INTERNATIONAL FOR RECONSTRUCTION AND DEVELOPHENT CONFIDENTIAL REPORT ON TEE EeONOHY OF FINLAND Economic Department Prepared by: H. W. Robinson Date: December 31, 1948 Copy No. • ol..1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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INTERNATIONAL :BAl~K FOR RECONSTRUCTION AND DEVELOPHENT
CONFIDENTIAL
REPORT ON TEE EeONOHY OF FINLAND
Economic Department Prepared by: H. W. Robinson
Date: December 31, 1948
Copy No. • ol..1
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66852
FINLAND r S ECONOUr
TABLE OF CONTENTS
(For Summary of This Report See Part II Section 4 of Operational Report)
}.1:ap of Finland 0. ••••••••••••••••••••• ' ••• ' •••• ' ••••• -.• -• • ' •••
Selected Statistics ••••.••••••••.•• ~ ••••••• i •••• r •• o.~ 1
I. GENERAL ECONOiUC CONDITIONS ••••.•••..••. "...... 2
II. THE FINA1 .. rAL SITT1A.TION ........................ 15
III. FOREIGN TRADE AND BA.~CE OF PAYHENTS •••••••••• 21
IV. TEE Ftl"TU'RE OUTLOOK ............ ~ •••••••••••••••••
Appendix I.
Appendix II.
Statistical Appendix Tables 1 to 6
Finland's External Debt History
27
... ... I I
",
.. ,
G U L f • 0' ...
MAP OF
FINLAND '00
FA &3 1
)G'
FINLAND
Selected Statistics
September 19. 1944 February 10. 19L~7
Armistice Treaty Signed: . Peace Treaty Signed:
IBRn Articles of Agreement Signed: January 14, 1948 (Subscription: $ 38 milli-on)
337.130 sq. kilometres (46,058 sq. kilometres lost by transfer to USJ=)
Volume of Exports (excluding reparations) Volume of Exports (including reparations) Volume of Imports
Foreign Trade in year 1948 435 million
Yepr 1248.
100 (ap})rox:.) 80 (ap)rox..)
100
85
125
71 92
116
Imports: ... $
Exports: - $ 380 million (plus $111 million in indemni ties)
Reparationa (vs,lued at 1948 prices). Delivered to December 31, 1948 $408 million OJ.tstanding at Decem"oer 31. 191-:..8 $159 mUlior
Transfers of German claims to the Soviet Union (valued at 19u9 prices)
Delivered by DecemDer 31, 1948 Outstanding at December 31, 1948
$1.;.7 mill: $ 1 /I
Balance of Pa~ents in 1948 (excluding reparations)
Dollar Balance of PaYment§ in 1948
$ 39 million deficit
$ 49 million deficit
,Gold and Foreign Ex~hange Reserves. Total Holdings at June 30,1948 : 0 28 million
Dollar Reserve at September 30. 1948: $ 21 million
~on€=Term Foreign Debt at December 31, 1948 (Estimated)
llholeaale Prices in 1948 (1938 ;;; 100)
Cost of Living in 1948 (19J8 = 100)
Export Goods Import Goods Internal Prices
$,:V::J million
1,080 (September) 910 (September)
: 980 (October)
8JO (SepteI:lber)
Nation~l Debt (Internal and External) at rec. 31,1948, 122 billion marks : $ 900 mill ion
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I
GENERAL Ec,ONmUC OQ}1DITIONS
a. General Charasteristics and Economic Struct'Ire
1. Finland t a :Balt ic country. lies to the east of the Gulf of :Bothnb.
Host of its frontier abuts on the Soviet Union, to \,rhom nearly one eighth of
the pre-war area (46,058 square kilometres) was transferred in September
1944, leaving 337.130 square kilometres 'voi thin the nell boundaries. The po:)U
lation of 3.9 million persons is well educated and culturally best classified
'iith the Scandinavian nations.
2. History and Const! tution. Both the people l2'J1d their economic
system have been influenced by the fact that, 1~ltil the end of the first
Horld "!art~"lhen independence tlas proclaimed anet the republic established t the
country ,,,as gC'verned first by S\leden and then by RUssia. The con~ti tution
vests sovereien po':!er in the people, represen ted b~l 200 members of a sin{,:le
chamber. the Diet. w~~ch r..a.s a life of trJ.!'ee years. He:r.lbers are elected on
the basis of proportional representation. antI. all citizens over 21 years of
age are entitled to vote. The President, elected for a period of six years,
enjoys ,·lide pO"lers including initiation of legislation and relations '.dth
other pO'ITers. Government is carried on by the President and a Co'_mcil of
IIinisters.
Internal Political Situation. Coalition governments have al~~~·s
been a feature of Finnish politics. and from 1945 to July 1948 the countr~r
ims governed by a coalition. composed after the Spring of 1946. of' the
IIDemocratic League", a combination of comm'U.1'lists and ten left "dng social,...
ish. the Social Democrats (a socialist pa.rty) nnd the Agrarian p<?rty.
Elections held in July 1948 resulted in gains for the Social De:r.locrats (55
seats) n~~,Agrarians (56 seats) at the expense of the Democratic Leaglle (38
seats) 'ihich lost eleven seats. A riGht "ling p?.rt~rt the National Coalition
(32 seats) also gained slightly.. O1voing to the unt'lillingness of the
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-3-
Democratic League to participate in a ne':' coalition government unless
the i~portant ministries of Foreign Affairs. Defense and Interior and the
difficulty of lnclu(Un,,; Agrarians in a government "Thich ,,,ould encounter t;::,,9
active op~osition of the Democratic League. lfr. Fagerholm, a Social De~ocrat,
,ms chosen by the President. Mr. Paasikivi (formerly National Coalition :P~t::'ty),
Renresentation of Harior Pa,rties 1M the Diet
Party July 19h5 J 111y 1948
Social Democratic 60 (50)* 55 Agrarian 49 56 National Coalition 28 32 Communi"t 39 (49)* (38)* Other ~ 12
200 200
* Figures in parenthesis shm'l the position after the formation, in Sprin$ 1946. of the "Democratic League ll (10 Social Der:J.ocrat sand 39 Comr.nmi st s).
to form a single party government. This governrlent has the tacit sup~ort of
the Agrarian pa.rty. and can rely on the stlpyort of the National Coalition
1.1hen seriously challenged by the Democratic League; so far it has not had any
difficulty in ,'tinning votes of confidence by a tdde margin \Then threatened
by Communist p!='.rliamentary tactics ..
4. Because of their minority position in the Diet, and uncertainty
regarding the reliability of st1]Jport from the Speaker, lir .. Kok1conen (At:raria!l),
\'Iho s"rays 2lj, members, it is possible that the e:o'Vernment may have to bring
representatives of other major parties into the cabinet. It seems reasonably
certain, hm'lever, that, unless the Soviet Union brings pressure to bear, the
Communists will not obtain strong representation. Such pressure seems at
present unlikely unless the international political situation seriously
,·Toreene. Although the COIl4'Ilunists. both in the Diet and in the trade unions.
embarrass the government by demands for higher "rages and 10\'fer taxes, uhich
conflict ",ith the stabilization program, control of the Central Association
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of Trade Unions is increasingly in the h£:.nds of the Social DeI:'loc!"'ats ~lT::O
Hark \rl. th the government on most questions; ~JS a result there have been
no major strikes and the ;fb'l." minor ones have been short-lived. Neverthe:!.e:Js,
Communist pressure haw forced the trade unions to mak:e their m-ffi "'TaGe 0.8-
mande ~"hich, even though finally wi thdra'l:Jn t have made the governraen t f S ta sk
more difficult ..
