North European example of reasonable transformation

Recently a renowned Finnish economist, Principal Adviser of the Bank of Finland Pekka SUTELA came to Kyiv on the invitation of the Kyiv School of Economics with the assistance of the Embassy of Finland to Ukraine. He delivered a lecture before the students of the Kyiv School of Economics on the topic “Europe after the crisis,” in which he revealed some secrets of the Finnish economic miracle, modern trends in job migration and the aging of nations. He also answered the questions of Den/The Day which is a traditional presence at the open lectures of the Kyiv School of Economics.

Mr. Sutela, how can the results of your research be useful for Ukraine?

“On the whole, the topic of my report may help to place one’s behavior in present-day economic realities. For the crisis is over. So, one should try not to miss the opportunity to restore the economy.

“In Ukraine, with an account of the historical heritage of the Soviet Union, there are serious mistakes in the institutional and economic policies. So, the result of its transformation is the ill-functioning economy with underdeveloped competitiveness, a bloated bureaucratic apparatus, total corruption, and lawlessness. However, the present-day Ukrainian economy is much more efficient than the Soviet one. Over the past two decades the service sector has been developing rapidly; as a result previously inaccessible services appeared and many new jobs were created. The real source of economic growth in the past years was reorientation of money and labor resources from inefficient branches of heavy industry, which produced things that people did not need, to more productive manufacturing industry and modern services.

“This structural change is one of the aspects of what economists call catching up with or imitation, repeating of experience. An ill-functioning economy with low efficiency and incomes may show rapid growth, simply using the products, technologies, procedures, and structures which have already been developed, implemented and checked in more advanced economic systems with higher indexes of productiveness and incomes. Japan and Korea went this way several decades ago, with great success. They started to apply Western production technologies and started to produce Western products at lower costs. Only much later did they begin to acquire technological experience needed for their own innovations, and switched to more high-tech kinds of export production. Not so long ago China also moved from imitation to innovation, proof of which is the increased expenses on research and the number of international patent applications.”

Incidentally, in what concerns China, in your report you spoke about the process of migration of industrial zones from Europe to Asia. What is your forecast: what impact will such transformations have on Europe? Should we expect migration of world economic centers together with the industrial zones?

“I don’t think so. The fact that developed European states bring their production capacities beyond their borders with increasing frequency, specifically, establish their offices, or sometimes whole companies in the East, does not mean that financial, banking, and scientific centers will move as well. In particular, China has always been a dynamic state, which has always worked hard. Yet the main engineering and scientific achievements have always been a prerogative of high-developed European states and the US.”

In Ukraine it is difficult to find a job for people who have reached the age of 45-50. Is there a similar problem in Finland? Please, share your experience on how to resolve this problem, specifically on the state level.

“Surely, this is a problem for Europe in general. In Finland it is almost unreal to find a new decent job for a person who is 50-55. And the state, in principle, does not have any levers of influence on this process. This is up to each person. People should care for their own competitiveness on the job market, even at such a mature age.”

Current Ukrainian-Russian cooperation is assessed in an ambiguous way by our society. Whereas some people note the importance of our cooperation with the RF, others state that there is a risk of surrendering national interests. From the experience of Russian-Finnish relations, is there a happy middle between these two stands?

“On the whole this kind of economic cooperation on establishing joint enterprises is advantageous, with the condition that partners are equal. For example, a quarter of the Finnish gas-transporting system is owned by the Gazprom. This is useful for Russians, as it offers an opportunity to study the Finnish market. It is also useful for us, because we receive information about the gas market on the whole. At the same time, Finland will never give 50 percent of its gas-transporting system to the Gazprom.”

What is your assessment of the economic reforms being carried out by Ukraine nowadays, specifically the tax reform?

“Many countries wanted to simplify their tax codes. But this turns out to be a hard thing to do. No country can create a perfect tax code, because there are always unsatisfied lobbyists, who will launch a campaign against the code.

“However, in my opinion, Ukraine’s main problem is not in whether its tax code will be better or worse than the foreign ones. Your main problems are caused by corruption and poor protection of private property. This is what prevents foreign companies from coming to Ukraine. But when Ukraine improves its investment climate and becomes more transparent, it will have a positive effect on its image.

“I can give you a Finnish-Russian example: when you ask Finnish entrepreneurs, why they don’t want to work in Russia, they mention the high level of corruption. Our businessmen are afraid that Russian corruption will destroy the Finnish companies as well.”

While the drafting of the Ukrainian Tax Code was underway some Russian experts noted that under the new tax situation, there is a possibility that Russian business would come to Ukraine en masse. That we will have a better investment climate than Russia. Do you believe in such possibility?

“Well, if Ukraine wants to involve the Russian business, it should adjust to its conditions, if the European one — correspondingly, the legislation should be adjusted to the EU.

“But Ukraine does not have such a vast domestic market as Russia. That is why it should itself produce goods, which would interest other markets too. So, you should use your advantageous geographical location, between Russia and the EU. Counting on other economic advantages, like low cost of labor etc., won’t be of any result. Ukraine cannot compete with China, Vietnam, or Indonesia in this.

“Other potential trumps are agriculture and metallurgy. Using them, your country will catch up with the level before 2008 — recovery from the crisis will be rapid. But as that level was not very high, a question arises: where will Ukraine go next? It is hard to guess what advantages it will have in the future. That is why the main attention should be focused on innovations.

“The example of the Finnish company Nokia is pretty good in this regard. In its time, because society was not very wealthy, Finland oriented its economy not at its domestic, but at foreign markets, using innovative products.”

According to your estimations, how real are Ukraine’s ambitions voiced by President Viktor Yanukovych in the State Program of Economic Development, i.e., to become one of the twenty best developed states of the world?

“Everyone needs ambitious goals, especially a state. However, as for realization of these statements, there are hardly any grounds that it is possible.

“However, there are no impossible things, if one works purposefully on reaching the goal set. First thing at which Ukraine should focus its attention is liquidation of corruption, reforming the main sectors of the economy, science and education.

“Not long ago Finland was a poor state. Now we have high economic indexes, and good social standards. All this is owing to the reasonable state economic policy and persistent work.”