1

The 7th Nordic Conference of Labour Historians in Nykøbing Falster, Denmark,'

May 6-9, 1991

Tapani Paavonen:

Welfare State and Political Forces in Finland in the

20th Century

1. Welfare State as a Historical Era

The formation of the welfare state has characterized the development of

the 20th century Western societies, which enables it to be regarded as an entire

historical era of Western society. The beginning of the welfare state in the

industrial countries is usually placed in the 18905 or at the turn of the 20th

century, when the modern social policy for labour protection was introduced.l

Also in Finland the modern social policy came into existence in this phase. The

Labour Protection Decree of 1889 and, even rnore, the Accident Insurance Act of

1898 were in this reSpect the first reforms based on the problems of the industrial

society.2

1See e.g. ASHFORD,DOUGLAS E., Ilte Emergence of the Welfare States, Oxford1986, p. 100-5

WARIS, HEIKKI, Suomalaz'sen yhteiskunnan sosiaalwolitiikka. Johdatus sosi-

aahpolitiikkaan, SosiaalipoliittisenYhdistyksen julkaisuja 5, 6.p. Porvoo 1978,p. 11-4; KARISTO,AN'm & TAKAIA, PENTI'I & HAAPOLA,ILKKA, Elintaso,elämäntapa,sosiaalipolitiikka - suomalaisen yhteislamnan muutoksesta, 4thed. Juva 1988, p. 140-9; ALESTALO,MA'ITI & UUSITALO,HANNU,“Finland”(Growth to Limits. Nie Western European Welfare States since World War II.

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The consolidation of parliamentary democracy and mass support for the

labour movement introduced a new phase in the development of the welfare state,

when the labour protection provided from above was replaced by the demands

carried through by the protected themselves. Thus, a social policy directed towards

marginal groups was replaced by comprehensive social and economic policies

aiming to influence the living conditions of the whole population. The experienceof the Great Depression of 1929-33 became the decisive turning point in this

respect.

The development of the welfare state has been influenced by many factors.

Firstly, the welfare state has been partially a result of the economic develOpment.The new social problems of the industrial society could not be solved within the

institutional framework of the old peasant society. At the same time, the economic

growth created resources that facilitated the foundation of the institutions of the

welfare state. Secondly, the deve10pment of political ideas, the competitionbetween political parties, political compromises and other political phenomenahave resulted in solutions that have increased the institutioual framework of the

welfare state. To this is connected the political consensus in regard to basic values,towards which the Western societies have moved in the 20th century. Thirdly, a

certain automatism is still discernable in the growth of the welfare state, i.e. the

application of the principles already decided on has enlarged the share of the

public sector in the Western economies.3

Compared with the periodization of the Swedish and British welfare states,

there was a clear delay in the Finnish development. In fact, Finland appears as a

backward country, where the old-fashioned, pre-industrial views based on

traditional peasant values and the modern liberal demands for a “free economy”constituted a dominant bourgeois view that, for many decades, obstructed the

arrival of the new Westem ways of thinking.

Volume 1: Sweden, Norway, Finland, Denmark (Ed. PETER FLORA),Berlin-N.Y. 1986), p. 200

CfI e.g. KOSONEN,PEKKA,Hyvinvointivaltion haasteet ja pohjoismaiset mallit,Mänttä 1987, p. 48ff.

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2. State, Economy and Society up to World War II

A lively debate on social policies arouse in Finland already at the beginn-

ing of the century. The social state, however, developed slow1y. In the conditions

of agrarian dominance, from the outset the question of the landless rural

population eclipsed the modern labour question. The leading bourgeois party of the

autonomous period, the Finnish Party supported e.g. by the wealthy farmers,

adopted at the critical stage of 1906 social policy views resembling the German

"Kathedersozialismus”, which emphasized labour protection granted from above.The main emphaSis in this respect was, however, on the question of the landless

rural population. A more modern view on social questions was represented by the

liberal-minded Young Finnish Party, but its political strength remained discernablyweaker.4

The demands of the workers were manifested by the Labour Party foundcd

in 1899 (The Finnish Social Democratic Party, 1903), whose potential force since

the electoral reform of 1906 was clearly discernable. The “immediate demands” of

the Forssa Program of 1903 included all the institutions characteristic of the

welfare state: general social insurance, general basic education, free health care

etc. It was understood, however, that the principal goal was the realization of

socialism in accordance with the German Social Democratic model. But, in

practice, even the Social Democratic Party paid great attention to the question of

the landless rural p0pulation, on whose support it was dependent?During the period of autonomy,the main obstacle to social reforms was

the Russian Emperor, who left unconfirmed most social legislation because of the

fear that they would stimulate similar demands in Russia. The dawning collective

bargaining system on the labour market, on the other hand, foundered on the

Oppositionof the employers.°

The Civil War of Spring 1918 had the effect that bourgeois White Finland

took up a very reluctant attitude to all demands based on labour interests. In the

4See BORG, OLAVI,Suomen puolueet ja puolueohjelmat 1880-1964, Porvoo1965, p. 36ff.

