sou · GOB383 · 2001-01-01 00:00:00 — Still, it can be argued that the 1990s deserve special attention, both due to the severity of the economic downturn and because this may have triggered developments that were awaiting an additional push. 3 For example, the reforms of national accounts and social protection statistics following from EU membership create some problems for achieving comparable time-series. 2 The economic crisis of the 1990s This section presents a general overview of the economic crisis of the 1990s in and . The severity of the recession can be detected above all in the significant falls in gross domestic product, in the dramatic rise in unemployment and in the historically unique fall in employment. In all these dimensions the changes were of unprece- dented magnitude, and few would disagree that these countries experi- enced their most severe spell of economic crisis since the 1930s. An effort is made here to distinguish between developments within this period in each country and between the countries. Examining employ- ment developments in different sectors makes it possible to interpret the economic crisis of the 1990s as a series of inter-related phases and to identify interesting differences between and . Although the economic crisis emerged in the 1990s, it had its roots in the 1980s (see e.g. , Kosonen and 1993, Kiander and Vartia 1998, Tarkka 1994, Sauramo 1991, Tson 1993, 1999). In both countries the crisis years were preceded by over- heating of the economy, caused by liberalisation of capital markets and deregulation of credit markets, dramatically reduced saving rates, marked rises in housing prices and considerable increases in indebtness. The international recession was accompanied by problems with currency exchange rates. Interest rates rose rapidly, investment dried up, property values fell and domestic demand dipped sharply due to shift in saving patterns. Thus in both countries the recession had internal as well as external origins. Another similarity is that some structural problems became more apparent along with the cyclical downturn of the international economy. The similarities of the passage to economic crisis in the two countries are so striking that in his analysis of Swedish stabilisation policy between 1985 and 1995 has named a perfect copy of (for further references see 1999: 202, for overviews about what happened at the 18 The economic crisis of the 1990s macroeconomic level in see e.g. 1999 and Kiander and Vartia 1998 for ). There is much scope for a more detailed analysis and various opinions on which issues would need more thorough consideration. For the purposes of this report it is not salient to touch on discussions concerning the reasons for the economic crisis, nor to attempt a comparison of economic policies and their motives, although for the recovery of the economy and the public budget these are important issues.1 Here it is more appropriate to consider whether and really had, if not a totally different type of economic crisis, at least differences in its severity. This is an important issue when attempting to understand the policy reactions and comparing the consequences of the recession. It is clear that in both countries the most remarkable slump in gross domestic product occurred especially between 1990 and 1993. The statistics (Table 2) show that the drop in GDP was clearly sharper and deeper in ; the fall was close to 12 percent in the three years from 1990 to 1993, and from 1990 to 1991 the GDP declined by more than seven percent. Annual changes in were less pronounced between 1990 and 1992. Both the absolute and relative decreases in GDP during the crisis period of 1990–93 thus appear more serious in . For both countries the recession manifested as negative growth in these three consecutive years. 1 and others plan a comparison of economic policies in and (see project description on the web pages http//www.aka.fi). The economic crisis of the 1990s 19 in and –97, billions and SEK Source: 1998, Statistics and Statistics . Note: National accounts and national currencies; figures for in 1990 prices, for in 1991 prices. Apart from the common factors contributing to the crisis already men- tioned, there may be numerous reasons why experienced a deeper recession than . One obvious candidate is the additional impact of the curtailment of trade with the Soviet Union, while others may include investment shortcomings as Pohjola (1996) has suggested, or disparities in the severity of the banking crisis. On the other hand, and in a slightly longer time perspective, instability in economic devel- opment began earlier in . The 1980s already saw a lively debate on economic performance and the relation between the welfare state and economic growth. The problems in the economy in the early 1990s fuelled this debate further (e.g. et al. 1995; Agell 1996; Korpi 1996). 1993 marks the turning point in the macroeconomic trends, since when GDP growth has been somewhat faster in . Much of the GDP growth in both countries is accounted for by fairly rapid recovery of the export industries, which was boosted by the forced devaluations of the Finnish markka and Swedish krona in Autumn . The strong currency policy founded on a fixed exchange rate had to be abandoned in both countries, and the currencies were left to float. The heavy currency depreciations were a blessing for the export industries as their price competitiveness improved considerably. Exports grew and the improved demand situation prompted a recovery in invest- ments, coinciding with an upswing in the world economy. Recovery of the export sector led to an improved GDP status in both countries. As a result, there is no justification for talks of an economic crisis beyond 1993. Already by 1994 the value of industrial production and exports 20 The economic crisis of the 1990s in both countries had risen above the level prevailing before the crisis. At present both and have the highest GDPs in their history, and their growth rates place them among the elite of the indus- trial world. 