INTERNATIONAL BANK FOR RECONSTRUCTION … report is restricted to use within the Bank. No. E-204 a RESTRICTED INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE CREDITWORTHINESS

This report is restricted to use within the Bank.

No. E-204 a

RESTRICTED

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

THE CREDITWORTHINESS

OF

FINLAND

February 8, 1952

Economic Department Prepared by: Alexander Stevenson

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CONTENTS

Selected Statistics

Charts

Map of Finland

Summary and Conclusions •••••••••••••• 1

The Current Situation in Finland..... 2

Political Situation............... 2 Recent Economic Developments,..... J The Outlook for 1952 •....••••••••• 4

Finland's Creditworthiness ••••••••••• 8

Area Po'j3Ulation Currenc y Unit

4

National Product

FINLAND

Selected Statistics

331,009 square kilometers 4,076,600 (January 1, 1951) Markka (Sign~ Fmk)

1938 1949 1950 -Net national product (billion Fmk) Per capita income (dollars) Real income per head (1938 = 100)

29.74

100.00

322.68 L.14.74 :;P350

106.40 111.00

Production 1949 1950 Jan.-Oct.

Industrial Production (mo. average) (1948 = 100) 107

Home market industries 111 Export industries 99

Agricultural Production (1938 = 100) 92

Price~ 1949 1950 1951 (Monthly Average)

----..

109 111 106 100

1950

(1948 ::I! 100)

1950

106 108 103

Jan.-Oct. 1951

129 129 129

Wholesale prices Import prices Export prices Cost of living

101 107

94 102

116 137 111 116

166 132 (Dec.) 147 (Oct.) 115 (Sept.) 125 (Nov.)

177 (Dec.) 195 (Oct.) 259: (Sept.) 137 (Nov,)

Money Supply (net) (end of period) (billion Fmk) 49.2 55.6

Foreign Trade 1949 1950

Volume of imports (mo. average) (1948 = 100) 93 100 Volume of commercial exports II II II 11 119 131

Value of imports (c.i.f.)(billion Fmk) 66.3 89.1 Value of commercial exports (f .o.b.) II II 65.1 81.4

Reparations

Nov. 1951

79.9

1951

129

159

155.5

186.6

Delivered through December 1951, ••••••••. ;;)216.0 million Due in final period ending

September 19, 1952. q •••••••••••••••• $ 10.5 million

(in IIreparation dollars" at 1938 prices .;. 10-15%)

Selected Statistics Page 2.

Geographical Distribution of Trade

Percent of Total Imports (c.i.f.) Percent of Total Exports (f.o,b.) (including reparations2

1949 1950 United Xingdom 21.9 23.3 Germany 1.3 4.6 United States 7.9 6.0 USSR, conmercial 12.2 7.9 USSR, reparations Other countries 56.7 58.2

Commodity Distribution of Trade ,

Percent of Total Imports (c.i.f.)

Machinery and vehicles Textiles, including apparel Base metal products Coal, petroleum and products Grains Other

Percent of Total E~ports (f.o,b.) (excluding reparations)

'i,'ood and manufactures rJoodpulp Paper and products Machinery and vehicles Other

Jan.-Oct. 1951 1949 21.2 9.6 6.0 7.6 ..

55.6

1949

18.2 17.9 17.9 9.5 5.1

31.4

47.3 21.8 19.0

2.9 9.0

23.j 2.5 6.4

13.6 15.8 38.4

1950

17.2 18.0 13.9 12.3

6,0 32.6

43.7 23.1 20.0 3.3 9.9

1950 Jan.-Oct. 21.3 27.9 5;3 6~7 8.6 7.0 7.0 8.0 8.8 6.8

49.0 4.3.6

Jan.-Oct" 1951

16.6 18.0 14 .. 1 12.9 6.2

32.2

40.2 32.4 19.8

2.4 5.2

Balance of Payments (million dollars) 1950 1951 (Est.) ~~ __ ~ __ ~ __ ~i~~

CUrrent receipts (excl. reparations) 426 Current payments 453 Current surplus or deficit (-) -27

Dollar Balance of PaJ~ents (million dollars)

Current receipts Current pa~~ents Current surplus

33.2 27.8 5:4

857 758 99

60.6 42.0 i1r.7)

Gold and Foreign Exchange Reserves, October 31, 1951. •••••••••• ~115.1 million Gold and Dollar Reserves, October 31, 19.51 ••••••••••••••••••••• $ 46.5 million Long Term Foreign Debt, June 30, 1951 •••••••••••••••••••• , ••••• $327.3 million

Government Income and Expenditure (billion Fmk)

Current revenue Current expenditures Net capital expendi ture8 Net increase or decrease Overall surplus

l.l1~OJ -101.6 -24.3

(~) in public debt -1.1 5,,9

181.5 -140.4 -38.8

2.4 4.7

1951

1/26/52 NO.60S

BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIONS OF U. S. DOLLARS)

0 200 400 1938 TOTAL

RECEIPTS

PAYMENTS

600

1947 INVISIBLES

FINLAND

800 1000

TOTAL REPARATIONS (U.S.S.R.)