SOIKKANEN,HANNU,Kohti kansanvaltaa 1. 1899-1937. Suomen Sosialide-mokraattinen Puolue 75 vuotta, Vaasa 1975, p. 44ff.

WARIS, 0p.cit. p. 15-6; KALELA,JORMA,Työttömyys1900-Iuvun suomalai-sessa yhteiskuntapolitiikassa,Helsinki (Ministry of Labour) 1989, p. 36

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politics of the inter-war period economic liberalism thus appeared mainly as a

› negative attitude to redistribution of income in favour of the workers. The accident

insurance was the only kind of compulsory social insurance that was generally

recognized. In other respects the social protection was mainly maintained on the

old basis of poor relief.71

The bourgeois partiesconcentrated on strengthening the peasant element

that was perceivcd to “consolidate” the society. According to JORMA KALELA, e.g.

the treatment of the employment question proved that the vision of a peasant

Finland remained as the predominant view in the Finnish social and economic

policies until the* late 19505.8 The agrarian predominance in Finnish society is

further reflected by the fact that the Agrarian Party was by no means the only

agrarian party, but, on the contrary, a strong agrarian wing appeared in all political

parties.

In spite of the White Victory in the Civil War, the inter-war period was

not completely dominated by rightist forces. The Agrarian Party became a strong

force in Finnish politics. And it was a state interventionist party. In Finland, land

reforms were carried out that exceeded the traditional liberalist view of protection

of private pr0perty. The customs duty policies favouring agriculture were sup-

ported also by the Right? But these policies were not jeopardizing property

relations. The increasing protectionism in the foreign trade policy was in other

respects, too, completely in accordance with the prevailingbourgeois line, not

calling into question the entrepreneurial freedom of action.lo

The Finnish economic liberalism included, also, the view that LEIF LEWIN

for Sweden has called positive industrial policies (positiv näringspolitik). This was,

in the first place, the building of infrastructures by the State. In this connection

should be mentioned also e.g. the Private Forest Act of 1928", which, in fact,

7Cf. e.g. KARISTO & TAKALA & HAAPOLA,Op.cit., p. 152-60

8

KALELA,Op.cit., p. 73-4

9See MYLLY,JUHANI,Maalaisliitta -Keskustapuolueen historia 2. Maalaisliitto

1918-1939, Helsinki 1989, p. 110-7, 128-42, 222-34

Cf. PAAVONEN,TAPANI, "Neutrality, Protectionism and the International

Community. Finnish Foreign Economic Policy in the Period of Reconstruction

of the International Economy, 1945-1950” (Scandinavian Economic HistoryReview 1/1989), p. 23-4

"Suomen Asetuskokoelma - Finlands Författningssamling161/1928

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limited the owner's freedom by forbidding destructive felling.12But, in Finnish

govemmental policies with regard to particular industries, again, the main em-

phasis was concentrated on the development of agriculture. Further, in Finland a

strong group of state-owned enterprises was formed, the most important of which

were: Enso-Gutzeit Oy and Veitsiluoto Oy (wood processing), Imatran Voima Oy

(electric power) and Outokumpu Oy (mining .13

The debate on nationalization of the means of production which, in the

aftermath of World War I, was brought about by the growing influence of the

labour movementin many countries (Germany, Austria, Norway, Sweden etc), did

not take place in post-Civil War Finland. The Social Democracy of the 1920s,

however, still stuck, in principle, to the realization of Socialism. The Nationaliz-

ation Program of 1930 continued the tradition of German Socialism, with obvious

influences from Austro-Marxism. In practice, however, the Social Democratic

Party was reorienting to the stand of reformism, which even strengthened in the

1930s."

In the other Nordic countries the c00peration between Labour and Agrar-ian parties was closer connected with depression policies. The governmental

policies that had meant regulation of income distribution since the Great Depress-ion di5placed the authority of the traditional economic doctrines. Also the Finnish

government formation of 1937 followed the Nordic line. In Finland, however, the

influence of the labour movement remained still relatively slight compared with

the other Nordic countries.

