Repairing Finland's Economy after COVID-19

Listen to Finnish Broadcasting Company's radio program about Fulbright in Finland with an interview with Vesa Vihriälä. Most of these  radio interviews were conducted in Finnish in 2017. (Yle Radio 1, September 25, 2017)

Vesa Vihriälä has devoted his working life to economic policy analysis, serving in key economic positions at home and abroad, including roles with the Finnish Prime Minister’s Office and the European Commission. In Spring, Vesa took on one of his most challenging roles yet, leading a working group of world-class economic experts to advise the Finnish government on the economic impact of the coronavirus crisis. Their report, published in May 2020, foresaw a potential “lost decade” for Finland’s economy, and proposed a strategy of fiscal stimulus followed by key economic reforms to ride out the longer-term effects of the crisis. As we approach the end of a tumultuous year, how does Vesa now view the impact of COVID-19 on Finland’s economy, and the path to recovery?

“The Finnish economy has been seriously affected by the pandemic, there's no question about that. But in relative terms, it's not as bad as one might think,” Vesa says, noting that Finland compares favorably to other European countries both in terms of the pandemic and the resulting economic fallout. “The widely accepted projection today is that we will lose 4-5% of GDP this year, compared to the average of 8% across the EU. If you compare this crisis with what we have gone through in Finland over the last 30 years, we are in a much better position. The GDP loss we now project is much lower than in the long recession after 2009.”

However, the recommendations Vesa and his colleagues made earlier in the year remain unchanged. In their report, the group proposed a three-phase strategy, moving from acute support to ensure business survival during the pandemic, to fiscal stimulus in the medium term, promoting investment not only to kick-start demand growth but also to support productivity growth, and finally a repair phase of reforms to increase employment and the economy’s growth potential as well as to strengthen public finances in the longer term.

“The policies followed so far have been along the lines we suggested. I think the government has been quite successful in containing the epidemic, even though we have seen some acceleration in recent weeks, but in relative terms we have done quite well - not just because of government processes, but also due to underlying strengths in society.”

“The most difficult part is the repair phase, and we don’t really know yet how it’s going to work out. Many companies will incur serious losses, depleting capital, some may go bankrupt. Many people will become unemployed and may drift away from the labor force, remaining long-term unemployed. That means lower economic potential, and a longer-term impact on the economy, so how do we handle that? We also need to stabilize public finances. The public deficit will increase quite substantially. This year the deficit is close to 20 billion euros, which is about 8% of GDP. It's again, in relative terms, not as bad as in many other EU countries, but given our starting point and demographics, this is not something we can tolerate forever. Unfortunately, most forecasts suggest public debt will increase until the end of the 2020s.”

To address this, Vesa and his colleagues propose measures to increase employment and productivity, and improve the efficiency of public services. These include expanding compulsory education from 16 to 18 years of age, creating more university places, and discouraging older workers from leaving employment early.

I think it would be beneficial for a larger fraction of people who finish secondary education to continue to university, both applied science universities and traditional universities.

“The starting point in the higher education sector is reasonably good. The system works well, and is comprehensive. However, currently we take in too few people. I think it would be beneficial for a larger fraction of people who finish secondary education to continue to university, both applied science universities and traditional universities. The share of people aged 25 to 30 who have completed tertiary education has stopped increasing, and if we compare our educational attainments with other countries, our relative position has declined. Given that other countries have also seen it necessary to increase the proportion of their populations in tertiary education, we should be doing the same. However, that requires more resources.”

One way of funding this change, in addition to allocating more taxes to higher education, is the group’s proposal of introducing partial tuition fees for university students. However, Vesa believes this may prove difficult to implement in today’s political climate.

“The proposition of tuition fees was made to indicate what sort of difficult decisions need to be taken in order to strengthen the economy with limited resources. The tax rate is already quite high, the population is ageing, but of course we want to maintain high quality and comprehensive health and social services. You have to ask the question, is there anywhere we could save public funds? That's the idea we wanted to put forward. Even though currently Finland can afford high deficits, going forward that's not going to be possible, so we have to find ways of economizing.”

