What we can learn from the Finns

By Prof. Roland Berger

Finland currently holds the presidency of the European Union for the second time. Today, the Nordic nation that signed up for the EU in 1995 is the envy of Europe. The World Economic Forum has declared Finland the most competitive economy in the world. In 2005, the Finnish GDP grew 2.1%, significantly faster than the EU-25 average (1.3%). This figure is expected to increase to 2.8% in 2006. Unemployment stands at 8.4% (against an average of 9.3% for the EU and nearly 12% in Germany).

Nokia and PISA are symbolic of Finland's road to success. In a country that, until 15 years ago, was dominated by agriculture and the timber industry, metalworking, engineering and electronics now account for half of all export revenues. More than 90% of Finns own a mobile phone, and every second household has access to the Internet. High priority is given to education and research – two disciplines that have been instrumental in Finland's transformation to a high-tech country. Comparatively high public spending on education and a nine-year comprehensive schooling system guarantee every youngster a good education. Over half of the country's 5.2 million inhabitants possess certificates qualifying them for higher education. In 2005, only 330 people left Finnish schools with no certificate whatsoever. Finland also invests more in research and development (3.5% of GDP) than any other EU country, with the exception of Sweden (3.7%).

And that is by no means all. When the Soviet Union collapsed in 1989, Finland lost its single most important trading partner at a stroke. It had to realign its entire economy. The Finnish government seized this opportunity to push through fundamental structural reforms. The subsequent austerity program led to years of budget surpluses. Social welfare systems were overhauled, too. Co-payment was introduced to the healthcare industry, employers' contributions to social insurance were lowered, and unemployment benefits were reduced as a function of the period of prior employment. To accelerate economic growth, the government also cut corporate taxes and pressed ahead with deregulation and privatization to free up new reserves of innovative strength. Although Finland now does almost 60% of its foreign trade with the EU, it has retained its close historic ties with Russia. During his brief tenure as head of the EU Council, Minister-President Matti Vanhanen aims to intensify the relationship between Brussels and Moscow. A basic agreement is also planned to guarantee a steady supply of energy.

To sum up: Having completed a painful structural transition, Finland has become a model economy and one of the world's most active high-tech players. This success story should encourage us to dare to innovate – preferably before protracted erosion gradually plunges this country into real crisis.

(This column was published in "Rheinischer Merkur" on August 7, 2006)