The postwar planning of economic policy that was carried out duringWorld War II within the Western Allies and in Sweden perfected the new

reformist conception of social and economic policies. The focus of the new way

of thinking was the Keynesian view that the State, especially by means of fiscal

12Cf. LEWIN, LEIF, Planhushållningsdebatten,Uppsala 1967, p. 20-2, 82-3

VIRRANKOSKI,PENTI'I, Suomen taloushistoria kaskikaudesta atomiaikaan,Keuruu 1975, p. 199, 200-4; AHVENAINEN,JORMA & VARTIAINEN,HENRI J.,“Itsenäisen Suomen talouspolitiikka”(Suomen taloushistoria 2. TeollistuvaSuomi, Helsinki 1982), p. 183-4

Cf. SOIKKANEN,Op.cit., p. 499-506; PAAVONEN,TAPANI,“The Finnish SocialDemocratic Party since 1918”,Political Parties in Finland. Essays in Historyand Politics (Eds. Juhani Mylly &. R. Michael Berry), Turun yliopisto. Poliit-tinen historia C:21, Turku 1984), p. 139

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policies, could influence the general economic development to mitigate cyclical

fluctuations and to maintain employment. The second cornerstoue consisted of the

general social insurance to safeguard all citizens.

The reformist Labour parties developed additionally a new conception of

planned economy that replaced the old socialist conception of class conflict.

According to the new view, the State should regulate economic deve10pment partly

by indirect fiscal and monetary means and partly by direct orders in accordance

with a plan to safeguard maximal welfare.

The bearers of the new view were the Reformist Labour parties on one

hand and the Leftist Liberals on the other. Their common basic view was that full

employment should be maintained by means of “effective demand” and that

general social insurance was a necessity. But even the most reformist of the

bourgeois parties rejected, however, any direct regulation of the economy by the

State, e.g. investment control, and in other respects they wanted to quantify the

economic and social measures more carefully than the Socialists.”

In Finland, however, the traditional ways of thinking were preserved

during the whole 19305. The economic depression was perceived as an inevitab-

ility, to which e.g. governmental finance had to be adapted. Accordingly, the

treatment of unemployment was seen as a separate social problem to be dealt with

by unemployment works as far as resources allowed.16 Yet, the Social Democratic

Party strove to some extent, inSpired by the Swedish example, to develop claims

for anti-cyclical economic policies, but even these thoughts were awakened onlyafter the depths of the depression were already passed, and the party was too weak

to exercise an effective influence on the practised policies.17

Also in Finland postwar planning was carried through in 1943-44 inaccordance with the Swedish and Western Allied examples. The social reformist

15Cf. eg. PAAVONEN,TAPANI,“Reformist Programmes in the Flaming for Post-War EconOmic Policy during World War II”, The Scandinavian Economic

History Review, Vol. 1000:3, 1983, p. 194-7

PEKKARINEN,JUKKA & VARTIAINEN,JUHANA & VÅISÅNEN,JARMO & ÅKER-HOLM, JOHNNY,“Suomalainen finanssipolitiikka ja kysynnänsäätely”(Satavuotta suomaIaista kansantaloustiedettä. Kansantaloudellinen Yhdistys 1884 -

1984, Vammala 1984), p. 218

Cf. PUOSKARI,PENTI'I,“Vanha Tanner ja uusi talouSpolitiikka”,in Murros-kausien mies. Väinö Tanner 1881 -1966. 100 vuotta Väinö Tannerin .synty-mästä. Tarkastelevia kirjoituksia, Helsinki 1981, p. 149-50

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orientation, prevailing in the Western planning work, however, met with defeat in

the Finnish committee work. The leading position in the Finnish planning activities

was occupied by the representatives of traditional economic liberalism, i. e.

prestigious business leaders, whose standpoints were followed by most bourgeois

politicians and press organs.18

3. The Postwar Phase, 1945-1948

After the war, Finnish society was in fierce ferment. The first postwar

Parliamentary election, in March 1945, produced an equilibrium between the

bourgeois groups and the lab0ur groups: 101 to 99. In social and economic

policies, however, the cooperation between the “Big Three”, i. e. the Communists,

the Social Democrats and the Agrarians, crushed the position of the traditional

authorities. But, on the other hand, the old doctrines were not replaced by any

coherent new guide-lines. The only thing that was clear was that in the new

situation the interests of the workers and the small-holders would gain a new

legitimacy at the expense of the'traditional upper and middle classes.