5. International Relations. Finland's external political relations
have been affected by her close proximity to the Soviet Union, against uhom
she has fought and lostitwice since 1939. and to ",hom she has had heavy peEl.ce
treaty obligations. She has had to avoid arousing the antagonism of her
pO'l.1erful neighbor; thus, she declined to part icipate in the European F:ecovery
Program and, on April 6, 1948, signed a Hutual Aesistance Pact "rith the
Soviet Union. Nevertheless, she has endeavored to develop COL~ercial rela
tions \"i th the ''lest t tmmrds ,"hich her foreign trade is naturally orienta ted,
and since the war has succeeded in obtaining $260 million in credits from
western countries.
6. Largely b~1" "lise statesmanshipt Finland has succeeded in gaining a
greater degree of independence than that enjoyed by any other cO\'U1try ill
the Russian orbit. :'lithout 'liar in Europe, military occupation or overt
intervention by the Soviet Union seems unlikely since Finnish resistance,
open or underground, "!ould involve Soviet mil! tary expenditure, /'l.nd might
diminish such economic benefits as the Soviet Union nO', derives from Finl~nd
even if it did not evoke counter action by the tlestern pm'lers. :ro.rthermore,
Scandinavian neutrality might be affectec't by any trxeat to Finnish indepen
dence. On the other i1l;>.nd, any move b~r Sueden to join the 1'lestern -Dloc
,,,ould introduce a ne't·, factor into the Soviet Union Is SCfmdinavian policy
and she might then take vigorous action in Finland; but such S't'ledish action
seems improbable,
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7. Economic Structure. Finland Is agriculture. forestry and industry
are carried on by private enterprise. except for State operation of rail
roads. important po,"er plants. mining. RIld the monopoly of ,~rines and s:;:;iritc.
The firms in each major export industry, ho"rever, have formed an ~\ssoci1?
tion which negotiates foreign sales contracts ~nd arranees shipments on be
half of the ,",hole industry. Co-ol')erative societies are of great imporkncA
in retail trade and agriculture~ A committee on nationalization recently
recOIlll'nended nationalization of the principal ~'rood1Torking industries. b',l.t the
government has sho,m no intention of acting quickly on this suggestion. ~e
lations between employer and ,.,orkers are often paternalistic especially Nhen
communities have gro'o;,rn around a fe,', concerns; conditions of Hork, ,'lalfare,
social activities ~~d in many cases housing. all receive close attention
and account for an important part of labor costs.
8. Unlike other agricultural countries in Europe, Finland r~s generally
high levels of education and efficiency and the average national income per
head had been brought, in 2S ye~rSt to $320 per ann~~ (1948 prices) in 1939,
a level higher than in the Balkans and Poland. about the same as in
Czechoslovakia, but lO\"er than in the other Scandinavia...'1 countries. About
three~fifths of the ,.,orking population is engaged in agriculture and forestry
compared ,'lith only 2S per cent in industry 1',nd handicrafts. T:"Pical holcl
lngs combine cultivated land and forest and thus provide :rear-round errrploy
ment for the farming community. There is no coal or oil ane;' fei,r raN mater
ials except copper ores (extensive nickel deuosits 1:1ere lost in the trans
fer of territory). The nationRl income ,.,.es therefore attained by gro~'ling
nearly all food at home (even exporting some animal products sUX?luses) and
by e::q,orting timber and ''load products to pay for ra','l materials .?nd fuel
needed in manufacturing goods at home,. and for import of some ccn~umer goods.
Forests. ,.,hich cover 71 per cent of the land area [llld rank next after
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Russian forests in quality, combined ,,,ith lakes and rivers ~'rhich provic'te
cheap transportation and ,'rater pO't·~ert ',Iere the basis of the countr:r' s st~.n
dard of living. lTood \'laS used for houses and for fuel. )0 ller eent 0: in
dustrial output consisted of pulp and paper and other ''load products ana. 37
per cent of the national income '-JaS derivecl. from the export of timber and
'II'ood products t "'hieh formed 80 per cent of all export!;!. Another iror-orta-nt
exchange-earning asset "ras the merchant marine ,..,hich totalled 64~>tOOO gross
tons.
9. About 45 per cent of the national income entered into foreign trade
before the "Tar and the bulk of it "las \·rith Vestern Euroue. Great :Britain took
up to 60 per cent of all exports and through her Finland "rag able to buy
im!,orts from overseas countries. Other important partners ",ere Germany,
Sl:ed~n, U:e .low. countries and Denmark. Trade "lith the USA accounted for over
10. per oent of all trade and resulted in a small dollar su!'?1us. Trade ':li th
the .USSR '-JaS almost non-existent.
10. After 1918 Finland borrowed capital to build up her economy, and
by 1931 her external debt had reached $206 million t "Thich is equivalent to
. a.bout $500 million at 1948 prices. After 1931, ho,-rever, she de7eloyed a
f~vourable balance of payments. due to the great ~emand for her e;~orts in
<Treat Britain ,,,here a building boom ','as in full mring. e~nd to drastic reduc
tions in wages made in depression years. By 1939 she had reduced her
foreign debt. including i'Torld '-Jar I debts to the United. St2~tes (1:1hich "rere
for relief needs), to only $12 million. This achievement. "1hioh involved
a.bstention from further borro"ling and repayment of some debts before due
dates, illustrates the fact that. as a nation, the Finns prefer to C'.lt their
coat according to their cloth (md esche,'I foreign borro·uing.
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b.. Effects of, the ,Second 110rld t'Tar
after the armistice, assisted in expelling the Germans. She lost 80,000
peoplet or Z per cent of the popule.tion, in "Jar casualties. Direct \1ar d~j-
age 1,1I'as eomparatively lisht except in the far north T·,here farns, buildings,
ample o\'fin~ to increased suppl ie s of coal. Al though 42,000 d't1elling units l'lere
built this year compared l;THh 21.).,000 per annum before the t'lar, the needs to re
house displaced persons (one-eighth of the population) are only slm<Tly being
met. Wages have risen as much as prices and rents are controlled at pre-~~r
levels but, olfin!" to much hee,vier taxation, shortage of food and compulsory
sharing of d'1Tellings, the standard of living, thouf"h improving, remains lO~'Ter
than before the ,~r, particularly for the middle and fixed income groups.
19. The above recovery has been achieved despite several l!'.ajor cliffi-
culties. One of the first ,1as a reduced sup~)ly of timber, since the country
had lost to the Soviet Union a1)out 10 per cent of its 20 million hectares of
productive forests. Before the \'lar annual groi-Tth yielded 45 million cubic
metres of ,,,ood per annum but today it yields only some 41 million Cl.loic metres.
Nevertheless, this is still greater than the quantity of wood cut in all except
the pea.k pre-'"ar years of 1934, 1936 and 1937 though a greater proportion is
in the form of birch rather than pine and spruce, During the '-Iar actual cutt
ing lms fa.r less than groi1Tth a.nd reserves of a.bout 1.5 million cubic metres per
annum '!.,rere accumulated. Since the war timber .h2.s been used ~o meet exceptional
postl,'lar requirement s for reconstruction and fuel t and the tim·oer available for
the woodworking industries was only 17 million cubic metres in 1947 and 16
million cubic metres in 1948 compared \'11 th 19.1l- million cubic metres in 1938 t
even though felling exceeded both the annual gro'"th and the quantity of timber
cut in 1938. Because of the necessity to rebuild stocks, this held back pro
duction in the sa'~ills and pulp and paper mills in 1947. In the long run
felling must be restricted to growth but since improved sup~lies of coal are
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reducinf': consumption as fuel (not·' about one half of all. consumption) there
would seem to be little danger of any permanent shortage of Hood for the e:<:
port industries. Furthermore, the sa ... ·nnills absorb over half the total conS')Il:9-
tion by these industries 8~d supplies of timber for the production of the
higher valued ply\100d, pulp and paper t on \·rhich the industr:r intencls to concen
trate as far as possible, could be assured by limiting the exp~'\nsion of 08<~"'"
milling. At the present moment, hOi1ever, o\"ing to the necessity of restrict
ing; costs in the export ind.uetries, prices being; offered to forest Oi-rnare tend
to discourage felling and some anxiet~r is felt as to ",hether it "rill be suf
ficient this "!inter to maintain the export industry at its present tempo during
1949.
