The Road to Prosperity: An Economic History of Finland

Published by EH.NET (June 2007)

Jari Ojala, Jari Eloranta and Jukka Jalava, editors, The Road to Prosperity: An Economic History of Finland. Helsinki: Suomalaisen Kirjallisuuden Seura, 2006. 343 pp. 43 Euro (cloth), ISBN: 951-746-818-0.

Reviewed for EH.NET by Lars Fredrik Andersson, Department of Economic History, Ume? University.

Just more than a century ago, Finland was an agrarian society featuring low per capita income and dependency of Russia. Today, Finland is a highly advanced independent industrial country in the top ten of the world income league. Finland’s twentieth-century economic miracle is a story of success over hardship, poverty and Russian dependence. How was this achieved? Considering the causes and consequences of this transition into modern economic growth, this book gives valuable insights into the challenges faced by Finland in particular and other small successful European countries in general.

This anthology, edited by Jari Ojala, Jari Eloranta and Jukka Jalava, sets out to provide a model of Finnish success. The so called “Finnish model” is characterized by: (1) solid institutional legacies, (2) long-term utilization of abundant natural resources, (3) rapid adoption to shifting economic and political structures, (4) heavy investments in human capital, (5) egalitarian society with an extensive welfare state, and (6) innovations in new technologies. Using this model as a point of departure, the chapters in the book underpin the specific features of Finnish economic and social development.

Finland’s long-term growth performance is outlined by Riita Hjerppe and Jukka Javala. The authors provide a description and analysis of Finland’s transition into modern economic growth. It is shown that the industrial breakthrough occurred during the period 1860 to 1940 and that rapid economic growth was achieved by high labor productivity growth. The labor productivity growth was driven by rapid technological progress. In turn, structural change was more an effect than a cause of the growth process.

Although the shift effects were small, one should not forget the importance of modernization in agriculture and the movement of labor from agriculture to industry and service production. Indeed, as noted by Jari Ojala and Ilkka Nummela, the shift from labor- to capital-intensive production in agriculture stimulated aggregated productivity growth and facilitated labor movement into the expanding industry and service sectors. In addition, the growth of industry and service production was also characterized by an evolution in business structures raging from merchant capitalism in the eighteenth and nineteenth centuries to industrial in the twentieth century and global capitalism today. To explain this evolution the authors Jari Ojala and Petri Karonen underpin the importance of competitive and institutional forces as well as long-term co-operation within and between companies in different industrial sectors.

The stages of evolution in business and are furthermore shown in Yrj? Kaukianinen’s chapter on maritime trade. Finland was foremost a supplier of raw material back in the nineteenth century. During the twentieth century, these commodities were replaced by manufactured products emanating foremost from the forest industry. Only in the later part of the twentieth century was there a transition to higher value added and high technology exports.

As Finland’s economy became more industrialized, factor markets became increasingly important. The labor market started to evolve in the end of the twentieth century in conjunction with the expansion of the manufacturing and service sectors. In the post-war period, the growth of private services and welfare services created job opportunities for women as well as men. The authors, Matti Hannikainen and Sakari Heikkinen, also stress how the labor market changed from domination by employers to a system with strong trade unions and centralized collective bargaining. In turn, the financial sector had a strong involvement from the government. The authors Concepci?n Garc?a-Iglesias and Juha Kilponen maintain that the Finnish case in some sense was different from other countries as the strong involvement of the government and the central bank in regulating the financial markets after World War II delayed the start of the financial modernization.

The government was apparently important in the development of the welfare state as well. Jari Eloranta and Jari Kauppila argue that while growth of government’s spending primarily was an issue of institutional expansion, other factors also need to the considered. The building of the welfare state was closely tied to the development of incomes and the trade-off between social and military spending.

The equality ambitions of the welfare state were furthermore strengthened by the development of income distribution (taxable income of tax units). Indeed, as shown by Markus J?ntti, inequality was quite variable in the inter-war period, increased significantly in the period 1950-70 and declined rapidly after 1970. In the 1990s, Finland had one of the most equal distributions of income across the OECD.

Growing income and output have been enhanced by, among other things, investments in education, human capital and R&D. Rita Asplund and Mika Maliranta show that high investments in education and training has been important to foster economic growth as well as technology policy focusing on R&D and ICT investments. Part of this success has been the joint effort of private and public spending.

Summing up the chapters in the book, Pauli Kettunen concludes that Finland was a late-comer among the Nordic countries. The industrial take-off occurred late and the social structure remained agrarian for a long time. He maintains that Finland has indeed absorbed features of the other Nordic countries but still preserved features of its own. The “Finnish model” has been characterized by egalitarianism, a strong government role, innovativeness and geopolitical adjustment.

This book, written by three distinguished editors along with fourteen prominent contributors offers many kernels of insight. Numerous important issues are addressed around the topic of economic progress. However, the main explanation of this progress, “the Finnish model,” has deficits. It is quite hard to find that Finland is an exception. The explanatory factors of Finland’s economic progress ? solid institutional legacies, utilization of abundant natural resources, rapid adoption to shifting economic and political structures, investments in human capital, egalitarian society with an extensive welfare state, and innovations in new technologies ? are also keys features of the other Nordic countries. With this shortcoming in mind, I still would like to congratulate the editors and contributors for providing a comprehensive description and analysis of how Finland has evolved into the affluent society that it is today. This book should find a broad audience.

Lars Fredrik Andersson is active in a research project titled “The Historical Development of Swedish Insurance,” financed by the Bank of Sweden Tercentenary Foundation. Among his recent publications is “The Evolution and Development of the Swedish Insurance Market,” in Accounting, Business and Financial History (November 2006).