RECEIPTS

PAYMENTS

1948 TOTAL

RECEIPTS

PAYMENTS

U.S. DOLLAR ACCOUNT

RECEIPTS

PAYMENTS

1949 TOTAL --

RECEIPTS

PAYMENTS

U.S. DOLLAR ACCOUNT

RECEIPTS

PAYMENTS

1950 TOTAL

RECEIPTS

PAYMENTS

U.S. DOLLAR ACCOUNT

RECEIPTS

PAYMENTS

1951 (Est) TOTAL

RECEIPTS

PAYMENTS

U. S. DOLLAR ACCOUNT

RECEIPTS

PAYMENTS

I.B.R.O. - Economic Dept.

1/28/52 No.G09

FINLAND EXTERNAL DEBT SERVICE REQUIREMENTS (MILLIONS OF U. S. DOLLARS)

30 I --------~----------~--------~,~--~30 , ALL CURRENCIES

20 ~.. i . • ~~....:..T.:::..OT:...::.A=L'----+ _____ ----1r--______ -+-_----I 20

I: ~>~\:~{~({:~H~J~r~}~~:f~:J~':~i:'~I;~~f~):~I~~?~r~~(~?~.: ·:~:~~···~~~ol!'x~~,'~~·;I~l~~~:I~··~~:x~:~:~:':~::'i:':':~(~::~~:':'~:::~::~':'~:-:'~::~':'i::'~"I:-:I';~' ~ ... ~ .. ~. ~"'~~~~~. 'i .. t==j ~ 0 20~----~--------~----------~----------~--------~'---~20

GEOGRAPHICAL DISTRIBUTION OF EXTERNAL TRADE (PERCENT) (TOTAL FIGURES IN MILLIONS OF U. S. DOLLARS)

80%

40%

O~~--~~~~~~~~~~~~

1938-39 '46 '47 '48 '49 '50 '51 1936-39 '46 '47 '48 '49 '50 '51 AVERAGE (Jan.-Oct.) AVERAGE (Jan.-Oct.)

GOLD AND FORE IGN EXCHANGE ASSETS (MILLIONS OF U. S. DOLLARS)

200 ~ ~~~~~~~~~~~~~~~~~~~~200 L-=r Pf-E_R_fO_D ____ t--_____ -t-_____ -+-_____ --I 150 ! 150

100 f----------+-----~~~~-------r--------~IOO GOLD AND

SHORT-TERM ASSETS IN U. S. 50 _____ \_---r-~~~~~-----~-----~ ~~~~~~~~ o 1938 '47 '49 '51 '53 D J D J D J D J DO

.... --1950 1951 1952 1953

i.B.R.D. - Economic Dept.

600

DELIVERIES OF WAR REPARATIONS TO U.S.S.R. (MILLIONS OF U. S. DOLLARS)

I I I

CUMULATIVE TOTALS

... ""

I 1 1

-_ .... .. - .. -

FINLAND

I I I I I I 600

_ ... ' "",,'

i ...... I ... p 400 400

1/28/52 No. 610

DELIVERIES: VALUED IN ,,,,," CURRENT DOLLARS ~ .......... ORIGINAL TOTAL)

i

PLANNEO~ ___ } ~ "'''" , ....

"",,'"

~- ... " ~CTUt>.L -, REVISED TOTAL , ... .........

(·'REPARATION DOLLARS") -- DELIVERIES: VALUED IN

200

ANCELLED: ULY 1948

200

"REPARATION DOLLARS"*· ~----~ I I I I I I . I I

Os 0 M J S D M J S 0 M J S D M J S 0 M J S 0 M J S D M J SOU J S DO '44 1945 1946 1947 1948 1949 1950 1951 1952

*i.e.volued at 1938 prices increased by 10-15%

300

200

100

o

150

100

VOLUME OF TRADE (INDEX, 1948= 100)

TERMS OF TRADE * (INDEX. 1948:: 100)

.---------~--~----~---------.---------.300

~--------+-~~----~--------~--------~200

r-~~~~~~~~--~---------r--------~IOO

~--------~--------~----------~--------~150

r---------~~-Y~~-+----------r_--------~IOO

50 ~~~~~~··~~~~~~~~~~~~~~~50

*Index of export prices divided by index of import prices.

WHOLESALE PRICES, MONEY SUPPLY, AND COST OF LIVING (INDEX, 1948:: 100)

200~ '-1 ---------,

i YEARLY

• MONTHLY I

WHOLESALE PRICES::;s.' ...... ;::; 15°ri , I , ~!

