U.S. DEPARTMENT OF STATE FINLAND: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS FINLAND Key Economic Indicators (Billions of U.S. dollars unless otherwise noted) 1992 1993 1994 1/ Income, Production and Employment: Real GDP (1990 prices) 102.9 79.1 85.0 Real GDP Growth (pct.) -3.6 -2.0 3.5 GDP (at current prices) 2/ 92.7 73.0 81.2 By Sector: Agriculture 2.43 2.01 2.2 Other Primary Production 2.71 2.02 2.6 Energy/Water 2.45 1.93 3.3 Manufacturing 20.62 17.83 21.3 Construction 5.81 3.46 3.6 Rents 3/ 13.94 11.44 12.2 Financial Services 2.90 3.07 3.4 Other Services 23.91 18.81 19.8 Public Sector 20.25 14.94 15.3 Bank Service Charge 3/ -2.35 -2.50 -2.5 Net Exports of Goods & Services +1.43 +4.62 +7.5 Per Capita GDP (1990 prices) 20,364 15,572 16,700 Labor Force (000s) 2,502 2,484 2,485 Unemployment Rate (pct.) 13.1 17.9 18.5 Money and Prices: Money Supply (M2) (annual percentage growth) -0.4 2.0 4.5 Base Interest Rate 4/ 9.2 6.9 5.3 Personal Saving Rate 10.4 9.5 6.5 Retail Inflation -7.3 -1.4 3.0 Wholesale Inflation -9.9 -0.8 4.5 Consumer Price Index (1990=100) 107.4 109.7 110.8 Exchange Rate (USD 1.00/FIM) 4.48 5.72 5.5 Balance of Payments and Trade: Total Exports (FOB) 24.0 23.5 28.0 Exports to U.S. 1.4 1.8 2.1 Total Imports (CIF) 21.2 18.0 20.0 Imports from U.S. 1.3 1.3 1.5 Aid from U.S. 0 0 0 Aid from Other Countries 0 0 0 External Public Debt (central government) (in foreign currency) 23.7 27.2 34.5 Foreign Net Interest Payments 4.4 4.1 3.7 (of which by central government) 0.9 1.6 2.0 Gold and Foreign Exchange Reserves (year-end) 6.6 5.9 9.1 Trade Balance +2.8 +5.4 +8.0 Trade Balance with U.S. +0.1 +0.5 +0.5 1/ 1994 figures are all estimates based on available monthly data in October 1994, or predictions by the Ministry of Finance. 2/ GDP at factor cost. 3/ "Real estate, renting and business activities" sectoral division is based on UN SIC-95 classification. 4/ Bank of Finland's base rate. 1. General Policy Framework The Finnish economy is slowly and unevenly emerging from its 3-year recession, during which GDP has declined by a cumulative 13 percent. An economic recovery led by strong exports has been underway since the first quarter of 1994. GDP looks set to grow at least 5 percent in 1994. The recession has resulted in a significant shakeout of the Finnish economy, including corporate downsizing, increased competition and cutbacks in government services. Also spurring structural change is membership in the the European Union (EU), scheduled for January 1, 1995. The economic recovery so far has been largely jobless, with unemployment remaining in the high teens amid stagnant domestic demand. These factors, coupled with low levels of business investment, have resulted in declining government revenues and increases in countercyclical spending, producing large budget deficits. Also contributing is continuing government assistance to the banking sector, particularly to the savings bank system. In 1994, the deficit will be about a third of total spending, the same level as 1993. The deficit is financed by foreign and domestic borrowing through the issuance of bonds; the balance has been roughly evenly divided between the two. The large deficits have brought about rapid increases in overall debt levels. Finnish government debt will increase from 35 percent of GDP at the end of 1992 to an estimated 64 percent at the end of 1994 and debt service will account for some 11 percent of government expenditures. Cuts in government social programs and aid to municipalities are helping to keep the debt from rising still faster. Also contributing are higher income tax rates and increases in indirect taxation. Finland's tax ratio will rise to an estimated 48 percent in 1994, a record. Despite the high level of foreign debt servicing, Finland is experiencing a sharp improvement in its balance of payments; the current account should move into strong surplus in 1994 after years of deficits. The main contributing factor is a sharp increase in export sales, spurred on by a depreciated finnmark and declining real wages. Finnish international competitiveness has increased by about 30 percent as compared to its long-term average in the past several years. Inflation has so far stayed at a low level as wholesalers and retailers remain reluctant to pass along increased import prices in the face of depressed domestic demand. However, the money supply (M1) is showing rapid growth due to capital inflows, causing concern among some analysts that inflation could take off in early 1995. Domestic credit is tight as banks seek to regain profitability; as inflation fears mount, the Bank of Finland is threatening to raise interest rates further. Banks remain conservative in their lending practices, particularly to new businesses. Finnish economic policy is based to a large extent on its forthcoming membership in the EU. The requirements of the EU, for example, have resulted in new competition legislation that is helping to reduce the cartelized nature of many Finnish industries. Legislation which took effect at the beginning of 1993 liberalizing foreign