20. By the autumn of 1947 electric p01.1Ter had become the critical bottle-
neck in the economy, Thllty-five per Gent of the power planta we:;;-e lost in the
transferred territories and these had formerly sup~lied ?o~rer to the rest of
Finland. To add to difficulties the flo\" of ,~rater in the riYers after 1944
diminished rapidly oNing to successive 10i1 precipitations. ':rhe actW'l"l s'~pply
of pot'ler in 1947. despite increased thermal productio::l. "las only 2,850 million
kvh compared 1"7i th 3,100 million :io.-:h before the '·1P~r. Demand had re£'.(;!led 3,100
million k'I:lh and it became necessary to ration pO~',er in the 1'linter months ,'lith
serious repercussions on production in the heavy potter-using 'J' :Horking
indu.stry. Production of pO\"Ter in 1943 '.';as even lauer at onl~~ 2,750 million lo.·,h.
A large program of development of hyd.ro-electrio power had, h01:1ever t been
undertaken in the early days of the ''.Tar and this began to bear fruit in the
latter part of 1948. Furthermore, normal precipitation can be e.1..1lected to in
crease hydro-electric po,,,er produ.ction in existing installations and I if the
program is completed on schedule, total pm'Ter production 1'1111 rapidly rise to
5,000 million k'I'Th by 1950. As a result, although pO~·.Ter "rill ag~:'vin be rationed
this '''inter, it is expected that production ,.,ill keep pace uith demand after
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next spring. Completion of plants, ho",ever .. depends upon obtr>.ining I'm', mp.t
erials and equipment from abroad. a part of "/hich requires scarce currencies.
Uhen the pO"rer bottleneck is eliminated, existing plants in the WOod"Torking
industries can, '-lith modernization and replacement, produce about 35 per cent
more pUlp, one-third more sat-rn timber. 10 per cent more plY'-rood~ and about 20
per cent more paper than in 1948, all of "'hich \-'Quld, Qf course, be available
for export.
21. Railroads and harbors have not as yet held back the econo~y but have
demanded intense efforts ann heavy investment to satisfy the demands made upon
them. The railroads, "lith more rolling stock but QnlY 87 per cent of the trB.ck
mileage, have he"ndled more traffic than before the ,-rar; rr>.i1 s and rolling
stock, therefore, need extensive repn.ir and replacement. rTarbors. ouL'1g to the
loss of nearly 30 per cent of port C1?,pacity in the ceded territories, ha:lTe had
to randle as much traffic as in pre-t"ar days and the ports of Hanina, Tur)::u,
Tornio I Kemi and others have M.d to be /"Ind are beine: expanded. If the 1:Tood
,-rorking indu~try increases its activity, railroad and harbor facilities ':lill be
strained. '-!hile there may be room for some compression of such traffic ao ce
ment and fueh/ood on the railroads, there ,-rould be no alternative but to ex:pHnd
facUi ties in the harbors, particularly D. t Kotka, Hamina, n~~S~}·lkJ;. 'lnd T1.lrku.
22. A much more formidable difficulty developed in 1948. Since l10rld
prices of timber and wood products are tending to turn dmrn '·rhUe. until re
cently, internal Finnish prices continued to increa~e. margins of profit of
some firms are endangered. In a large measure tb~s is due to the high labor
costs attendant on expansion of output. particularly the high cost of welfare,
social amenities and housing. Dev-aluation of the mark ,-rould jeopardize the
government I s financial stabilization program, as '''ould subsidizing of exports.
There is. therefore. a strenuous effort on the part of the industry to reduce
coats wherever possible by modernization and mechanization, particularly in the
case of transportation and h~ndling involved in bringing timber to the factories
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El,nd in shipping finished products. The equipment required for such pro,jects t
hO'l:!ever. is costly and almost all must be imported. Furthermore the only
possibilities for immediate procurement are often in the United Sta.tes. Cl:.a.t
pa.rt of the loan application to the :Bank for $100 million in the four ~rears
1949-l9.52 \,rhich is requested for reconstruction of the trood':TOrking industry,
ra.ilroa.ds and harbors is primarily for such projects.
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II
THE FINANCIAL SITUATION
a. Inflation
1. The least satisfactory feature of Finland I s economic recove:::-y r.as
been the continuo'lts and rapid rise of prices since the end of the '~'ar. Des
;')ite the necessity for government approval of all price increases, and a '\'!~=tges
stop, wholesale prices rose from three times pre-ltar levels in 1945 to over
nine times pre-'ITar levels at the end of 1947. Beti1een 1945. uhen the mark:
'-TaS devalued from 49 ms.rks to lJS ma.rks per clollar. and 1948, "orld prices
of Finnish exports were risin~ so rapidly that the internal price level never
menaced Finland's exporting possibilities. Even though the ma.rk became pro
gressivel:-r overvalued on a purcr-asing pouer pari t~r basi s (no,', by some 60% :i.n
terms of U.S. dollars) the exchange rate remained appropriate for the export
trade. During 1948, hOl,rever. "rorld competition became keener and a dm,nmard
tendency in Horld prices of tim-oer and w'ood products made it imperative first
to bring prices under control t and. secondl~r to decide ~\rhat is the correct fis
cal policy in the ne", circumstances.
2. Until the autumn of 1947 the prime cause of rising prices '''as success-
ive rounds of lmge increases. These aimed at restoring as soon as possible
the 1938 standard of living but since the economy, should.ering inescapable
heavy :!,)ost\1ar burdens. could not provide such a sta.ndard it '"as inevitable
that. because of budget and bank credit policy, money supply and prices rose
,\1i th every increase in "lages. After 1947 an agreement bet',leen the government
and the trade unions provided that ~'rage increases ,.rould be restricted to 5-1/2%
for each 5% rise in a special cost of living index in each three-month period.
Though this tying of wages to prices removed 'mge increases aa a prime C~lUse
of inflation, it ~~S magnified the effects of any other inflationary elements
in the economy.
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3. There have been t"ro monetary factors in the inflation ....... 'budgt)~ d~
ficits and over-expansion of bank credit. Budget deficits arose from the
political, and economic infeasibility of raising revenue or borrm'ling to covt::r
the exceptional postwar expenditure required for reconstruction. colonizat:on.
reparations and other indemnities. and ever-grol/ing food subsidies in connec
tion ,d th the rationing system. During the tl'lO years, 1945 and 1946. there
'..rae a defici t of some 16 billion marks on a total expenditure of about III
billion marks. These deficits "rere mainly financed in an inflationar;;7 manner
by heavy borro,,,ing from the Banl~ of Finland and by making pa;:nnent s to indi ...
viduals in the form of bonds, a large proportion of ,!;lhich, being tiecl to a
wholesale price index, became negotiable securities of a highly desirable
nature. Yet the succession of budget deficits and price rises tended to ~ring
about an equilibrium since, as prices. "rages e,nd incomes rose, the yield s from
taxes rose more than in proportion. In the year 1947, therefore, the budRet
deficit had fallen to some 4.3 billion marks on a total expenditure (includ
ing extra-budgetary expendit1lTe) of 75.5 billion and a total national income
of over 250 billion marks. Durin~ this year, furthermore. foreign borrowing
(net) provided the government "lith 4.6 billion marks anct increased (l,eposits
in the postoffice savings bank another ).8 billion marks. Taking account of
changes in the Treasury's cash bale~ee, cash to the extent of 3.0 oillion
marks (net) "Tae abstracted by the government from the econom~r. During 1948.
revenue I particularl:T from income, property and sales taxes t increased by 30%
,,,hile t OI;dng to the diminishing real burden of reconstruction, re-settlement
and reparations, expenditure,(including extra-budgetary expenditure~ increased
by only 25%. As a result, the deficit \-las only one and a naIf billion marks
on a total expenditure of 95 billion and a national income estimated at about
350 billion marks. Furthermore I foreign borrOHing (net) yielded the govern-
ment 5 billion marl,;:st and, allo"ling for changes in cash balances,the government's
·.\
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financial activities as a ,,,hole abstracted some 2 billion marks of ca.oh :rcn
the economy.