§(I(::ST OF LIVING ? 100'

50r-~r-------~

o 1938 '47 '49 '51 '53 D

.. ~. .,» ... .;

I

J

1950 D

MONEY SUPPLY

1

J

1951

1 I

D I I I

J

1952

i

I I I

D I I I Li

J

1953 I.S.R.D. - Economic Dept.

200

150

100

50

1/28/52 No.611

FINLAND GOVERNMENT REVENUES AND EXPENDITURES (BILLIONS OF MARKKAS)

200

1949 EXPENDITURES

REVENUES

1950 EXPENDITURES

REVENUES

1951 EXPENDITURES

(Est.) REVENUES

1952 EXPENDITURES

REVENUES

INDUSTRIAL PRODUCTION (VOLUME INDEX, 194B=100)

200 YEA~Lyl I I I I I I rr-r-r-1rT""1rr-1----"---rT""T'"T---rT--r-T--rT--rT--rT""TTTlTlrr"rrrrrrrrrrrnrl

150

100·.

I HOME MARKET INDUSTRIES

501 ALL INDUSTRY EXPORT

INDUSTRIES·--~------1I------·--t-------I

o 1938 '47 '49 '51 '53 D

UTILIZATION OF

J

1950

GROSS NATIONAL PRODUCT (PERCENT)

D J

1951 o J

1952 D J

1953

REAL NET NATIONAL PRODUCT (INDEX, 1938 = 100)

D

200

150

100

50

0

TRANSFERS OF RESOURCESAND INCOME ABROAD (NET>* o 20 40 60 80 100

DOMESTIC I GROSS INVESTMENT

I---t---t-------t----i --,--1 I, :::

r----j--r--t---j-------t---j "0

I ~ ... : .... : ...... : .. :: ....... ::-:;: ..... :., ... .

1950 ~·:;':·Y':':·:·:·':::·:f::·::.:.:::·.::t:.:-:_·::_::::_--' 1947 1948 1949 1950

~--~----~--~----~--~IOO

1951

*Includes deliveries of war reparations

I.B.R.D. - Economic Dept.

".

",

G U L F ...

MAP OF

FINLAND L.ea 10

willi

100 !

Summary and Conclusions

1. The present coalition Government, like its predecessor before the July elections, is dra:wn from the '~grarians, the Social Democrats and the ~vedish Party. It reflects the distribution of political forces in Finland and attempts to resolve the basic conflicts of interests, notably between the farmers and the industrial workers. Because of these conflicts of interest, no coalition can be very strong but should the present one break dovin, it would probably be replaced before long by a grouping which would fallOff policies not very different from those of the present Government.

2. The spectacular rise in the prices of timber products since Korea has had a great effect on the Finnish economy. In 1951 commercial exports more than doubled in value compared to 1950 and the balm ce of payments, excluding reparations, showed a current account surplus equivalent to about ~100 million of which about ~20 nul1ion in gold and dollars. In great part this surplus has been added to the countryl s slim reserves of foreign exchange.

3, Total resources available for consumption and investment in 1951 will be at least 10% higher than last year. Because of the balance of payments surplus, however, money j.ncornes continue to rise more rapidly than available resources. This situation is contrasted yd.th earlier postwar years, when the inflationary pressure ca~e from budget deficits and the expansion of credit to business. N:ost of the additional incomes are being earned by the farmers and the woodworking industry and are largely being invested.

4. Economic developments in 1952 will depend mainly on the prices of timber, pulp and paper and on the Government's success in implementing its plans for economic stabilization~ Though lumber prices may well decline somewhat from their present abnormally high levels, the balance of payments will probably still show a surplus in the first half of 1952. It is still too early to say whether the stabilization program ,viII be successful. Because it is a compromise between the major economic and sociru. groups in the country it may well not bring complete stability quickly. On the other hand, under­lying economic conditions are more favorable to stabilization than at any time since the war and there is little doubt that in Finnish conditions the plan is all the more workable because it tries to spread the burden over everybody, even at the price of SOPlC inc,)nsisten~ies.

5. Finland could without much difficulty service an external debt somewhat larger than that now outstanding. In the absence of general currency convertibili ty, however, the problem of servicing dollar debt becomes more serious. A significant improvement in Finland's pattern of dollar debt repay­ment has been effected by arrangements made .nth the u.s. and Argentine Govern­ments last spring, as a result of which the fixed oiJligations due in the next few years have been reduced to ~12/13 million annually, and the uncomfortably high peak expected in the period 1953/57 has been eliminated. Nevertheless, Finland's dollar position remains vulnerable and since general currency con­vertibility cannot be safely assumed in the near future, such new dollar borrowing as she undertakes should not be so large as to increase substantially the amount now outstanding.

- 2 -

The Current Situation in Finland

Political Situation

6. Coalition governments have long been a characteristic feature c~ Finnish politics. As may be seen from the following table summari~ing polit­ical changes in recent years, for more than a decade no One party has com­m~~ded an absolute majority in the Diet.

