There are more than a hundred explanations for where long-term economic growth comes from (source: Hyytinen & Rouvinen, 2005, Mistä talouskasvu syntyy?). Growth and the resulting increase in wellbeing are indeed the sum of a broad spectrum of underlying factors.
A consensus has been reached on the key causes of growth, namely innovations. In this context, innovations mean the implementation of new ideas in the offering of goods and services.
Wellbeing is the product of the amount of work multiplied by its smartness, i.e. its productivity. Since 1900, the amount of work performed in Finland has dropped by 12% but its productivity has increased 16-fold (as calculated by Professor Matti Pohjola of Aalto University). In other words, long-term growth is generated by productivity. Not from increasing toil, but from offering new kinds of services and goods organised better than before and produced using new tools.
Innovation activities are driven by unit- and organisation-level incentives, sticks and carrots alike. The sticks are related to competition. Companies should be provided with an environment in which those who do not engage in innovation activities or do so inefficiently lose out to their better-performing peers. As carrots, the dissemination of the best ideas should be rewarded with plenty of money, reputation and glory.
Regulation of competition is already a challenge in itself. When we turn to incentives, the challenges are even greater. A new idea is a complex commodity: it is not worn down by use and, once shared, it cannot be taken from the recipient. From the citizens' viewpoint, too little information is therefore generated by the private sector alone. For this reason, all advanced societies have policies that intervene in the market for private intellectual property, from education all the way to monopolies granted on immaterial production factors. The toolkit of public decision-makers also includes aid for private innovation activities, in the form of either cash or tax relief.
The effectiveness of innovation aid is a subject of continuous debate – thousands of pages of high-quality research have been written on the effectiveness of Tekes alone. Final answers to this are rare because the question is a devilishly difficult one: where would the world be now if we had not intervened through innovation policy? Several approaches – and combinations of them in particular – bring us pretty close to the answer, but we cannot give a final, definitive reply to the question.
Finland's strategy? Innovation-driven growth. And from this point onwards. This is not my opinion, but an arithmetical fact. From the viewpoint of long-term growth, there is no plan B. We need to make the public finances sustainable and improve our labour force participation rate; however, taken separately, neither of these will serve as a motor for long-term growth, even though we need to fix them in order to maintain the institutions necessary to ensuring our growth.
Education and expertise are the soil from which innovations spring. But education is only the starting point. New ideas need to be applied in practice and must be suitable for the production of goods and services in order to have any kind of broader impact on growth.
Cuts have been made to public research and development funding during the current government term, and the focus of funding has been shifted towards basic research. Although the Government has opened new doors in this field, there is a risk that the bottom line for the current Government term will remain negative.
On the whole, it is difficult to see how the Government is contributing to Finland's growth potential in the long run, at least if the radical restructuring and renewal of the Finnish labour market does not succeed.
In fact, it is unclear whether our Government has a long-term growth strategy at all.
Research Director at Research Institute of the Finnish Economy (ETLA), CEO at Etlatieto Oy