investment restrictions has helped spur a sharp increase in foreign portfolio investment and hence has contributed to the internationalization of large Finnish companies. The rise in stock market activity is also due to lower domestic interest rates and a tax law, also new in 1993, which sets a uniform rate of 25 percent on capital income taxation. Foreign direct investment has been slower to materialize, although Finland is hoping to capitalize on its location and expertise to serve as a "gateway" for foreign investors in the former Soviet Union. In October 1994 Finland's citizens voted in favor of EU membership. Membership will occur in January 1995. EC membership and budgetary constraints have brought about some reform in Finland's highly protected agricultural sector. Finland will convert to the EU agricultural regime in 1995, although in the membership negotiations Finland has strived (with some success) to establish special support mechanisms which provide levels of support higher than the EC average. However, the support mechanisms will not be adequate to prevent major structural changes in the agricultural sector. Over the longer term, some of these changes will include a reduction in the number of farmers and consolidation of surviving farms into larger, more efficient units. 2. Exchange Rate Policy The finnmark has been floating since the government and central bank broke its fixed link with the European Currency Unit (ecu) in September 1992 in the midst of a currency crisis. Shortly after the float was initiated, the parliament passed new legislation allowing the float to continue indefinitely. It is unlikely that the government will attempt to establish a new currency linkage anytime soon. The finnmark has declined by about 35 percent in relation to the dollar and over 15 percent in relation to the ecu since the float was initiated, but in recent months the finnmark has again been gaining strength against both of these currencies. Devaluation has strongly boosted Finland's international competitiveness and has dampened demand for imports from all sources, including the United States. Conversely, exports have boomed. The government has not regularly intervened in financial markets to influence the value of the finnmark. The government has encouraged lower interest rates to boost domestic demand, but rates (particularly long term rates) remain high. Many analysts expect that in the medium term the finnmark's value may stabilize near present levels. The slightly strengthened finnmark has eased Finland's external debt burden and has partially offset the inflationary impact of higher commodities prices, but has not had a measurable impact on export competitiveness. 3. Structural Policies Finland replaced its turnover tax with a value added tax in June 1994. While the change is expected to have little effect on overall revenues, several areas not now taxed or taxed at a lower rate, including many corporate and consumer services and construction, are now subject to the new VAT in conformity with EU practice. The government decided to keep the basic VAT rate at the same rate as the turnover tax, 22 percent. Some goods and services, including transportation services, accommodations, films, pharmaceuticals and books, will be taxed at a 12 percent rate and other services, including health care, education, insurance, and rentals are not subject to the VAT. Agricultural and forestry products will continue to be subject to different forms of taxation outside the VAT. At the beginning of 1993, a uniform tax rate of 25 percent on capital income took effect, including dividends, capital gains, rental income, insurance, savings, forestry income, and corporate profits. The sole exception was bank interest, where the tax rate was increased from 20 to 25 percent at the beginning of 1994. The change in capital taxation, along with a sharp decline in interest rates and liberalization of foreign investment legislation, has resulted in a strong revival of the Finnish stock market and greater corporate use of equity rather than debt financing. It has also substantially increased the foreign ownership share of many of Finland's leading companies, and may become the vehicle for the privatization or partial privatization of state-owned or dominated companies. The government has moved slowly on privatization, but has been reducing the government stake in several state-dominated companies. Currently, four of Finland's 10 largest companies are majority state-owned, and the government is heavily involved in several key industrial sectors, including energy, forestry products, mining and chemicals. The volume of government subsidies provided to Finnish industry has increased markedly as the Finnish economy has deteriorated. In real terms, industrial subsidies have increased by about 80 percent since 1988 and now constitute about 1.2 percent of GDP. The government has begun to reduce subsidies in line with falling government revenue and the requirements of EU membership. The government has set the goal of reducing direct subsidies and replacing them with more general measures to improve the business climate. 