Parties

Social Democrats 85 Agrarians 56 Communists Conservative Parties

(Finnish & Swedish) 43 Finnish Peop1e t s Party

(and predecessor) 6 others 10

200

Seats in Diet

50 49 49

42

9 1

200

54 56 38

47

5

1951 -53 51 43

43

10

200

Change from 1948 to 1951

-1 -5 "5 -4

1-5 o o

Furthermore, conflicts between all parties make the maintenance of a coalition government difficult.. On the other hand, the strength of the various parties has remained strikingly stable throughout the Dostwar period, and though a new coalition conceivably could emerge the present government fell, it is more likely that the existing political alignment would be maintained With only a change in personalities~ Under present circlliilstances the Communist Part.)' could hardly gain a place in any new government.

7. The present Government is a coalition consisting of 7 Agrarians, 7 Social Democrats, 2 from the Swedish People1s Party (conservative) and 1 non-partisan. The Prime Minister, Mr. Urho Kekkonen, is an Agrarian while the non-partisan, Mr. Sakari Tuomioja, occ1.lpies the important post of l'llnister of Foreign Affairs. A coalition of the two main parties, Social Democrats and Agrarians, is probably the most stable arrangement possible. In recent years each has trieq to govern vvithout the support of the other, vdth the result that the conflicting demands of the groups they represent (the industrial workers and farmers) have led to politic~ and economic instability. The present ooalition dges not, of course, remove this conflict but should enable it to be better controlled.

8. There has been no change in Russo-Finnish relations, which Prime lliJinister Kekkonen has so far been extremely astute in handling. Although reparations deliveries do not end until September 1952, these do not now con­stitute a serious problem. The negotiations with the Soviet Union on the trade agreement for 1952 apparently proceeded smoothly and the agreement has recently been signed,

- 3 -

Recent Economic Developments

9. The spectacular rise in the prices of timber products following the outbreak of war in Korea has had a marked effect on the Finnish economy. Its impact was not felt until the end of 1950, but by the fall of 1951 the export price index was alrrlos t twice as high as in December 1950. Stimulated by such attractive prices, exports have increased in volume also and for 1951 as a whole were about 20% above the 1950 level. Consequently the value of exports, equivalent to <rlore than '0,800 million, was !aore than twice as high as in 1950, so that, despite a rise of close to 30% in import prices, Finland was able to import about 30% 1U0re than she did in 1950 and still show an overall balance of payments surplus on current account estimated at the equivalent of about ~lOO million. The greater part was in sterling but there was also a surplus in gold and dollars estimated at close to ~20 million. Most of the surplus viaS added to the country's foreign exchange reserves. Already by the end of October the gold and short term foreign assets (net) of the Bank of Finland were ~76million (equivalent) higher than at the end of 1950, while its gold and short term dollar assets (net) had risen by ~;15 million.

10. In great part as a result of the boom in the export industries, the general level of economic activity in Finland has continued to rise. In 1951, industrial output is estimated to be about 18% higher than in 1950, and although crops were about 15>~ lower than in 1950 because of insufficient rain the out­put of &~imal products was probably about 10% higher, . All in all, the real national income in 1951 was estimated to be about 10% larger than in 1950. Because of the improved balance of payments position, the inc~ease in total resources available for consumption and invest!nent may have been even slightly greater.

11. . Nevertheless, the rise in available resources - a.s in former years has been more than matched by the increase in rnonej incomes. In the first eleven months of 1951 the money supply ~ose by more than 40%.

12. There has been a significant change in the source of inflationary pressure. In 1951 the management of the state finances had practically no effect on the money supply. The strict credit policy of the Bank of Finland has also been continued,and last summer when the position of the commercial banks was eased by the mounting export receipts, the Bank of Finland forced them to reduce their rediscount credits to the amount of their "own fundsl!.

13. The increased money in circulation, which in earlier years came from budget deficits and the expansion of private domestic credit, is now attributable almost exclusively to the balance of payments surplus. Despite the export tax imposed on timosr products, the gre at bulk of the increased export proceeds have found their way back into circulation. The proceeds of the export tax are paid into a special account at the Bank of Finland. In 1951 twenty perqent of the funds ~cc-umulating in the account were paid to the Price Equalization Fund to I'educe consumer prices. Apart from 7 billion marks earmarked for payment to the Price Equalization Fund in 1952, the woodworking industry borrowed ttost ~r the remaining funds back from the special account.

- 4 -

14. ',ath the dramatic rise in the prices of timber products, the farmers - most of whom also ovm some farest land -and the woodworking industries are now enjoying a degree of prosperity such as they have not experienced for more than twenty years. Much of the additional incomes they earn are appar-ently being directed to the purchase of investment goods whose prices have risen sharply. Sales of agricultural machinery have been very high, building in rural areas is intensely active, while the woodworking industries have embarked on a very ami)i tious expansion program.

