On Monday, May 7th, I had the honor of taking part in the Conference “Europe. After 100 Before”, organized by the European Commission Representation in Latvia, the Latvian Institute, and the Latvian Political Science Association. My panel focused on the economic strategies of the small Baltic nations, and the speakers were Valdis Dombrovskis, Marek Belka, Gatis Krumins, Martins Kazaks and myself.
My short introductory note:
Let me thank the organizers for this important and flattering opportunity. I have been interested in the economic growth strategies of small nations and, in particular, late industrializers like Finland, Austria and the East Asian tiger countries. Let me take up a couple of lessons that, so I hope, are of a more general interest for the Baltic nations.
Small nations face two kinds of challenges and constraints: external and internal. The external ones are obvious. We small nations must work for an international order that respects principles and constraints, in security matters and in matter that regulate the international economic exchange. Liberal internationalism and free movement of goods, services, capital, ideas and people is obviously the international order that best supports the endeavours of small European nations to enrich themselves and become wealthy and happy. Our standards of living are underpinned by the international division of labour. This should never be underestimated.
The internal constraints have to do with the need to support economic policies that make positive economic growth and improving living standards possible. This entails a lot of responsibility: a commitment to openness and responsible long term fiscal policies to keep the public finances healthy. It is also a good idea to establish price stability in some way or another.
Yet the recent decades and the recent years have clearly taught us a lesson about the political acceptability of market capitalism as well. A nation can prosper as measured by economic aggregates like GDP and total employment. However, if a large part of the population feels deprived of the fruits of growth, this deprivation will in the course of time be expressed in politics that contravene responsible economic policies.
This is the clear and loud message of phenomena like the election of Donald Trump and the UK Brexit plebiscite. We might say that large nations have more room for stupidity without their very existence being threatened, and that is probably true, but the same lesson holds for small nations as well. Economic policy is a tightrope, a very narrow path where we must be hard-headed with realistic and market-oriented policies, but soft-hearted with social insurance and social policy that that distributes the risks inherent in globalization. In the absence of hope for unemployment benefits or re-education, people will turn to irresponsible political alternatives like nationalism and economic populism. That is the first lesson.
The other lesson is that policies and growth strategies must evolve. They must be contingent or ”strategic” in the sense that they react to changing circumstances. Good economic policy is not a set of specific policies but a set of values and principles which find different applications at different times. This reflection sends me back, to conclude, with some remarks on my own country, Finland. Finland was a successful post-WWII late industrializer, equipped with a corporativist and interventionist growth model. That was time of the Cold War when Finland had not much room for manoeuver. We were part of a zone contested by the Communist and the Capitalist world systems, and we could never afford an economic failure. That put us in a tight spot but it also concentrated the minds and forged a long term economic growth strategy based on rapid capital accumulation. It required a lot of political consensus and a corporatist political superstructure where labour representatives and business representives, together with political decisionmakers, forged growth-enhancing economic policies.
Now, from my point of view of a liberal politician, the problem is that even after the end of the Cold War, this political superstructure is still there and makes it more difficult for us to adapt to the global economy and the aging of the population that puts pressure on public finances. We should carry out many liberalizing reforms of the labour market, in order to raise the employment rate. Yet this turns out very difficult if the precondition for this is that labour market partners — employer organizations and the trade unions — must agree on all major reforms.
Thus, national consensus, which was surely an extremely salutary characteristic of Finnish politics during the Cold War years, has turned into a liability when it seems not possible to forge a consensus on labour supply reforms in an aging society. Therefore, Finland’s employment rate lags behind that of her Nordic neighbours, and our public finances are ill adapted to the rapidly deteriorating dependency ratio that jeopardizes our ambitious welfare undertakings.
Thus, unfortunately, in the present circumstances, our country has a lot of difficulties to adapt, due the political culture of consensus that prevents even some very moderate reforms of the labour market. In this sense, as the almost exactly 200 years old Karl Marx once wrote, the chains of history weigh heavily on the present generations.