The border as a factor in the development of the forest sector in Finland – past, present and future Jakob Donner-Amnell Researcher, Karelian Institute/UEF

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 growing Economic 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

: 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 1917 Without 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 Finland Sawn 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

: 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 vanished Russia 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 did This 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 s In the economic sphere, this meant strong support for developing the forest sector This 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 land These 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 risks So 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)

: rapid growth of Finland and its forest sector During this period, Finland rebuilt itself, prospered and changed into an industrial welfare-state Until 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 period It 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 1970s For 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 directions Especially 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

: 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 decade This 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 ownership Still, 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

: 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 strongly 2. 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 it 3. 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 Finland Of 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 timber As 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 production The 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 economyGrowth triggered by new Indebtness and high resource economies prices as obstacles World tradeGlobalisation deepens Trade blocs/regional solutions GeopoliticsCommon interests dominate Own interests dominate Climate measuresRapid developmentModest progress Energy Low price, old forms ofHigh price, renewables dominate production dominate Land use No scarcity, no price hikeScarcity and conflicts between uses, land price hikes Food securityGuaranteed by effectivityEndangered by many factors TechnologyIncremental developmentBreakthroughs and /or failures ConsumptionDirect consequenceActive process, surprises possible CitizensStay calm, becauseReact, because of unsecurity and wealth is spreadinglacking 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 ones Some 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 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 countries The 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 decreased To 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 needs The 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 society contains a huge economic potential Bioeconomy moves into the core of many sectors -energy production (present value mrd USD) -food production (present value 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 billion USD 495 billion USD (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 big The 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 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 potential This 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 unsecurity Predictions 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: a spirit of cooperationa spirit of competition Renewable resources: play a key role in development Renewable resources: have no major role in development