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April 19, 2009


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The paper is interesting, but I don't think that the authors have really managed to make their case.

As they state in the introduction, the decline of the Finnish-Soviet trade was gradual. Yet somehow, they don't seem to regard this as an important factor, and instead argue that the "collapse of Soviet trade was largely unanticipated".

The fact is that the bilateral trade had taken a dive already in 1986. Anyone who actually lived through that period and followed the television news remembers the reports of the chronic difficulties in the Eastern market.

The Finnish shipyard industry, which they cite as one example in the footnote, was in dire straits already before the ultimate crash of the Soviet market. Wärtsilä was on the ropes in 1987, and went bankrupt in 1989. The company that was founded on the ruins was very nearly devoured by the new generation of Finnish corporate raiders.

The usually-cited reason was that the Finnish shipbuilding industry simply could no longer compete with South Korean and Japanese shipyards. The shipyard crisis was universal all across Europe for that same exact reason. True enough, the perceived security of the Soviet market had delayed the effects of the crisis on Finland; but on the other hand, Sweden also managed to delay the inevitable by their questionable policy of massive government subsidies. In the end, Kockums wasn't closed until 1986.

There are good parts in the study, of course. No one denies that the final collapse of the Soviet trade did have an impact, and yes, trade shocks are usually responsible for some contraction in the economy. But I don't really see them offering any good comparative analysis explaining why the collapse of the Eastern market should be regarded as the major, let alone primary cause for the Depression of the '90s.

There were a number of other reasons, and the Banking Crisis, at least, had clearly domestic roots. As I've already said before, and as those other papers also point out, the Finnish banks had played an active part in the late-'80s "casino economy" of risk investments, takeovers and gambling, extending credit more or less on a whim. The end result was that by 1989, inflation was running wild in the aftermath of easy money, the banks had run into trouble and the loose credit had tied the companies and households to the bondage of debt. The results were what one would expect in such a situation; the movement of money stopped, business ground to a halt and the first wave of bankruptcies led to the loss of workplaces in the private sector, contributing to the rising unemployment.

And at that moment, the Eastern market crashed. At most, it just aggravated an already-desperate situation. The overvalued currency didn't exactly help the matters, although the stop-gap devaluation in 1991 wasn't exactly pleasant medicine, either - but on the other hand, at least it did managed to kick-start the export industries once again. Still, by that time, the high unemployment had become a permanent feature.

Finally, the treatment of the Banking Crisis was the major reason why it was impossible for the government to support economic recovery by public spending (for argument's sake, we can leave aside the possibility of the government eschewing such a solution for ideological reasons). The fact is that the support measures that were commenced to save the Finnish banks in 1992 swallowed 18% of the GNP, which was entirely comparable to the burden that the war reparations to the USSR had placed on Finland. In such a situation, far-reaching additional stimulus packages to the economy were considered too much of a luxury. The revenue was decreasing, the national debt was rising, and "spending" had become a swear-word.

So, yes, for some parts, it was probably a coincidence, with separate domestic and international developments morphing into one phenomenon. As for the responsibility... well, to use your own analogy, you can argue over which traffic crash actually caused most of the injuries, but the fact still is that back in the 1980s, Finland had definitely made a conscious decision to drive without a helmet. And possibly also on the wrong side of the road. Drunk.

The Finnish Depression of the '90s was a complex story. You can see the elements of the Finnish experience in the present-day troubles in Iceland, the Baltic States and even in the United States. Also, those same experiences in the '90s are probably one of the reasons why Finland isn't on the facilis descensus Averni right now. Strange as it may sound, sometimes people actually do something from their mistakes.


J. J.

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