The root cause of Finland’s economic problems lies in the private sector

Since 2007, total productivity in Finland’s market sector – essentially the business sector – has declined by 10%, and the downturn affects a broad range of industries. In other words, the same resources are yielding less output or production with lower added value.

Matti Pohjola, Professor Emeritus of Economics at Aalto University, has studied Finland’s economic growth and its drivers during his long career. He conducted the study for Sitra comparing the development of Finland’s productivity and living standards with similar countries, including Sweden, Denmark and Germany. (Download Sitra’s memorandum Miksi Suomen talous ei kasva? / Why is Finland’s economy not growing?)

Between 2008 and 2013, after the financial crisis and the euro area debt crisis, total productivity declined in Finland and the comparison countries, but Finland is the only country that has not recovered from the downswing.

This stagnation has undermined economic growth and eroded living standards, indirectly contributing to the rising public sector debt. For 150 years – since the beginning of industrialisation – Finland’s standard of living (measured by GDP per capita) was among the fastest growing in Western Europe, but this growth stalled in 2007.

Pohjola’s calculations show that Finland has failed to harness the forces of change of the 21st century – digitalisation and the rise of the service economy – as drivers of growth.

In contrast, Sweden’s and Denmark’s successes have been fuelled by intangible capital and services, as well as combinations of these two. Intangible capital includes assets such as accumulated research and development capital, software and databases.

“The structural change of the economy is progressing much more slowly than in our competitor countries. In Denmark and Sweden, the majority of industries contributed positively to economic productivity growth. In Finland, fewer industries experienced growth, and even among those, the pace was slower,” summarises Sitra’s President Atte Jääskeläinen.

Weak productivity is a more severe problem than recession – technological progress has stalled

Among the comparison countries, Finland is also the only one where labour productivity has not increased since 2007. For households, this translates into stagnant wage growth, for example.

“The sluggish growth in labour productivity is primarily due to weak total productivity. Total productivity is a key driver of economic growth, and it has been missing from Finland’s economy since the financial crisis. This is the core of our problem,” concludes Sitra’s Chief Economist Matti Paavonen.

Simply put, total productivity describes technological progress and indicates how effectively labour and capital are combined to create better products and services.

According to Matti Pohjola, Finland’s problems cannot be attributed to bad luck or external factors. Finland’s export market has grown at the same rate as those of the comparison countries, yet Finland’s export volumes have failed to keep pace. This means that Finland has lost its market share.

Despite the bleak outlook, the good news is that Finland has the power to reverse weak productivity development through its own actions.

Sitra’s Atte Jääskeläinen is hopeful that solutions will be found: “Now that we know what is holding back growth, we can focus on the right solutions. In the big picture, productivity stems from new and better ideas. This underscores the immense importance of research, development, innovation and skills for Finland’s future.”

The memorandum outlines two simple future scenarios that illustrate the levels of total productivity growth required for Finland to achieve stronger economic growth. In both cases, the growth in productivity would deliver a much-needed boost to living standards.

Additional information:
Matti Pohjola, Professor Emeritus of Economics, Aalto University,
tel. +358 50 321 0260, matti.pohjola@aalto.fi
Matti Paavonen, Chief Economist, Sitra,
tel. +358 294 618 334, matti.paavonen@sitra.fi
Taru Keltanen, Specialist, Communications and Public Affairs, Sitra,
tel. +358 40 674 3246, taru.keltanen@sitra.fi

Sitra's new strategy came into force in September 2024. Acclerating sustainable economic growth is increasingly guiding all our work and choices. This is reflected, for example, in the return to research and development themes.