4. ~dng largely to a reduction of 5-1/2 billion marks in extra-
budgetary expenditure, estimated expenditure in 1949 (95.5 billion marks) i~
,I.!Imortant Change!!!. in Budget Ex;pendi ture, (all figures in billions of marks)
Sta te investment Loans for private investment Redemption of internal and foreign debt Reparations and other indemnities lie oloniz:at ion II Aid and compensation to private
individuals and enterprises
Extra-budgetary payments (net)
Expenditure in 1248
8.6 1.0 7.8
15.0 9 .. 0
9.8
9.3
Proposed .F#Fpend~ ture i11 195
7.1 4.3
11.1 11.7 8.9
no higher than in 1948 but, o'l;lin,,,!: to reductions of income tax rates of up to
50% introduced this autumn for political reasons. it is expected trat revenue
\.,ill fall short of this figure by about 3 oi11ion marks. Gro,.,th in postoffice .
savings bank deposits Nill, ho~,ever, provide some 2 billion marks and the
proceeds of further foreign borroHing another 0,6 billion marks, not a11o",-
lng for any possible loan from the International Bank. It is clear that t~e
government is no\" covering its expenditure from non-inflationary sources.
5. As a result of post\var budget deficits the public debt was increasing
rapidly until the end of 1947. It rose by some 32 billion marks in the
tHO years 1946 and 19/.j.7 and at 31 December 1947 reached 120 billion marks
($890 million), or about 35% of the national income at the 1948 level, com
pared "ti th 12% before the ",ar. During January to September 1948 it increased
by only 4.2 billion '!larks ann -the internal debt actuftlly decreased slightly.
The foreign debt inc~eased bv 4.3 billion marks ($33 million). The estimated
foreign debt at the end of 1948 of $383 million is o~'led almost entirely
to S~"edent the United States and South American countries 'l:,ho granted
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oredi ts for war-time aGsistanoe and postt-Tar reconstruction.
60 During 1946 and 1947 the banking system ,.,as extending reconstruc-
tion credits to the economy on a large scale and in 1947 became the c111ef
inflationary element. Bills discounted by the Bank of Finl~nd increased in
1947 by 5.7 billion to reach 34.5 billion marks. At the ~ame time the B~nk
rediscounted bills for the commercial banks to the extent of 3.5 billion
marks. About one third of gross investment (tt-To-fifths of net :1.nveatm('nt) \*-',8
financed out of bank credit advanced to inclustry and individuals by the :3ank
of Finland and credit institutions. The total credit outstanding increased
in 1947 from 37.5 billion marks to 49.8 billion marks. In consequence, notes
in circulation climbed steadily;
25.2 billion marks during 1947.
they increased from 18.2 billion marks to
Betueen the middle of 1947 p"nct February 19l j.8.
hot-rever, the BaD.k of Finland inorse.sed the discount rate "~..r stages from 4%
to 7-1/4% and total outstandinf, bank credit fell slightly in the second half
of 1948. 1'lholesale prices t/hich reached ten times the pre-t-lar level in July
this year, actually fell by about 1% between July and October.
7* In vie,;? of the satisfactory status of the bud,-?;et und bank credi t the
main financial problem is now the stabilization of \~ReS~ Although price
stability has been almost achieved and the cost of living index rose only 3 to
4;t .. in the previous three months. a demand vas made in November by the Centr~>l
Association of Trade Unions for a general "anticiI'atoryll increase of "rages
of the full 5.5%. This demRnd ,~s not t hO',-Tever I put fort"!ard ~:!ith much deter
mination since its main purpose '"!as to preserve th!'; pan tion of th~ u..'1.ion
leadership againat communist competition. and an Elgreement ~'ras finally reached
that the demand ",auld be wi thd.ra~:.rn but that I in return t cert~dn 10'" '"!ages
llould be adjusted upwards.
So Although immediate demands he.ve thus been successfully resisted. the
Communists are ffi8-~ing as much political capital as uossible o~t of the situa-
- 19 -
tion and the question of a general increase in ,..rages vTill almost certp,inl~T
be raised again. To allo"1 such an increase before there is a substantial
increase in the national income "'ould mean sacrificin:;:; all that has been a;'!
complished in the effort to stabilize prices. Furthermore. Nages nre L~5 to
50% of costs in the ex-port inclustry and ",rage increases 1:lOuld therefore m!',ke
almost :1mpossible the reduction in costs ~,'hich must go :band in hand 'Ii t~ the
fall in world prices of timber r.Jnd ,('lood products if devalua.tion of the mari{
is to be avoided. A slight devaluation bas been considered 1:ut this 1,\!Quld
increase import :9rices and thereby start a ne'" spiral of price and wage in
creases. Subsidies to the export industry might have a similar effect via
the budget. Considerable economies. how'ever, should accrue 'rhen the pO\ver
shortage is eliminated in 1949, p,nd ",hen ne'''equipment is installed in the
factories; the best policy therefore seems to be to a~t~ii to stabilize
prices and t"'ages and e.Ildeavol:, b~r reducin,g other costs I to :?Ostl)one devalua
tion at least until 1950. T"TO other problems must eventually be solved. Food
subsidies are gradually being reduced - they are elftimated to cost only 1.2
billion marks in 1949 compared with 4.0 billion marks in 1948 - but must be
eliminated if possible '"ithout provoking demands for \-rage increaMs. The
greatly improved harvest this year has undoubtedly assisted. through its
depressing effect on farm prices, and further improvement next year miFht
make elimination of subsidies possible. Unfortunately; farmers are disturbed
by the fall in pr:ices and the Agra.rie"n party is therefore pressing for removal
of food rationing, a step '''hieh night cause a rise in food prices sufficient
to revive 'I...rage demands. Removal of rent control, uhich keeps rents at pre
l'!ar levels. is a much more difficult problem since rent accounted for 14)'& of
the family budget before the 1,Jar. The uide discrepancy betireen controlled
rents and present buildinG costs creates many anomalies for both workers end
employers J particularly ,·then firms provide housing. A solution of this
problem seems far distant.
- 20-
b. Ca~it~l Market
9. According to recent estimates gross investment in Finland r~s been
running at the extremely high level of over 30% of the national income. a:ld
at the same time reparattons deliveries have been absorbing some 10;6. Du.ring
the period of inflation the funds to finance these expenditures, anart from
foreign borrm-ling t partly out of inflationary budget deficits I'\,nd inflatior:",r~,"
bank credit, ,,,rhUe constantly rising prices held dmm consumption. T::itI, t:-,e
slot,ring do,m of the rise in prices during the first m,lf of this year t ad,:'!.i ....
tional credit t~S no longer available on the same scale, inflationary profits
'-Tere eliminated, and the capital me,rket became extremely tight, The string
ency continued in the second half of the year but there is n01:1 some slight
easing of the sittk~tion. Total investment demand has been reduced by the
raising of the discount rate to 7-1/4%. Stabilization of prices has dis
couraged mere speculation and stocks are being reduced from unnecessarily
high levels~ The present price difficulties of the export industry are tend
ing to diminish timber cutting by forest Ol,mers which bas decreased clemand
for credits.
10. Furthermore, investment needs for reconstruction, IIcolonization" and
reparations are no'., diminishing and from no'''' on total investment d.emo,nd should
decrease and the emphasis should increasingly be placed on modernization of
existing equipment and addition of ne'l.'" ,.,Ood'·10rking processes. The extent of
such investment depends more on success in obtaining imported equipment and
therefore upon the extent of foreign credits.
