13 Economic Crisis of the 1990S: What Happened to Regional Convergence and Inequality, and Housing Market Phenomena in Boom and Bust?
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VATT-JULKAISUJA 27:6 VATT PUBLICATIONS 1990s Economic Crisis The Research Programme on the Economic Crisis of the 1990s in Finland: Down from the heavens, Up from the ashes The Finnish economic crisis of the 1990s in the light of economic and social research Edited by Jorma Kalela Jaakko Kiander Ullamaija Kivikuru Heikki A. Loikkanen Jussi Simpura VALTION TALOUDELLINEN TUTKIMUSKESKUS Government Institute for Economic Research Helsinki 2001 ISBN 951-561-381-7 ISSN 0788-4990 Valtion taloudellinen tutkimuskeskus Government Institute for Economic Research Hämeentie 3, FIN-00530 Helsinki, Finland Email: [email protected] Cover: Markku Böök Gummerus Kirjapaino Oy Helsinki, October 2001 Contents Preface 1 1. Introduction 3 I Economic and social policies and the crisis 23 2. Finnish Economic Crises in the 20th Century 25 Sakari Heikkinen and Antti Kuusterä 3. The Economic Crisis of the 1990s in Finland 52 Seppo Honkapohja and Erkki Koskela 4. Did the Crisis Change the Welfare State in Finland? 102 Heikki Lehtonen, Simo Aho, Jarmo Peltola and Mika Renvall 5. The Survival of the Finnish Health Care and Social Service System During the Economic Depression of the 1990s 130 Jussi Simpura, Peter Blomster, Matti Heikkilä, Unto Häkkinen, Mikko Kautto, Ilmo Keskimäki, Juhani Lehto, Merja Rastas, Pekka Rissanen and Hannu Valtonen 6. Politics displaced, politics replaced, Elites’ and citizens’ talk on the economic crisis 168 Minna Aslama, Anu Kantola, Ullamaija Kivikuru and Sanna Valtonen 7. Bridging the Gap: Financing of Social Policy in Finland, 1990 - 1998 189 Juho Saari II Labour Market 215 8. Employment and output growth in the 1990s 217 Jaakko Pehkonen and Aki Kangasharju 9. The internationalisation of Finnish economy and labour market adjustment - An analysis using Finnish employer-employee data for the years 1988 – 1996 229 Marko Tuomiaro 10. Unemployment and Early Retirements of the Finnish Aged Workers in 1989 – 1996 249 Pasi Huovinen and Hannu Piekkola 11. Evolution of inequality in the Finnish labour market, 1988 – 1996 277 Tomi Kyyrä III Income Distribution and Poverty 307 12. On the Social History of Unemployment and Poverty in Finland 1860 – 2000 309 Antti Häkkinen and Jarmo Peltola 13. Economic Crisis of the 1990s: What happened to regional convergence and inequality, and housing market phenomena in boom and bust? 346 Aki Kangasharju, Seppo Laakso, Heikki A. Loikkanen, Marja Riihelä and Risto Sullström 14. Income Inequality in Finland during the 1990s 385 Marja Riihelä, Risto Sullström, Ilpo Suoniemi and Matti Tuomala 15. Multidimensional Poverty in the Aftermath of the Recession: Finland in 1995 and 2000 411 Veli-Matti Ritakallio 16. Mediated Economic Reality or Aching Spots of Civic Society? Finnish Mainstream Media Publicity of Welfare Disparities 1988 – 1998 433 Minna Aslama, Ullamaija Kivikuru, Inka Moring, Tuija Parikka and Sanna Valtonen IV Survival strategies of Groups and Individuals 465 17. Individual Survival 467 Liisa Lampela-Kivistö, Hannu Sorri and Jouko Kiiski 18. Perceived Job Insecurity among Finnish Employees in 1990 – 2000: Prevalence and Antecedents 484 Jouko Nätti, Ulla Kinnunen, Mika Happonen, Saija Mauno and Marjukka Sallinen 19. The Labour Market Participation of Immigrants in Finland during the 1990s Recession 507 Kathleen Valtonen 20. Ethics and Changing Incentives, Social-ethical model for examining changes in the Finnish incentive system during the economic crisis of the 1990s 526 Liisa Mäkelä Preface The Finnish economic crisis of the 1990's was much more severe than ever expected. The collapse of the GDP in1991 - 1993 was about 12 percent. It was four times bigger than the collapse in Finland during the Great Depression of the 1930's. The unemployment rate rose from 3.5 percent in 1990 to 18.4 percent in 1994. The motivation to do economic and social science research on these phenomena is certainly very strong. The Board of the Academy of Finland decided in 1997 to organise a research programme on the economic crisis of the 1990's in Finland. The Research Council for Culture and Society organised the planning of the programme and launched this multidisciplinary three-year programme in 1998. The idea was that the Academy of Finland being a central science policy actor must take the economic crisis into the focus of social science research. The main aim of the programme was to boost research on the economic crisis on a broad basis. The events, causes, and consequences of the crisis were to be taken into consideration. It was hoped that the research work could indicate if the crisis has left some permanent traces into the society or if the shadow of the recession has already disappeared. Especially valuable would be results showing us what the lessons to be learned from the crisis were. Through these the findings of the