Equity, Economic Growth, and Aid in Finland

by Markus Jantti

Finland is now a solid member of the European Union and the OECD. While Finland is not one of the richest countries, as measured by GDP per capita, its economic performance has been quite adequate. Finland is far from the top of the 'league table of aid donors and lies behind both UN recommendations and its own set goals. Finland is, however, more or less in the middle pack of aid donors among OECD countries.

It is worth recalling, however, that Finland is a fairly late arrival among the high-income countries. Finland was a recipient of multilateral aid as late as in the 1970s. Drawing on recent work commissioned by the World Development Report team and conducted in part at WIDER, I point to the severity of several crises that occurred since 1860, including the famine of 1867-68, the civil war in 1918, and mass migration in the 1960s. I also point to a number of equity-oriented reforms, undertaken in part to resolve social conflicts, which may have contributed positively to economic development. Thus, while Finland is known as a quite tranquil, prosperous, ICT-intensive, and egalitarian country in the European periphery, things were remarkably different 140 years ago.

The Great Famine of the 1860s

The three deepest dips in Finnish population growth post 1860 occurred in 1867-68, 1918, and 1969 (population growth was of course very slow during World War II). The famine of the 1860s occurred after several years of poor harvests, driven in large part by bad weather conditions. A very bad harvest in 1867 led to mass migration from the hardest hit rural areas into the larger cities, where the migrated persons were gathered in various temporary poor houses and often put to work in various public works projects. 

While many deaths occurred even in the countryside, so to speak on location, mortality in the urban areas and poor houses reached very high levels. A significant cause of death was typhoid fever and other illnesses that could spread easily in the dense and unhygienic conditions that prevailed in the poor houses and which the undernourished migrants contracted easily.

The poor harvests were driven by bad weather conditions, but Finnish agriculture had throughout the 19th century suffered from poor harvests driven by bad weather. It seems, the very large increase in mortality that occurs during a famine requires additional problems. An important circumstance that contributed to the social upheaval during the 1860s was the fact that Finland, at that time an autonomous part of the Russian empire, had by the Czar been granted the right to issue its own currency, the silver Markka. With the need to build up foreign currency reserves in anticipation of the issue of the Markka, Finnish economic policy (which as conducted independently of Russia) was during those years very restrictive. This may have contributed both to lower purchasing power among the rural communities, making it more difficult to make up for the shortfall in grain by buying it from markets, and to an unwillingness on the part of central government to import, rather than export, grain. Indeed, when a decade later Finland was to move to the gold rather than silver standard, many who had in the 1860s supported the tight fiscal stance had considerably more sympathy for its critics.

Civil War in 1918

The causes of the Finnish civil war of 1918 are under considerable debate. The immediate reason was the fact that parliament, which had a socialist majority, was dissolved by the then narrowly non-socialist controlled senate (government). A contributing factor to this political crisis and its escalation into a bloody civil war was that despite having been on the agenda for several years, a land reform to provide farms for crofters - farmers who rented a less than 0.5 hectare farm - was yet to be implemented.

The civil war was fairly brief, lasting from January to early May in 1918. Some idea of the level of hostilities, however, can be gleaned from the causes of death on the 'red (i.e., socialist) and 'white (non- socialist or bourgeoisie) sides. The overall death toll was 34,277 persons (27,426 reds, 4,821whites and 2,030 others). Of the reds that died, however, less than one in five, i.e., 5,324, persons died in battle. Most of the reds died of executions and murders (7,207) or perished from hunger or diseases in prison camps (11,785) after the war. While a number of whites were also murdered, the vast majority of those on the white side who did die were killed in action. 

Land Reform Act of 1918

A land reform act which allowed crofters to purchase, through a publicly-regulated process, their farms was enacted in the fall of 1918, just months after the prison camps closed. A few years later parliament passed a law that gave public loans to farmers who had acquired farms using the land reform act in order to enlarge their farms.

