Finland is a free market economy that is highly dependent on international trade. Around 1900, agriculture, especially forestry, was Finland's economic backbone, as trees were Finland's chief natural resource. The more arable southern provinces of Finland have always had higher population density and have dominated the agricultural economy. Finland now has a technologically advanced economy, in high-tech forest production, electronics, and other manufacturing. But the southern regions continue to dominate in population and productivity.
The late 19th century saw the heavily forested country first investing in sawmills and timber, followed by wood pulp and paper production. Wealth from the timber industry was used to invest in making the machinery for the pulp and paper industry. Technical know-how and growth in metalworking and engineering facilities enabled Finland to expand into metal shipbuilding after World War II. Combined with forest products, this industry led the economy until the mid-1990s. In the 1990s, high-tech electronics came to the foreground, with Finland currently the world leader in mobile-phone manufacture. Finland also produces high-tech instruments for environmental measurement and medical devices.
A strong focus on research and development (R&D) and cohesion between government, industry, and workers has helped economic development, especially in the past 50 years. The government's support and coordination of high-tech R&D began as early as 1983 when it founded the Technology Development Center (TEKES). TEKES is the principal organization in Finland for implementing technology policy. In 1984, one year after TEKES was founded, a small business called Nokia switched its focus to high-tech mobile phone production and became the largest mobile phone company in the world. Nokia's growth drove production in the manufacturing sector unlike many European economies, expanded its share of gross domestic product (GDP) throughout the 1990s. TEKES has also had an effect on agriculture through its support in 1997 of research into developing functional foods (foods with proven health benefits, often additives and substitutes that are less dependent on the quality of farming land than on the quality of the R&D infrastructure ).
As in most other developed nations, the Finnish service sector has in recent years become the highest-producing sector in the economy and accounted for 63 percent of the GDP in 2000. Business services, data processing, and transportation are all key service industries, with expansion in business and financial services especially driven by new technological developments, expanding into Internet and Internet Technology (IT)-based services. Public services, primarily health care and education, are also important and employed 32 percent of the labor force in 2000.
A welfare state is made up of institutions reflecting the responsibility a government has assumed for the well-being of its citizens. In Finland, Europe, and most of the developed world, a welfare state includes health care, education, social security, and unemployment. In Finland, the extent of the welfare state is smaller than those of other Nordic countries, but it still accounts for over half of the GDP.
Finland's proximity to Russia, and formerly to the Soviet Union (USSR), has powerfully affected Finnish economic development. In the early years of the USSR, political differences prevented much trade. Yet Western European demand, especially for lumber, pulp, and paper, supported the forestry industry at that time. During World War II, Finland joined the Axis powers, partly in order to prevent partial annexation by the Soviet Union. After the war, Finland had to pay reparations to the Soviet Union, who required mainly industrial products. This requirement forced Finland to develop a substantial metal and engineering industry. After reparations were completed in 1952, trade with the USSR continued through a barter system , characterized by an exchange of goods for energy since Finland lacked natural fuel resources. Finland was the only free-market member of the Council of Mutual and Economic Assistance (COMECON), an economic and development cooperative association formed in 1949, which was otherwise composed of socialist states. Finland was able to use its good relations with socialist states as a economic buffer against downturns in the Western market. Finland did not hesitate to link itself to Western markets as well, which helped its position as a trade gateway to the USSR. Finland joined the Organization for Economic Cooperation and Development (OECD) in 1969 and the European Free Trade Agreement (EFTA), a predecessor to the European Union (EU), in 1986. However, the USSR, as Finland's closest neighbor, remained a large and influential market, and its collapse in the early 1990s worsened Finland's already severe recession .
Deregulation of Finnish financial markets in the 1980s led to a domestic credit boom, which collapsed in the early 1990s, leading to stock and real estate market speculation and crashes. Finnish observers called this experience "casino economics": an economy becomes dependent on speculation (first seen as a sign of growth) and speculation runs out of control. The chief casualty was productivity and employment; the GDP fell by about 15 percent in 3 years while unemployment skyrocketed to 20 percent. The recession lasted until 1993, when Finland devalued its currency. This action allowed the nation to improve its export sector, especially through growth in manufacturing high-tech electronics and expansion of its export market for paper goods into the newly-booming Asian economies.
During the recession from 1990 to 1993, the Finnish government began accumulating external debt , which peaked at nearly 60 percent of the GDP in 1994. There has only been a partial recovery from the recession, with high unemployment lingering and debt continuing to increase. The currency devaluation , however, helped economic growth rebound, and by 1996 the GDP had recovered to pre-recession levels. The flourishing high-tech industry, led by the cellular phone manufacturer Nokia, was at the center of export-led growth. In 1998, Nokia alone accounted for 1 percent of Finland's approximately 5 percent growth of the GDP. Growth was fairly steady through the second half of the 1990s, except for a slight recession in 1998 that was mainly due to the slump in many Asian economies that were importers of Finnish goods and services.
In 1999, central government debt was 45.4 percent of the GDP. Since joining the European Monetary Union (EMU) in 1999, Finland has been required to reduce its debt. Even before its membership, partial privatization of many state-owned businesses, such as the telecommunications provider Sonera, helped to create revenue from the sale of shares. However, public debt is still high and has been increasing, posing a continued economic challenge into the 21st century.