The shock sensitivity of the Finnish economy has traditionally been higher than in other countries – why was the shock during COVID19 in 2020 lower than in others?

Finland’s cyclical fluctuations have been greater than average compared to Sweden, Denmark and several other developed countries. However, the external shock faced by Finland in the COVID19-crisis was smaller than in many other countries. Production disruptions through global value chains dropped half a percent of the value of Finnish production. Disruptions in value chains have also driven Finnish companies to reform their operations, according to the Etla study published today.

In Finland, economic fluctuations have been greater than in Sweden, Denmark and in the majority of other developed countries. The size of the country’s GDP and the living standard are negatively correlated with economic fluctuations. However, there exist only a few general factors affecting to output volatility. In the Covid19-crisis, global value chains transmitted economic impacts between countries and industries. As much as one fifth of the decline of the Finnish GDP in 2020 can be explained by disturbances in global value chains.

– Both in the export recession of the 1970s and in the recession of the early 1990s, the Finnish economy contracted clearly more than in Sweden and Denmark. We also recovered more slowly from the financial crisis of the 2010s. In large countries, the economic structure is often more diversified and fluctuations in individual sectors are unable to shake the economy as a whole. In small countries, the situation may be different, and we also have experience of Nokia and the paper industry in the 21st century, says Jyrki Ali-Yrkkö, Etla’s research director responsible for the study.

In 2020, the disturbances of value chains were based output decreases originated from covid diseases and restrictive actions against Covid-19. In the late 2021, however, these disturbances were more based on strong demand, the lack of stocks, the rise of transportation costs and the lack of containers.

Furthermore, it seems that factors behind different economic crisis vary. In the long run, innovation policy potentially increases the versatility of economy but its impact is uncertain. According to the results, companies itselves try to improve the resilience of their value chains but it is hard to design policy instruments that could be efficientely used to improve the resilience of value chains.

 

This publication is part of the implementation of the Government Plan for Analysis, Assess-ment and Research.

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