Sweden and Finland in the Cold War International Economy:
Reconstruction, Stabilisation and the Power Politics of Finland's International Economic Orientation, 1944-1975

Juhana Aunesluoma

Draft version, please do not quote


Between the end of the Second World War in 1945 and the end of the Cold War in 1991 economic relations between Sweden and Finland experienced a profound transformation. Starting from a low level of mutual trade, asymmetric phases of economic and technological development and different ways in which the countries were linked to the institutions of the international economy, towards the end of the period the countries’ positions to a large extent resembled each other in material and organisational terms.

Their mutual economic relations intensified and became more equal. Finnish GNP per annum had reached that of Sweden by the end of the century. Investments were made in both directions, and Finnish companies competed with Swedish ones, alongside the traditional wood processing industries, in the fast growing information and telecommunications sectors. Large-scale corporate mergers and acquisitions between Swedish and Finnish businesses were the keyword of the 1990s and thereafter.

In this development towards greater integration of the national economies several factors were at play. Starting from a lower initial level, Finland’s growth rates were higher than Sweden’s throughout the period, thus helping to close the gap between the two national economies. In trade theoretical terms the growing similarity in the demand structures of the two national economies created greater potential for mutual trade.

With step-by-step liberalisation of international trade and the lowering of national barriers to economic transactions beginning in the 1950s, the geographic proximity of the two countries, among other things, has been mentioned as a contributing factor in the increase in these contacts. The character of both as small, open economies in terms of in- and outflows of factors of production contributed similarly. The development of intra-industry trade was significant especially from the 1960s onwards, highlighting the fundamentally transformed nature of Finnish-Swedish economic interaction if compared to the pre-Second World War period or earlier.

The overall diversification of Finnish exports, that is, the greater variety and quantity of exportable goods in the 1960s and the 1970s, increased Finland’s trade not only with Sweden, and foreign direct investments, which saw a marked increase in the 1980s, were hallmarks of the general internationalisation of the Finnish economy as a whole. In this process Sweden was well placed as a contributor, or as can be seen in the following, as collaborator.

Besides these more easily quantifiable factors, there were factors such as language, culture, religion, traditions and customs, climate, similarities in taste and design, business culture, easy access to knowledge about market opportunities, readiness for risk-taking close to home markets etc., which all can be considered to have created favourable circumstances for increasing economic interaction between Sweden and Finland during this period.

This introductory list of factors influencing economic relations between and Finland and Sweden over the post-war decades highlights how there can be numerous factors that were in various ways related to a structural change of the Swedish and in particular the Finnish economies, what their foreign trade consisted of, their trade patterns, income and production levels etc., which all can be analysed as explanatory factors behind this phenomenon. In addition to this, several psychological factors may be helpful.

In this paper the rise of economic activity between Sweden and Finland between 1944-73, mainly the increase of trade, is analysed against a set of foreign political and foreign economic policy priorities and goals. The first aim of the paper is to outline a broad framework for political and institutional analysis of international trade, in which political and institutional factors related to creation and hindrances of trade as well as the political significance of trade can be assessed. The main theoretical points of departure are the state-centric realist approach to International Political Economy represented among others by Robert Gilpin and institutional economic theory developed by Douglass C. North.

What is analysed first is the institutional and organisational setting regulating economic relations between the countries, which will be followed by an overview of the increase of economic interaction until 1975. Second, the political motivations and goals in establishing and influencing the institutional setting will be analysed. Finally, the political outcomes of increasing trade are outlined.

What is argued is that the rapid increase of Finnish exports to Sweden between 1963-73 influenced the perception of Finland as a Nordic country not only in economic, but also in political terms. This change in Finland’s attachment to the western European economy through Sweden, and to a lesser extent Norway and Denmark, should be added as an explanatory factor in the Soviet Union’s policy revision after 1968, when a tougher approach towards Finland's international status was adopted in Moscow.

