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Small Countries, Smart Successes

Finland: The World's Most Competitive Small Nation

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With three major strategies, a small, out-of-the-way country, poor and downtrodden for 800 years, became a land of plenty and a model the whole world seeks to emulate.

Finland: The World's Most Competitive Small Nation

By Fuyuan Hsiao
From CommonWealth Magazine (vol. 385 )

History has always shown its spotlight on David defeating Goliath. If Taiwan took center stage for its economic miracle in the 1990s, then Finland is the star of this decade.

Within the past six years, Finland was ranked number one four times by the World Economic Forum's (WEF) Global Competitiveness Report, and twice by the Programme for International Student Assessment (PISA) survey of 15-year-old students. Transparency International has also repeatedly put Finland at the top of its Corruption Perceptions Index as the least corrupt country in the world.

Finland also excels in mainstream pop culture. After taking the crown at the Eurovision Song Contest last year, Mr. Lordi, lead singer of hard rock band Lordi took to the streets in celebration, donning a hat in the pattern of the Finnish national flag.

Like a card player with a great hand that just can't lose, Finland has become the poster child for national transformation in the international media.

On the map, Finland is shaped like a long-skirted maid with right arm upraised (her left arm was sacrificed to the former Soviet Union following World War II) who in no way resembles a debutant. Her nickname in Europe – daughter of the Baltic Sea – is not without a hint of hardship.

Winning Over East and West

If being born to hardship can be called lucky, Finland is blessed indeed.

Finland isn't “pure-blooded” Scandinavian – it's not located within the Scandinavian Peninsula and its language and people differ from all other Scandinavian countries. In the Teutonic languages, “Finns” are the ancient Scandinavian hunter-gatherers. Europeans never saw Finland as a part of Europe , and even regarded her as a double agent traversing both capitalist and communist societies during the Cold War.

The Finns remember very well their awkward former status as neither Asian nor European, neither Eastern nor Western. Refusing to resort to nationalist passions, Finland used its wisdom to prove to the world that it was not a two-faced double agent, but a buffer zone for the conflict between East and West, winning over its traditionally superior-feeling neighboring states, and becoming a cultural and economic leader on both sides of the Cold War divide.

The“Three-pronged” Finnish Model

The Finnish model has been a hot topic in recent economics research. With her 21 years of parliamentary experience, 64 year-old Finnish president Tarja Halonen was invited to speak at the London School of Economics in mid-October on how Finland grew from a poor, marginalized country to the most competitive nation on Earth. According to her, the key to Finland 's success was “a foundation built on democracy, good governance, the welfare state, and investment in education.”

Three smart strategies – a smart philosophy of pragmatism, a smart welfare system, and smart investment – have put Finland firmly on the road to becoming a major world power.

Pragmatism – the Road to Wisdom

When one searches for a word that best describes Finland , “pragmatic” rises to the top. Pragmatism allowed Finland to preserve democracy and good governance under even the most trying circumstances. While she can do nothing about her geographical location, she has turned a negative into a positive and used it to her advantage.

In a speech given during his visit to Washington D.C. in September of this year, Finland 's minister of defense openly asserted that the three greatest threats Finland faces today are Russia , Russia , and Russia .

Russia to Finland is like China to Taiwan – both a threat and an opportunity. Finland employs its philosophy of “Sisu” ( determination and level-headed judgment) in bilateral relations: pragmatism, not brawn, in the face of adversity, and fortitude in completing any mission required.

After 90 years of independence, and 60 years on from its devastating wars with the former Soviet Union , Finland is still wary when discussing its former “motherland.”

Finland and Russia share a border more than 1300 kilometers in length, which to this day is dotted with landmines; if it were not pragmatic, Finland would never be able to maintain its prosperity, suggests F-Secure CEO Risto Siilasmaa, who founded Finland's first Internet security firm at the age of 22. Security and development are Finland 's foremost endeavors; without pragmatism, it's all just talk, he observes.

To survive, Finland was forced to purchase a peaceful eastern border with concessions to the former Soviet Union , including ceding 10 percent of its territory, paying US$600 million in war reparations within a period of six years, and submitting all future diplomatic decisions to Soviet agreement. Western Europe heavily criticized Finland for its timorousness toward the Soviet Union . Yet anti-Soviet opinion was scarcely seen in the Finnish media; over 1,700 books were once banned from public libraries for their anti-Soviet content.

However wronged, Finland 's leaders never criticized their hostile neighbor. A peaceful coexistence with Russia is the greatest testament to Finland 's practicality. Despite the dissolution of the Soviet Union 16 years ago, Finland never became a member of NATO, an organization founded by democratic nations in response to Soviet communism.

Finland 's pragmatic view of Russia is due to both national security and economic concerns.

In the 50 years following World War II, the former Soviet Union was Finland 's greatest export market, purchasing 25 percent of all Finnish exports. Finland 's dependence on Russia was made painfully clear when its GDP fell by 10 percent and its employment rate fell by 20 percent within two years following Soviet dissolution.

