Since you asked: Un-Scandinavian lessons in balancing Finland’s economy

‘Finland . . . is proposing scrapping two bank holidays and cutting pay for sick leave, overtime and Sunday working.’
FT, September 9

That doesn’t sound very Scandinavian, does it?

Actually Finland is not technically in Scandinavia.

Not very Nordic, then. You know what I mean.

Sorry. You mean the Nordic model — welfare states, equality, and all that.

Exactly. Even the austerity-obsessed UK government wouldn’t get away with scrapping bank holidays. So how come the happy shiny people of a progressive Scandi-land do it?

Not Scandi . . .

Stop it.

Right. The government thinks it is necessary to reboot the Finnish economy.

Is it doing so badly?

It has not really grown for five years, unemployment has gone up and the export surplus has vanished.

Ouch. What happened?

It has a lot to do with the sort of things Finland makes. It has big forests, which are good for producing pulp and paper. But as any newspaper journalist will tell you, that is not a hot commodity.

They should produce digital devices instead! There’s a big future in that.

Er, they were. But I bet you are not reading this on a Nokia phone.

Oh yeah. Talk about putting all your eggs in one basket. I don’t think Nokia failed because the Finns take long holidays, though.

Then there’s geography: Finland happens to be next to Russia, which is a lousy trading partner ever since the EU finally slammed sanctions on it.

Pretty unlucky. But how are these not-very-Nordic policies going to help?

The government is very big on competitiveness, or “unit labour costs”. They blame the problem on rising ULCs and predict that if they come down the economy will recover.

You’re too technical. Say it the way the politicians explain it to the people.

Er, that’s what they say.

Are you kidding me?

No. According to Reuters, Juha Sipilä, prime minister, says the goal is to lower ULCs by 5 per cent.

And this is a government that includes populists! How would a technocratic one look? OK, explain ULCs.

It is the cost of labour that goes into producing one unit of something. How much a company spends on wages and benefits to make one roll of paper or one Nokia phone, say. If its ULC is too high, it won’t be able to sell the paper or the phone at a price that makes a profit. Others will undercut it and send it out of business.

That makes sense.

For a company, yes. For a country, not so much.

Why not?

Because countries do not go out of business, for one. Every generation, a brilliant economist teaches this to the world, which then proceeds to forget it. Last time was 20 years ago, when Paul Krugman shot down the “dangerous obsession” with competitiveness.

But countries have to sell stuff to others. If you export much less than you import, you’re uncompetitive.

You have to sell enough to pay for your imports over time. Finland does that just fine. It had huge surpluses in the boom. They have gone, but its trade balance is basically zero.

I don’t understand how lower ULCs would resurrect Nokia anyway. That had to do with a failure to innovate, not wage costs.

Indeed. Here’s another thing. What’s the ULC for the whole economy?

The cost of labour needed to produce a unit of all that the whole economy makes?

Sort of. It is the total wage bill divided by GDP.

But that’s just the workers’ share of the economy! That’s redistribution, not “competitiveness”.

I see you’re getting it. ULCs are a pretty bad measure of anything that policy should care about. And while a single company can cut labour costs without affecting its own sales, cutting the labour share in the whole economy easily reduces domestic demand.

They had better be right exports will go up, then. Should we be confident?

Hard to tell. Greece has cut labour costs enormously but not seen a big export gain. Spain’s exports are booming without any boost to “competitiveness”.

What’s with the euro countries’ self-flagellation? They seem to yearn for the competitive devaluations it was meant to overcome.

It is funny, isn’t it? Alex Stubb, finance minister, says “devaluation is . . . like doping in sports: it can give a short-term boost, but in the long run it is not beneficial.” But this policy aims for exactly the same thing .

So they treat the economy like a business and try to replicate devaluations they had given up because they did more harm than good.

What do you expect with a former businessman as PM and a smart alec for finance minister?

His name is Alex . . . 

Don’t be one yourself now.

martin.sandbu@ft.com