research programme could be used in the economic and social decision making of the society. The programme was the largest social science research programme funded by the Academy of Finland up to the time the programme started. The number of research projects accepted to the programme was 25, and the budget allocated was FIM 25 million (4.2 million euros). The Government Institute for Economic Research was chosen to co-ordinate the programme. The institute appointed Dr. Jaakko Kiander to be the programme co-ordinator. The Research Council nominated the steering group of the programme. Members of the group from the year1998 were professor Paavo Okko (chairman), professor Risto Alapuro, director general Martti Hetemäki, professor Marjatta Hietala, and professor Hannu Uusitalo. Dr. Kaija Heikkinen has been a member of the group during the current year. The research work done under the programme has been extensive and successful. Research teams have published a large number of publications on different forums. Many scientific conferences have been arranged. We are convinced that this investment into the research work has been productive. The economic crisis of the 1990's is a special research object for the Finnish economic and social sciences. They must know the phenomenon very well. Otherwise they could not serve the society in a proper way. The Finnish crisis is interesting also from the international point of view. This publication is the final 2 report of the programme. It is not covering all the work done, but it contains central reports from different fields of the work. It gives an overview and a collection of results at the same time. On behalf of the Research Council for Culture and Society I have a great pleasure to express our gratitude to project leaders, to researchers, and to the people otherwise promoting the programme. We are especially grateful to the editors of the final report, which shows unconditionally how successful the programme was. Helsinki, October 8, 2001 Paavo Okko Chairman of the steering group 3 1 Introduction Jorma Kalela, University of Turku, [email protected] Jaakko Kiander, Government Institute for Economic Research, [email protected] Ullamaija Kivikuru, University of Helsinki, [email protected] Heikki A. Loikkanen, University of Helsinki, [email protected] Jussi Simpura, National Research and Development Centre for Welfare and Health (Stakes), [email protected] 1.1 An introduction to the economic crisis of the 1990s Finland experienced an exceptionally deep and long economic crisis during the first half of the 1990s. Within four years, output was reduced by more than 10 percent and the unemployment rate quadrupled to almost 17 percent. The economic crisis lowered standard of living at household level for many years, led to bankruptcies in firms and to a large scale banking crisis and finally caused severe public finance problems which endangered the existence of the Nordic welfare state model in Finland. In a way, Finland fell down from the heavens – from the booming economy of the 1980s and the heyday of the Finnish version of the Nordic welfare state. This volume aims to tell why such a change took place and how the economic and social policies reacted to the crisis. Since 1994 the Finnish economy started to recover from the recession. The Finland was raised up from the ashes. However, in spite of the recovery, the country was not the same than in 1990. Persistent unemployment and widening inequality were new problems. The articles of this volume address them, too. In the 1980's Finland was known as one of the small and rich Nordic countries with advanced welfare systems and corporatist labour markets. Finland, Sweden and Norway along with Austria and Switzerland seemed to be immune to the rise of unemployment and related social problems experienced in the other Western European countries at the same time. In the 1970s and 1980s the unemployment rates rose almost continuously in the member countries of the EEC while unemployment in these EFTA countries fluctuated between 2 and 6 percent without any serious upward trend. However, starting from the end of the 1980s all the Nordic countries – not only Finland – faced an economic crisis. The Finnish crisis turned out be the worst. While all industrial countries suffered from severe recessions in the end of the 1980s and the beginning of 4 the 1990s, it was only in Finland and Sweden where the recession was severe enough to be called a crisis or even a depression. In Finland the recession of the early 1990s was clearly the worst peace time crisis experienced in the 20th century. Output fell by more than 10 percent and unemployment climbed up to almost 20 percent, far higher than in the depths of the great depression of the 1930s. What were the crucial factors that caused the recessions? In Finland it has become common to say that the crisis was caused by “bad banking, bad luck and bad policy”. Issues of banking and policy will be dealt with in detail below.