Even now, Russia remains Finland 's second largest trading partner, and export value to Russia continues to grow by 25 percent annually. In addition, Russia remains Finland 's top supplier of energy and raw materials. Finland 's interactions with its giant neighbor are nothing but cautious.

Becoming a Wealthy Western Nation

Profiting, perhaps, from the detriment of heavy war reparations, Finland was able to develop solid foundations for its heavy industries within a very short time, joining the ranks of wealthy Western states in the 1980s by surpassing the U.K. and rivaling the U.S. and Western European powers.

Finland gained an advantageous position when Russia emerged as one of three new major world markets. According to analysis by the Financial Times of London , Finland has become a major conduit for world products into the Russian market. With Finland 's help, Western European nations are already introducing their products into this mega-market – after all, who knows better than the Finns how to do business with Russia ?

“ Russia is an opportunity Finland can't miss. We need its huge market for future growth,” says Juha Yl?-J'ski, director of the Federation of Finnish Technology Industries.

Gateway to the Asian Market

Even with its close ties to the east, Finland has not distanced itself from Europe .

Since joining the European Union 12 years ago, Finland has diligently applied itself to the role of honor student, always first in the fulfillment and realization of the many different EU agreements, and the only Scandinavian country to adopt the euro as its national currency. Finland has also volunteered her expertise in Russian relations to assist the EU with its dealings in that quarter. Important summit meetings between Russia and the EU are often hosted by Finland .

Today, Finland has become part of the European family and successfully decentralized its exports. Finnish exports to the 15 EU countries now constitute 65 percent of its total exports, and 70 percent of Finnish funds are invested in EU countries.

Aside from retaining influence in the Russian market to the east and cultivating the European market to the west, Finland has also stepped into the Asian market.

Finland once prided itself as being the “Japan of Scandinavia,” importing and learning from Japan 's industrial development model. Finland has been exercising its Asia strategy since before the emergence of the Asian market. For example, it declined to join the Scandinavian Airlines consortium of three national Scandinavian carriers, and started its own national air carrier instead. Finnair's strategy was not to compete with the rest of Europe for European or American routes, but to use its geographical location to advantage in the development of Asian routes, becoming the Scandinavian air carrier operating the most routes and flights to Asia .

And so, Scandinavians must go through Finland to reach the Asian market.

Finnish pragmatism is one not of shortsighted expediency, but of shrewd decision-making. The following sensitive policy decision elucidates Finland 's practical, farsighted thought process.

Jukka Uosukainen, director general of the Ministry of the Environment, declares that Finland has been aware of its over-dependency on Russian energy since long before the current energy crisis struck, and acknowledges that its carbon-emission rate, second-highest among European countries, will no doubt face EU pressures for reduction. Following much discussion between the public and private sectors, a consensus was reached to break Europe 's 20-year opposition to nuclear power.

Finland now operates four nuclear power plants, with a fifth set for completion within two years, and assessment for a sixth in progress. The controversial topic of nuclear waste disposal was also never a cause of conflict; the residents of the areas where the treatment plants were to be located voted by an overwhelming ratio of two-thirds to establish the plants in their own backyard.

“We will do whatever is good for the future,” stresses Uosukainen. Finland is a country not wrought with opposition, but filled with pragmatism.

Welfare State 2.0

Jarno, a reporter in Lapland 's capital of Rovaniemi, has been on paternity leave for two months, taking care of his daughter Sarga, recently turned one, and two bark-happy dogs.

Househusbands have become a trend in Finnish society, their numbers multiplying year after year.

Finland's omnipresent social welfare scheme reflects the traditional Scandinavian belief that the value of government is in making sure that each and every citizen is well taken-care of. The Finns do not subscribe to the American philosophy that less government makes for a greater society. Finland 's annual welfare spending is 25 percent of the GDP, twice that of the United States , and five times that of Taiwan .

The proposition that overly generous social welfare will detract from international competitiveness has no place in Finnish logic.

Finnish economic growth has increased by an average of 3.5 percent per year over the past decade, with 2006 showing a 10-year high exceeding 5.5 percent. Research results from strategy expert Michael Porter at the end of 2006 show that among the 122 countries in the world, Finland 's industrial competitiveness is second only to that of the U.S. and Germany . “True competitiveness,” Porter emphasizes, “is measured by productivity.” Finland 's productivity has grown more than any other Scandinavian country in the past decade.

In Finland 's blueprint for national development, social welfare is the engine that drives competitiveness, not an obstruction, and the combination of social welfare and technological development is a mutually reinforcing, win-win policy.

Director Jaakko Kiander of the Labour Institute for Economic Research reflects that the key to the transformation of Finland 's industrial structure from profit-centric heavy industries to the competitiveness-based technology industry is rooted in its social welfare system.