The government coalition of the “Big Three” in 1945-48 was based on

unstable foundations. The party most content with the new sitüation was SKDL

(The Finnish People's Democratic League) dominated by the Communist Party. The

Communists, however, did not intend to content themselves with those relativelymoderate “democratic” reforms mentioned in the common declaration, but aspiredto a unified front along Eastern European lines, within which they had to attainthe

leading position. The Social Democrats, again, expected that the new situation

would bring new support for their social reformist views. But Finnish Social

Democracy was politically split in the aftermath of the war. The “Tannerite”

majority recognized only reluctantly the political change that had taken place, all

the more as they were systematically accused of being “fascist war politicians” byone of the c00peration partners. The party Opposition, on the other hand, tried to

'8PAAVONEN,TAPANI, Talouspolitiikka ja työmarkkinakehitysSuomessa toisen

maaiImansodan jäIkeiseIIä jälleenrakennuskaudella vuosina 1944-1950,Annales Universitatis Turkuensis, C:64, Turku 1987, p. 30-53

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harness the cooperation grouping of Social Democrats and Communists, that was

formed within the Confederation of the Finnish Trade Unions as well as within the

Government, to the vehicle of reformist social change. The Agrarian Party, for its

part, was suspicious of the labour groups that were in leading positions in the

Government.

An important role in Finnish politics was played by the Confederation of

the Finnish Trade Unious (SAK), which to a high degree dominated the ec0nomic

and social policies practised in the country in 1945-47. SAK represented lab0ur

politics that were a compromise between the Social Democratic party Opposition

and the Communists. Especially owing to this influence far-reaching reforms were

outlined in the first postwar years.”

The debate on nationalization (socialization) was started soon after the war

ended. For the first time the situation was favourable for such a discussion. The

Social Democratic party executive decided to take the initiative into its own hands

and suggested in January 1945 that the Government appoint a committee to in-

vestigate the matter. The initiative reflected the new Social Democratic view that

definitively detached itself from the traditional German socialism and was oriented

towards the modern western, democratic socialist views of planned economy along

the guide-lines of Swedish Social Democracy and the British Labour Party. The

obvious model for the initiative was the Myrdal Commission of Sweden.

Nationalization was touched on in the common declaration of the “Big

Three” in April 1945, but not mentioned in the subsequent Government program.

When the Social Democratic Party urged the matter, the Government finally in

February 1946 appointed the Socialization Committee, within which were formed

seven, strongly leftist dominated sub-committees.

The public discussion did not deal with the basic questions of the initiat-

ive, i. e. the economic role of the State and the means to increase it. Up to summer

1946 both the bourgeois and the Communist polemic made it seem as if the Social

Democratic Party was suggesting a large-scale nationalization of the economy,

while various “tactical” concerns were seen to lie behind the matter. The Com-

munist polemic additionally implied that the Social Democrats did not understand

the logic of transfer to Socialism. The Communists opposed “socialization” as

being premature, emphasizing “democratic reforms” as what was required in that

19 See PAAVONEN,Op.cit., p. 69-79

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phase. They aspired to get hold of the economy through the existing economic

regulation machinery.

After spring 1946, however, the demand for “nationalization” became one

of the most central Communist claims. Subsequently, the polemics about national-

ization were influenced by the “people'sdemocratic” model, e.g. the Parliamentary

election campaign of the bourgeois parties in 1948 rested to a high degree on

opposition to nationalization.m

The assignment of the socialization committee observed, in accordance

with the Social Democratic initiative, the modern western conceptions of planned

economy. The leadership of the committee was in the hands of reliable party

representatives, even though the party in many respects was displaced from central

decision-making. The committee was, however, unable even to define the guide-

lines of the investigation work. Within the committee reports were drawn up that

outlined the most grandiose schemes for nationalization but that in fact represented

only a minority view within the committee.Finally, the modest proposals of the

committee, aiming at nationalization of electric power, the telephone companies,the sugar industry and the tobacco industry, foundered on opposition from the

bourgeois Parliamentary majority.21

Within the prices and wages regulation system dominated by SAK, on the

other hand, more realistic schemes were outlined to reorganize the economy on the

basis of comprehensive planning. There was pointed out the necessity of more

“concentration” as part of the actual stabilization efforts. To attain more planningthe purpose was to preserve part of the governmental regulation powers adopted

during wartime as normal instruments of economic policy.The first attempt to attain more “concentration” was made in autumn

1945, when SAK demanded the establishment of a Production Ministry. The Prices

and Wages Council dominated by SAK began to prepare the reorganization, still

leaving out the Production Ministry at this stage. The Government, however,limited the concentration to prices and wages regulation, which even the bourgeois

groups could accept. Among SAK's claims the Production Ministry was included

until 1947.22

2°PAAVONEN,Op.cit., p. 209ff.