15. The current investment boom has one further noteworthy feature. So far the rise in the cost of living vmich accompanied it has been relatively modest. ulthough there has been a tendency for IIblackll wages to be paid in the building trades in rural areas, new wage demands have not ;Jeen an important inflationary factor since the econo:nic truce was reached on May 2, 1951 between the Government and the most important economi.c and political groups in the country, an agreement which provided a breathing space va thin y;,hich a stabiliza­tion program was to be worked out.

The Outlook for 1952

16. Economic developments in 1952 will depend mainly on 1) the prices of lumber and related products, particularly pulp and paper, and 2) the Government's success in implementing its plans for econQnuc stabilization.

11. Prices of lumber; ~)\I1 p and pap::;r are traditionally subject to wide and sudden fluctuations and $hort-rw~ market developments are exceedingly dif­ficult to forecast. So far prices continue at about the highest levels reached in 1951, particularly in Europe, where the dollar shortage caused prices of Scandinavian exports to;iestern lturope to rise substantially (about 30%) above American prices. There are some indications, however, that the turning point may not be far off. :-}e cause of the deterioration in it SJal ance of payments" the U.K., ,easily Finland's largest customer, will spend considerably less on lumber" puJ p and paper products in 1952 than she dicl. in 1951, and is attempting to bring European timber prices down by revoking the prohi')ition on private imports from North America and instituting a global quota system. However, the demand for timber, pulp and paper products is still active ann part of the loss ot the U.K. market may well be ta~en up by increased sales to other countries l

notably -.Jestern Gerrna."lY and Latin America.

18. In pulp, paper and plywood the Finnish producers estimate that, taken as a whole, orders already placed ",<ill cover at least the first half year's pro­duction. In many cases, however, prices have not yet been fixed. The situation

entirely different in sa~m soft wood which is, hO'wever, delivered only in the open water season from 8.bout llIay to January. Here the Soviet Union appears to have agreed to take a larger quantity of the somewhat smaller supply expected next season but apart from this nothing has yet been sold and buyers and sellers are each trying to out-wait the other. In this sector the action of the British buyers will be extremely importa.'1t.

19. On the basis of the available information, it is impossible to tell when and, if so, hovr far prices of lumber and related product.s will fall. How­ever, taking into account the seasonal fluctuations in Finnish trade and also the Finnish licensing policy and the supply situation of products which Finland imports, the Finnish balance of payments will probably continue to show a surplus

- 5 -

at least in the first half of 1952~ The present dollar surplus on current account, which has been recorded without the benefit of premium prices, will probably also continue, though the pulp and newsprint markets in the U.S. are sho\ving some signs of saturation.

20. The attempt to achieve internal economic stabilization is closely connected with the balance of payments position but is much more complicated for reasons that are at least as much s0cial and political as economic. Pur­suant to the economic truce agreement of May 2, 1951, the Economic Planning CO~fdssion, appointed to consider the longer-run measures necessary to reestablish economic equilibrium, drafted a stabilization program. The most important parts of this program, Which was completed at the end of September, are addres$ed to t,~o main problems: a) the reduction of the rate of investment; and b) the pre­vention of a rise in wages.

21.. The rate of investment in Finland has been considerably higher since the close of the war than in 1938. In recent years gross investnent (including repairs and maintenance ~nich account for about one-third of the total) has been 27-30% of gross national income at market prices, compared with 22,.5% in 1938. This is clearly a very heaV'.1 burden for a country where average income per head is equivalent to around ~i400 anG where the rigors of climate necessitate relatively large expenditures on food, clothing and heating.

22. This high rate of investment was in large part made necessary by wartime neglect, physical destruction, loss of territory, reparations obliga­tions, the absorption of displaced Kare1ians and the fairly high rate of popula­tion increase. The bulk of this investment has naturally been in dwelling construction, industry, power and transportation. d'ith the exception of urban housing, much of the backlog caused by the war has been made good.

23. In earlier postwar years the high rate of investment has been financed ":Jy the Government, through bank credits and, recently in particular, mainly out of earnings arisins directly or indirectly from the export trade. It has been in part responsible for Finland's persistent post-war inflation, and at the present time it is perhaps the greatest single threat to monetary stabilization.

24. The aim of the stabilization program is to reduce investment by about one-seventh or about 5% of the gross national income and 7% of the volume of consumption.. This is to 've done by various means, notably by fisca;I. measures, by control of credit, construction and imports, and by the sterilization of part of the incomes obtai~ed as a result of the hi&~ export prices.

25. The program recommends that a budget surplus be maintained until economic equilibrium has been achieved. In the light of the 1952 budget pro ... posal, the amendments so far made by the FinaYlce Comuittee and the other fiscal changes proposed in the stabilization program, however, it would seem rash to . expect more than the maintenance of a balanced position in 1952. ~dth the large proportion of revenues coming from indirect taxes, Finland may well find balancing the budget more difficult in a period of stabilization than in years of inflation ..