On the other hand, both the growth and diversification of Finnish exports was closely linked to official export promotion campaigns and encouragement by the political and administrative decision-makers so as to achieve Finland's economic integration to the West through the Nordic region in general and Sweden in particular. This campaigning should be taken into account as an explanatory factor in the rapid increase of Finnish exports to Sweden in particular in 1965-69. 

Analytical framework and sources 

In the type of political and institutional analysis applied in this paper main emphasis is on the analysis of non-economic motives attached to, and non-economic outcomes following international trade and the political and administrative direction of international economic activities in general.

The motivation to study the administrative regulation and political interventions to bilateral economic relations is twofold. First, there is a need to establish the politico-administrative and institutional setting for the rise of economic activity between the countries in the post-war decades. In order to do this research is needed on trade policy, trade negotiations, administrative practices, official promotion of mutual economic interaction and high political direction.

In studying both of these broad themes, and seeking to find the links and relationships between them, the main focus of analysis is besides basic economic motives also on non-economic motivations of the policy-makers. It may be held as an a priori assumption that the primary motive of all economic actors is eventually to maximise their economic gain. But when it comes to the regulation of economic activity, including its active promotion, other interests come to play. These interests are not necessarily in conflict with the motivations of the economic actors, but they shape the organisational and institutional setting for economic actors. Here these non-economic motivations are expected to arise primarily from the power politics of the cold war international system - economic orientation signifying a country’s international position, regional stabilisation - and from the politics of adaptation to changes in the international economy. 

International political economy 

The defining global political experience in 1945-1991 was the system of structured and regulated superpower competition known as the cold war. The structure was the result of the system of alliances built mainly in 1945-55 and the regulation a function of the nuclear build-up, which made conventional war between the two main poles impossible. War was waged by proxy, in particular in the third world, and power-political competition found outlets in the non-military fields of economic, social or cultural-ideological interaction. Trade policy, subsidies and sanctions, or the direction of the international economic system towards either the capitalist-liberal or the socialist models, were dimensions of the master conflict.

In explaining the cold war international system, two closely related fields of scholarship have attracted particular attention over recent years. The first debate has concerned the rise and the responses to economic and political interdependence in Western Europe after the Second World War, manifested in what today is a large body of literature on various aspects of economic and political integration between European nation states, culminating in the European Union of the 1990s. Related to this have been the studies conducted upon EFTA and Nordic co-operation.

The second debate has dealt with the ways in which the international economic system of the post-war decades should be understood in relation to superpower competition and the geo-strategic considerations of the cold war. As societal, cultural as well as the economic spheres were influenced by and had influence in the way in which that conflict developed and ultimately reached its end in 1989-1991, a conceptual shift in cold war studies has occurred.

In general, the traditional, realist or neo-realist school stressing geo-strategic and geopolitical interests, their definition, and responses to perceived threats to the national interest, has given way among others to constructivist approaches stressing the significance of culture and the societal dimension as a whole, leading into the return of the concepts of ideology and ideas back to the research agenda. Questions of not only how but why certain events happened the way they did, and what were the ultimate driving forces behind political behavior (ideology, security etc.) in the cold war are now at the centre of scholarly attention. The debate on the essence of the cold war has in terms of its analytical focus and methods applied been similar to the first one in as much as its main concern has traditionally been on concepts such as military or economic power, open or latent conflict and international negotiations and bargaining.

The end of the cold war seemed to vindicate the approach propagated already in the 1980s by International Political Economy scholars, who had brought international trade and financial regimes on the agenda of International Relations.[2] But one of the most difficult issues in the dialogue between economists and international politics experts was, and still is, about the nature of economic activity and its analytical construction.

