The border as a factor in the development of the forest sector in Finland – past, present and future

Jakob Donner-AmnellResearcher, Karelian Institute/UEF

18.11.2013

Background

The forest sector – forestry, forest industry and related activities – has had a central role in Finland´s economic development for about 150 years Between 1920s and 1970s, the forest sector was the biggest export sector, the motor of the national economy and employed a lot of people in its production chain

After that period, the Finnish economy has developed into a more versatile direction, with engineering, chemicals, electronics, metals etc in rather strong roles But still today, forest sector´s share of total export is close to 20 % and its share of GDP is around 5 %. This is very much for a developed country, especially when the global forest sector is going through one of its biggest structural changes

Many studies have still estimated, that forest-based activities can be rather important for Finland in the future

The border is a constant (f)actor – but in different roles over time

Because some resources are getting scarce on the global level, demand for products based on renewable resources seems to be growingEconomic sectors built on a renewable basis should be well equipped to grab such an opportunity The Finnish forest sector has been considered to have the necessary prerequisities for this So if you are interested in the role of the forest sector in history or future, the Finnish case is interesting to study

And when doing that, you soon notice that the border (and Russia) is clearly present in the story – but the role is very different in different phases

At the end of the presentation, we will focus on

- what the future might bring with it for the forest sector - what the role of the border might be in different scenarios

1809-1917: Finland develops as a society and as a major actor in saw milling

Finland was an autonomous part of Russia (a grand duchy) between 1809 and 1917Without doubt, Finland gained from this position and developed rather strongly during this period in many ways

Saw milling grew very big and affected economic and social development in FinlandSawn timber was exported mainly to Western Europe, but the emerging production of paper leant mainly on the Russian “inner market” This is a main reason why South East Finland is a centre for forest-industrial production still today The forest sector also caused some problematic issues in forest use and between different social groups (uneven distribution of the benefits)But despite many tries, it was not possible to solve these issues properly

1918-44: An independent republic, a strengthening but dependent economy

The revolution in Russia had many direct and indirect effects on Finland The most evident one is Finland´s independence, which would not have taken place without that (at least not then!)Also the outbreak of the Finnish Civil War in 1918 was partly a consequence of the revolution in Russia Anyway, Finland suddenly found itself in a very different situation The country had to build its own foundations, when the Russian-lead administration vanishedRussia closed its borders, so the big trade with Russia (also with paper) had to be redirected to the west

Many sectors did not manage to do that – but the paper industry didThis was helped by the fact that forest industry suddenly dominated Finnish exports and the national economy and had to be taken into account accordingly

Finnish policy focused strongly on building a solid economic, social and political basis for its existence in 1920-40s

In the economic sphere, this meant strong support for developing the forest sectorThis took place in many different ways, from building ports to enlarging relevant education and research

At the same time, agriculture was also developed, because it was seen as a basis for independence and political stability A piecemeal land reform was put through, which almost doubled the amount of farms New legislation stopped forest companies from obtaining more forest landThese moves changed the relation between forest industry and land owners from partial suspicion into interdependence

This was helped by the fact that foreign owners of forest industry left Finland because of the political risksSo the forest industry turned also in this way into a national industry, with the state as a key owner (Enso-Gutzeit and Veitsiluoto) and as a strong industrial actor also otherwise (energy, mining, metal companies)

In the interwar years, the border was “high” – very little trade or contacts (only notable exception: people moving from Finland to Soviet Republic of Carelia)

1945-1985: rapid growth of Finland and its forest sector

During this period, Finland rebuilt itself, prospered and changed into an industrial welfare-stateUntil the late 1960s, the forest sector was the central economic actor in this development

The forest industry grew very rapidly and modernized a lot during this periodIt changed its structure to strongly rely on paper production in big efficient units

This development was helped by European recovery in the post-war decades until 1970sFor the forest industry, it meant strong demand for sawn timber, pulp and paper

The border was one key element in the story

Because of the peace treaty with Soviet Union, Finland had to put much more effort on engineering and metal industry

This added strongly to the development of a Finnish “metal and technology cluster” with strong links to forest industry: - ship building, production of paper machines, equipment for pulping and saw milling and machinery for logging

As a part of the special relation with Soviet Union, Finland´s trade with its neighbor was extensive

It was based on a barter principle, so it was important to find suitable goods in both directionsEspecially when the price of oil and gas was high, it meant that Finland could export a lot of different products to Soviet Union

Also timber started to be imported from Soviet Union in bigger volumes in the 1970s (after a long pause)The forest companies gained from this, as it kept the price of domestic timber down

1986-2006: wind of change

During this period, Soviet Union fell in pieces and Russia was re-established Finland experienced a boom in late 1980s, a heavy recession in early 1990s and a long boom after that

Because the export to Soviet Union dropped and the eastern neighbor seemed unstable,Finland decided to apply for membership in EU and also EMU, which soon happened

From mid-1990s, the Finnish economy thrived for a decadeThis was unusual and also one main reason was unusual – a Finnish company as global market-leader

