The early days of VATT: Welfare state assessment during the great Finnish depression and the Nokia boom years

Reino Hjerppe was the first Director General of the VATT Institute for Economic Research. He led the institute for sixteen years from the worst years of the great Finnish depression in the 1990’s, through the EU membership discussions to the boom years of Nokia. These were also years of fast-paced development in Finnish applied empirical economic research. “Education and know-how are the key to a nation’s success”, VATT's first Director General says now.

Reino Hjerppe

VATT perustettiin lokakuussa 1990 yhdistämällä valtiovarainministeriön suunnittelusihteeristön (SUSI) ja Taloudellisen suunnittelukeskuksen (TASKU). Valtiovarainministeriö halusi keskittää tutkimustoiminnan ministeriön ulkopuoliseen keskusvirastoon.

VATT was founded in October 1990 by merging the Planning Secretariat (SISU), which was a part of the Ministry of Finance, and Economic Planning Centre (TASKU). The Ministry of Finance wanted to concentrate all research efforts into a single bureau outside the ministry. 

– In the early days of VATT, the focus was on studying job markets and unemployment, because the unemployment rate was so high. Labour market research at VATT got quite a boost from it. But that’s only one half of the story. The other half was that it was hard to get more resources. It was a pretty austere time, Hjerppe recalls. 

From the start, assessing the Finnish welfare state has been the core of VATT’s research activities.

– The production of public services, taxation and transfer payments form the core of the welfare state. As economists, we want to know how efficient and productive these services are. We are also interested in the interplay between taxation and social welfare, in other words, how these mechanisms encourage people to work and to run businesses, Hjerppe summarizes. 

In austere times, policy makers are particularly interested in efficiency and productivity.

– During the great Finnish depression, much of research focussed on the efficient allocation of public funds, when there were no funds. Then again, there will probably never come time when we have enough funds. Resources are always scarce, and choices have to be made, Hjerppe says.

The depression years were followed up by Finland’s EU membership and the Nokia boom years. For ten years, Finland was doing extremely well. But, Hjerppe is not longing for the good-old Nokia times.

– Nokia’s influence has not vanished: We learnt a lot from Nokia. An unprecedented amount know-how was accumulated in this country during those years and now this know-how is being put to use new projects, he states.

According to Hjerppe, Nokia’s success was not a lucky coincidence but the result of sound long-term innovation policy.

– Education and know-how are the key to a nation’s success. This is often forgotten in day-to-day politics, when the focus is on saving and cutting costs. We fail to recognize that accumulating know-how is the core of an economy, Hjerppe warns.

Developments in applied economics in Finland

When VATT was founded, only two researchers had doctoral degrees. They were Reino Hjerppe and Heikki Loikkanen, the pioneer of Finnish urban economics. Hence, the goal was set to gain more expertise and to increase the employees’ education level. 

According to Hjerppe, the teaching of econometrics was still fairly limited at the University of Helsinki in the 1980’s and it was difficult find qualified researchers. To respond to the demand, VATT started training econometricians together with the universities of Helsinki and Jyväskylä. Econometric analysis was developed in the field of labour market research.

Hjerppe finds that research visits abroad and international work experience were essential to developing his own skills a researcher. A year spent a master student at the University of Rochester and another one as a visiting researcher at Stanford University in the United States, showed him what teaching and research in economics can be at their best.

– Working as a researcher is extremely demanding. Nothing comes for free. Research requires hard work and constant effort. You need to be engaged to keep up with the constant change. Otherwise, it will start feeling difficult. An engaged and cooperative team is what keeps the research in motion, says Hjerppe.

To do stuff such a demanding job, you need to feel that your efforts are being rewarded. Having a good attitude is also important.

– You need to be proud of your accomplishments. You need to rejoice, when you have achieved something and enjoy your success. This has to do with finding your work personally rewarding. For researchers to be content and happy, they need to feel that what they are doing is important and significant work, Hjerppe reflects.

Hjerppe praises cooperation with the Ministry of Finance and other ministries.

– The Ministry of Finance showed great leadership in giving VATT the freedom to conduct research independently. The demand for the research came from the ministry, but how the research was carried out was decided by the research institute, based on their expertise, says Hjerppe.

Focus on research impact

VATT’s mission is to produce economic research to support evidence-based decision-making. Even though the political environment may change, the principles of conducting empirical research do not.

– Politics is all about making value judgements. Research produces information about how things are and how different things are related. The political decision-maker then decides how to proceed, Hjerppe declares.
 
He is worried about a way of thinking which discredits scientific information.

– It is dangerous, if this type of thinking becomes more widespread in political circles. In Finland, recent governments have pledged to make evidence-based decisions. This type of thinking should be supported, Hjerppe maintains.

From the start, VATT has had an active role in public discussion.

– Research results should be communicated clearly, and they need to be easily translated into actions, so that ordinary citizens can also understand them. In society, there lots of people who are interested in research, Hjerppe states.

Hjerppe’s own career was sparked by interest.

– As a high school senior, I came across an old economics text book. I did not really understand it at all, but I wanted to figure it out. Trying to figure out what economics is, has been very rewarding, it has been a very interesting life career, Hjerppe says with a smile.

 

Reino Hjerppe

Bachelor of Political Sciences 1966 (University of Helsinki)
Master of Arts 1968 (University of Rochester, United States)
Doctor of Political Sciences 1975 (University of Helsinki)

Statistics Finland (then: Central statistics office), in different role 1965-77
Professorship at the Helsinki University School of Finance Studies 1977-79
Visiting researcher at Stanford 1979-1980
Head of the Planning Secretariat at the Ministry of Finance 1980-88
Economic advisor at the Finnish Embassy in Brussels 1988-1990
Director General at VATT 1990-2006
Research leader at the United Nations University World Institute for Development Economics Research (UNU-WIDER) 1994-1996

 

This article is a part of VATT's 30th anniversary series.