Taking Risks Doesn't Mean Risking an Empty Stomach

Kiander is convinced that in a welfare state “people are willing to take risks, which makes us more competitive.” The more people rely on knowledge to make a living, the more the welfare state must provide support to stave off the unsubstantiated fear of failure. The Finnish government guarantees 18 months of unemployment compensation at 70 percent of a person's former income. “You don't have to worry about being hungry if you fail.”

Earning his PhD by the age of 20 and achieving international fame with the book The Information Society and the Welfare State: The Finnish Model , the young Finnish philosopher Pekka Himanen helped shape Finland 's strategy for developing an information society. He uses the term “the welfare state 2.0” to describe the distinguishing characteristic of the Finnish dream. “The core is combining creativity with caring,” he avers.

If the American dream of the 20th century was obtained through individual effort in competition, the Finnish dream of the 21st century is being achieved through the mutual efforts of individual endeavor and government welfare.

Finland 's social welfare system is based on universal equality. One does not need to rely on Daddy being wealthy or an accident of birth to be successful – in Finland , there is no fear of losing at the starting line.

But the price of equality is high. Finnish income tax rates range from 35 percent to over 60 percent, and half of its GDP comes from income tax – the sixth highest tax-to-GDP ratio in the world. In any national competitiveness index, heavy taxation is nearly always Finland 's worst-performance category, consistently bringing down the overall rating.

While neighboring Scandinavian states are also subject to heavy taxes, the Finns seem more willing to pay compared to their neighbors.

As a lecturer at the University of Helsinki , 28-year-old Heidi takes home only half her monthly salary, while the other half goes straight into the national treasury. But Heidi has never complained about her salary going to support the unemployed. “I like to see people on the street surround me that are doing well.” She feels good about the “missing half” of her salary going to benefit the masses.

Equality in Finland is most clearly demonstrated on its roads. The amount one must pay in traffic-violation fines is contingent on both the severity of the offense and the offender's income. One example clearly demonstrates the principle: A few years back, a 27-year-old Internet entrepreneur sped through town in his BMW sports car at 110 miles per hour.

Bingo! He brought home a ticket in excess of US$70,000.

How is that fair? Finnish law decrees that a wealthy man who breaks the law should suffer to the same degree as a poor man who breaks the law.

The new-made technology tycoon did not consult a politician or try to backdoor his offense, but paid the fine in full with the virtue of a good Lutheran – the religious affiliation of 83 percent of all Finns.

Investing in Brainpower

The eminent economist Jeffrey Sachs once praised Finland as the country best at organizing brainpower. When Finland designated the development of technological might as national policy back in the 1970s, it conducted major educational reforms to offer children free, high-quality basic education. (See the CommonWealth Magazine article “ Secrets to Finland 's World-topping Education .”)

A Society of Engineers

Finland 's investment in brainpower isn't random. It focuses resources in a few key areas, especially the information and communications engineering industries. The Finns often say that theirs is a society of engineers.

Arja Suominen, Nokia's vice president of communications, believes that the reason behind Nokia's global technological dominance is Finland 's excellence in science and technology education, which affords its companies consistent access to the best engineers.

Aside from education, Finland also invests heavily in innovative R&D, ranking third in the world for R&D expenditures, which account for 3.5 percent of the nation's GDP. In honor of the 50th anniversary of Finnish independence in 1967, the Finnish Parliament set aside 100-million Finnish markka (the pre-euro Finnish national currency) to establish Sitra, the Finnish Innovation Fund, aimed at fostering innovative high-tech entrepreneurship. The Finnish government then established Tekes, the Finnish Funding Agency for Technology and Innovation, in 1986, to bring together private industry, government and academia for integrated R&D in the high-tech and communications industries. Finland 's three major R&D institutions – Sitra, Tekes, and the Academy of Finland – are in charge of researching, determining, and executing national strategies for innovation. Finland is widely recognized as having the most innovative environment of any country on earth. According to the latest report from the European Innovation Scoreboard, Finland leads the world in innovation, followed by the U.S. , Britain , and Ireland ; Finland tied with Sweden for first place in terms of innovation performance.

A Great Future for Finland

Having enjoyed stable high growth over the past decade, Finland is now a benchmark for all advanced nations and a rival of emerging Asian powers. However, in the spirit of preparedness, the Finns are always thinking a step ahead. Kari Komulainen, an economist and researcher with Tekes, reminds his people that when enjoy favorable results, “not to celebrate too long – one day is enough.” The Finnish penchant for preparedness is not without reason. This year, Finland 's rankings in the WEF Global Competitiveness Report and IMD World Competitiveness Yearbook fell to 6th and 17th place, respectively, from 2nd and 10th place in 2006; the national economic growth rate is also expected to decrease to 3 percent this year. These statistics send a clear warning to Finland , because in order to maintain her current social welfare system, she must maintain an annual economic growth rate of 3 percent at the least. There Must Be More Than One Nokia.

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