Wayzata World Factbook 1996/The World Factbook - 1996 Edition - Wayzata Technology (3079) (1996).iso/pc/text/economic/finland.txt

Text File | 1996-01-10 | 23KB | 476 lines

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

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