26. A somewhat unorthodox feature of the program is that it recommends the lowering of interest rates. On October 18, 1951 the Bank of Finland decided to reduce the discount rate by 2% to 5.15% from December 16, 1951, and the

- 6 -

Finnish banks reduced their rates from January 1, 1952. It is hoped that the reduction in interest rates will reduce building costs and rents, but othe~~se the effect of this change on the volume of investment will be limited, both since a very high proportion of investment in Finland takes the form of se1f­financing and mainly since the Bffi1k of Finland retains direct control over every loan of over 500,000 marks (;;2,165).

27. In accordance with the recommendation of the Planning COmmission, the Cabinet has appointed an Investment Council to supervise the reduction of in­vestments and to draw up an investment progran for the various geographical. and economic sectors of the country, giving preference to investments which will increase production, reduce costs and alleviate the housing shortage. Since the Council is composed of the same competing and often conflicting inter­ests wh~.ch govern the country, however, it is difficult to believe that it will be able to achieve much that is very unpalatable to any grqup. Control of imported investment goods vvill be easiest and will be carried out through a licensing system which has in the past worked extremely well. The Council is now concentrating its efforts on the reduction of building. At present the Government estimates that through the issuance of building permi. ts it can control about ,30% of the total volume of new construction. .The legislation necessary to extend that control to 80% of all construction, which represents about 40% of gross investment in Finland, is being worked out. The avowed aim of reducing the Volume of building by one-seventh will not be easy to achieve. It has already been conceded that because of the acute housing short­age the construction of dwellings should be on the same level as in 1951. To allocate the larger cut required in non-residential construction vdll test both the Council t s ingenuUy and the major social groups t willingness to compromise .. Furthermore, there is the additional difficulty that most of the building remain:i.ng uncontrolled will be in rural areas where most of the recent expansion has taken place"

28. The reduction of the inflationar;{ effect of the high export incomes is to be achieved by the extension of the system of eAport taxes described earlier. If export prices and tax rates remain at their present levels, it is estimated that in 1952 about 23-24 billion marks (about :;PlOQ million) would be paid by the woodworking industry into the special account at the Bank of Finland. Half of this is to be trans£erred to the Price Equalization Fund, a transfer which has in part already taken place since 7 billion (~3Q million) had to be paid in advance in 1951. The other half is to be paid into a special fund and ways are now being sought by the Government to sterilize this and return it to the exporters in 1959, 1960, and 1961, However, investment plans and statements of the woodworking industry reveal a natural desire to convert those earnings into extensions of plant and equipment just as they are now doing and it is by no means certain that the Government plans will be fully successful.

29. The export of rounm~ood posed a special problem? Roundwood is pro-duced mainly by farmers and,at present high prices, is being exported in rather large quantities, mainly to Svveden for Plllping there. The strength of the orgari­ized farmers is reflected in the reoomHlendation by the Planning Commission of a relatively low e:l{cise duty on roundwood exports {only 200 marks or 87 cents per piled cubic meter, which at present prices would yield only about one billion marks ($4.3 million) in 1952). Although the legislation required fOr control of roundwood exports has the support of the Agrarian Party, it might not be accepted by the Diet since the Communist Party has announced its opposition

and commands the proportion of votes in the Diet (one-sixth) requi~ed to block it~ Furthermore, the guess may be ventured that if the bill does become law the 'Proceeds will be spent rather than sterilized in accordance with the Planning Commission's recommendation.

30. Among the series of measures designed to prevent a rise in money wages one of the most noteworthy is that wages are to be pegged to a new cost of living index based on the price level prevailing in October 1951. Unlike the previous arr~lgement by which adjustments were made monthly, wages are to rise for every quarterly rise of 5% in the index. At the same time, price controls are maintained, the sales tax has been remitted on certain essential consumers' goods ~nile consumer rrice subsidies have been removed from others and disposable incomes in the lower brackets somewhat increased by a reduction in direct taxes. The Government estimates that the net effect of these measures will not disturh budgetary equilibrium. Furthermore, the Planning Commission recommends that the assets of the Price Equalization Fund should be used to redUce the prices of essential imports such as coke, rubber, wool and cotton, while the supply of consumers' goods and raw materials is to be increased by additional imports (mainly textiles) which may also help to get speculative inventories on to the market. It nov. appears that there was no wage increase in December, thus ensuring substantial wage stability for practically a year.

31. The power of the agrarian interests in the coalition is also seen in the maintenance of subsidies paid to farmers for such things as fertilizE;rs and the removal of the sales tax not only on some consumers' goods, but also on agricultural machinery. Furthermore, the stabilization program contains provisions which, if implemented, would guarantee prices for farm products in such a way as to naintain farmers' income at the level of October 1951, and would also J;marantee that their income should be in a definite fixf'4.;pr@~.rtJon to that of other social groups.