11. Savings have recently tended to incr~se m1ing to grm1ing confidence
in the mark and the higher rate of interest, but redistribution of incooe in
favor of the lo,.,er income groups and higher levels of taxation mean a lOi-ler
level of voluntary saving than before the ,~r. Furthermore, sh.ortage of
dt.,ellings ,.,ill continue to stimulate investment of savings directly in ne,"
- 21-
houses. detracting from other forms of investment. The capital market is.
therefore. likely to improve only slo'l;rly.
3.20 There are no estimates of the extent and type of investments likely
'.. be undertaken in 1949 and subsequent years nor of the fund.s likel~! to "ce
available. It does seem probable. hm'lever. that the capital market uil1 re-
main tight. and internal expenditure required to supplement foreign cre~its
more difficult to obtain than in 1948. If, nO"lever t the foreign credits arc
used mainly for such investments as improvement of efficiency or addition of
ne\'l processes to existing plants '''hich do not require much complementary ex-
penditure. and if \lorking stocks are reduced 11Therever possible. it should be
possible t '.'1ith careful handling. to restrict eJq?ansion of bank crecUt to non-
inflationary dimensions.
III
FOREIGN TRADE AND BA.LAnCE OF PA'Yl:lE!:TTS .
a. Character of Pc~t\n:'"r Trade
1. The composition of Finnish post~~r trade and its distribution between
countries have been marked1~t different from pre'rc'.r but, a1 though certain
changes will be permanent. are slo,,,ly moving nearer to the old patterno Im-
ports have been concentrated more on food. fodder and fertilizers because of
Comnosition of Finnish Im~orts
1936-9 ;1.949 ~ 1m 1.9L!.8, .(Estimated}
p % % % Food 14 21 17 17 Agricultural Sq:rplies 4 6 7 5 Fuel 12 12 16 15 ~feta1 S t machinery and transportation
equipment 35 35 34 37 Other ra,., materials and can SUll1p t ion
goods ..l? 26 26 26 --100 100 100 100
22 -
the loss of territory and 10"1 yields in agriculture, and on ra,-r materials
and fuel for the ne", metal and engineering industries. Fl1.rthermore, reccn
struction needs have emphasized imports of equipment and ra',! material for
capital goods. On the other hand, food bas disappearetl froll Finland's 9.X
ports e,nd they 4:'we been more than ever confined to timber and ,·rooe. products
"Thlch are no,'1 90~b of all exports. Reparations deliveries. particl.llarl~r afte>r
1947, have been to a large extent composed of exports of the shipbuilding and
ne,,, metal and engineering industries and in size were 30~~ of commercial ex
port s in 194·8.
2. There have been major changes in the volume of trade \.ri th '''arious
countries. There has been almost no trade "rith Germany, "!hich had formerly
supplied 20% of all imports. The United States had to supply cereals, meat
and fats in the first postwar years.. Cereals and fodd.er "rere bought from the
Soviet Union on a large scale after 1946. Argentina has also becooe ~tn im
portant supplier of cereals and fodder. O\vinr to the need for quick delivery.
much coal, cotton and cotton yarn, metal products and equipment could only be
procured in the United States and, although some of this could be paid for
t'rith exports of new'sprint and cellulose, reconstruction needs llere so great
that the country had to seek extensive dollar credits to finance a continuous
dollar deficit. Trade ,.,i th Great Britain "Tas much lo'\,rer tban before the yar
O'l;!ing to that country's severe restrictions on the use of timber and "1000.
products, its inability to supply convertible currenCY. and the limited
possibilities of obtaining desired imports. 1'.'hereas trade with the Soviet
Union had been almost negligible before the ':ra.r, in 1948 it accounted for 16;b
of all exports (.35% if reparations are included) and some 14?h of all imports.
Similarly the United States sup:!>lied 13% of imports (24% in 1947) compared 1:lith
11% before the war. Great Britain t s ahare in Finnish eXports fell from 35.% to
29%, but her' share of imports rose from 16% to 25% (18% in 1947).
- 23 -
3. Progress in resuming trade on the pre-i-rar sce.le, a,s shoun in Ap:~cn-
dix Table 1 t has been remarkable. Fortunately. credits of $ 260 million
granted since the tolar by S'·leden. the United States. Argentina, Brazil and
Colombia enabled imports to expand ahead of exports and their volume reecned
68~ of pre-tmr in 1947 and an estimated 116% in 1948" Finland "Iao una'b:::'e to
export animal products but her timber and 1'lOod products "rere in great demand
for reconstruction by other European countries. and ~,rere fa,vored by shorta.7 8
of paper and ne'rsprint in the United States. Availability of timber and
prcduction levels in the Nood1.-rorking industry,thereforeiset the l,a,ce for ex
ports; "commercial" exuorts. 8S distinct from reparations, reached 57~ of
pre-,·rar in 1947 and 71% in 1948. Reparations absorbed a large proportion of
Finland's export capaCity, including considerable quantities of the tradi
tional timber and wooo. products exports in the early years. In 1948, despite
the halving of reparations after July, indemnities \-lere three-tenths as large
as "cammel'cial" exports and in 1949 it is estimated that theY"Till be about
one-six.th as large. If these indemni t:i,es to the S01>-iet t:~1!t)n are
added to "commercial" exports Finnish exports recovered in 1948 to 92% of
their pre-war volume in the old boundaries.
4. Export prices. being dependent mainly on prices of timber and ,,'ood
products. ,IIere mucn more variable than import prices before the \'Jar ~tnd it is,
therefore, difficult to choose any particular year as a basis for judging the
post'ffl.r terms of trade. In 1945 nnd 1946 the terms of trade vere a'bout the
same as in 1938, though about 10% '-lorse than in 1937 o'-ring to the exceptionally
high export prices obtained that year. In 1947. houever. export prices rose
by 40~, very much more than imDort prices; the terms of trade improved by 20%
and became 10 to 20% more favorable than in the immediate pre-war years.
Because of the fall in timber and '''ood products prices ':!hich began in 1948, the
terms of trade are no", falling off slightly
· I ..
- 24-
5. Due to higher prices, j'roceeds of exports recovered more rapic.:L-
than the volume in 1946-48. Thus "commercial" exports in 1948 are estinated
at $)80 million. a sum which, on the basis of movements in the general ,rioe
level. would have bought the same imports as in 1937/8. Including repara
tions deliveries export~ were about $490 million. At the same ti~e Finland
bought imports, swollen by increased food requirements and reconstruction
needs, of $435 million. co~ared with 8360 million (at present prices) befo~e
the 't"l'ar. If reparations are added to "commercial" eX1)Orta, Finla.nd_1s thC1'-'
cnly cQuntr~ in Europe.which has consistently maintained an excess of e~tports
over imports in the last three years.
6. Finland I s post"Jar commercial balance of payments has been mainly in-
fluenced by the steadily grm·ring unfavorable "commercialll trade balance (see
Appendix Table 2). Iioreover the loss of 60~ of her mercl1ant marine reduced
her shipping earnings. and it "ms only in 1947 and 19L~8 that, ouing to high
post"1ar freight rates. and additions to tlle fleet * they retwned to pre-war
levels. The gro't",th of her foreign debt, from $138 million at t:le end of the
,~r to $)83 million by the end of 1948, also meant a steadily inGre~sing
burden of interest. Nevertheless in 1946 the current "commercial" -bala.'1ce of
pa.yments was approxiIuately balanced a,nd in 1947, o,dng to a stronp, recovery
in shipping earnings, the defiCit was leept dot'ffi to some $13 million. If, to
complete the picture, reparations and transfer of Germen assets to the Soviet
Union are included ($64 million in 1946 and $99 million in 1947). the total
ba.lance of payments sho",ed surpluses of $64 million e,nd $86 million in the
t'iTO years. During 1948 the II commercial ll payments deficit increased; a spurt
in imports from $345 million to ;p435 million accompanied by onlJT a modest
increase in the volume of "commercial" exports raised it to C39 million.
