It is not completely wrong to describe Finland as a bark boat caught up in the waves of world history.
The Finnish population has always accounted for far less than one per mille of the world’s population, and therefore, the Finnish development story relied heavily on technologies and innovations adopted and copied from more developed countries as well as world trade (Eloranta and Ojala 2018; Heikkinen 2019; Haapala and Christopher 2018; Kokkinen 2019). It is evident that the policies adopted, and institutions created based on foreign models helped the country successfully navigate through the choppy waves; however, success through planning and careful policymaking were rather limited since Finland only became independent rather late, in 1917. Although many reforms were planned already during the late 19th century, they were implemented only in the aftermath of independence (see further discussions in Haapala and Christopher 2018).7 The region now known as Finland, in Northern Europe,
‘drifted’ through the centuries by adopting institutions largely imposed by Swedish rulers. Subsequent Russian rulers mainly retained the old Swedish institutions, and Finland became an autonomous Grand Duchy of the Russian Empire. Next, I discuss the following central topics in Finnish history, which are important for understanding the patterns of inequality: 1) development, 2) wealth, 3) shocks, 4) globalisation and technological change, and 5) institutions.
Finland can be described as a poor, backward, rural region before the latter part of the 19th century. Finland began to gradually industrialise roughly from the 1870s onwards, but it did not transition to a more service-based economy until the late 20th century. Industrialisation occurred gradually, and the social and the economic structure of Finland were predominantly agrarian until the early 20th century. The share of the workforce employed in agriculture and forestry did not drop below 50% until roughly the 1940s (Haapala and Peltola 2018; Hjerppe 1989). In the mid-19th century, more than 80% of the workforce was still engaged in agricultural production, declining to roughly 70% in the early 20th century, and only below 10% in the late 20th century. Today, more than 60% of the workforce belongs to the service sector (e.g. Eloranta and Ojala 2018; Hjerppe 1989) (for more detail on the social structure, see article IV). Moreover, the primary sector’s share of GDP has decreased from 58% in the 1870s, to 43% in 1913, to 26% in the early 1950s and to roughly 10% in the 1970s (Heikkinen 2017a).
7 The region now known as Finland was largely part of Sweden until 1809, whereas it was an autonomous Grand Duchy of the Russian Empire during the years 1809–1917. Finland only gained its independence in 1917 after the collapse of the Russian Empire.
24
Figure 1 compares the real GDP per capita ($2011 PPP dollars) starting from 1700 in Finland, Poland, Argentina, Sweden, Denmark and the United Kingdom. Only in 1900 did the income level in Finland exceed the GDP level attained in the United Kingdom two centuries previously. The Finnish income level was considerably lower in comparison with the other Western countries over the centuries, but it was not far from the income level in Sweden in the 18th and the 19th centuries.
Nevertheless, the income level was significantly lower in Eastern European countries before the mid-19th century, including Poland (see also the development of real wages in Eloranta and Ojala 2018).
The income level remained relatively stagnant through the centuries, and it only gradually began to increase in the latter half of the 19th century in Finland. The industrialisation process combined with new technologies and innovations advanced first in the industrial core, the United Kingdom, only to gradually be adopted in Denmark, Sweden and Finland centuries later. However, Finland caught up with the other economies quite quickly in the 20th century, when it industrialised, modernised and became service-dominant economy. The Finnish GDP per capita did not exceed the figures for Argentina until the 1950s (Figure 1). The period of 1950–1990 especially was a time of development:
Finnish annual real GDP growth was 3.6%, exceeding by a large margin its Western counterparts. In addition, annual productivity growth varied greatly by sector: for the primary sector it was 4.1%, for industry it was 4.7%, for the construction sector it was 2.7% and for the service sector it was 2.5%, whereas overall productivity growth was 3.9% (Heikkinen 2017a).
