Finnish Economic and Industrial Growth – 1920 to 1939

How and why did the Finnish government create an environment favorable to the growth of large industrial concerns which resulted in rapid ongoing economic growth through the 1920’s and the 1930’s? That they did, and that the economic and financial ramifications were many and varied, is now well known and an interesting case study. Less well known is the effects this growth had on Finland’s ability mount a strong defence against the USSR in 1939. As a preliminary to covering the strengthening of Finland’s defence forces, we will first look at Finnish economic and industrial growth through the 1920’s and 30’s. 

Although small in population, Finland rapidly developed into a modern European industrial state during the interwar period. This accomplishment was exceptional among the new nations that had gained sovereignty after World War I. Why did Finland succeed where others failed? Historians have long pointed out that Finland had already created independent legal and bureaucratic institutions by the 19th century. Finland was also able to build a relatively strong national identity under Russian rule and by the time of the Bolshevik Revolution, was politically, socially and culturally independent and ready to set herself free from the Russian empire.

Very briefly summarized  the Finnish government integrated private and state owned enterprises, as well as multinational enterprises, into a process that unified the nation and transformed Finland from an agricultural in to a modern industrial state.The core of this process was a public policy deeply influenced by nationalism. Hence, we will also argue that nationalism played a far greater role in the creation of modern Finland than previously thought. Finnish Nationalism encouraged the Government to create large state owned enterprises and to support and guide the growth of Finnish businesses, to allow foreign high technology enterprises to selectively invade Finnish markets, to find a new type of industrial entrepreneur, the “patriotic manager” and finally, Finnish Nationalism combined with ongoing economic growth gave Finland both the incentive and the means to develop the military strength to adequately defend herself.

Finnish Economic and Industrial Growth Accelerates between 1800-1920

In the 1800’s, Finland was an agrarian country, despite climatic conditions that were not suited to efficient grain growing. Seventy percent of the population was engaged in agriculture and forestry, and half the country’s income came from these primary industries in 1900. Only in the nineteenth century did slash and burn cultivation give way to permanent farming, even in the eastern parts of the country. Where agriculture was practiced  it was generally based on large estates with a work force consisting of tenant farmers and itinerant farm workers, with a great deal of poverty (common across Europe in that period).

Industrialization had begun as early as the seventeenth century when some small iron works were first founded in the southwestern part of the country to process Swedish iron ore. Significant tar burning, saw milling and fur trading also brought cash with which to buy a few imported items such as salt, and some luxuries – coffee, sugar, wines and fine cloths. The small towns in the coastal areas flourished through the shipping of these items, although restrictive legislation in the eighteenth century required transport via Stockholm. The income from tar and timber shipping, Finland’s primary industries in the eighteenth century, served to accumulate capital for the first industrial plants.

The nineteenth century saw the modest beginnings of industrialization, far later than in Western Europe. The first modern cotton factories started up in the 1830’s and 1840’s, as did the first machine shops. The first steam machines were introduced in the cotton factories and the first rag paper machine in the 1840’s. The first steam sawmills started only in 1860. The first railroad shortened the traveling time from some inland towns to the coast in 1862, and the first telegraphs came at around the same time. Some new inventions, such as electrical power and the telephone, came into use early in the 1880’s, but generally the diffusion of new technology into everyday use took a long time.

The export of various industrial and artisan products to Russia from the 1840’s on, as well as the opening up of British markets to Finnish sawmill products in the 1860’s, were important triggers of further industrial development. From the 1870’s on pulp and paper from wood fiber, delivered to Russia, became major export items, and before World War I one-third of the demand of the vast Russian empire was satisfied with Finnish paper. Finland became a very open economy after the 1860’s and 1870’s, with an export share equaling one-fifth of GDP and an import share of one-fourth. A happy coincidence was the considerable improvement in the terms of trade (export prices/import prices) from the late 1860’s to 1900, when timber and other export prices improved in relation to the international prices of grain and industrial products.

Finland participated fully in the global economy of the first gold-standard era, importing much of its grain tariff-free and a lot of other foodstuffs. Half of the imports consisted of food, beverages and tobacco. Agriculture increasingly turned to dairy farming, as in Denmark, but with poorer results. The Finnish currency, the markka from 1865, was tied to gold in 1878 and the Finnish Senate borrowed money from Western banking houses in order to build railways and schools. GDP grew at a slightly accelerating average rate of 2.6 percent per annum, and GDP per capita rose 1.5 percent per year on average between 1860 and 1913. The population was also growing rapidly, and from two million in the 1860’s it reached three million on the eve of World War I. Prior to WWI, only about ten percent of the population lived in towns. The investment rate was a little over 10 percent of GDP between the 1860’s and 1913 and labor productivity was low compared to the leading nations. WW1 in particular was beneficial to the Finnish economy at first. Finns were not subject to conscription into the Russian military and Finnish exports to Russia boomed as a result of war spending.