Reparations and other indemnities of $111 million, houever, if included , .. ould.
have again transformed the deficit into a surplus of $72 million.
- 25 -
7. The "commercial" payments defioi t m"s been financed by foreign
credits and the long term foreign debt incree,sed o;'"r some $60 million in 1946,
$33 million in 1947. and over $40 million in 1948, bringing the total 01J.t
standing debt to $)8) million. Because S,.,eden supplied considerable lJar-tine
aid to Finland, and most post,mr credit has come from S,.,eden and the dollar
area (United States. Argentina. Brazil and Colombia), the bulk of this debt
is now in Swedish kroner ($197 million) and United States dollars ($172
million).
8. Finland was advancing short term credit to the rest of the 'Lforld. to
the extent of $20 million in 1946 and $)6 million in 1947 (see Appendix Table
)0 In one sense, therefore, the long term loans received ~p to the end of
1947 \1ere used partly to extend short-term credit to FinlBnd' s customers~
Considering reparations and transfer of German claims to the Soviet Union as
forns of foreign debt, the country in effect actually reduced its net debt to
the rest of the world by $22 million in 1946, over $101 million in 1947, and
$64 million in 1948. Nevertbeless, at the end of the latter year the out
standing debt,including these obligations to the Sovi~t Union, amounted to
$.574 million.
9. Within the co~nercial balance of payments there r~s been a ster~in~
surplus and a dollar deficit.. In 1947 Finland :b..ad a paynents surplus of
some $)0 million with the sterling area. but a dollar pa~~ents deficit of
some $54 million. She took advantage of the short-lived convertibility of
26 -
l1!l1apA t s .l2..illar !l~+Pl1£e .of PP.ym.~
(in million U. S. dollars)
E:x;ports Imports Tra.de :sale.nce
Shipping Earnings Net Interest Pa.yments Net "Other Payments ll
Net IIInvisib1es li
Net :Balance
Loans Transferred ~ sterling Transferred from other currencies Transferred !Q other currencies
~
65.3 -98 .. 9
. -33,6
-10.2 - 209 - 7.1 -20.2
-53c8
Est" 1248.
5400 -82 9 3
....=,.28.:2
- 9.5 - 6.1 - .5.4
, -21.0
-49.3
~
40.9 2508 5.9
- 3.1 1.9
-20.0
1.1 Not allotfing for any credits from the International j3ank.
Est. 12.ti 44.0 34.3 1./
--2.~
•• •• ,.-
-12.L~
- 2.7 11
sterling to the extent of about $26 million and covered the remainder of the
dollar deficit '''ith medi1)m term borrot'ring from the United States, :Brazil and
Colombia. In 191}8, though she obtained $10 million more tl".an in 1947 in c"ollar
loans. (United States, Argentina, Colombia) this ~as offset by a fall of $11
million in dollar exports, a,nd the non-convertibility of sterling. Finland
has been forced to make her purchases wherever she has had funds. :By increas-
ing her sterling purchases of commodities and freights from $21 million in
1947 to $33 million in 1948 she achieved an approximate balance in sterling
payments. By reducing purcr.ases of commodites and freights in the dollar area.
from $110 million to $95 million she has been able to rec.uce the current dollar
deficit to some $49 million compared with $54 million in 1947. It should be
noted, however. that Finland has also had to pay dollars to certain European
countries in re~ect of trade deficits. such as $5 million for coal and coke
- 27-
imports from Poland (in January-September 191.!-8 the trade defie! t ~'Ti th Poland
"TaS nearly $17 million). During the year 1948 total dollar credits from the
United States, Argentina and Colombia provided some $51 million, abo;lt tte
same amount as the dollar deficit, but at the same time Finland made dollar
payments of some $20 million to countries outside the dollar area by clra"!i:lg
dmm her dollar reserves.
IV
~lHE FUTURE Ou"1'LOOK
1. On the asgumption t~~t developments in the international politic~l
situation do not interfere materially with internal political stability or
economic develoTlment, it is possible to make an appraisal of Finland's posi
tion immediately after reparations deliveries have been completed.
2. It is important that the present efforts to stabilize prices and
"rages should succeed in vieu of the G.mlfll"Jard tendency of Horld timber and ,"Tood
products prices. If it does, there is a good chance that for the next ye~r
or so operating economies \'1111 enable Finnish exporters to compete in "!orld
markets ,.,i thout sacrificing their profit margins. ,,,hic11 are probably nOt'l just
adequate. It might then be possible to postpone devaluation tmtil such time
as it w'ould not I as at present, set off another inflationary SlJiral and nullif;T
the financial achievements of 1948. In this connection I the Il.rE' have agreed
to postpone the fixing of an agreed par value until the end of 1948. It is
essential, however, that the operating economies should be made in advance of
price declines I and, accordingly t rapid complet ion of thE:! electric pm'rer
.,. 28-
program and installation of nell" equipment to cut costs in h8,ndling and in
manufacturing processes is essential; Finland's need for foreign credits is
therefore urgent.
3. Clearly, Finland Is position in 1953 "Till be influenced by t1:e extent
of the foreign loans she obtains in the next four years to incre8_se t:le scc.Ie
and effectiveness of her productive apparatus. The Finnish government has
assumed in its calculations that $100 million of ne,'! dollt>.r eratH ts (includ
ing the recent Export-Import Bank loan of $10 million) ,,!ill be obtained in the
years 1949-1952. Since Finland is not eliFible for aid under EGA such credits
could only come to any extent from the Eximbank. the IHF, ancl the I:BF.D. :1hile
the funds required lJUl.y be over esti:nated tit is clear that. unless ~.:t consid
erable proportion is obtaineo., the economy "rill develo:? less rapidly and the
level of imports and standard of living in 1953 ~,rill be much reduced.
4. Hany conflicting tendencies affect exports and imports.. O':rinp: to loss
of territory. the best that can -oe achieved by 1953 is to reduce cere8,ls. feed
and fertilizer im:r:>orts to pre-"lar levels.. It ~."ill not be possible, h01,rever.
to resume e::qJorts of animal prod'~cts. Utilization of present u.ymsed cp_pacit;T
in the timber and ,,,ood, productS' ind1lstr~T (see Appendi;x: Table l~,) ~;'ould inc::-ease
production some 30% and by 1952 the program of modernization iiill 118.ve further
increased output and added new processes to the industrY. A conai.ierable
expansion in tlle volume of these exports ShO;llC_. therefore, be possible.
Little additional timber and HOod products e:x,orts except prefabricated hoLtses
(or the timber equivalent) '''ill t no,,,ever, be available by virtue of completion
of indemnity deliveries. Exports of tinter and Hood prod.ucts are expected to
increase in volume by about one-third above 1948 levels but ':lil1 sti11 be
about 10% less than in 1938.
n 29 -
5. By the year 1953 iIllI'orts of equipment and materials for reconstro:tc-
tion lITill be greatly reduced. Imyorts of fuel and rrnl rn.aterials for the
metals and engineering industry t nm'l largely devoted to reparations, vill
decline to some extent. but if the industry is to make its :ul1 cont~ibution
to Finland f s balance of payments, they \"lill still be greater than before the
"18.1'. Although \"lhen converted this industry can produce a considerable pro
portion of manufactured prowlcts formerly imported, not all the present cap
acity Can be absorbed and it ':lil1 be necessary to develop exports. The Soviet
Union, for instance, might be interested in continuing her orders on a com
mercial basis, particularly if she continues to supply Finland \"11 th cereals.