Before industrialisation and modernisation, people’s source of living was tightly connected to the land (wealth). Finland, as one of the world’s northernmost agricultural regions, was vulnerable to frequent crop failures and its agricultural productivity remained low until the late 19th century (Nummela 2018). Highly fluctuating and low production meant a stark social divide between the landowners and the landless, brutally affecting people’s odds of surviving, especially during crises: for example, in the famine years (1866–1868), when almost one tenth of the population was lost and the death rates were much higher among the poorer social classes and in the poorer regions (Häkkinen 2018; Nummela 2018). Therefore, Finland was still a quite unequal estate society, even neither though serfdom on the one extreme nor massive fortunes on the other existed, as was common in the feudal systems in parts of Europe. Estates had many privileges, many of which were abolished after Finland became an democratic state, but they were not completely abolished until as late as 1995 (Nummela 2018).8 According to probate inventory data, Finland was at least as unequal as the much wealthier nations, such as the UK, France or the US, between the years 1750 and 1900. During the industrialisation period of 1850–1900, forests that were largely owned by farmers increased in value,
8 See the law abolishing estate privileges (971/5.12.1995) (https://finlex.fi/fi/laki/alkup/1995/19950971).
25
which helped level off the extremes of wealth concentration. This transition had an impact on the upper part of the social stratum, whereas the overall wealth inequality gap did not diminish drastically until during the 20th century (Bengtsson et al. 2019; Roine and Waldenström 2015).
Figure 1. The GDP per capita in the United Kingdom, Denmark, Sweden, Argentina, Poland and Finland, c. 1700–2010 (real 2011 PPP dollars).
Sources: Finland 1600–1860 (Eloranta, Voutilainen, and Nummela 2016), other years (Bolt and van Zanden 2020); Sweden 1560–1950 (Schön and Krantz 2015), other years (Bolt and van Zanden 2020);
Denmark (Bolt and van Zanden 2020); the United Kingdom 1700–1870 (Broadberry et al. 2015);
Argentina 1800–1870 (Prados de la Escosura 2009), 1870–1900 (Bertola and Ocampo 2012); Poland 1700–1913 (Malinowski and van Zanden 2017), other years (Bolt and van Zanden 2020).
Life expectancy serves as a crucial development indicator, with Figure 2 showing comparisons between Finland, Sweden, Denmark and the UK from the early 18th century to the 21st century. Low-income levels before the modern period of economic growth tended to lower life expectancy in Finland, which is decidedly evident during shocks. As highlighted by Häkkinen (2018), the late 18th and 19th centuries were difficult times from the standpoint of life expectancy. Most people’s life expectancy was quite
26
low because of poor working conditions and nutrition as well as low productivity in agriculture and unequally distributed resources (Häkkinen 2018; Nummela 2018). Life expectancy started to increase along with economic growth, industrialisation and modernisation, which began in Finland in the 1870s and converged with figures for other Western countries in the latter 20th century. Remarkably, average life expectancy has more than doubled during the last 150 years or so.9 Moreover, public health and medical interventions played a significant role in lowering death rates (e.g. Lazuka 2017; Peltola and Saaritsa 2019).
Figure 2. Life expectancy at birth in Finland, Sweden, Denmark and the United Kingdom, c. 1700–
2010.
Sources: Zijdeman and Ribeira da Silva (2015).
9 Other development indicators suggest a relatively similar story as witnessed previously, although there are differences in volatility and timing (see indicators considering life expectancy, schooling rates, reading and writing scores and HHDI-index in Saaritsa 2019).
27
The pattern of average life expectancy starkly reveals how crop failures and turbulent shocks impacted individual lives (see also Sweden in Figure 2). Indeed, Finland experienced repetitive epidemics, crop failures and other turbulent shocks every other year or between decades for several centuries. The list of crises is long and includes the following: the Great Northern War (1700–1721); the Russo-Swedish War of 1741–1743; the splenic fever epidemic (1763); the Russo-Swedish War of 1788–1790; typhus epidemics (1788–1790, 1808–1809); the Finnish War (1808–1809); smallpox, splenic fever and typhus epidemics (1830–1834); crop failure (1833–1834); famine years combined with typhus and typhoid fever epidemics (1866–1868); another splenic fever epidemic (1893); the Spanish flu, the Finnish Civil War and prisoner internment camps (1918–1919); the Winter War (1939–1940); the Continuation War (1941–1944); and the Lapland War (1944–1945). Thus, the most severe crises that affected life expectancy were related to crop failures, wars and epidemics throughout the 18th and the 19th centuries (Figure 2; Häkkinen 2018).