Also the Finnish forest industry grew and internationalized both in production and ownershipStill, it was rather dependent on paper markets, on Finland and on imported Russian timber(1/3 of roundwood was imported)

Risks attributed to these factors were brought up by some critics, but were ignored

2007-13: risks get real in the global economy and the forest sector

On the global level, this short period is dominated by two themes:

- the global recession, starting 2008 and still firmly on the scene, with some variation between areas- the importance of resources has been on the rise, reflected in rising price levels and a “resource rush” In Finland´s perspective, there are some more nuances:

1. the prolongued recession in Europe affects an export-dependent economy such as Finland strongly2. Nokia´s failure to keep any position in the market for mobile phones is a blow against the strong ICT-identity and national pride linked to it3. to some extent, this has been compensated by success of Finnish companies in other segments, such as electronic game companies (Angry Birds, Super Cell), clean tech (Outotec, Kemira, Wärtsilä) or bio refining (Neste Oil, UPM)

For the Finnish forest industry, this period has until now consisted of the biggest peacetime decrease of production, turnover and personnel

Why has the forest industry run into structural problems?

The global recession is one part of the story, but the most important factor is the rapid decline of printed media and advertisement

It started in North America after 2000, reached Western Europe some years later and is starting to affect media and markets for printing paper everywhere

Canada has until now faced the biggest decrease, followed by FinlandOf the Finnish companies, UPM and Stora Enso have suffered heavily, closing many factories and reporting losses or poor results for most of the period

One additional hardship for the Finnish forest companies came from Russia´s decision to impose export duties on timberAs a big part of their production was dependent on timber import, this lead to higher costs and contributed to temporary or permanent closures

In a few years´ time, the Finnish forest industry has made a major restructuration of its productionThe main goal has been to be less exposed to the risks linked to the paper market and to timber import

Practically, it has meant scaling down production in Finland and Western Europe and investing only in growth markets – but not in Russia

DEVELOPMENT CAN ALWAYS TAKE MANY DIFFERENT DIRECTIONS IN THE FUTURE

- There are many alternatives – despite the dominating rhetorics in economy and politics

- Our interpretation of the future has a strong influence on the decisions and plans we make: WHAT KIND OF FUTURE ARE WE PREPARING FOR?

-Any single future is unsufficient as a basis for planning or decision-making.

- Also the forest sector/use of natural resources should be studied in a broad perspective

World development might turn into many different directions

World economy Growth triggered by new Indebtness and high resourceeconomies prices as obstacles

World trade Globalisation deepens Trade blocs/regional solutions

Geopolitics Common interests dominate Own interests dominate

Climate measures Rapid development Modest progress

Energy Low price, old forms of High price, renewables dominateproduction dominate

Land use No scarcity, no price hike Scarcity and conflicts between uses,

land price hikes

Food security Guaranteed by effectivity Endangered by many factors

Technology Incremental development Breakthroughs and /or failures

Consumption Direct consequence Active process, surprises possible

Citizens Stay calm, because React , because of unsecurity and wealth is spreading lacking influence

The future is different – a major update should be made

A return to strong growth of the global economy will not take place soon; many economies are heavily indebted and there is much unsecurity

Trade liberalisation has not progressed rapidly, trade restrictions have been in use

The world is multipolar and interconnected, but global cooperation to solve growing challenges (climate, food etc) has not developed strongly

States have been necessary in solving economic and other crises, but the market has not been changed to take a more responsible role in safeguarding stability and trust

Climate and environment issues have a strong impact on many spheres of life

The price of food, energy and many other resources has risen to record levels

The ”Arab spring” is one clear example of dissatisfaction of citizens

The world economy has undergone clear change since 2000

The western economies have experienced very slow growth – but not the new onesSome economic sectors and products have suffered from decreasing demand because of

changes in technology and consumption habits – printing industry is a good example

Many activities that can be labelled as ”clean tech” or ”green economy” have experienced strong growth throughout the globe – their market value is over 1.500 mrd USD

Renewable energy, environmental technology, waste and water treatment, energy efficiency, logistics and traffic, production replacing use of oil/coal belong to these

Growing pressure on land and forest has occurred, especially in tropical countriesThe production of pulp, food and bioenergy has grown, states and companies have acquired

land areas from other countries, also use of land for carbon sequastration and conservation has increased. Meanwhile, forest loss still continues in many areas.

New mineral and energy sources are looked for and taken into use all over the globe

Many political processes at different levels (states, EU, international agreements) have contributed to these developments (together with other factors)

The ”resource boom” has both positive and negative effects – but it is strong signal

The resource prices have been on the rise since 2002(Source: Jeremy Grantham/GMO 2011)

What can be said about the future with some certainty?

Mankind is facing very big challenges this century

World population is growing, more energy and food is needed, also other human needs exist – demand is growing

Oil is getting expensive and the use of fossil fuels should anyway be decreasedTo increase energy and food production a lot can prove to be difficult, because important

resources such as oil, phosphate, water and arable land are scarce

Industry, agriculture, traffic/transport, construction/housing should be transformed into a low carbon, energy efficient direction - this a huge task!

