the challenge of health and elderly-care ahead of us. We also need international cooperation between governments and enterprises.

Ladies and Gentlemen,

When addressing the theme of ageing society, it is proper to start from the economy. The ultimate purpose of economic policy is to improve people’s welfare. Welfare is a multi-dimensional thing.

It comprises not only consumption possibilities of various private goods and services but also many types of public goods such as clean and safe environment. In fact well-being and happiness require much more than that. As some sociologists say, being and loving are equally important as having for the happiness of human beings.

Why start from so far? The reason is simple. In an affluent, ageing society, which furthermore is facing potentially very dramatic changes in climatic conditions, to consider the whole picture is important, more important than it has been in the past.

First, increasing material abundance reduces the marginal benefit of an extra euro or yen for private consumption and increases consequently the importance of other aspects of welfare. Second, to cater for the needs of elderly people in our societies requires not just higher GDP but also mechanisms which make sure that the economy is capable of producing precisely the sort of services these people need and that they can afford to have them. Third, ageing and climate change will put pressure on the pace of economic growth per capita so that even if we wished, we would not be able to base our well-being as much on increasing consumption as before.

Growth will be reduced when the share of working age population in total population declines. Simultaneously, when the labour force grows older, its productivity is likely to diminish. These challenges are more serious and acute here in Japan than in Finland. Nevertheless, Finland is on the same path and among the European Union countries we are ageing at the fastest rate in the coming 25 years. Others will catch us up by 2050, though.

Meeting these challenges of smaller working-age population and pressure towards lower productivity growth can be met either by using the shrinking working-age population more intensively or by measures that increase labour productivity. In most countries both avenues are feasible, but clearly everywhere the key thing is to increase productivity.

The means of doing so are familiar: more physical capital, improved human capital, new technologies, better organisations, right incentives for efficiency through competition and wisely designed regulations. Given the changes in technology and market conditions, the importance of physical capital has declined and that of human capital, technology and other less tangible growth factors has increased. In a nutshell, innovation policies are the key to growth today and tomorrow.

That is precisely what countries like Finland and Japan have been doing for years. In my own country, the roots of current innovation policies date back to at least the 1960’s. It was then that extensive measures were taken to add to the economy’s human capital and to improve the level of technology. Vocational training and higher education were radically expanded. During the same decade, R&D support became a central element of industrial policy. In 1983 Tekes – the Finnish Funding Agency for Technology and Innovation started to coordinate and channel public R&D funding.

In our view a clear connection to the business world is important. Tekes programmes are forums for the exchange of information and networking between companies and research groups. They provide opportunities to carry out ambitious R&D projects and develop business expertise and international cooperation. Programmes are a gateway to best researcher groups and innovative R&D companies in Finland. They are established in strategically important R&D areas that Tekes has identified together with the business community and researchers. Every year companies participate in about 2,700 projects and research universities in about 1,100 projects.

Besides financing, the programmes increase the exchange of information and know-how by providing professionals with both networking opportunities and with the very latest information on new innovations in their fields. At the core of the programme are activities that support companies’ business operations, such as defining shared visions, arranging seminars, training programmes and international visits and facilitating researcher exchange.

Ladies and Gentlemen,

Since the severe recession of the early 1990’s, the Finnish economy has seen a transformation to one characterised by high technology, innovation, creativity, and ever-increasing openness. High-tech products, and in particular ICT products have become the most important part of our exports. The share of R&D spending in GDP, at 3.4 per cent in 2007, is among the highest in the world. Finland tops the ranking of triadic patents per person and it belongs to the top three innovation countries in the world according to the European Innovation Scoreboard. Finnish high-school students have systematically displayed top performance in science, mathematics and reading in the OECD’s Pisa studies. In all these respects, Japan is very much like Finland: Japan has been spending almost the same relative amount of GDP in R&D, patents a lot, scores high in innovation indexes, and the Japanese high-school students have also performed well according to the PISA studies.

We are currently in the process of revising our innovation strategy. Our basic approach has been to create good general conditions for innovation and business rather than trying to pick winners. Making sure that the educational level is generally high, that universities and research centres receive public funding for research, that communications infrastructure is good, and taxation or regulation do not stifle effort or risk taking has been central in this approach.

I do not believe that there will be a revolution in this approach. But some changes are needed. One of them is to broaden the concept of innovation from science and technology innovations towards customer and user-driven innovations. We are determined to meet this challenge by refocusing public R&D funding, by restructuring parts of the university system precisely for that purpose (for instance, the biggest technical university of Finland, a business school and the University of Art and Design will be merged to form “Innovation University”), and by paying more attention to services innovations in general. Innovative welfare services using newest advances in science and technology are a central field of expansion.

We need to attract talent to the key sectors in our economy. For example, some of our companies claim that they do not find sufficient numbers of highly qualified engineer graduates.

I read in a paper a couple of weeks ago that there are similar problems in Japan, as engineering is not considered sufficiently interesting by the students. In our case, the issue is not so much lack of interest. Rather we are simply reaching the limits of the domestic talent pool. Therefore, we have to resort to foreign students and graduates more than before.

An important element of our strategy is to promote international networking. We have been active supporters of the European Union’s technology platforms and joint technology initiatives. But increasingly our efforts are directed towards cooperation with innovation centres on a global basis. There are already many fields where the Finnish research centres and firms usefully cooperate with their Japanese partners.