2.2Developments in unemployment and employment While the macro-economic crisis was thus limited to a period of three years, there are good reasons to consider the whole decade of the 1990s as a period of crisis for both unemployment and employment. In both countries unemployment rose each year after 1990, and to record levels in 1993 (Figure 1). started from a higher unemployment level than , but the increases in both countries were almost five-fold. 1993 again marks the turning point in both countries, but there seem to have been divergent trends since then; while in unemployment started to decline thereafter by about one percentage unit per year, Swedish unemployment continued at a historically high level between 1993 and 1997. A marked decrease in unemployment has since occurred in . Overall, two major differences stand out: the consistently far higher level of unemployment in , and the differing trend following the economic upswing in 1993. The economic crisis of the 1990s 21 Unemployment rates in and –98, percent Source: 1–2/1999, Table 25 (labour force survey figures).2 In both countries unemployment rates are still at a high level, and despite some improvement in this area another labour market indicator – total employment – has shown a less positive development. Employment rates are still very low compared to 1990. In employment rates, too, the differences between and are obvious. To start with, total employment rates throughout the entire post-war period have been at a higher level in . The two main components of this disparity are womens labour market participation and that among the work force of pre-pension age (50–64). 2 The figures are taken from Statistics and Statistics . There are two different institutions providing unemployment statistics in both countries (the ; AMS (Arbetsmarknads- styrelsen and Statistics ) and their figures differ to some extent. The difference is accounted for by the Ministries' way of using register data, that include all unemployed job-seekers as unemployed regardless of whether they could also be classified differently (e.g. as students). The Statistics and Statistics figures are based on survey data and follow and definitions of unemployment. 22 The economic crisis of the 1990s Figure 2 contrasts and during the period. According to labour force survey figures3 the drop in the employment rate was somewhat more pronounced in (Figure 2). In comparison with the economic trends, however, the drop in Swedish employment can be considered more striking. After 1993 the direction of the trends diverge. The employment rate started to improve slowly in while in it stayed low, and even continued to fall. In 1998 the employment rate in was still lower than in 1993, while for the situation in 1998 was better. However, no return to 1990 levels has occurred in either country. Employment rates in and –97, percent Sources: Employment in Europe 1998 for the years 1990 and 1991, 1994–97; Employment in Europe 1996 the for years 1992 and 1993. Note: employment rates are based on labour force surveys and indi- cate the total number of people in paid work relative to the working-age popu- lation (15–64 years). Unfortunately there are some inconsistencies in employment rates for the same years in different publications, so some caution may be advisable for separate years. Information about trends is more reliable. 3 According to non-comparable national sources in the employment rate was 74.1 percent in 1990 and 62.9 percent in 1997 (Labour Statistics 1997). According to (2000) in the share of employed declined from 84.8 percent between 1986 and 1991 to 74.5 percent between 1995 and 1997. Wadensjö (1999) claims employment rates have not returned to the levels prevailing earlier as some of those who became unemployed have exited the labour force, the entrance age of the young to the labour market has increased, refugees are experiencing problems and the long- term unemployed have difficulties in re-entering employment. The economic crisis of the 1990s 23 2.3Anatomy of the crisis According to Per (2000), the development of unemployment in can be divided into three phases. Waves of unemployment reached the different sectors of the economy at different times. As a consequence, total unemployment was divided over the whole labour force rather than concentrated in certain sectors. In the international phase the overheated economy ran into an expenditure crisis that coincided with an international downswing in demand. The plight of the export sector was worsened by the policy of a strong krona. The unemployment that ensued hit the export sector and its dependent sectors hardest. These and certain other factors led to additional problems in other sectors. In the real interest rate phase the fixed currency exchange rate policy maintained in the period of relatively high inflation led to high interest rates. When inflation fell and nominal interest rates increased, rising real interest rates led to a fall in consumption and an increase in savings. The falling demand for domestic products caused unemployment in the domestic-oriented manufacturing sector. After the currency was allowed to float in employment in the export sector increased. The international phase of unemployment ended, but the real interest rate phase persisted. By now, considerable declines in private sector employment had caused significant budgetary problems in the public sphere. According to the government applied no measures to fight unemployment as low inflation had become the goal. Moreover, budget consolidation involved cuts in public expenditure, which in turn exacerbated unemployment in the public sector. This became the third phase of unemployment, the budget consolidation phase. In conclusion, the various phases of economic crisis resulted in job losses in different sectors at different times. During the international phase (1990–93) unemployment hit the export sector, while in the real interest rate phase (starting ) unemployment spread to the domestic private sector, hitting trade, transport, construc- tion and manufacturing industries. This second phase overlapped with the budget consolidation phase (1993–97), characterised by job losses in the public sector, starting with state employment and proceeding to municipal employment. explains persistently high unemployment rate between 1993 and 1997 by the overlap of the two latter phases, which also had a mutually detrimental effect on employ- ment. The in which employment developed in different sectors is presented in Figure 3. 