32. It is s till too early to say whether the stabilization program will be successful~ Because it is a compromise between the major economic and political groups in the country, it will probably not bring complete stability quickly. On the other hand, there is little doubt that in Finnish conditions, it is the more workable because it tries to spread the burden over everybody, even at the price of some inconsistencies. Basically, several factors are favorable to stabilization. Previous experience of dissolving the somewhat uneasy coalition that governs Finland was disastrous to economic stability and the elections of July 1951 shoned that the distribution of political strength remains basically unchanged. Real income and consrunption per head have gone up steadily. Both are now well above prewar and should continue_ to increase particularly since reparations deliveries are beginning to taper off. -I'v-ith the eaTIng of winter, protracted strikes are probably less likely, other things being equal, than they would have been a few months ago. Finally, several. of the stabilization measures proposed are already in effect, and progress continues to be made. The greatest danger is that if the current shift in income distri­bution in favor of agriculture and the woodworking industries is not controlled, the Social Democratic leaders in the Central Association of Trade Unions may find that, with the Communists waiting to profit by such a situation, they can no longer agree to the compromise on wages which they have so far accepted, and which is basic to the program.

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Finland's Gredi tworthiness

33. To an important extent the risks involved in lending to Finland arise from her location between East and ',';est and her economic importance to both. Because of her geographic position, Finland is of considerable strategic import­ance to the USSR and for obvious reasons must avoid arousing the antagonism of her eastern neighbor.. Finland also obtains valuable supplies of grain, oil, and coal from the East. Furthermore, reparations payments do not end until September 1952, and thereafter the Soviet Union should be an important outlet for the products of the Finnish engineering industry which was very rapidly expanded to manufacture reparations goods - at costs which are still very high in many lines. The fact that these industries are not competitive by inter­national standards and that their production is directed primarily to the Soviet Union renders Finland more vulnerable to Russirul economic pressure. On the other hand, Finland has succeeded in maintaining her independence despite the fact that she has recently fought and lost twice against the USSR. She has close cultural and commercial ties 'with the v/est, and those she is anxious to retain. Furthermore, her exports of timber products are of great value to the West and might conceivably oe interrupted if economic warfare were stepped up or if the USSR chose to closo the Gulf of Finland. Russian intervention in Finland cannot be ruled out.- Such action would certainly provoke Finnish resistance, however, nd.ght force Sweden to aba.'1don her tradition~ neutrality and might even bring general war in Europejp .

34. . Internally there iii also the risk that stability might be disturbed by a renewal of the conflict bet,Yeen the agrarian groups and the industrial workers, that this would take the form of prolonged strikes in key industries and would result in further rapid inflation. Although this can never be rlJled out as long as the present constel12.tion of political and SOCial forces persists, and although the present struggle over the stabilization program might provoke a cabinet crisis, the chances of achieving internal nnancial stability have . grown substantially over the past year. It should, hO'.'I'ever, be noted in this connection that, .~hould stablll ty not be fully achieved, the consequences of a moderate inflation would not be as serious in Finland as in some countries. In the recent past Finland's import control system has worked well. Further­more, any increase in the home demand for -,{ood products will be too small to affect export sales s1 gnific ru1tly. A.'1d, finally, whenever the competi ti ve position of the woodworking industry has been threatened, devaluation has fol­lowed, and has not interfered with the servicing of foreign debt.

3,. Finland1s long-run balance of payments prospects are almost entirely dependent upon exports of wood and wood products ~hich have regularly accounted for over 90% of the total value of her exports (excluding reparations) in the postwar period. The need to deliver metal prOducts to the USs...'1. as reparations has, indeed, led to a considerable rise in the relative importance of the metal and engineering industries. Because of this development, the relative importance of exports of forest products 'nIl in the long-run be reduce~. The conditions under whicn the engineering industry was founded have left a legacy of high costs and uneconomic production in many lines, which are now beginning to be corrected. If this can be done, however, such a shift in the structure of exports would improve the country's econolfQ.c situation and make it less vulner­able both to Soviet econowic pressure and to the sudden changes vmich character ... ize the timber, pulp and paper tradea. Nevertheless, even with such a structural change, exports of wood and wood products should still remain predominant.

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36. It is fortunate for a country in such a vulnerable position as Finland that although violent short-r~~ fluctuations may well occur, the long-run world outlook for timber and related products is favorable. Only a 13101, expansion can be expected in the suppl~r of softwood timber and products available to the western world. On the other hand, the use of wood in one form or another in construction is expected to rise moderately despite the expansion in the use of cement and other materials, while, With the spread of education, with rising world population, higher standards of living and the constant development of new uses, the demand for pulp, newsprint and packaging materials should continue its rapid increase. In brief, the supply situation may be expected to continue tight and prices to be relatively high.