Ladies and gentlemen,

Even though maintaining reasonable GDP growth per capita is an important issue in an ageing society, growth is just a means. It is equally important that we organise our welfare services and pension systems in such a way that the elderly can have a decent life and a fair share of the GDP we manage to create.

These are truly big challenges in most countries. As I noted, Japan is in a pioneer position in this regard, but Finland comes not very far behind. How we will cope with these challenges is likely to have significance beyond our national borders.

In Finland, we have a very extensive public pension system, covering basically the whole population. Towards the end of last decade it became obvious that it is not on a financially sustainable basis: demographic trends would bankrupt the system in the end and force radical cuts in pension benefits.

As a result, we did a major reform of the pension system as of 2005. The basic aim was to increase fiscal sustainability by encouraging people to stay longer in the labour market, by saving more through higher pension contributions early on, and by reducing the impact of increasing longevity through an automatic adjustment of the pension level on the basis of future increases in life expectancy. In particular, avenues to early retirement were restricted while the retirement age was made flexible between 63 and 68 years of age.

The experience of the past few years has been rather encouraging. People are indeed postponing retirement. The employment ratio of the people between 55 and 64 years of age has increased markedly, even though it still is much lower than in Japan. However, even the most recent calculations suggest that the public sector finances are not on a fully sustainable basis. We cannot exclude the possibility that further reforms of the pension system are needed.

The other important dimension of taking care of the elderly is the provision of health and old-age care services. As in other Nordic countries, the public sector bears the main responsibility.

The current estimates suggest that without productivity increase and without improvement in age-specific health conditions, public expenditures will increase by some 3 percentage points of GDP in the coming 40 years. Probably even more problematic will be the shortage of helping hands.

We try to address these difficulties by a twin strategy. On the one hand, we have intensified preventive measures to keep people of all ages in a better shape and thus reduce the need for extensive services. Looking around here in Japan tells me that we have a lot to learn from here in making our life style healthier.

But it is also important is to develop new healthy foods that are attractive to people. Here we need good cooperation between science and the enterprise sector. We have had a number of programmes going on in this field. For example, Sitra, the Finnish Innovation Fund, has a broad five-year programme to make Finland a front-runner in the production of healthy food, with the emphasis on promoting commercialisation. Tekes in turn focuses on one programme turning Finnish and American scientific results on nutrition into innovative new products helpful in weight control. An increasing number of Finnish enterprises are already on the market with their health food products.

The second part of the strategy is to improve the efficiency of the care systems which in our country are mainly in the hands of municipalities.

Even though our health care system is relatively cost-efficient by international standards, there are large variations in efficiency between different units within the country. A major reform undertaking – municipality and services structure project – was started two years ago to modernise the provision of welfare services across the board. Significant further gains could be made by utilising smartly the possibilities new technologies open for reorganising various activities. A major Tekes programme called FinnWell, running from 2004 to 2009, aims at improving the efficiency and quality of health care services through new technologies. I wish to emphasise that private enterprises play an increasing role in health and elderly care and in introducing innovations to the market and exports.

A very important part of keeping care costs down and improving the quality of life for the elderly is to develop technologies, infrastructure and service concepts which allow the elderly to stay home and in home-like living environments much longer than is the case now. Many programmes have been going on in this area, starting from state subsidies for building elevators in old apartment buildings and new designs of kitchens and bathrooms to make every-day tasks easier and safer, to developing remote surveillance techniques that alarm the heath centres should a person living alone at home fall ill or unable to move etc.

Introducing new technologies and working practices is not easy, especially in old-age care, where sensitivity to the needs and wishes of the citizens is essential. It is therefore very important that science and practical work go hand in hand. Learning from the experience of other countries and firm-to-firm innovation cooperation are very useful. Therefore, I am pleased with the achievements in combining Finnish and Japanese know-how. I mean the Sendai-Finland Wellbeing Center where already for many years Finnish and Japanese researchers and companies have worked together to develop new innovations which then have been introduced to markets. I wish to encourage new enterprises to become active to that effect. Now is the time for more commercial cooperation. Governments have played an instrumental role in getting cooperation launched.

My understanding is that the academic level of life sciences is very high in Japan. Although much smaller in scale, Finnish life science research is also developing fast, and it is in certain fields already world-class. For example, the Biomedicum and Viikki campuses (medical sciences and biosciences respectively) of the University of Helsinki have recently attracted substantial attention by foreign researchers.

Given that we share the interest in finding new innovative ways of improving life for our ageing populations, I see substantial benefits in widening the cooperation between the research communities in life sciences of Japan and Finland not only in basic research but also in developing innovative practical applications.

Ladies and gentlemen,

Let me come back to from where I started. In an ageing society, a sound economy utilising the innovation potential created by human ingenuity is essential for providing the material basis for well-being. So are a sustainable pension system and well-functioning, efficient services. But we have to aim higher. We need a society where people of all ages can have a rewarding life and feel valued members of the community.

In concluding, I wish to emphasise again that there are a lot of new business opportunities for the private sector in the era of ageing societies. Both technological and social innovations often come from the private sector. Public-private partnerships offer much potential. International cooperation is of great importance. I hope Finnish and Japanese enterprises find each other to a greater extent to that end. I am convinced that win-win cooperation is possible. Mutual benefit is the only lasting basis.

But we should also recognise that there are aspects of well-being that can be only marginally helped by government policies as they are basically determined by our cultures. Respect for people of old age, in fact people of all ages, is such a thing. Here we Finns, and I believe most Europeans, have a lot to learn from the Japanese.