24 The economic crisis of the 1990s Employed persons by industry in –98, thousands Source: (SCB) by 2000. Since big disparities between the two countries can be found in unem- ployment levels and trends, it is worth contrasting Lundsborgs account with the development in . Generally, it can be seen that unem- ployment spread relatively evenly across the sectors of industry. Yet Lundsborgs account of distinct phases with differing consequences for different sectors seems ill-fitted to the Finnish pattern in some respects. This is evident in the next figure, which presents the development in numbers of employed persons by industry sector in (Figure 4). The economic crisis of the 1990s 25 Employed persons by industry sector in 1990–98, thousands Sources: Labour Statistics 1997, oral information from , . Despite the different classification by type of industry, the figure sug- gests that between 1990 and 1993 employment decreased in absolute numbers in all industries in . As in , the heaviest drops between 1990 and 1993 were in manufacturing, trade and construction. In absolute numbers most jobs were lost in the manufacturing industry, but in relative terms the fall was most precipitous in construction where about fifty percent of jobs vanished over the three to four years period. The figure also suggests that a major difference from occurred in the development of the service industry. The post-1993 trends are somewhat different, too. Thus what terms the international phase seems to apply quite well to the Finnish situation. Similar causes appear to have had similar effects. The additional job losses in other than export and export-dependent sectors could perhaps be explained by the real interest phase coinciding with the interna- tional phase. Thus problems with its export industries took place at the same time as decreased domestic demand caused lay-offs in the sectors dependent on it. In other words, the first phase was perhaps a combination of the international phase and the real interest phase. The export industrys new dawn emerged in the manufactur- ing and transport industries between 1993 and 1994, at the same time as falling employment levels finally stabilised in other industries. From 1994 onwards the numbers of employed persons increased annually in all sectors, although the overall growth in employment continued to be 26 The economic crisis of the 1990s But surely, on the basis of unemployment trends alone one can certainly not draw the conclusion that there was no budget consolida- tion phase in . To examine the differences in employment trends in more detail, statistics on the development in absolute changes in employment by employer status are helpful (Figures 5 and 6). Employment by employer status in –98 Source: SCB (2000). Employment by employer status in 1990–98 Source: Labour Statistics,1997, oral information from , Comparing developments in employment by sector, the similarity between the countries between 1990 and 1993 is again striking. In the total employment loss in this period was 538 000 persons, and in 433 000. Of course, in relation to the absolute level of total employment in these countries the loss was more dramatic in ; nevertheless, the pattern is quite similar. Most of the decline in employment occurred in the private sector: 400 000 lost jobs in SOU 2000:83 The economic crisis of the 1990s 27 and 377 000 in , the private sector thus accounting for about 74 percent of the reduction in and 86 percent in . Also, both countries have seen private sector employment increasing since 1993. Interestingly, the crucial difference in the development of total employment for the period 1993–97 lies in public sector employment. In the changes in public employment appear more minor than in . According to our crude data state employment decreased in both countries but the trends in municipal employment appear to differ. In public employment decreased between 1991 and 1993 but then increased a during the latter years under investigation. For the period 1993–98 employment by the local authorities increased by 38 000 persons (Labour Statistics 1997: Table A 15 and oral information from ). In public employment decreased every year between 1991 and 1997, though in 1998 an increase took place. Summing up employment trends in and between 1990 and 1998 it is interesting to note that total employment in absolute figures declined in both countries by 11.4 percent during this period (Table 3). Yet the way this decline was distributed between the private and public sectors was very different. the period 1990– 1998 total employment in decreased from 2 502 000 to 2 217 000, the private sector accounting for 205 000 persons and public employment (State and municipalities) for 80 0004. Particularly interesting is the development in municipal employment; after the fall and subsequent recovery, the difference between 1990 and 1998 is a mere 2 000 persons. (Labour Statistics,1997, oral information from ) In the number of State employees decreased from 394 000 in 1990 to 220 000 in 1998 (job 174 000). At the same time municipal employment fell from 1 in 1990 to 1 089 000 in 1998 (job loss of 169 000). Overall, public employment decreased in by a massive 344 000 persons during this period. 