Renewable resources are essential in the future and products based on them have very good prospects in the long run

The biocapacity of the globe does not suffice to meet all present or future needsThe ”coping capacity” of world´s ecosystems might be endangered, if use is too big and

harsh

This poses big challenges for economic, political and cultural institutions: how govern such a development? How strike a balance between different interests and needs? How secure wellbeing and trust of citizens?

A ”green” economy is different – but there is no lack of demand

To produce bio-based materials and solutions for nearly all activities in societycontains a huge economic potential

Bioeconomy moves into the core of many sectors- energy production (present value 7.000 mrd USD)- food production (present value 4.500 mrd USD)- construction- retail industry (cars, tires, aeroplanes, machines, textiles)

Biochemicals and -materials have been estimated to have a potential of 200 billion USD in 2015

New products and Traditional forest products biomass-based energy

2015 505 billion USD 495 billion USD2020 776 5122030 1309 545(source: FPAC 2011)

In a bioeconomy, the use of all resources must be efficient and intelligent, because they are expensive and there are many competing forms of use

How is economic activity based on renewable resources affected?

Demand for products and services based on world´s biocapacity will be bigThe resource base is a necessity, but its value potential is realized only through use and

consumption – resources not in use have no practical economic value/price

When biomass and biocapacity are used in a wide range of products and activies, the typical borders between biomass from different sources (forest, field, water etc) will be blurred

The biomass source is not that important, but the usability of raw material for different purposes

So the use of biomass will depend on its suitability for different end uses, demand, prices, logistics, policy etc

Food and fodder, bioenergy, fibre, construction, chemicals, medicine, carbon storage, tourism, biodiversity, water compete about the use of land and forest

It is likely that traditional forest–industrial use to some extent will give way to other forms of forest use, especially in areas with population pressure, big demand for food and good soil

What might be the effects of changes of demand for products based on natural resources? (based on an estimate made by Don G. Roberts 2007)

If the predicted changes of demand come true, they might have big consequences:- especially paper production, but in 10-20 years also pulp production might lose its present strong

position in land use- the role of wood for construction, food, fodder and energy production, wood-based production of

chemicals and materials, carbon sequastration, water protection and tourism might grow

These developments in land use and forest demand can have different effects for different countries, social groups and companies

Actors possibly gaining from the development: countries that have the capacity to increase their resource use in a sustainable way, land owners, producers of technology, companies capable of integrating new activities with old activities (wood industry?)

Actors possibly losing positions: social groups with no clear land ownership, biodiversity and ecosystem services of forests, companies not capable of integrating new activities with old ones (paper and pulp industry?)

The effects might be the biggest where there is big pressure on land (part of the tropical countries) and where paper and pulp production has been in dominating role (Finland, Sweden and Canada)

Forest usage in the future

Decrease of paper production will continue in the West, which will advance structural change of the forest sector

The timber use of the forest sector might decrease in countries, where paper production has had a pronounced role (such as Finland, Sweden and Canada)

Many present forest-industrial products (such as board, pulp, certain paper grades, hygiene products, sawn timber and engineered wood products) have good future prospects

Bioenergy and new biobased products have a much higher growth potentialThis will change forest and business practices – present sector structures will erode

Other forms of renewable energy (solar and geothermal energy, energy based on waste, side streams or algae) might grow more rapidly than forest-based bioenergy)

A big part of new bio-based production will take place close to end users (and big side streams of raw material) = the geography of production will change

Changed setting and use = a different model?

In the future, the character of forest use will change considerably.

Globally, rising demand for food, energy and other forms of land use competing with fibre for forest industry is the main driver

We have seen only the beginning of the process, much more will evolve

Actors with resources and skills to change focus to activities with good prospects can gain

A further diversification of forest-related activity will take place, because its conditions are very different (population density, local and global demand, resource base etc)

Forest use and processing might turn into a relocalised direction (less trade/transport, more local use)

A change of the forest use model (cont.)

The effects of the change are different in different areas

Some forest-related activities are more important than today (value and societal esteem)

To a big part, they are operated by other actors and sectors (energy, construction, chemical, medical, food and tourism industry)

Forest use is very important in a multiple of ways, but its physical volume might be smaller than today

These developments will lead to a clearly different power dynamic in forest use and governance = a different model

What might evolve until 2050: ”Super cycle”, ”Zero sum game” - or something very different?

The direction of many factors and their impact are loaded with unsecurityPredictions and views about the future get often some numerical things right – but often they do not catch political and cultural change/dynamics

Futurists can now be divided into two very different ”camps”

- The optimistic ”Super cycle” leans strongly on bioeconomy and mankind´s ability to learn/change- The pessimistic ”Zero sum game” stresses conflicts of interests and the absence of functioning

international mechanisms for steering development

But some factors having a great impact in 2050 can be stated:population growth, the growing importance of renewable resources – and surprises (in technology, economy, culture, politics, climate etc)

The future is unwritten – different paths are possible

What might be the role of Finland, the forest sector and the border in different alternatives?Let us give this a thought together!

World development: World development:a spirit of cooperation a spirit of competition

Renewable resources:play a key role in development

Renewable resources:have no major role indevelopment