Speech by the President of the Republic of Finland




Translation


SPEECH BY PRESIDENT MARTTI AHTISAARI AT THE AUTUMN MEETING OF THE FEDERATION OF FINNISH COMMERCE AND TRADE, 24.11.1999


The Challenges of the New Millennium for Finnish Enterprises


Looking to the near future, the turn of the millennium is taking place in economically favourable conditions for us. Domestic economic development is brisk and continues to strengthen. Economic and monetary union has produced the monetary stability which was expected of it. Prices have remained stable. The state economy has improved. Unemployment has fallen sharply, though it is still at a high level.

Causes for concern include the still difficult position of many victims of the economic slump, wage development, the housing market situation and migration. Excesses in wage formation and banks' lending could stop the favourable development of the economy. There is reason to believe that this will not happen, however. External risks mainly concern economic development in Japan and the United States.

Experience of the functioning of economic and monetary union is still quite short and we can only draw tentative conclusions. It can be noted, however, that EMU has brought monetary stability and kept inflation expectations low. There is every reason to believe that this situation will continue. A stable monetary environment and stable prices benefit enterprises. This should encourage long-term investment decisions.

The labour market and wage formation

EMU will provide a new framework for the functioning of the labour market and wage formation. Since a rise in wage costs cannot be passed on to prices, excessive wage increases will force enterprises to adjust their operations, which most often means reducing personnel. If excesses take place on the wage side, the loss will be long-term, since there will be no possibility to correct the error by means of devaluation.

The challenges for the enlargement of the European Union

The enlargement of the European Union to include countries in Central and Eastern Europe is no easy task. It involves considerable costs. But the potential economic benefits are also great. The prospect of EU membership supports applicant countries' political and economic stability. Stability is a prerequisite for fast economic growth in those countries. In this way the applicant countries will draw closer to the member states, although it will take a long time before economic prosperity rises to the same level.

The applicant countries' rapid economic growth signifies bigger markets for enterprises in the EU and will therefore support growth in the EU countries. This is not a question of sharing some existing cake, but of a rapidly expanding cake which has plenty for everyone to share.

The integration of Central and Eastern Europe will change the structure of Europe's foreign trade, although this change will take time. This is understandable, since for historical reasons the structure of trade is unnatural and far from relative advantages. The former socialist countries' trade flows were directed to the Soviet Union and trade between neighbours remained small. In a similar way the EU countries' trade with neighbouring socialist countries was smaller than it could have been on the basis of a market economy and free trade.

Now trade flows are gradually seeking some kind of "natural" balance. In the case of the EU countries this means and has already meant that some products are no longer produced here but in applicant countries, where prices are lower. This is a precondition for these countries to become more prosperous and ready for membership.

Challenges in the Baltic region

The Baltic region is a good example of how political history has shaped foreign trade and the quantity and quality of economic relations between the countries in the region. Trade between the Nordic and Baltic countries as well as trade among the Baltic countries themselves was quite limited during the socialist period. Now the structure of trade has changed substantially in just a short time.

The progress of the Baltic countries and Poland towards EU membership will create preconditions for the rapid expansion of trade and other economic relations between the countries in the Baltic region. Business is internationalizing and forming chains in service fields as well. It is easier to form chains between neighbouring countries than between countries which are far apart. In the Baltic region we can increasingly expect to see the same logos and service concepts in a larger area in many sectors, such as retailing, the hotel and restaurant field, and banking and insurance.

The President's Working Group on Employment

When I assumed my present office, I felt a duty to tackle the unemployment problem. Since the President's means of influencing economic policy are limited, I wanted to formulate a programme of goals, which those with actual responsibility for economic policy could then set about implementing.

In June 1994 I appointed a working group under the chairmanship of Matti Pekkanen and with a membership comprising influential figures from the economic sector and society in general. The working group explored obstacles in the way of permanently lowering employment, collected studies and proposals drafted by experts and presented clear recommendations for measures that would effectively reduce unemployment. It took only three months to produce its final report.