After the famine years of the 1860s, economic crises no longer primarily occurred as a result of crop failures due to productivity growth and modernisation in the agricultural sector. Moreover, rapid globalisation provided new possibilities to buy food products from abroad or from the Russian Empire, if necessary. For instance, Finland imported roughly half of its bread corn just before WWI, which eased the centuries-old pressure on agriculture. On the other hand, relying on trade and the global economy had its disadvantages as well. The great economic crises that occurred in the 20th century were related to the civil war and two world wars (1914–1919, 1939–1945) as well as to global economic turmoil connected with national-scale challenges (especially the Great Depression of 1929–
1932, the crisis of the early 1990s and the financial crisis after 2008). In the past, Finland had recovered from such turbulent shocks quite rapidly, apart from the most recent protracted financial crisis, by trusting in a recovery of the exports. Overall, however, Finland has benefitted from global trade and globalisation massively during the 20th century (Heikkinen 2017a; Heikkinen and Kuusterä 2001;
Heikkinen 2013).
Already in the early 19th century, Finland had become more closely connected to global networks and had absorbed innovations and technologies from abroad. However, Finland started to develop industrially and become more connected to the global trade especially from the 1870s onwards (Eloranta and Ojala 2018; Ekholm and Hjerppe 2019; Koponen and Saaritsa 2019; Heikkinen 2019;
Nummela 2019). During the first wave of rapid globalisation, 1870–1913, Finland became one of the most open economies in Europe (export and import share of GDP was roughly 50%). Starting from the 1870s, Finnish primarily exported goods and materials to Western countries (mainly butter and lumber), but exports to Russia were important too (mainly paper). Whereas the share of foreign trade with respect to overall GDP remained at relatively similar levels during the anti-globalisation phase
28
lasting from 1913 to 1950 (roughly 30–50%), the share drastically increased during the rapid globalisation periods of the later 20th century (roughly to 80%). Being a small open economy, Finnish exports rely on relatively small export trades, like paper, chemical pulp, board and timber, although exports have diversified somewhat after the 1960s (like ICT products and services) (Heikkinen 2017a;
Haaparanta et al. 2017). Thus, the development process was tightly connected with globalisation processes, where a small and open economy like Finland’s could benefit from innovations and technologies copied abroad but especially from countries or regions offering large-scale export markets.
It is a widely accepted fact that institutions play a central role in economic growth. Perhaps the most crucial institutions are legal apparatuses that guarantee ownership rights, a constitutional state and other institutions that enable a market economy to function properly. Many such institutions were established during the 1850–1870s, when people had greater freedom of movement and more opportunities to become entrepreneurs or choose a trade (Heikkinen 2017a; Nummela 2018).
Moreover, the adoptions of innovations and technology was possible only after enough human capital existed to make use of them. Earlier, the necessary level of human capital needed was not outstanding, whereas the need grew rapidly during the latter part of the 20th century. Thus, it has been crucial for Finland that it has also invested in human capital, not only for adopting innovations and technologies but also for devising new innovations (Heikkinen 2017a; Kokkinen 2019, 2012).
Despite the basic market institutions that were established in the late 19th century, it can be argued that the ‘real’ opportunities were rather limited since the cumulated privileges and disadvantages of the various social groups only fractured gradually (see more details in Häkkinen 2018;
Nummela 2018; Hannikainen 2018). For instance, the old poor relief system contained strong power asymmetries between the haves and the have nots, with it being much harsher towards the poor.
Typically, the unemployed were assigned to a house (based on the idea of allotment) for one year at a time to work as a means of offsetting their living expenses. The poor relief system was based on varying types of institutions in the parishes and municipalities, as was common in Sweden and other Western societies at the time, including workhouses, allotments and giving minimal cash and food supplies.
Also, employers had certain obligations to offer some amount of security to their employees if and when they should retire or become ill. Gradually during the late 19th and the early 20th centuries, a general relief fund and trade unions were established to cover the livelihood of persons during sickness or retirement (Hannikainen 2018; Häkkinen 2018).