21PAAVONEN,0p.cit., p. 230-2, 237-59

22PAAVONEN,0p.cit., p. 266-8

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The second scheme, the TE-Ko Program (program for increasing produc-

tion and standard of living), also observed the guide-lines set by SAK. The

Economic Council appointed for the final design of the program concentrated its

work on short-term stabilization problems, but the intention was also to con-

solidate long-term comprehensive economic planning. The scheme, however,

foundered essentially on political contradictions. The industrial employers were

prepared to make short-tenn concessions to the workers, but the agriculturalcircles whose claims had been neglected caused the scheme to founder in the

Government.23

4. The Victorious Anti-Reformism

The plans of 1945-47 for far-reaching reforms in the economic system

foundered before anything was realized. Firstly, the reformers lacked politicalforce. The leftist majority in the Government was to a great extent based on the

new foreign policy requirements. But even the Social Democratic parliamentary

group had a sceptieal attitude towards the policies of the P0pular Front Govern-

ment. Further, the labour leaders lacked the education which was required to

manage the new institutions. And the reformers' front was split by the political

struggle for the workers' “soul”; a struggle finally won by the Social Democrats.

When the institutions of the welfare state in the Western countries

principally were consolidated in 1945-50,24 in Finland the cooperation group of

the labour movement neglected to develop the economic and social policies alongthe new social reformist lines. In 1947 began the counter-offensive of the Conser-

vative forces. The counter-offensive was not limited to curbing the “nation-

alization enthusiasm” - for which campaign the vigorous Communist propagandagave appropriate inducement - but was continued to final torpedoing of the social

reformist conCeption. Here the liberalist tenet of the business circles coincided

23PAAVONEN,Op.cit., p. 131-8; JORMA KALELA,on the other hand, emphasizesthe aspect of long-term planning as the profound goal for the IE-Ko Plan,instead of short-term stabilization aSpirations, KALELA, Op.cit., p. 141-2

2*' See ASHFORD,Op.cit., p. 106-8, 189, 240, 294

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with the agrarian egoism.

In many respects, even in Finland, the experiences of World War II shat-

tered the ideological foundations of the old world. But contrary to e. g. Sweden and

Great Britain where the Conservatives by 1945 had abandoned their traditional

opposition to the new social reformist ideas,7J Finnish Conservatism stuck to the

old principles. The German economist Wilhelm Röpke had, in Finland, much the

same role as an international authority that F.A. Hayek had in Sweden. Only some

few understood his Neo-Liberal theory, but his fierce criticism against “collectiv-

ism” pleased the bourgeois public.26Yet, the wartime experiences had accustomed

even the Finnish Right to the thought of permanent influence of the Iabour move-

ment in political life. Thus, even the Conservatives ad0pted a practical negotiation

attitude in matters that did not touch the foundations of the economic system.

The Socialization Committee had to develop, among other things, means

for maintaining full employment, but the “Keynesian”economics were apparently

foreign to the Committee's members and investigators. The Economic Council

drew up in 1947 a plan to consolidate the centralized labour force administration,

including the establishment of a Ministry of Labour. However, the plan foundered

on opposition from the bourgeois groups, led by the Confederation of Finnish

Employers. A governmental labour employment service was labelled as conflicting

with the “free economy”.

In the same way, the attempt by the Social Democratic minority govem-

ment of 1948-50 to achieve a permanent employment service act foundered. The

bourgeois Parliamentary groups especially picked on the proposed labour districts

and vocational guidance, which were claimed to represent over-organization and

to limit the employee's individual freedom, respectively.27When the principle of the full employment policy foundered, winter

unemployment was, in the 19505, combatted by public unemployment works, a sort

of employment rehabilitation. In the unemployment works the productivity was

intentionally kept low. It was known also as the “spadeline”.28

Cf. ASHFORD,Op.cit., p. 264ff; IÆWIN,0p.cit., p. 271-8

Cf. IEWIN, 0p.cit., p. 271-2

PAAVONEN,Op.cit., p. 299-303

KALELA,Op.cit., p. 159-71äüäü

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The idea of a general social insurance failed as well. The labourers'

accident insurance was still the only kind of obligatory social insurance that fitted

into the framework of that time's economic liberalism. The old-age insurance

legislated in 1937 was not even intended to become effective fora long time. A

general unemployment benefit was quite unthinkable in the Finnish society of the

19405 and '50s, but public financial aid to the voluntary unemployment benefit

societies was accepted. The report on Sickness insurance in 1949 by the Social

Insurance Committee appointed in 1945 aroused only little interest. The scanty

discussion concentrated on the question of how to forestall “misuse” were the

'

reform to be realized.”