Though the ne';T industry '-'ill undoubtedly contribute to the "oalance of pay
ments it would be unwise to count on it to the full extent of present repara
tions deliveries.
6. The vi tal question affect ing the future bala .... lce of trac.e is the
course of import and export p~ices. However, there is ~~doubtedly a large
pent-up demand for timber, pulp and paper in Europe owing to the much greater
deficit in housing than 'before the war, and restrictions on net·rsprint and
paper consumption. The ti:::lber resources of e:l{ ... Finnish a.nd ex-Polish terri
tories no .. , transferred to the USSR (formerly exported to i1estern European
countries) ~rill probably be required to meet the Soviet Union t S Oi,m expE'.nded
needs. Furthermore, timber and ~"ood proctucts 8~re nm-, being purchased from
Canada on a large scale "1i th ECA dollars, a.nd in eliminating its dollar defic
it i1estern Europe ''fill probably try to replace part of its present imports
from the tiTestern Hemisphere by Finnish products, providing the pricesof the
latter are competitive. It 't101:1.1d seem reasonable, therefore, to as::rU.l!le that
Finland can sell all she Ca.~ supnly, but that, in order to keep 11er prices
competitive she will eventually be forced to devalue the mark, and tlat the
terms of trade, though somet'rrat better than before the '.'rar, 11ill be less
- 30-
favorable t~~ at present.
7. Naturally. prediction of the value of exports and imports after
1952 involves estimates of each of the above changes flnd. iSt therefore~ su~},~ect
to '''ide error. Hot'lever t the Finnish Government calculates the,t, aEouing
for some "Torsening of the terms of trade, by 1953 commercial exports 'T;;'11
have increased by 1310 tThile imports can be reduced very slightly from 19'·~8
levels (see AppenCl.ix Table 2). Reparations, hot'lever, \1,1,11 have been com-plated,
Instead, therefore, of the present sur-plus of total e:tports (including repara
tions) over imports of $56 million, there will be an approximate balance in
commercial trade. Turning to the "invisible" side of the balance of pay
ments, ti.IO conflicting factors are operating. In the first 'Dlace the foreign
debt \,rill continue to rise and, therefore, net interest pe,yments ,·1111 grm'T
rapidly from the $8 million in 1948 to $15 million. On the other lm.nd t:i.le
Finnish merchant fleet is being reconstructed as rapid.ly as possible nnd it
is estimated that its net earnings will increase from $26 million in 1948 to
$39 million. N'et income from invisibles ':rill thus reach $23 million comppred
,·lith only $16 million in 1948. The complete balance of J?a.~ments. therefore t
mainly becatJ.se of the less favorable terms of trade. is e:::pectect b;;r 1953 to
yield an overall surplus of some $23 million compared ";i th the s11rplus of
$72 million (including reparations) in 19L~8.
8. About $15 million ':rould be sufficient to provide for repa;j'ment of
foreign debt falling due in 1953, excluding short term cotton credl ta. The
fact that government estimates of the balance of payments surplus ~'Jould be
sufficient to meet contractual e.mortization tsyments is no accident, since Finlax
approaches its balance of payoents :problem from the point of vie,·, of giving
absolute priority to service of foreign debt. Imports are assumed to be
restricted by import 1icensine and exc~~ge control as far as is required to
achieve a balance in the balance of payments. Although. of course, restric-
- 31 -
tion of imports reaches a limit ,-,hen it begins to affect the assumed eXTor:s
or involves a politically impossible restriction of the standard of living,
it appears safe to say that, in 19.53. after the reparations period is over
and the reconstruc tion program completed, ser~ricing of foreign de"ht ,,'il1 be
feasible and '"ill not impose hardship on the Finnish popull'!.tion. In f~.ct I
l·.7ith imports of $430 million compared ,·,ith $345 million (at 1948 pricM)
before the 'var [md more manufactured goods produced at home, the mass of the
"lorking population should enjoy a higher than pre-'1ar standa.rd of living.
9. :By 1953 the total foreign debt tdll, if $100 million is borrol;led in
next four years, he,ve reached some $L~80 million allolTing for contractual
amortization of existing debt. It is clear that, if by this date. the bal-
ance of payments is yielding a surplus of $23 million per annum " .iT repay-
ment of principe,l, there should follot·, a period, simil,-"r to that in the
1930 1s, ~'rhen the existing foreign debt could be rapidly paid off. It "lCuld
not be too much, in fa.ct, to expect H.at all except the public debt to S"reden
(not amortized until 1984) 1.·Tould largely disappear by 1975. This does l'ot
teJce account of any additional debt \"Ihich mignt be incurred. after 1952, but
presumably any such debt \'1ould be for productive purposes and ~·rould save or
earn the foreign exchange for its O"Tn servicing.
10.. There is, however, a concentration of repaymel~t of the debt incut'red
in United States dollars during the years 1954 to 1958? acoentua~ed in 1954
by {'ommencement of amortization of the S,,,edisn debt;. Principal pa.yments in
dollars reach a peak of about $24 million in 1954 (excluding short term
cotton credits)and bring the total foreign debt service, in that year, up to
some $48 million, of "Ihieh some $35 million '''ill be in United States dollars.
Some $13 million is required for amortization of Export-Import Bank lo~ns in
that year. Some difficulties might be experienced, therefore, in these
years, but in vie,1)' of the f?_ct tba. t lone-run prospect s are fa.vorable, and
... J2-
debt service payments fall from $39 million in 1958 to $]0 million in 1959.
it should not prove difficult to effect some arrangement, such as short term
borrO\'ling. 't'lhereby some repayment of principl'l,l can be deferred untU aft'Jr
1958.
11. As regards the dollar deficit. e~::amination shouo it to be largely
temporary PJld due to Finland's heavy and pressing needs for reconstruction,com
bined ''lith the present dislocation of the European econo!!l~·. Indeed, ?inl!?ncl
seems to be one of the few' countries in Europe '1111ch can look for\1ard to a
dollar surplus on current account (excluding contractual emortization).
Appendix Table 6, shm-ring her dollar trade (including that i'lith Poland) in 1948,
shows that many products, such as coal, ~~chinery, motor vehicles, and vessels,
have been obtained from the United States o':ring to the late delivery dates
quoted in Europe. 11hile it is ;rue that c.ollars i,,,ill still be requirod for
imports of petroleum, some specialized machinery, and possibly cotton and
tobacco from the United States, it should be pos~ible in futt~e to obtain bread
grains, fodd,ar Md some petroleum commercially from Russia, nnd all coal and.
manufaotured products in ~~rope, especially if there is economic recover7 in
Germany. It should :::dso be possible to purchase coffee from S012th America lrit11
sterling. At the same time, exports of cellulose and pa?er to tte United.
States provide a steady dollar revenue ,'!hich "las some $.46 million in 1948 and
might even be increased since the market on the eastern seaboard is favorable
for Finnish exports. Deliver;:r prospects for certain manu.factured equipment
are already improving in the United Kingdom and other European countries and by
1953 should be more normal. It ~'Till be a natTl.l'al development if Finlrncl supplie
timber to replace the present dollar purchases of these countries vrhile they
supply coa.l and manu.factured products to replace Finland I s current rrxrchatles
in the dollar area. Partial convertibility of sterling and recovery of the
Bri tish economy 1:Tould increase Fin19,nd Is sUP:91y of currency for overseas pur-
- 33 -
chases t especially textile raN' materials and rubber. Finland f s dollar pt.l>y ...
ments to Poland for coal and coke are completely te~porary and diminishinG;
it lms recently agreed that in 1949 only $2 million ,'!ould be :D~,id in o.ollnrs
and the remainder in sterling.