Indeed, the bargaining power of labour relative to the owners of capital and other market institutions was still rather limited before the increasing power of trade unions (Jaumotte and Osorio Buitron 2019; Farber et al. 2021). The Finnish trade unions and relief funds were established during
29
the late 19th and the early 20th centuries. Nevertheless, the power of labour unions was still relatively weak in Finland in comparison with other Nordic countries before WWII. The labour movement increased its power through the growing number of union members as well as negotiations between various labour market organisations from the early 1960s until the early 1990s. Today, the Nordic countries, including Finland, have the highest share of union representation of all Western countries (Heikkinen and Lundh 2020; Bergholm 2016; Visser 2019).
Finland gained its independence in 1917 and a democratic state was established in 1919, which arguably explains to a great extent the adoption of new policies during the 20th century. Finland introduced many new taxes on the wealthy already starting from 1915, and it established a state income and wealth tax in 1920. In addition, a law was passed in 1918 stating that crofters and other leaseholders could redeem their rented land. The state supported these leaseholders in multiple ways, especially by setting a fixed land value in 1914, enabling leaseholders to buy the land at a low real value due to high inflation (Rasila 1970; Peltonen 1992; Wikström 1985; Hannikainen 2018). Moreover, the state in 1921 introduced a law, making education compulsory until the age of 13 in rural areas and 14 in urban areas.
However, the legislation only took effect in municipalities gradually. Therefore, the compulsory basic education was only really implemented on a national level until the early 1950s. Moreover, the comprehensive school reforms of 1972–1977 abolished the old two-track schooling system. The state also raised the minimum age for compulsory schooling to 15 in 1957–1958 and to 16 in 1970. In addition, secondary school education was vastly expanded: whereas only roughly one third of pupils continued past primary school in the 1935 birth cohort, more than two thirds continued their education after primary school in the birth cohorts of the early 1950s (Jäntti, Saari, and Vartiainen 2006; Pekkala and Lucas 2007).
Although the welfare state began to take shape already in the early 20th century, the level and coverage of its institutions and redistribution policies were rather limited before the 1950s. For instance, the level of unemployment benefits covered only a small fraction of the population and the level was much lower in 1950 compared with other OECD countries (Kangas 2006). Indeed, despite introducing some reforms quite early, Finland was behind most OECD countries in terms of the share of social expenditures relative to GDP until the 1950s. The great expansion of the welfare state occurred when the social expenditures as a percentage of GDP increased from roughly 10% to 25% (roughly 30% if education is included) between the early 1960s and the late 1980s. The most crucial reforms were made until the late 1980s, and they consisted of an expanded social insurance system (accident insurance, unemployment benefit, health insurance and pensions), public healthcare system (healthcare centres, hospitals), educational system (comprehensive schools, vocational schools and universities), benefits extended to families (family allowances, day care, school meals and child health clinics), and
30
other forms of support offered during an individual’s lifetime (housing allowance, student financial aid and disability subsidies). Therefore, the catch-up phase after WWII encompassed structural changes as well as the constructing and expanding of a comprehensive welfare state (Hannikainen 2018; Kangas 2006; Jäntti, Saari, and Vartiainen 2006).
In historical perspective, Finnish social and economic development reads as a great success story. The cold climate and low agricultural productivity combined with unequally distributed resources had resulted in repeated crop failures, epidemics and severe struggles with subsistence before the late 19th century. During the research period, Finland transformed itself from one of the poorest and most backward countries of Europe into a prosperous and highly developed Western nation. The catch-up phase started gradually during the late 19th century, however the real convergence only occurred during the latter half of the 20th century, when Finnish economic growth, development and progress in well-being were greatly enhanced. The Finnish development story is tightly interconnected with expanding global markets, which propelled it forward in the late 19th century and inflicted severe economic crises sporadically during the 20th century. The welfare state developed during the 20th century, and was greatly expanded only after WWII, to soften the impacts of these global market shocks. However, although the Finnish state enjoyed reasonably prosperous outcomes, its success is not unique and progress in implementing reforms has repeatedly been halted due to shocks or other delays.
31