4. Debt Management Policies Finland has rapidly accumulated external debt in order to finance recession-induced budget deficits. Gross public debt (EMU definition) continues to rise, and is projected in the 1995 budget at 78.5 percent (in 1990 gross public sector debt stood at only 27 percent of GDP). Finnish corporations, formerly heavy users of foreign capital, are now reducing their foreign obligations. However, financing requirements of the central government have not diminished. In response to the rapid increase in foreign borrowing, Moody's lowered its rating on Finnish long-term government bonds from its second to its fourth highest category (AA-) in March 1993. Finnish debt issues continue to sell easily (albeit at slightly higher risk premiums) in international financial markets, however. Finland is an active participant in the Paris Club, the Group of 24 countries providing assistance to East and Central Europe, and in efforts to assist the former Soviet Union. In response to budgetary problems, Finland has reduced foreign assistance from approximately 0.7 to 0.4 percent of GDP in the past three years. 5. Significant Barriers to U.S. Exports In most cases, effective January 1, 1995 Finland will adopt the EU's overall trade regime, including the EU tariff schedule. The agricultural sector will remain the most heavily protected area of the Finnish economy. In 1993 Finland changed its basic system of protection from an import licensing system to a system of variable levies similar to the EU. The net effect is essentially the same, which is to protect domestic production from cheaper foreign imports. Surpluses of agricultural products are usually disposed of on world markets through government and producer-financed export subsidies. The government will end direct government financing of export subsidies as part of its EU accession terms. Import licenses are no longer required for any products, although some textile imports from Far Eastern suppliers are covered by quotas. Finland will phase in EU textiles tariffs over a 3-year period starting in January 1995. Finland's adoption of the EU tariff schedule will result in increased barriers to U.S. exporters in several key categories including agriculture, chemicals, and electronics. Preliminary analysis indicates that semiconductors will be the U.S. export category most adversely affected. Tariffs for several key semiconductor types will increase from the present 0 percent to 14 percent under the EU tariff schedule. In late 1994 the U.S. Government entered into negotiations with the EU under Article 24:6 of the GATT, seeking compensation for lost exports as a consequence of Finland's EU accession. The Finnish service sector is undergoing considerable liberalization in connection with EU membership. Legislation implementing EU insurance directives has gone into effect. Finland will have exceptions in insurance covering medical and drug malpractice and nuclear power supply. Restrictions placed on statutory labor pension funds, which are administered by insurance companies, will in effect require that companies establish an office in Finland. It is unclear whether such restrictions will cover workers' compensation as well. Auto insurance companies will not be required to establish a representative office in Finland, but will have to have a claims representative there. In 1994 the government opened up long distance telephone service within Finland to competition. The government requires that the Finnish Broadcasting Company devote a "sufficient" amount of broadcasting time to domestic production, although in practical terms this has not resulted in discrimination against foreign productions. Upon accession to the EU, Finland will adopt the EU broadcast directive, which has a 50 percent European programming target for non-news and sports programming. Finland does not intend to impose specific quotas and has indicated its opposition to quotas to the EU. Finland is a GATT Standards Code signatory and has largely completed the process of harmonizing its technical standards to EU norms. Finland removed most restrictions on foreign investment and ownership through a law which took effect at the beginning of 1993. The new law abolishes various restrictions placed on companies with foreign ownership and eliminates distinctions between foreign and domestic shareholders. A large increase in foreign portfolio investment has occurred since the law took effect. The new law provides for a screening mechanism for proposed foreign acquisitions involving a third or more of the stock of approximately 100 large companies. The provision will be in effect until the end of 1995, but the government has pledged that only in extreme circumstances would a foreign takeover of a Finnish company be prevented. New investments are not affected by the monitoring procedure. After 1995, only proposed investments involving the manufacturing of defense equipment will be monitored. A requirement to obtain the permission of local governments in order to purchase a