As a counterbalance to the unsuccessful social reformist conception, how-

ever, modern social policies succeeded in the field of population policy. The Child

BenefitAct of 1948 and the state-subsidized housing construction in the population

centres, started in 1949, were remarkable social reforms that gained support even

in bourgeois circles.30

It would be, however, exaggerated to refer only to the tenet of economic

liberalism or the bourgeois and agrarian class interests in explaining the im-

plemented economic and social policies. For example,the Agrarian Party, the most

central government party in the 19508 and until 1966, was clearly a state interven-

tionist party. But the State interventionism of the Agrarian Party concentrated on

promoting the agricultural income formation, while appealing to the poor (“kåyhän

asia”) mainly referred to small-holders' interests. Hence, the party obstructed

governmental measures aimed at wage-eamers' interests.

The Social Democratic Party was the second government coalition party

until the party Split in the late 19505. Finnish Social Democracy did not par-

ticularly emphasize the modern social and economic policies, even if they were, in

principle, included in the party program. It seems obvi0us that the workers' interest

was mainly concentrated on the amount of money wages. In many cases the trade

unions succeeded in including provisions for sick pay into wage agreements”.

PAAVONEN,Op.cit., p. 306-9

PAAVONEN,Op.cit., p. 309-14

MANSNER,MARKKU,Suomalaista yhteiskuntaa rakentamassa. Suomen Työn-antajain Keskusliitto 1940-1956, Jyväskylä1984, p. 410-6

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Mill MK

- GDP

._._. Public Expenditure

....... .. Social Expendlture

-50 -55 -60 -65 -70 -75 -80 -85 -90

FIGURE 1. Gross Domestic Product, Public Expenditure and Social Expenditure at

constant 1985 prices, 1950-1990

Even though the social reformist conception foundered in the postwar

situation, the change in Finnish society was none the less impressive. Theincreased influence of the labour movement remained permanent, even though it

weakened by the 19505. From 1945, collective bargaining was put into practice for

worker occupations, a system the employers had earlier rejected.32After the war

the public finance was consolidated at a level that was higher than prior to the

war, though naturally lower than during the war. The incidence of state taxation

also adhered more to the income distribution claims of the labour movement than

had been the case prior to the war.33

The distinctive feature of the Finnish economy, i. e. the share of the state-

owned industries, strengthened considerably in the period of government cooper-ation between the Social Democratic Party and the Agrarian Party in the 19505.

This again was opposed by the Right in the Cold War atmOSphere. Especially to

be mentioned are Neste Oy (oil refining) and Rikkihappo Oy (now Kemira Oy;

32Cf. e.g. PAAVONEN,Op.cit., p. 106ff.

33 Cf. e.g. PAAVONEN,Op.cit., p. 282ff.

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per cent of GDP

_ Public Expenditure

-- Grass Tax Rate10

-50 -55 -60 -65 -70 -75 -80 -85 -90

FIGURE 2. Public Expenditure and Gross Tax Rate as percentage of GDP

fertilizers), and in the '605 Rautaruukki Oy (basic metallurgy).34

5. The Breakthrough of the Welfare State

In the 19505, developmentstook place that anticipated the emergence of

the modern welfare state in Finland. Firstly, the bourgeoisparties were gradually

detaching themselves from their traditional opposition to “state socialism”. The

liberal National Progressive Party, that hitherto had emphasized its commitment to

the “pure”liberal idea was, in 1951, replaced by the People's Party, that com-

mitted itself first of all with the cause of the middle class. The program of the

People's Party stressed also the demands for modern social policies.”But even

more important was that, within the conservative National Coalition Party, the

younger generation, that represented a more social-minded spirit of “brotherhood

34Cf. HJERPPE,RII'I'I'A,“Teollisuus” (Suomentaloushistoria 2), p. 412-3

35Cf. BORG, OLAVI, Suomen puolueet ja puolueohjelmat 1880-1964, Porvoo

1965, p. 302-9

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of arms” dating back to the common experiences of wartime, strengthened its

position.36Even within the Agrarian Party there began to arise trends of detach-

ment from the strict commitment to agricultural interests and of reorientation to

population centres, which was manifested in the new party program in 1962 and

in the change of name to Centre Party in 1965.37 Thus, the question of welfare

ceased to be an ideological watershed of the political field.

The idea of regulation of cyclical fluctuations through fiscal policies found

no response within the Finnish decision-making system. According to JUKKA

PEKKARINEN'S study group, Keynesianism was consolidated within Finnish

academic economics during the 1950s, but the practical fiscal policies continued

along the old conventional ways of thinking, characterized by the general negative

attitude towards increasing of public expenditures as well as the assumption of

tight budget restriction.38

A remarkable social reform was when the national basic pensions were

increased near to the subsistence minimum in 1956.39 The Labour Exchange Act

of 1959 finally consolidated the governmental labour force administration. The

new Employment Act of 1960, on the other hand, brought about e.g. the general

unemployment benefit that had been hitherto shunned, even though the amounts of

mOney in the beginning remained modest. The governmental labour exchangeaimed at promoting the mobility of the labour force. The former unemployment

works were replaced by normal public works that were to be organized so that

they would balance fluctuatious in the private sector. The new ideas were, how-

ever, put into practice rather slowly. The Ministry of Labour started to function in