4 Official Finnish statistics include a category for employment by unknown sector, but these figures are not included in the table as the point is to show the breakdown between the public sector and private sector. In any case, the number of 'employed by unknown sector' is not considerable (3 000 in 1990 and 8 000 in 1998). 28 The economic crisis of the 1990s Employment trends in and , 1990 and 1998, employed persons Of which State employment Of which State employment Sources: Labour Statistics 1997, oral information from , 2000. Simple conclusions concerning shifts in the balance between private and public employment are complicated by the practice of labelling jobs differently. Some of the apparent job losses in the public sector are not true job losses but mere job shifts. For instance, the continuing downward trend in employment is partly explained by the privatisation of Post and Telecommunications in 1994, and in 1995 (since when their employees are classified under the private sector). Similar changes have occurred in as a result of privatisation. Without more detailed investigations it is not possible to say whether the two countries have applied different practices of privatisation that would explain the differing trends in public and private employment. Similarly, with regard to public employment some caution is needed when assessing the distribution of employment within the public sector. Administrative changes and the practice of decentralisation may underlie some of the reductions in state employment in both countries. Furthermore, the table reveals nothing about the change in the nature of employment. Differences between the countries in the prevalence of part-time work and temporary contracts affect these figures. There may also be differences in the practice of The economic crisis of the 1990s 29 making these statistics. Nevertheless, the disparity of trends in private and public employment in and is worth noting, especially as it runs counter to the working hypothesis of a softer welfare state adjustment path in . It may be concluded that in both countries the decade started with a private sector employment crisis during the economic crisis years of 1990–93 and continued with problems in public employment. Looking at the change over the period 1990 to 1998, it can be calculated that the contraction of the public sector accounted for 28.1 percent of total job losses in , compared to 67.7 percent in . These figures would seem to indicate a shift in the balance between private and public employment in , but not in . A consequence of this is that the two countries are now more similar with respect to the share of public sector employment of total employment. In , public employment accounted for 37.0 percent of total employment in 1990, and 33.0 percent in 1998. The corresponding figures for are 28.3 percent in 1990 and 28.4 percent in 1998. 2.4Balance sheet for the 1990s crisis in and The macroeconomic and employment trends point to a fairly similar picture for both countries over the decade (at least until 1998), par- ticularly in the overall pattern of economic development. Notwith- standing differences in intensity, the similarities are striking in terms of background causes of the economic crisis, as well as macroeconomic developments between 1990 and 1993. Furthermore, the export sector – led economic recovery since 1993 also displays a very similar pattern in both countries. A further similarity can be seen in the unem- ployment and employment trends during the severest economic crisis years of 1990–93. Looking at developments over time, the economic turmoil of the 1990s can be divided into two waves: the economic crisis years of 1990 to 1993, which left an employment crisis in their wake. The employ- ment crisis was triggered by the difficulties experienced in the private sector, but unlike the economic problems that began to wither after 1993, the employment problems proved more resilient. If the employ- ment level prevailing in 1990 is used as the benchmark, the employ- ment problem persists in both countries to this day. While there are good reasons for claiming a general pattern for the dynamics of the crisis, the highlighted differences call for caution; 30 The economic crisis of the 1990s simplistic conclusions are simply not warranted. Although macro- economic indicators show similar trends, the extent of the economic decline in 1990–93 was much more pronounced in than . This probably also largely accounts for the big disparity in unemployment levels, not only in 1990–93, but also for the latter part of the decade. A further difference can be noted in the unemployment and employment trends since 1993. This section has confirmed that experienced more severe economic problems and a much more pronounced unemployment crisis than . interestingly, the comparison shows how falls in employment – despite the above mentioned differences – appear to have been equally severe in both countries. This highlights the need to include other factors in future comparisons, such as possible alterna- tives to unemployment, existing policy differences, or developments in migration. For example, it could be that in there were more alternatives to unemployment for those who lost their jobs, such as easier access to education, further training, activation measures etc. And although a comparison of migration trends during the period could not be undertaken here, the important differences in migration policy and in the number of refugees absorbed by these countries during the period have certainly influenced employment rates. The economic crisis and the employment crisis are clearly related, but in terms of their implications for public finances, one should probably avoid drawing hasty conclusions. This section has shown that a change in the performance of the national economy is not the only important issue in the quest to understand the need for policy adapta- tion.