vacation home in Finland will also remain. EU membership will eliminate most sectoral investment restrictions. Foreign investors instead will have to meet the obligations required of Finnish investors. Finland is a signatory to the GATT Agreement on Government Procurement (Procurement Code) and has a good record in enforcing Code requirements in letter and spirit. In the excluded sectors, particularly defense, countertrade is actively practiced. Finland is purchasing fighter aircraft and associated equipment valued at $3 billion from U.S. suppliers. One hundred percent offsets are required as a condition of sale. In connection with the EEA agreement, Finland is implementing all EU procurement-related directives. Finland has a streamlined customs procedure, reflecting the importance of foreign trade to its economy. 6. Export Subsidies Policy The only significant Finnish direct export subsidies are for agricultural products, including grain, meat, butter, cheese, and eggs as well as for some processed agricultural products. Finland does not provide subsidies to promote shipbuilding exports, although a mechanism exists on paper to do so. Finland has advocated worldwide elimination of shipbuilding subsidies through the OECD's Working Party 6. Finland is a member of the GATT Subsidies Code. 7. Protection of U.S. Intellectual Property Finland has a good record in passing effective laws to protect intellectual property. With the exception of software, where unauthorized copying is widespread, enforcement is very good. Finland and the Nordic group of countries have taken a constructive position on intellectual property in the GATT Uruguay Round negotiations and in other international discussions. Finland is a member of all principal multilateral intellectual property organizations. Finland's copyright legislation has recently been modified to conform with EU practice, as required by the EEA agreement. The EU directive dealing with reselling videocassettes has been implemented, as has the EU software directive. The directive has made it easier to prosecute cases of unauthorized software copying. While piracy of audio and video recordings is only a small problem in Finland, industry representatives estimate that over 50 percent of software installed for business use has been illegally copied. Finland will start granting product patent protection for pharmaceuticals at the beginning of 1995; currently process patent protection is applied. 8. Worker Rights a. The Right of Association The Finnish constitution contains specific guarantees for the right of workers to form trade unions and assemble peacefully. The right to strike is guaranteed by law. These rights are honored in practice; trade unions are among the most powerful political forces in Finland. About 85 percent of the work force is unionized. Unions are free, independent, democratic and associate in three federations as well as internationally. b. The Right to Organize and Bargain Collectively The right to organize and bargain collectively is protected both in law and in practice. Collective bargaining traditionally has been conducted according to national guidelines agreed among employers, the three central trade union organizations, and the government, but in the past two years wage negotiations have been more decentralized. Workers are effectively protected against antiunion discrimination which is prohibited by law. c. Forced or Compulsory Labor Forced or compulsory labor is prohibited by the constitution and is not practiced. d. Minimum Age for Employment of Children Sixteen is the minimum age for full-time employment (eight hours per day). Children that are fifteen years old may work up to six hours per day under certain restricted conditions. Finland has compulsory education laws. Child labor laws are effectively enforced. e. Acceptable Conditions of Work Finland has no legislated minimum wage, but non-union employers are required to meet the minimum wages established by collective bargaining for unionized workers in each sector. The maximum standard legal work week is 40 hours; in practice most contracts call for standard work weeks of 37-38 hours. Finland's health and safety laws are among the strictest in the world. They are enforced effectively by government inspectors and actively monitored by the unions. f. Rights in Sectors with U.S. Investment There is no difference in the application of worker rights between sectors with U.S. investment and those without. Extent of U.S. Investment in Selected Industries.--U.S. Direct Investment Position Abroad on an Historical Cost Basis--1993 (Millions of U.S. dollars) Category Amount Petroleum (1) Total Manufacturing 127 Food & Kindred Products 1 Chemicals and Allied Products 52 Metals, Primary & Fabricated 4 Machinery, except Electrical (1) Electric & Electronic Equipment 2 Transportation Equipment 0 Other Manufacturing (1) Wholesale Trade 141 Banking (1) Finance/Insurance/Real Estate 1 Services 7 Other Industries (1) TOTAL ALL INDUSTRIES 336 (1) Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Bureau of Economic Analysis (###)