37. In Finland, as in Europe generally, the annual timber cut has been for some time approximately equal to the rate of forest growth. Particularly in the north, however, it seems poss ible to increase the yield somewhat by better forestry and by better transport facilities which "l'lOuld make possible the commercial utilization of smaller logs. Although great progress has been made, more could be done to use savrmill waste. Furthermore, the pulping of birch" at present largely used as fuel, now ap]:ears corr:mercially possible, Finally, the trend of development in the Fi~~ish woodworking industry is to produce and export products ,\lIihich are more highly processed and therefore of greater value~ For all these reasons the industry should be able to increase steadily the value of its exports, As in the past, however, its major markets will be in Europe though Latin America may also be increasingly important. North America is substantially self-sufficient in pulp and paper, and there Finlond '.rill remain a marginol. sunplier. NiJvertheless, in \'ie1ii of the rising trend consuYt1]Jtion, Finnish exports to the U,S. shO'.lld continue to expand •

.38. Finland's balance of payments position has improved steadily through.,.. out the postwar period. Even before the present export boom she had substantially achieved overall balance on current account (excluding reparations). In 1951, with abnormally favorable terms of trade, she had a surplus equivalent to about $100 willion. At the same time she has repaired heav:, war damage, resettled more than 10% of her population, greatly expanded her engineering industry and made reparations deliveries to the Soviet Union equivalent to about $500 million. And all this has been achieved despite substantial territorial losses and with ex:ternal assl.stance of' only about $.300 million of loans. 1iath the burdens of' the immediate postwar years behind her and assuming rather favorable terms of trade, Finland should be able to maintain overall equilibrium in her balance of payments at a level of trade sufficiently high to service her external debt. Annual service payments on that debt average the equivalent of $23 million in the JB riod 1952-54 and only ;~18 million in the folloYling six years. \1ith gross foreign exchange receipts on current account in the past two years averaging about $600 mil.lion equivalent per annum, the service of foreign debt would not, under conditions of general currency convertibility, give rise to any diffieulty~

39. finland is, however, a relat~vely underdeveloped country ~ much of her industry grew up after she obtained her independence • and it would be sound policy for her not to payoff her foreign debt too quickly, but to apply some of her gains to increasing her monetary reserveS, which have hitherto been inadequate, and to supplement her own resources by borrmving abroad to strengthen and diversify her economy while at the same time enabling the people to enjoy a steady improverr.ent in their standard of living.

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40. Finland's dollar position is less strong than her overall position. Since major European currencies, notably sterling, may remain inconvertible for some time, her dollar balance assumes crucial importa.'1ce. '~uite apart from this yearls surplus of '11'20 million - in part a windfall - Finland's dollar balance has shown steady improvement as a result of increased exports as well as reduced imports. After 1952, as more wheat ani petroleldm - now ~n part imported against dollars - become available in exchange for commercial exports to the USSR, it should improve further.

41. 'ithin the past year important adjustments have been made in Finland1s del)t. The rearrangement of the U.S. Government debt smoothed out dollar payments somewhat. More important, arrangements have been made with Argentina to repay the debt to that country more rapidly and in kind. As a result of these changes the fixed obligations due in dollars in the next few years have been substantially reduced, and the uncomfortably high peak ~hich would have occurred in 1953/57 under the previous agreements has disappeared. As of January 1, 1952, Finland's outstanm.ng dollar obligations will amount to rather more than bl50 million. Total payments on this debt amount to ~~8 million in 1952 and thereafter average about ',;>12 million for the rest of the decade.

42. 113spite these improvements, Finland I s dollar position remains vulner-able. This so, less because of any long-run inability to halance dollar receipts and paJ1nents bilaterally than because of the susceptibility of her dollar exports to fluctuations in the level of U.S. eccnomic activity, taken together with the fact that her fixed obligations are large in relation to the total volume of her dollar trade. Average dollar interest and ~lortization payments of around ~p12 rrillion in the remainder of the decade would absorb about one-fifth of gross dollar receipts even on the unlikely assumption that they remain at their present exceedingly high level. If dollar receipts were to drop to the 1950 level, debt service would absorb close to two-fifths of the total. Fixed liabilities of this magnitude may thus become very onerous if the value of Finland's dollar exports, which are more than ordinarily sub­ject to fluctuations, contracts at all sharply.

43. In these circumstances, such new dollar borrcwving as Finland under-takes should not be such as to increase greatly the amount now outstanding. Given the amortization payments totalltng $iS million in :tho period 1952..,..54 .on loans already outstanding, additional borrowing of about ~20 million over the next three years would maintain Finland I s dollar indebtedness at about its present level. Even if present exports to the U,S. decline somewhat, additional dollar borrowing of this size would be within Fir~andts capacity to repay_ Her ability to service debt in other currencies is greater, but the possibilities of oorrowing in these currencies are fewer.

44. In considering any loan to Finland the possibility of Russian economic or even military pressure against Finland cannot be ruled out. This risk has been aocepted by the Bank: in making the previous loans. Furthermore, if Ilulitary action occurred and could not be isolated, the risk in lend1ng to Finland might not be very different from that involved in lending to most other European countries.