The Collapse of the Market Structure

Finland industrialized during the last three decades of the 19th century. Lumbering in previously untouched forests and incipient development of hydro power made large scale production of timber, pulp and paper possible. The domination of Finland’s export market by forest industries is illustrated by the fact that wood, paper and pulp comprised more than 90% of Finnish exports in 1920 and over 80% as late as 1938.

Table1: Main export goods in 1920 and 1938 ( %)
Timber and wood products             56.4%   40.3%
Pulp and paper                               37.3%   41.5%
Forest products total:                 93.7%   81.8%
Other export goods total:           6.3%   18.2%

The wealth created by forest industries was broadly dispersed in Finnish society. It is often argued that Finnish society and its cultural heritage have been built on forests. The dominance of forests in Finnish culture is derived from age-old traditions. Historically forest land had not been owned by private companies, but rather by farmers, peasants and the state. Therefore, forest industries became dependent on farmers and land-owners

The movement of capital from the industrial to the agricultural sector

The agricultural sector in turn, supplied forest industries with raw materials and skilled as well as unskilled labor. Finnish sawmills and tar producers established business relations with European ship-building and construction industries by the 17th and 18th centuries. These associations proved valuable in the 19th century when rapid urban development in England and Germany opened new markets for wood products. Finnish sawmills and lumber companies eagerly supplied these new markets. Just prior to World War I, Finland was estimated to be the third largest timber exporting country in Europe. A sizable proportion of Finnish pulp and paper products were sold on the Russian markets. An estimated 80% of the total production of paper in Finland was “exported” to Russia before World War I. The word “export” is slightly misleading because the Russian markets were in fact domestic markets for Finnish paper makers.

Finnish paper was very popular in the large printing houses of St. Petersburg, Moscow, Kiev, Odessa and Minsk. Just before the war the Finns controlled about 30% of the Russian paper market. World War I, the October revolution and the Civil War in Russia changed the structure of the paper market entirely. In short, the Russian paper market closed when the Bolsheviks seized power. At the same time, World War I closed the export route of timber from Finland to European markets. The dramatic change in market structure is illustrated by the followingf igures: in 1910 about 27% of Finnish exports went to Russia and approximately the same share went to Great Britain; two decades later the tide had turned, Germany and Great Britain were the most important trading partners while only 0.5% of Finnish exports went to the Soviet Union.

The collapse of the Russian market was, of course, a terrible shock to the Finnish paper industry. Paper makers had to find business partners in western European markets. The loss of Russian markets also caused a decrease in the food supply in Finland. Russia had started to “export” inexpensive grain to Finlandi n the 19th century. Because of this, dairy-farming gradually replaced grain production, especially in the eastern part of Finland. By the dawn of this century, Finland was not self-sufficient in grain.When Lenin’s government cut off the grain supply in 1917, starvation and hunger plagued Finland for the first time since the years of the great famine of 1867-68.

A Nation Divided

“The people of Finland have by this step taken their fate in their own hands; a step both justified and demanded by present conditions. The people of Finland feel deeply that they cannot fulfill their national and international duty without complete sovereignty. The century-old desire for freedom awaits fulfillment now; Finland’s people step forward as a free nation among the other nations in the world.”

Hopes for Independence in Finland had been ignited by the February Revolution of 1917 in Russia, when Grand Duke Nicholas II abdicated. His abdication on March 15th was interpreted in Helsinki to signal the end of the legal basis for the personal union between the Grand Duchy of Finland and Russia. The October Revolution heightened those hopes, and on November 5th, the Finnish Parliament declared itself to be “the possessor of supreme State power” in Finland, basing the declaration on article 38 in the old Instrument of Government of 1772, which had been enacted by the Estates following the bloodless coup of King Gustav III of Sweden. 10 days later, on November 15th, the Bolsheviks declared a general right of self-determination, which included the right to secede, “for the Peoples of Russia”.

Parliament had appointed a new government in November, the Senate of Finland, and it returned on the 4th of December with a proposal for a new republican Instrument of Government. On December 6, 1917 the Finnish Senate declared Finland independent from the Russian Empire. The declaration of independence ended a century long relationship between the two nations and was a decision made rapidly in light of the Bolshevik seizure of power in St. Petersburg.

On December 18th, the new Soviet government issued a Decree which recognised Finland’s independence, and this was approved by the highest Soviet executive body, the VtsIK (All-Russian Central Executive Committee) on December 22nd. Finland was now recognised as an independent nation. The quick declaration of independence alarmed Finnish Socialists and Communists, who declared their solidarity with fighting comrades in Russia. Conservatives parties however, were determined to secure independence. As a result, political polarization escalated and a bloody and bitter civil war was fought during the spring of 1918.

