Economic Prosperity Recaptured: The Finnish Path from Crisis to Rapid Growth (review)

Finland is a late industrialized country that transformed itself during the twentieth century from a poor economy based on primary production to a modern welfare state where cutting-edge telecommunications appliances are produced. Economic history teaches us that growth is not necessarily a smooth process but that it can be subject to periods of rapid acceleration and deceleration. Seppo Honkapohja, Erkki A. Koskela, Willi Leibfritz, and Roope Uusitalo look in Economic Prosperity Recaptured at the—quite exciting—past two decades of Finnish economic development that exhibits an economic performance going from overheating via bust to regained growth.

Economic Prosperity Recaptured is made up of seven chapters. The introductory chapter sets the stage for Chapter 2, which describes the early 1990s' economic crisis and which also contains an econometric analysis of finance constraints' impact on consumption and investment. In Chapter 3 the macroeconomic policies before and during the crisis and in the upswing are observed. That is, monetary, exchange-rate, fiscal, and wage policies are scrutinized with respect to their impact on the macroeconomic performance. Starting from Chapter 4, the focus shifts to the acceleration of economic growth that commenced after the recession. Part of this recovery was due to normal business cycle dynamics and partly it was induced by a speedy restructuring of the economy, both of which contributed to a fast productivity growth. In Chapter 5 the importance of human capital is highlighted as one of the main drivers of productivity growth; albeit difficult to exactly quantify. Chapter 6 looks at the new economy in Finland. The bulk of the increase in research and development (R&D) expenditure as well as the ICT (information and communication technology) revolution can largely be explained by the Nokia phenomenon. Finally, Chapter 7 addresses the remaining policy challenges. This is done also in a comparative perspective in order to provide recommendations for other countries.

Professors Honkapohja and Koskela are two of the most prominent active Finnish economists. In writing this book, they have joined forces with Willi Leibfritz, who formerly worked with the OECD, and Roope Uusitalo, who is a research director. The authors do a convincing and competent job in describing blow by blow the very volatile recent Finnish economic development and the reasons for it. Finland is a small country that since the mid-1980s has felt the pros and cons of globalization after deregulation and a liberalization of the financial systems. The early 1990s recession is explained to be the unfortunate combination of "bad luck and bad policies." The authors attribute the recovery to better economic policy, the ICT revolution, and successful internationalization. Here is a lesson to be learned for other countries, that is, to ensure that they combine their financial deregulation with a mix of adequate micro- and macroeconomic policies. The authors highlight the other key lesson from the Finnish experience to be that policymakers must not try to hinder the continuous (and sometimes painful) structural changes that are necessary for long-term economic growth.

I would have wished that the authors said a few more words on the science and technology policy consistently pursued by the government since the 1990s. They do mention TEKES, the National Technology Agency, as an important supporter of Nokia's R&D in the late 1980s and early 1990s. But the shift of technology policy toward the innovation process as well as focusing on competitiveness and networking has played an important role together with education policy (with free education for all citizens up to and including PhD degrees). It is clear that the main reasons for Nokia's success are internal to the company, as the authors rightly point out. Another aspect the authors could have discussed is the future of the so-called "Nordic model," i.e., how the welfare state can survive the challenges of globalization.

All in all, I found Economic Prosperity...