Johnny Åkerholm: the Nordic model combined with Baltic dynamism: a recipe for economic success

Summary of a seminar speech*

I note that the organisers have not put any question mark in the title of this panel! We have experienced 20 years of good growth, and one might be tempted to believe that this is somehow a normal state of affairs. I am afraid, however, that the past success was supported by a number of one-off factors.

Globalisation is one of them. It brought a lot of cheap products to the world market. Another one is the high rate of global growth, which was supported by debt-financed demand in the US and technological catch-up in China. The next factor is the move from a fragmented European market to something which resembles a common one. Then, we had stability in the Nordic countries, which was brought about by the efforts to stem the crisis in the late 1980s and early 1990s. Then there is the Nordic welfare model, which mobilised skills on a wide front. And finally, we witnessed the European integration of the Baltic countries in a situation, where the cost level was very favourable in relation to the skills.

Most, if not all, of these factors will not support growth in the next twenty years. The economic environment might look very different, and one should be prepared for much more of an uphill struggle. Some challenges are known, while some are looming on the horizon. I will not discuss the option that the present mess in the EU could lead to the disintegration of the union, which is a threat both in Europe and globally.

The future development of the Nordic-Baltic region is doubtlessly facing significant challenges. The gravity of growth and development will shift further out of Europe. We will be even smaller and more marginalised in the world economy. We make up 0.4% of the world’s population and somewhat more of the world’s output. We are miniscule as a region and we are hardly noticeable as individual countries.

Growth will have to be based on technological advances. R&D is becoming increasingly expensive. We have too few resources and face a challenge to stay on top even if we are able to pool our resources. We will have to choose and make the right choices.

The basis of the Nordic welfare model will change with the ageing of the population. So far, those working and paying high taxes have also by and large reaped the benefits in terms of free education for their children, good infrastructure, etc. With the change in the population structure this will change. In this country (Finland), annual growth will fall to below 2%, and out of that some 40% will go to the passive population; the net burden on the active population will become very different from the past.

The Baltic countries are not, and should not be, attractive to activities which rely on cheap labour. But the challenge is to be able to attract activities, which have a higher added value. Are the Baltic countries attractive enough for these kinds of activities? And what does it take to become more attractive?

In dealing with these challenges, I think the Nordic and Baltic countries should work together more on a regional basis and seize more opportunities to make a global difference as a region rather than as individual countries.

The countries should also acknowledge that the business sector has to be in the driving seat. The business sector, in turn, needs to be acutely aware of the political constraints, as the political leaders continue to be elected on a national basis.

Can the mobile phone experience be repeated by the creation of common standards, in, for example, the area of clean tech? This is the area, where NIB can contribute. NIB supports the creation of a regional energy market and the development of renewable energy forms. In this area, the Bank has financed the construction of Estlink 2, a power link across the Gulf of Finland, connecting the Baltic and Nordic power grids, as well as a number of hydro- and windpower projects. The Bank finances the development of regional transport and logistics necessary for the creation of a more coherent region. NIB hosts the Secretariat of the newly established Northern Dimension Partnership on Transport and Logistics. The Bank has extended loans to the Swedish rail operator Green Cargo and for building a motorway linking the harbour of Gdansk to the road network in Central Europe. Although limited due to the lack of risk capital, NIB finances investments in R&D, such as projects at Nokia-Siemens and the Danish wind turbine producer Vestas.

Another suggestion is to redirect, on a regional basis, the public support for higher education and research from the institutions to the students. The institutions should compete and specialise.

The Nordic countries need to adapt the welfare model to the change in the structure in the population, thereby ensuring incentives for work and mobility and creating better incentives for entrepreneurship, risk-taking and giving up unproductive activities.

* The speech was delivered at the seminar “Nordic and Baltic Countries: The Next Twenty Years” arranged by Finland’s Ministry of Foreign Affairs in Helsinki on 30 August 2011.