Throughout Finland's independence, industrial production has been a vital generator of economic growth in the country. Between 1925 and 2006, Finland's industrial output went up by an average of five per cent per year despite the fact that the period contained the Second World War and two economic recessions. Up to the beginning of the 2000s the country's industrial output grew considerably faster than its total output. The growth of Finland's industrial output has clearly exceeded the average respective growth in other industrialised countries.
The Volume Index of Industrial Output contains statistical data starting from 1925. At that time Finland's industrial output experienced strong growth, boosted right up to the latter part of the 1920s by the years of economic growth that followed the First World War. Europe was being rebuilt after the war and exports of products of especially the wood industry thrived.
Volume Index of Industrial Output 1925-2006 (1938=100)
The world-wide Great Depression started when share prices slumped on the New York Stock Exchange in September 1929. The effects from the 1930s depression could be seen earlier in Finland than elsewhere in Europe: the pace of economic growth already slowed down in 1929. In the same year the rate at which industrial output was going up also decelerated from the preceding years when it had exceeded 10 per cent. Between 1930 and 1931 Finnish industrial output suffered one of the strongest periods of decline in its history.
The problems of Finnish industrial production did not arise as a direct consequence of the slump on the New Your Stock Exchange only. The biggest problems were caused by the difficulties the wood industry - the most important industry at that time - faced on the world market. Soviet Union entered the international market for wood, dumping prices downwards. At the same time, international demand for wood was declining as a consequence of the Great Depression of the 1930s. Added together, these factors caused to the industry serious problems, which could also be seen as declines in output in 1930 and 1931.
Yet, the Great Depression of the 1930s was much more short-lived in Finland than elsewhere in the world. Industrial output began to go up again already in 1932. The international competitiveness of Finnish industry was improved by the devaluation of the Finnish markka in 1931-1932, which lowered its value by 50 per cent against the US dollar and by 15 per cent against the British pound. Mainly driven by exports, industrial output grew very strongly, at best by over 20 per cent per year, in the period between 1933 and 1938.
Because of the increased political uncertainly in the world, the pace of growth in industrial output began to moderate in 1938. The Second World War broke out in 1939 and Finland was also drawn into it. International trade shrunk to almost nothing during the war years. Industrial output contracted sharply in the first two war years. In relative terms, the collapse was the biggest during the entire examination period of 1925-2006.
During the war years, a peak occurred in industrial output in 1943, but this was promptly followed by a clear decline in the very next year. During the war years from 1939 to 1945, production of munitions accounted for most of Finland's industrial output.
Although the early war years were characterised by dramatic drops in industrial output, industry recovered quickly from the war. In the first peace year of 1946, industrial output increased by more than 20 per cent and higher output than in any year before the war was recorded still in the same year. In the immediate post-war period of 1946 to1951, industrial output grew very rapidly.
Many factors contributed to the brisk growth. First, rebuilding of the country after the war increased demand for industrial products. Second, Finland devalued its currency several times in 1945 and 1949, which boosted exports to the west. For example, the combined effect from the two devaluations in 1949 was that the value of the dollar rose by 70 per cent against the Finnish markka. Third, the International Court of Justice ordered Finland to large war reparations which were largely paid in manufactured products. From 1946 to 1952 these reparations accounted for a significant share of all industrial output. In terms of magnitude the war reparations could equal to up to four per cent of the country's gross domestic product.
In 1951, the Korean War boosted exports by creating in the world a huge rush to buy munitions and, in its wake, an international economic boom. This shows as a peak in the volume of Finnish industrial output. From 1950 to 1951, industrial output went up by about one-sixth. After the economic boom demand for exports faded quickly in the next year and Finland's economy was weakened by both import regulations and tight monetary policy. After one year's strong growth, industrial output duly declined in 1952. However, from 1953 to 1955 rapid growth resumed in industrial output: thanks to the war reparations the quality of manufactured products had improved, and exports to the western markets also began to grow.
Between 1950 and 1975, Finland's industrial output was at the mercy of international economic trends. Following the cyclically sensitive wood industry, the volume of industrial output see-sawed faithfully according to international up and downswings. This development was strengthened by the fact that counter-cyclical measures were given a minor role in economic policy during the period. On the other hand, Finland practised an active exchange rate policy and devaluation was used several times to raise the competitiveness of exporting industries.
The fast growth of output in 1953-1955 was followed by a period of more moderate growth which started in 1956, the year of general strike in Finland. Besides the general strike the causes for the deceleration of growth were weakened export trends and easing of the strict regulation of Finland's foreign trade in 1957, which compelled industry to compete against ever toughening international challengers. An economic recession brought industrial output down by 3.4 per cent in 1958.
However, industrial output recovered quickly during the international economic boom that followed the recession. One reason for this was the devaluation of the Finnish markka in 1957 which put the value of the US dollar up by 39 per cent against the Finnish markka. A period of strong growth in industrial output started after 1958.
