Why is Finland so rich?

James, a loyal MR reader, has a request:

Why is Finland, with its tax distortions and subsidies, as rich as it is?

1. Finland’s taxes and subsidies do not much discourage the adoption of cutting-edge technologies and thus Finland has moved relatively close to “the frontier.”  Ed Prescott and Stephen Parente have a very important paper about the difference between interventions which have this effect and those which do not.  It’s one of the best papers on economic development.

2. Finland’s high taxes do discourage male labor supply and that is one reason why the country is not as wealthy, in per capita terms, as the United States.

3. There are extensive day care and child care subsidies, which in part counteracts the effects of high taxes on female labor supply.

4. Finland has one of the best educational systems in the world and high levels of human capital.  You might re-ask your same question about living standards in Russia, which had far worse economic policies than Finland, yet is not too far from first world standards in the major cities.

5. Finland invested in communications and IT at exactly the right time.  For a relatively small economy this had a huge payoff.

6. Some people might cite Finnish industrial policy as having driven growth; I am not sure how significant it was.

7. An open economy, with lots of trade, is usually much freer than traditional statistics will make it seem.  International markets are a disciplining force and they cannot be ruled by the domestic government.

8. That all said, I am not especially optimistic about Finland.  Their current investment and R&D stats are not those of an economy on the move.  They will be hit hard by aging and they have not made immigration policy work in their favor.  Public sector productivity is not as high as you might think (see also the McKinsey report).  Do they have another big success on the way?  Can they get further productivity gains in cell phones and timber?  It’s not obvious.  They’ll do “well enough,” however, see #1.

Here is a McKinsey study of Finland (pdf).  Here is a good Charles Sabel essay (pdf) on the economic future of Finland.


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