As usually happens after a civil war, a nation is socially, politically and culturally divided. Finland proved to be no exception. Victorious Whites controlled society. Communists and socialists were imprisoned or forced into exile in Soviet Russia. This situation could not last long. The White government was very much aware of the fact that a divided nation was unable to resist the political and ideological pressures coming from the East. In addition, England, France and the United States delayed their recognition of Finnish independence as long as the political situation in the country remained unsettled.

New Economic And Political Policies

The White government took the first steps to unify the nation in the fall of 1918. Red prisoners were pardoned, concentration camps dissolved and moderate left-wing parties were granted political rights. Upheaval in the spring and summer of 1918 forced the government to take radical steps to improve the economic situation as best they could, but there was not much the government could do. Land reform was introduced which provided farming land to a politically unstable rural proletariat. Municipal governments were encouraged to start social housing projects and employers to improve working conditions in factories. But Russian paper markets were permanently dosed and the markets for timber exports remained closed as long as the war in Europe continued. The domestic situation was even worse. Many Factories had been partially demolished and a large number of workers had suffered from diseases and malnutrition in concentration camps. Deserted farms and uncultivated fields predicated more starvation and famine for the coming winter.

The Economy of the Interwar Years

The Russian Revolution of 1917 and Finland’s subsequent independence cut off Russian trade and devastated Finland’s economy. The food situation was particularly difficult as 60 percent of grain required had been imported from Russia. With Civil War in Russia, this source was no longer available and Finland was also largely cut off from trade with the rest of the world. The collapse of the Russian empire had however eliminated one of the largest producers of timber from the European market and Finnish sawmills were more than eager to take over the former Russian share. Also, the demand for paper was expected to increase after the war. Although Finnish paper was low in quality, there was a growing demand for brown wrapping paper and low quality newsprint in Europe.

As the war in Europe approached its conclusion, Finnish companies and the government hurried to make preparations for what they foresaw as the coming economic boom.A committee setup by private business associations in 1913 had provided comprehensive guidelines for future policies. The committee recommended first, that Finnish companies that exported goods should form cartels to minimize domestic competition, and second, that the government should take strict measures to protect domestic industries (iron and steel, textiles, foodstuffs) from foreign competition. In the midst of the political chaos, the Finnish government quickly introduced a new economic policy based on these two recommendations. The new government had also signed commercial treaties with Germany and Austria-Hungary in 1918. In the early 1920s, similar agreements were made with France, Estonia, the British Commonwealth and the United States.

In addition, Parliament passed laws prohibiting foreign enterprises from purchasing or owning land, forests, hydropower resources or mineral ore deposits. New tariff regulations and tax reductions were introduced which gave domestic industries almost total protection against foreign competition. Forest industries followed the recommendations by forming export cartels in 1918. FINNPAP, FINNBOARD and FINNCELL agreed upon prices and regulated production of paper, pulp, board and timber. After WW1 ended, postwar reconstruction in Europe and the consequent demand for timber soon put the Finnish economy on a swift growth path. Finnish sawmill products, pulp and paper found old and new markets in the Western world, including the American and South American markets.

Finnish Cartels also promoted the increase of exports by establishing broad networks of sales branches in major European, North and South American, and Asian cities. In addition, Finnish export cartels collaborated with other Scandinavian paper and timber Cartels, for instance with Scannews and Scankraft. Other growing industries included mining, basic metal industries and machine production, but they operated on the domestic market, protected by the customs barriers that were typical of Europe at that time. Textiles and metal products on the other hand found no markets in the West and had to compete hard with imports on the domestic market. In 1920, more than four-fifths of exports were still based on wood, and one-third of industrial production was in sawmilling, other wood products, pulp and paper.

The land reforms of 1918, among the first measures implemented by the new Government, had broken up the large estates and secured land for tenant farmers and farm workers. A large number of new, small farms were established. However, these were generally so small that they could only support families if they had extra income from forest work. The country itself continued to remain largely agrarian. Even on the eve of World War II, almost half of the labor force and one-third of the production were still in the primary industries of agriculture and forestry. Small-scale agriculture used horses and horse-drawn machines, lumberjacks went into the forest with axes and saws, and logs were transported from the forest by horses or by floating.

The new economic policies were highly successful. The volume of Finnish industrial production increased by almost 12% annually in the immediate post-WW1 years.This was faster than the average growth of world trade. The wealth created by the volume of exports and the very favorable trade balance was widely dispersed throughout society. The nation’s standard of living improved rapidly, and for the first time, people had money to spend on fashionable clothes, new technological appliances, automobiles and entertainment. The rapid and steady economic development in Finland was exceptional relative to other small Eastern European states. Tariff protection and other policy measures had helped to raise the domestic grain production to 80–90 percent of consumption by 1939.

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