12. As at present envisaged, ho,V'ever. d.ebt service in dollars in the r.Gid-
1950 113. absorbing, as it does, up to $35 million a year, plus certain othor
minimum dollar expenditure. may mean a continued dollar deficit in the years
1954 to 1957 t even though it ~'rould !,robably be small in magnitude. If. hm'T
ever. Finland could convert even a small part of her sterling export proceeds
into dollars by this time,the problem ",'culd be eliminated. A trade surplus
,"lith Sweden to service the S'1Tedish debt. requiring some $11 million per
annum, might not be possible because of the difficulty of exporting to a oimi
lar economy, but the sterling surplus 1,Jould probably solve the problem nlso
13. To conclude this examination of Finlandfe economic prospects, it
should be mentioned that her credit Northiness is en,banced by the past record
of the Finnish people and government. Rer debt record is excellent: behleen
1931 end 1939 she paid off $206 million of foreign debt ,.,hich l-Tould corresr,ond
to some $500 million at present prices; and, by the end of 1952, she Nill,
in the first eight post"Tar years. have pnid off Peace Treaty obligations to
the SOViet Union t valued at nearly $6.50 million at present prices t '"hile
borro,dng from abroad (net) only to the extent of $;40 million.
Long Term Foreign De2t and Debt Service ( in million U. S. dol1a.rs)
(Assuming all ~resent credits are fully utilized and $90 million borrot-led at 4-1/2% during the years 1949-1952)
(u) Outstanding Long Term Debt
lit
u.S. dollars Pounds Sterling S-v.redish Oro\-ms French Franca
Total
Approximate estimates.
Service of Debt in 1954
Interest
On Present Loans On N elf Loan s
Total
On Present Loans On Net., Loans
Grand Total
125 18
197 -..£
342
6.4 .J±.&** 10.4
22.4 2.4
24.8
35.2
172 12
197 ~
383
--5.9
5.0
5.0
10.9
19ta1 ~.S. ~ollarr and Suea ish Orol-mt
27. 4 2.4
29.8
,46.1
*. Aasu.ming ne,,, loans of $90 million are repayable in 15 years.-
Table 6. Finland f s Dollar Tra§.LJanuarz .. Se;p\.ember 1948
Princinal E~orte
$ Uillion Poland
''looden houses and barracks 3.45*
United Statstl
Hechanical pulp Cellulose Paper
0.76 18.84 12.21
PrincinaJ, Imnor·~J?
Poland
Coal and coke
United StRt!!!1
Coal and coke Petroleum Rubber & rubber products Cotton Cotton yarn ~nd cloth Iron and metal products Hachinery and apparatus ::lee. machinery Hotor vehicles Vessels To1:Jacco Chemicals and drugs Rolling stock
'" Only $.5 million \,lill be paid to Poland in U. S. dollars and the remainder in sterling to cover the trade deficit in the year 1948.
Finland' s IExte~na;L Debt tp.sto!:z
by James J. Lynch
The Republic of Finland has had an excellent payment record \-lith no defaults on its external debt from the time of its independence in 1917 un-til 1941, 'Hhen conditions of Horld lIar II brought default on its ste:::-ling issues. On November 1, 1943, it suspended interest and amortization payuents on the Swedish external issues. :Payments on the sterling iSSUE>s were resuraed on November 1, 1945 and arrangements for payrllent have been made on the SWedish debts, the interest to start at 3% in 1950 and amortization payments in 1954, ending in 1973 on private debts ~~d 1983 on Swedish government loans.
Outstanding in Finland's financial history 11a7e been the con-t.buous payments, totalling ~~7,969,072, on its Horld Har I deb-t.s ($21,695,055)" It is the only country '\:Jith Horld Har I debts outstanding '''hich$ since the 19.31 Noratorium, has consistently paid in full its req..nred pay.nents, though it must be borne in mind that the loan was for relief needs.
Of the nine dollar bonds issued in New York by the Re~ublic, totalling ~97 million (including refunding), \-/11ic11 '\tlere mainly for public works, hydroelectric, railroad and harbor deve~opnent, all have been retired, excep~1i three on which ~9 million was outstanding as of the end of 1947. These three issues have maturity dates of 1960, 1961 and 19630
In 19.30 Finland had outstanding some ()200 million of external debt but, through a consistent policy of debt retiroment, the debt was reduced to about 012 million by 1939. Due to conditions arising from Horld Har II, the external debt of Finland has increased steadily. Since the cessation of hostilities in Finland in September 1944 inter-govermnontal credit of ~~260,253,OOO has been granted of '''hich the United States 10a.l1ed ~p126,314,OOO and Sweden $83 t 139,OOO ..
It is estimated that, by early 1949, the outstanding debt of Finlru:d (excluding reparations to the Soviet Union and desired new loans o~ 090,000,000) \1ill be in the amount of ~392 million" Amortization payments in 1949 will amount to aroU11d $11 million and interest payments to $7 million, a total of ~p18 million. Total service payments are expected to increase to ~\25 million by 1950,. remain at that level through 1951 -1953, rise to ~;1+1 mllion in 1954, the peak payment year, thereafter declining gradually to around f,al million by 1958 and then dropping sharply to $21 million in 1959 and then to $12 million in the period 1966 through 1973.
Finland contemplates borrowing $90 million, mainly in U.S. dollars, between 1949 and 1952. Service of this amount would call for additional payments of $lel million in 1949 rising to U.S. $8.4 r~llion in 1956, in t-1hieh year 8L1ortization payments on the ",hole (..90 million would come into effect. '.Caking account of this additional debt, total service pa;yments would reach a peale of 047.7 million in 1954, decline to t39 million in 1958, drop sharply to $30 million in 1959 and then decline gradually to ~~12 million in 1973, uhen only ~78 million of debt would be outstanding.
APPENDIX II- Contin~ed
The major portion of the service payments are on the "110 million Swedish kroner debt (~197 million), uhich calls for interest and a..."!lor~ization payments equivalent to 05.9 million in 1950, increasing to ~~11 million in 1951;. when amortization payments start.c lIext in importance are Export-Import Bank loans vlhich, it is estimated,i-ull be outstanding in the amount of about 095 million by early 1949.
In addition to the sizeable external debt payments, there are the remaining reparation payments to Russia discussed elseivhere in this report.
APPENDIX II - 'raole A
F:.!nland i s Total External Debt, Interest and Arrort.iEi!.onPayments
(in thousands of U.S. dolla,rs)
~ota1 Debt NO\IT Au.thori2ed Loans Contemplated Ii Grand Total Prin- Prin- Inte- Prin- Prin- Inte- prin- prin- Inte-
Year ci-pal cipnl rest Total cipal cipal rest Total cipal cipal rest Total oUt- Pay- Pay- Pay- Out- pay- Pay- Pay- Out- Pay- pay- pay-
11 It was assumed that both dollar and sterling bonds would be bought in for sinking fund at an average price of 80. Z! It was assumed that all credits now authorized but unutilized would be drawn down before their expiration date.
APPENDIX II - Table C - Pa/?;e 2
... ------.-±J Sterling ~1?t '''-'.'---' Colo~bia and Bra?il Thousl':l.nd.s of P 01.111QS Thcusanc.s of Dollars Due in U,S" Dollars
:J This credit was granted in July 1948 and terms are not available, so it ,,,as assumed that they \,lould be similar to the 75,000,000 peso credit dated March 1947.
APPhl.'J.DIX II - :i.'aOle C - .t:.EifO tl ...2.
-~>'"'''- .. --.-"----.. ----~-~------.------
____ . _______________________ ~1tTed~1'l,_. _______________ - Loans To Be Gr~.nted !±I __ Thqusands..2J S\'Jcdish Kroner Tho~snnd.8 of Do11rtrs Prin- Prin- Inte- Prin- ?rin- Inte- Prin- Prin- Inte-
Year ci1'a1 ci1'a1 rest Total cipa1 ci1'a1 rest Total cipa1 ci1'a1 rest Total Out .... pay- Pay.~ Pay- Out- Pay- pay- Pa.y- Out- pay- pay- PRY-