On Finland's Economic Growth and Convergence with Sweden and the EU15 in the 20th Century

Abstract

Finland is one of the few examples of poor countries’ absolute GDP per capita convergence in the 20th century: One hundred years ago it was a poor agrarian country with GDP per capita less than half of that of the United Kingdom or the United States, world leaders at the time. In the beginning of the 21st century it is an industrialised and services emphasised country with a standard of living ranked among the top fifteen to twenty-five countries in the world. In the same time frame Finland has converged with the average income levels of her leading neighbours, Sweden and the EU15. How did this convergence happen in the geographically large but low population country without being blessed with abundant natural resources? Thinking of today’s poor countries it would be important to understand the processes the few catch-up countries worldwide have gone through. The study is conducted in accordance with the following analytical framework: Firstly, the structural change is seen driven by new possibilities (technology) to produce products (old and new). Secondly, this production with new technology will drive labour productivity and GDP per capita up on the national level. Thirdly, to use new production technologies requires human capital. To find out empirically the impacts of investing in and accumulation of human capital by schooling on GDP, investments in human capital are investigated in the same National Accounts framework as GDP. Fourthly, for permanent growth of labour productivity continuous adoption of new production technologies from the evolving world technology frontier is needed. This requires openness and close interaction via foreign trade with the leading countries. The increasing foreign trade and foreign direct investments will render the business cycles of the economies involved more dependent on each other, which should result in increased co-dependence of business cycles. The issues are investigated in the study by econometric techniques with annual long-run data sets, comparing Finnish growth with Sweden and the EU15 and framing the discussion in the growth variation of a broad set of countries. The results in this study suggest a paradigm shift from neo-classical growth and convergence explanation to technology diffusion model with human capital, in which technological progress is embodied in the new varieties (qualities) of fixed capital.