Finland only in 1970.40

The employee pension was legislated in Finland in 1961-62, and the

general Sickness insurance in 1963. There was no battle in Finland over the

employee pension like in Sweden; the reform was prepared mainly on the employ-ers' terms by governments led by the Agrarian Party. The contributions were to be

paid to private pension funds, while the employers got the right to reborrow the

3°cr. BORG, 0p.cit., p. 322-31

37Cf. BORG, 0p.cit., p. 350-6

3”PEKKARINFN & Orm-:115,Loc.cit., p. 223-30

39KUUSK,PEKKA, 60-Iuvun sosiaalzpolitiikka, Sosiaalipoliittisen Yhdistyksenjulkaisuja 6, 4th pr. Porvoo 1963, p. 213-4

4°

KALELA,0p.cit., p. 185-97

%,

16

funds on relatively favourable terms. The general breakthrough of the new way of

social thinking was in any case shown by the fact that the reforms were carried

out in a period when the Agrarian Party played the leading role in government

politics, which again was based mainly on foreign policy factors.41

Pekka Kuusi's book 60-Iuvun sosiaalipolitiikka (1961) (Social Policy for

the Sixries, 1964) became in many respects indicative of Finnish social policies.

Kuusi himself emphasized the goal of economic growth to which the social and

economic policies were to be subordinated. This meant especially employment and

housing policiesywhile the other branches of social policies had to ensure an

adequate livelihood for the citizens when required.42The same guidelines were

observed by the Economic Council's report on growth policies in 1964.'3

The short-lived days of glory of Social Democracy in Finland started with

the Victory in the 1966 Parliamentary elections and lasted about ten years. Yet, the

economic and social policies since 1970 were decisively influenced by the bour-

geois majorities in Parliament and in the governments. In any case the Finnish

welfare state widened enormously during this period. The basic ideas of social

reformism were largely accepted, even though they were identified most distinc-

tively with the aSpirations of Social Democracy.'

One of the most remarkable reforms carried out in this period of Social

Democratic dominance was the comprehensive school that after 1968 graduallyended the division of compulsory education into two; that for the ordinary pe0pleand that for the educated class. The Social Democratic Party carried on tough

negotiations with the centre Party for the reform. The National Health Act of

1972, for its part, complemented the general sickness insurance, while the

municipal health centres offered new services in accordance with the increased

demand. The rightist opposition sharply criticised the ways and means of realiz-

ation of the reforms, but the basic principles in this phase were already broadly accepted.44In the 19605, the power of the trade union movement began to grow again,

4'KALELA,Op.cit., p. 167-9

“2

KUUSI,0p.cit., p. 35ff., 85ff. and passim43

Talousneuvoston mietintö Iähivuosien kasvupolitiikasta, Kommiet. 1964:A 16,Helsinki 1965, p. 51-70

“For the enlargement of welfare state in Finland, see KARISTO & TAKALA &

HAAPOLA,0p.cit., p. 162ff.

;

17

reaching a comparable level with the other Nordic countries. The incomes policies

practised since 1968 with the comprehensive solutions and social policy

“packages”of the wage agreements marked, above all, commitment by the

employers to the development of the welfare state. On the other hand, this “neo-

corporatism” arosed opposition, too, in some rightist circles. During the rising

boom in the first half of the 19705 the comprehensive labour market policy was

disturbed mainly by the tendency of the Communist trade union fraction to follow

the wild wage movements that tried to exceed the general level of wage increases.

The idea of more governmental management in the economy also got onto

a better footing during the Social Democratic reform period. For example, the need

to direct capital flows was discussed. The most famous example was the -

subsequently unsuccessful - attempt to start state-owned television tube produc-

tion.

6. The Welfare State in the Post-Industrial Society

Since approximately the mid-19705, the Finnish welfare state has been

"completed". According to MA'lTl ALESTALO and HANNU UUSITALO,the relatively

strong position of the Agrarian/Centre Party, i.e. the agricultural interests, in