The Pekkanen working group outlined a strategy and measures that would reduce unemployment to 200,000 by the turn of the millennium, but the terms were tough. Unemployment was at its worst in autumn 1994 and the policies proposed by the working group aroused distrust. In the view of the working group, growth in aggregate output at an annual average rate of 5% up to the year 2000 was a central prerequisite for lowering unemployment. Special measures to boost demand for personnel and strengthen the functioning of the labour market would likewise be required.

The growth called for by the working group was generally considered unrealistic, but we are not falling very far short of the goal. In 1995-1998 aggregate output has been growing at about 5% a year. Without such rapid economic growth, the improvement in employment would have been substantially slower. According to the latest statistics the jobless rate is 9.5% and 237,000 people are out of work.

The measures proposed by the working group and the goals set for economic development have already been achieved astonishingly well. We must not, however, allow ourselves to be lulled into complacency, even though it appears that solid growth will continue in the foreseeable future.

Challenges facing enterprises

Globalization in its different forms blurs distinctions between present branches and expands geographical markets. Globalization signifies the disassociation of economics, technology and culture from national control into independent variables which have worldwide effects. Enterprises will establish operations where it is most profitable economically, regardless of national borders. This development poses a demanding challenge for nation-states. They have no alternative but to adjust increasingly to bilateral and multilateral cooperation. The most important task of nation-states is to ensure a predictable and stable operating environment for enterprises on global markets.

Globalization also signifies growing demands for small and medium-sized enterprises. They must be able to supply goods and services on a broader scale and in a larger geographical area. Meanwhile competition on traditional domestic markets is intensifying. Small and medium-sized enterprises must learn to operate flexibly in internationalizing markets. By networking and cooperating with one another they can develop new strengths and turn threats into success.

The EU offers Finnish enterprises large and stable markets. The free movement of goods, services, capital and people is a competitive edge in which Europe still lags too far behind its competitors. The shift to a common currency in the euro zone will improve the comparability of goods and services, reduce enterprises' costs and enhance the functioning of the single market. Particularly trade in services between the EU countries could grow substantially. At present this trade only concerns part of financial, insurance and corporate services.

The EU accounts for a large portion of our foreign trade, but other areas should not be forgotten. The Asian, Latin American, NAFTA and Russian markets offer enterprises significant opportunities in the future. Russia has enormous natural resources and a large and educated population. A socially stable, democratic Russia with prosperous citizens and a healthy and sustainable economy is in the interest of Finland and Finnish enterprises.

Finnish enterprises still spring from the Finnish soil and environment. The domestic operating environment and business policy must be in order so that our enterprises can succeed in the world. Our business policy must be constantly reshaped to respond to changing circumstances - we must avoid self-complacency. The state should encourage enterprises to internationalize and should support export promotion work.

In addition to other challenges we must also remember the ageing of the population. It appears that this question has not yet received the attention it deserves. This may be because the greatest effects of ageing will only be visible a few decades from now, although development can already be calculated with amazing precision.

The problem of ageing is in fact due to two factors: the lengthening of average life expectancy and the drop in the birth rate. Their effects are cumulative. In 2030 Finland will have about two million persons over the age of 55, which is 50% more than today. The situation is similar in many other industrialized countries, such as Germany. As a result of this change, pension costs and social welfare and health costs will rise while the number of working-age taxpayers will decline. This equation will be difficult to resolve.

This does not mean that an ageing population should be viewed as a problem. On the contrary, it is a great challenge and opportunity to develop a nation with more life experience than ever before. Adapting to change will require the renewal of our society, however.

The change on markets will also be enormous. Change in the structure of demand and growth in the wealth of elderly persons will create plenty of new business opportunities especially in social welfare and health services. This applies to low- and high-tech fields alike. High-tech products which can be used effectively to monitor and prevent illnesses related to ageing have already appeared on the market. As a result of the drop in births, the supply of labour will decline in 10-20 years. Unemployment may be replaced by a shortage of labour.

Enterprises' operating environment is changing. Change creates new threats and challenges, but it also offers new opportunities. The need for renewal will continue in the new millennium as well.