This certainly does not mean austerity, he emphasizes. “There’s no question about that. But when hopefully the good times arrive, we need to be cautious with public finances, to build a buffer which allows us to have higher fiscal deficits again when the not so good times arrive, and unfortunately they will arrive again.”

“There is an element of resilience in this country, and a lot of trust in people, authorities, and institutions. Finland has a history of hard crises, but we’ve created institutions which are intended to increase resilience in society against all kinds of shocks. This has helped us now, and I think will help us going forward.” 

Vesa asserts that although Finland faces a number of risks due to the ongoing demographic trends within the country, it is also in a good position to benefit from opportunities afforded by global trends in technology and trade, and increasing internationalization.

“We have an ageing population, the fertility rate has come down quite substantially, and we are not a country of widespread immigration. There has been more immigration over the past twenty years or so, and Finland has become a more open society. However, when compared to other countries, we have less inward migration. We definitely need all kinds of people who could contribute to our economy and our society coming from abroad.”

We have a high quality of living in Finland, and we should be able to make it attractive for global talent to come here to live and work.

“Attracting global talent is the most urgent thing we should be doing, and there is already some government activity working towards that. If we think about the pandemic, one of the implications is that remote work is going to be much more widespread globally, and so the sort of services that can be provided over the net will increase their share in the total economy. Location will no longer make such a difference. Finland is a geographically peripheral country, and it is also sparsely populated. The trend for remote working works for our benefit because the degree of our isolation declines, and a scattered population is no longer such a handicap for productivity. We have a high quality of living in Finland, and we should be able to make it attractive for global talent to come here to live and work.”

Vesa says international exchanges, such as Fulbright and Erasmus, have a crucial role to play. “There's no question that international exchanges are very important. Understanding at first hand that there are different places, different people, but at a certain level we are all very similar, is very valuable. It’s valuable personally for everyone who has the chance to do so, but also valuable for creating a more open society.”

“We are becoming a global village. Technological advances will allow people to interact more than ever, enabling us to be semi-physically present, and helping language barriers come down through automatic translation. Being open to outside influences, having interactions, is necessary for all successful nations and economies. It's so obvious from our own history. There are so many examples where foreign talents, foreign money, access to foreign markets, have been key elements in creating prosperity in Finland in different phases, and I think this will be the case going forward as well. In order for us to benefit from this, we have to improve our game. A larger proportion of our population needs exposure to foreign experiences. We need people coming here, and also we need people going abroad.”

My year in the U.S. as a graduate student was very important, both professionally and culturally.

Vesa experienced the benefits of international exchange at first hand while studying at Helsinki University, first with student exchange organization AIESEC  and later with an ASLA-Fulbright scholarship to the Massachusetts Institute of Technology in the early 1980s. “When I was at university, it was an exception to go abroad. My two summers as an AIESEC trainee were the first experiences of that kind for me. Later, my year in the U.S. as a graduate student was very important, both professionally and culturally. I saw the level of research and teaching at a top university. MIT had highly skilled people, top minds, producing highly  technical models to understand the economy. But at the same time, those very people clearly transmitted the message that the key reason for economic studies is to help to make the world a better place.”

“It confirmed and strengthened my own thoughts about the best way for me personally to contribute is to be in policy analysis, be it in the government or from outside. And that's what I have done all my working life. Not only is it fascinating to be part of that process, but also one can make a difference. Even making a small difference is very motivating!”

Despite the challenges ahead, he remains optimistic about what the future holds. “As we all know there are daunting challenges for mankind, including climate change, pandemics, loss of biodiversity, and weapons of mass destruction. But thinking about human history, life is much better for most people on earth than it was fifty years ago, in terms of life expectancy, expectancy of healthy years of life, and the number of people dying because of violence. Of course we have created a great deal of problems ourselves with industrialization, which has been the engine of economic advancement, but at the same time we have been able to find solutions. We have overcome many difficulties in the past and I believe we are going to in the future as well.”

Read the whole Fulbright Finland News magazine 2/2020!