Finnish politics has moulded the general social insurance more towards general

national than particularly labour insurance.” PEKKA KOSONEN has compared the

Finnish welfare state with the other Nordic countries. According to him, the

Finnish state has been more committed to the promotion of capital formation in

the national economy, because of which the levels of employment and social

security as policy targets have been subordinated e.g. to the competitiveness of the

export industries. Accordingly, the real level of social benefits has remained lower

than in the other Nordic countries. As the most important reason for the difference

he regards the weaker position of the labour movement in Finnish politics than in

the other Nordic countries.46

*5 ALESTALO & UUSITADO,Loc.cit., 225, 228

“6KOSONEN,Op.cit., esp. p. 183-6, 218-26, 233-9

18

Social policies have concentrated on modifications and minor adjustments

on the basis of earlier solutions. In the reforms of 1982-85 social benefits were

made taxable, while their real levels were raised correspondingly. The income-

bound unemployment benefit was raised even in real terms. The VALTAVA

reform of 1984, for its part, rationalized the shares of social expenditures between

the state and the municipalities."The “revolt of the affluent” against high taxes has appeared also in the

Finnish discussion on economic and social policies. The gross tax rate in Finland,

38 per cent in 1988 or 45 per Cent inclusive employers' compulsory payments to

private pension funds, has represented an approximater average level in compari-

son with other economically advanced countries.48 The “blue-red” government

Coalition of the National Coalition Party and the Social Democratic Party in 1987-

91 tried to lighten the taxation, however, at the same time trying to widen the

taxation basis in order to better adjust taxation to real income formation. In the

government position, the Coalition Party, which has traditionally been. backed by

the Opponents of high taxation, has found itself in a situation where cutting down

on public expenditures has proved to be very problematic. In recent years, the

public sector has, however, striven to move more towards the principles of market

economy. For example, many public services, both state and municipal, have been

transformed to a self-financing basis. Discussion of privatization of state-owned

companies has increased as well.

The comprehensive wage negotiations system is facing a crisis. Most

pronouncedly the principle of comprehensive solutions has been opposed by the

employers, but also by the unions of salaried employees. The advocate of this

system has mainly remained the workers' trade union movement. But even within

it, tendencies to deviate from the general line have appeared in separate unions.

Obviously, the comprehensive labour market policy will be the first institution of

the welfare state to be abandoned in the 19908.

The Swedish discussion of collective wage-earners funds in the 19705

found no response in Finland. In the 19805, the discussion was launched mainly by

younger rightist representatives emphasizing individual pr0perty acquisition. The

“7See KARISTO & TAKALA & HAAPOLA,0p.cit., p. 166ff.

Growth and Integration in a Nordic Perspective, The Research Institute of the

Finnish Economy (Helsinki) - The Institute for Future Studies (Copenhagen)- The Industrial Institute for Economic and Social Research (Stockholm) -

The Institute of Industrial Economics (Bergen), Helsinki 1990, p. 24

19

Employees' Funds Act of 1989 was based on this neo-liberal, individual basis. The

enterprise-related employees' funds became voluntary, and primarily the funds are

to be divided into individual shares.49I

However, the pessimistic predictions of F.A. Hayek and Wilhelm Röpke

how the Western societies, first ad0pting the welfare state, would slide through

“collectivism” to totalitarian dictatorship and poverty, did not materialize. On the

contrary, in the era of that “collectivism” unparalleled economic growth and

prosPerity have been achieved, without individual freedom even seeming to have

been je0pardized. There is, however, a rather common view that the welfare state

has completed its -histor'ical function by having brought about considerable equality

and broken down the class borders. Yet, for the moment, the rise of Neo-Liberal-

ism (“Friedmanism”)in the 19805 seems to remain mainly an Anglo-Saxon phe-nomenon. But, on the other hand, even in Finland the increase in real incomes thathas taken place during the 1980s has not been distributed equally, but has been

most obviously concentrated on occupational groups that have been the first to

adopt new technologies.

According to KOSONEN, the welfare state as a whole has not facing a

crisis in the sense that it would have become unable to fulfil its functions. Opinion

supporting the welfare state, however, has weakened to some degree;0 The

Keynesian-Meidnerian model for employment policy, on the Other hand, is clearly

facing a crisis. The multiplier does not work as the mechanism creating employ-ment in an open econOmy where the production is highly mechanized and auto-

matised. KARI SALAVUO refers to problems produced by the new technologiesbased on micro-electronics in the adaptation of and the demand for labour

force.51 According to KALELA, again, a labour market policy based on the

requirement of mobility becomes inefficient in en situation where qualifications of

quite a new type are suddenly required from the citizens.52

49Suomen säädöskokoelma - Finlands författningssamling814/1989

5°

KOSONEN,Op.cit., p. 320-8

5'SALAVUO,KARI, “Sosiaalipolitiikantulevaisuus” (Järjestelmä,toimeentulo jatoimintakyky. Esseitä sosiaalipolitiikasta Terho Pulkkisen täyttäessä 60 vuotta

28.3.1986, Turku 1986), p. 25-37

52KALELA,Op.cit., p. 216-27