The land reform act was passed by a coalition of moderate bourgeoisie parties and social democrats. It can, at least in part, be understood to have been enacted to avert further violent unrest. Indeed, the 1920s were a period during which many modern progressive reforms were enacted. Legislation that made primary schooling compulsory was enacted in 1926, although its full implementation took a few decades. Infant and maternity care was centrally developed, progressive income and wealth taxation was introduced starting in 1920 and the separate taxation of married couples income was enacted in 1936 after having been debated since the in- ception of progressive income taxation.

Helsinki was seriously damaged during World War II. © LEHTIKUVA / HEDE-FOTO
Helsinki was seriously damaged during World War II. © LEHTIKUVA / HEDE-FOTO

Thus, many equity-oriented reforms were enacted quite soon after a bloody civil war. The reality of politics is quite complex and assigning a conscious, united will to further equity to these reforms would probably be unjustified. Their enactment did, however, require much consensus. It seems reasonable to assign part of the reason that so many reforms of this type came into place to the recent memory of civil war and the turmoil that both preceded and followed it. 

Post World War II developments

Finnish economic policy in the post-World War II period has often been characterized as corporatist and driven by consensus. Arguably, however, central government continued to provide in the 1950s and late 1960s what it had done in the 1920s, namely an institutional framework within which private producers could operate with little fear of unproductive conflict. In the agricultural society of the 1920s, land reform may have been the chief way of solving conflict in the economy. In the 1950s and 1960s, wage and price freezes and social policy legislation were used as methods to pacify the now industrial conflicts. In the late 1960s, governments refined their ways to intervene by participating directly, starting in 1969, in the wage settlements between labour unions and employers organization.

This latest stage of state intervention, government-sponsored collective bargaining, is the best known way in which central government has intervened in the economic process in Finland. It is arguably just a different way of resolving conflicts.

Finnish economic development from the 1950s onwards is fairly well-known. State intervention, using a variety of methods over time, was frequent. Economic growth and industrialization proceeded at a fairly rapid pace, as witnessed by Finland s catching up, in relative terms, the income levels of other industrialized nations. While Finland now has one of the most equal distributions of income in the world, historical data suggest that inequality has not been low for a very long time. Indeed, inequality seems to have increased substantially from 1950 to the late 1960s.

What can we learn from Finnish experiences? An important lesson is that while Finland is today a country with low income inequality, stable political conditions, and an extensive social safety net, these are of fairly recent origin. Finland has experienced during the past 4-5 generations substantial humanitarian crises and is a late arrival among the rich club of nations. The development of various equity-oriented reforms - land and educational reform, various mechanisms for handling social risks, such as old-age pensions and family benefits - pre-dated rapid economic development. Even if the causal effect on growth of such reforms can be debated, at the very least many of these re- forms created a setting in which economic actors - chief among them labour unions and employers - had fewer conflicts to resolve and could, therefore, concentrate on productive activities.

It is useful to recall in the current debate on development aid that Finland received substantial assistance from other countries during its 'golden age . Early on in the form of Marshall Aid and through multilateral organizations, such as the World Bank, whose first loan to Finland was given in 1949. The last World Bank loan was granted as late as in 1972. It is possible that a critical examination of the Finnish development experience would help in the design of bilateral aid and bolster the case for a more pluralistic view of how multilateral aid institutions are run. While the Finnish experiences can not provide the blueprints for development cooperation, they can and should be noted. In particular, state intervention and the management of social risk have worked through many different mechanisms and have at the very least been compatible with, and have possibly been supportive of, beneficial long-term development. 

Acknowledgements: The author is grateful to Juho Saari and Juhana Vartiainen for permission to use material from our working paper, to Lauri Sarkki and Vappu Ikonen for information on loans to Finland from the IMF and World Bank.

Markus Jantti is Professor of Economics at the Abo Akademi University, in Turku, Finland and a Senior Research Associate at WIDER. He has published widely on income distribution issues.