Quick Facts
Population:
GDP (PPP):
- $179.6 billion
- -7.8% growth
- 0.6% 5-year compound annual growth
- $33,556 per capita
Unemployment:
Inflation (CPI):
FDI Inflow:
Finland’s economic freedom score is 74, making its economy the 17th freest in the 2011 Index. Its score is 0.2 point better than last year, with improvements in monetary and investment freedom undermined by a growth in government spending. Finland is ranked 8th out of 43 countries in the Europe region, and its overall score is well above the world average.
The strong competitiveness of Finland’s economy is built on flexibility and openness. The economy is a world leader in several of the 10 economic freedoms, including business freedom, property rights, and freedom from corruption. The regulatory environment encourages entrepreneurial activity and innovation. Commercial operations are handled with transparency and speed, and corruption is perceived as almost nonexistent.
As in many other European social democracies, however, high government spending continues to support an extensive welfare state. In addition, restrictive labor regulations undermine employment and productivity growth.
Background
Though culturally and economically inclined toward the West, Finland struggled during much of the post–World War II period to manage its relationship with the Soviet Union. Finland became a member of NATO’s Partnership for Peace program in 1994 but has not pursued full NATO membership because of its neutral military status. Finland joined the European Union in 1995 and adopted the euro as its currency in 1999. It is sparsely populated, with about one-fourth of its land mass above the Arctic Circle, but boasts a modern and competitive economy with vibrant information and communications technology sectors. Previously robust economic growth slowed in 2009, and Finland was hit particularly hard by the global recession as demand for its mainly capital goods–intensive exports collapsed. Finland, like many other European nations, faces demographic challenges in the form of an aging population and shrinking workforce, which threaten future growth and the ability to maintain generous social spending programs.
A modern regulatory environment strongly facilitates business formation, dynamism, and competition. The efficient business framework is conducive to innovation and productivity growth.
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Finland’s trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 1.2 percent in 2009. However, the EU has high or escalating tariffs for agricultural and manufacturing products, and its MFN tariff code is complex. Non-tariff barriers reflected in EU and Finnish policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members. Ten points were deducted from Finland’s trade freedom score to account for non-tariff barriers.
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Finland has moderate tax rates but a relatively high level of overall taxation. The top income tax rate is 30.5 percent, with municipal rates between 16.5 percent and 20 percent and a church tax between 1 percent and 2 percent. The top corporate tax rate is 26 percent. Other taxes include a value-added tax (VAT) raised in July 2010, an inheritance tax, and a flat 28 percent tax on capital income. In the most recent year, overall tax revenue as a percentage of GDP was 43.2 percent.
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Total government expenditures, including consumption and transfer payments, are high. Finland‘s discretionary stimulus package was one of the region’s highest. In the most recent year, government spending increased to 49.5 percent of GDP, driving the fiscal deficit to nearly 4 percent of GDP. State ownership of productive assets is considerable.
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Finland uses the euro as its currency. Between 2007 and 2009, Finland’s weighted average annual rate of inflation was 2.2 percent. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also imposes artificially low prices on pharmaceutical products. Ten points were deducted from Finland’s monetary freedom score to account for measures that distort domestic prices.
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Finland is open to foreign direct investment. Foreign acquisitions of large companies may require follow-up clearance from the government. Regulation is relatively transparent and efficient. There are no exchange controls and no restrictions on current transfers or repatriation of profits, and residents and non-residents may hold foreign exchange accounts. Property may not be expropriated without compensation. Restrictions on the purchase of land apply only to non-residents purchasing land in the Aaland Islands.
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Finland’s sophisticated financial system provides a wide range of services, guided by sound regulations and prudent lending practices. Mergers and acquisitions have made banking more international and competitive. Efficiency and capital adequacy remain sound. There are more than 300 domestic banks, but three bank groups (Nordea, OP Pohjola Group, and the Sampo Group) dominate the system. The government retains an ownership share in the Sampo Group. Banking is open to foreign competition, and about 60 percent of assets are foreign-owned. Capital markets determine interest rates, and credit is available to nationals and foreigners. The stock exchange is part of a Baltic–Nordic exchange network. Merger of the Financial Supervision Authority and Insurance Supervisory Authority came into force in January 2009. The impact of the global financial turmoil has been relatively mild.
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Property rights are well protected, and contractual agreements are strictly honored. The quality of the judiciary and civil service is generally high. Expropriation is unlikely. Finland adheres to numerous international agreements concerning the protection of intellectual property.
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Corruption is perceived as almost nonexistent. Finland is tied for 6th place out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. Finland is a signatory to the OECD Anti-Bribery Convention. The Council of Europe’s Group of States Against Corruption has recommended that Finland sharpen its control of political financing and increase the transparency of donations to political parties and election candidates.
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High costs and burdensome regulations characterize the labor market. The non-salary cost of employing a worker is high, and the severance payment system remains costly. Long-term structural unemployment remains significant.
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