International economy remained very stable in the 1960s. This also shows as steady growth in Finnish industrial output throughout the decade, although signs of fading could already be seen in it in 1967. In the same year the Finnish currency was devalued by 31 per cent and in the years that followed industrial output swung again towards strong growth. The tight economic policy and the strike in the metal industry in 1971 resulted in a short-lived economic stagnation which briefly slowed down the growth of industrial output. In the years that followed industrial output quickly went up again, buoyed by an international upswing. The growth continued right up to 1971.
The years of rapid growth of output in the early 1970s were followed by the international Oil Crisis. The price of oil increased tenfold between 1974 and 1979, and this lead to world-wide inflation and economic slump. Internationally, 1973 is regarded as the year when the depression started, but in Finland's industrial output its effects were not seen until 1975 when output began to decline. Besides by the Oil Crisis, the decline in output was caused by the free trade agreement made between Finland and the European Community in 1973. The agreement subjected Finnish industry to ever toughening international competition and a strong contraction duly followed in Finland's exports to the west.
In 1976 and 1977, almost zero growth was still recorded in industrial output, but in 1978 it swung back towards strong growth again. In 1978 and 1979 industrial output grew at above average speed. The stimuli for this were the three devaluations of the Finnish markka, which were made during 1977 and 1978 and lowered the value of the markka by a total of 19 per cent against the market prices of foreign currencies. Impacts from the Oil Crisis on Finnish industry were also alleviated by Finland's bilateral trade with the Soviet Union. More and more of the trade comprised of exchange of manufactured commodities for dearer oil.
In 1979, the price of oil leapt up again, which produced a second oil crisis and in its wake the world-wide economic decline of the early 1980s. However, no appreciable effects could be seen from this decline on Finland's industrial output. Industry's international competitiveness was partly boosted by the two devaluations made in 1982 which raised the values of foreign currencies against the Finnish markka by a total of 11 per cent. In addition, trade with the Soviet Union was increased again as the price of oil inched up during the oil crisis of the early 1980s.
In consequence of the oil crisis, 1980s was a period of weak economic development in Western Europe. However, Finnish industry came out from the final years of the 1970s to the end of the 1980s clearly better off than the European average.
The hesitancy of Finland's economy in the late 1980s could not yet be seen in industrial output in 1989 when it still kept going up in all industry. Finland's' money market was deregulated in the late 1980s. This made taking foreign currency loans possible and increased the indebtedness of households and non-monetary corporations. After the 1989 revaluation of the Finnish markka, the economic crisis of the 1990s also began to show in the very next year as a slight contraction of industrial output. There were also many other concurrent reasons for the decline in industrial output: exports to the east dried up almost completely after the collapse of the Soviet Union and exports to the west also contracted. In addition, domestic investments and consumption collapsed. In 1991, industrial output diminished by approximately nine per cent.
Although the economy was in a crisis, thanks to the devaluation made on 15th November 1991, Finland's exports started to recover quickly. Industrial output began to rise again as soon as in 1992, although other sectors of the economy still continued to suffer for a long time from the consequences of the recession. One important contributor to the growth of industrial output was growth of exports: after 1991, the share of exports of gross domestic product went up briskly so that by 1997 it already amounted to 40 per cent of GDP. From 1992 onwards industrial output went up very rapidly throughout the 1990s and right up to the year 2000. Finland became member of the European Union in 1995 and joined the European Economic and Monetary Union in 1998, and this has also greatly influenced industrial development in Finland.
The strong growth in industrial output that continued up to the year 2000 slowed down at the beginning of the new millennium. In 2001 to 2006, average annual growth in industrial output failed to reach three per cent, whereas for the whole examination period of 1925 to 2000 it was nearly six per cent. In 2001, part of the reason for the stagnation of output was the instability of the world economy in the wake of the terrorist attack in the United States.
Finnish industrial output did not begin to grow again until 2004 when it went up by good five per cent. In 2005, a halt in the growth of industrial output was partly caused by an industrial dispute in the paper industry which brought production to a standstill in the entire paper industry in summer 2005. Thus, 2006 showed a better than average rate of growth partly because zero growth was recorded in the comparison year.
In the 2000s, Russia has again become Finland's most important trading partner alongside Germany. Finnish non-financial corporations' investments in the rest of the world have increased considerably in the past decade. They also already provide almost as many jobs abroad as in Finland.
In the early years of independence Finland's industrial output hinged on the wood and paper industry. After the Second World War, manufacture of machinery and equipment gradually grew into the most important branch of industry. Since the mid-1990s, manufacture of electronic and electrical equipment has become the most important industry in terms of value added. A large proportion of the goods produced in Finland have been exported, hence economy world-wide and developments in it have greatly influenced Finnish industrial output.
In Finnish economic history, devaluations have had a significant role in boosting industrial output. Finland devalued its currency at least once in every decade from the 1930s to the 1990s. In today's circumstances of common currency and increasing globalisation of business, devaluation can no longer be used as an economic policy instrument.
Inquiries: Mr Kari Rautio, +358 9 1734 2479, Statistics Finland
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Last updated 15.5.2007