When economic activity is studied from the viewpoint of factors that are not directly related to economic activity as such, or factors that are not its direct material consequences, the fundamental question of the purpose of economic must be tackled. Robert Gilpin has pointed out how: 

“Most economists, trained in the discipline of neoclassical economics, believe that the purpose of economic activity is to benefit individual consumers and maximize efficient utilization of the earth’s scarce resources. While other values may be important, they are not of fundamental to economists qua economists. The basic task of economists is to instruct society how markets function in the production of wealth and how these markets can be made most efficient. How societies then choose to distribute that wealth among alternative ends is a moral and political matter lying outside the realm of economic science.”[3] 

In contrast, in the study of political economy the purpose of economic activity is a fundamental issue. Is the purpose of economic activity to benefit individual consumers, to promote certain social welfare goals, or to maximise national power? In most studies of contemporary global political economy a salient question is the way in which societies decide to pursue particular strategies in economic policy. Whether they decide to rely on the market or some other mechanism to allocate productive resources and the distribution of national product is a political decision arising from the set of priorities agreed by the decision-makers irrespective of the type of the political system they operate in. In most cases: 

“The social or political purpose of economic activities and the economic means to achieve these goals cannot be separated. In every society, the goals of economic activities and the role of markets in achieving those goals are determined by political processes and ultimately are responsibilities delegated by society to state.”[4] 

From the viewpoint of a political and institutional analysis of trade and trade policy this highlights the necessity to understand the political purposes, rivalries, and cooperation of states, which interact to create the framework of political relations within which economic forces operate.[5]

Gilpin's statement on the relationship between political and economic activity is a useful point of departure for not only in analysing decisions behind particular domestic economic strategies, but also on the relationship between the origins and execution of national power and the international economic regime. Although Gilpin's main interest has been to explain the evolution of the global political economy, the state-centric approach is useful in conceptualising bilateral economic relations, in particular during the transitory period from regulation and protectionism towards liberalisation between 1944-73. 

Institutions and international economic interaction 

According to Douglass C. North institutions 

“are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.”[6] 

Institutions exist, North argues, due to the uncertainties involved in human interaction; they are the constraints devised to structure that interaction. On the other hand, institutions create the incentive structure in an economy and organisations will be created to take advantage of the opportunities provided within a given institutional framework.[7]

It is hardly controversial to say today that institutions affect the performance of economies, and that economic changes cannot be separated from the institutions that either instigated them in the first place, or influenced ongoing changes towards specific, consciously determined goals. The latter claim is key to the analytical framework used in this research.

What are the institutions in question here? First, an important distinction must be made between organisations and institutions. If institutions are the "rules of the game", organisations are created to provide a structure to human interaction. They include political bodies, economic bodies, social bodies and educational bodies, for example.[8]

It is not difficult to list the political, economic or administrative organisations involved in economic and political interaction between Sweden and Finland. A more challenging task is to identify the institutions involved and their significance. Such institutions that have been relevant can be found mainly on four levels: domestically, bilaterally, regionally (i.e. at the Nordic level) and internationally.

Domestically in both countries' international trade policy a corporatist policy-making framework was adopted and developed since the early 20th century, in Finland's case since its independence. The corporatist frame sought solutions to conflicting interests arising for example between exporters and home market industries as a result of protectionist tariffs and quotas.[9] The inclusion of various organisations representing different interests into the policy-making process can be understood as an institution in North's sense, incorporating and legitimising different domestic views and preferences in the policy-making framework.

Both on the bilateral as well as the regional Nordic levels it has been distinctive how the way in which expectations of Nordic co-operation has influenced activities on various fields. In can be argued that there has been an a priori expectation that the Nordic countries would treat each other preferentially for cultural, social as well as practical material reasons embedded in their national self-interest. Between Sweden and Finland this has been seen in the way in which mutual goodwill and trust has been expected as an important ingredient in bilateral trade negotiations. Even it this good-will could not always be realised, and expectations have failed, there is strong evidence of the presence of this good-will factor during the 1940s crisis years and reconstruction period, when the stabilisation of Finnish society was both in the Swedish material self-interest as well as the goal of many private people and organisations for general humanitarian reasons. On the level of Nordic co-operation these expectations were high in the 1960s, although not much thereafter.

On the international level we can find institutions in the practice of diplomacy, the conventions in signalling policy-change, or agreement or displeasure in other nations' behavior. In the Nordic context there has been a particular wish that the other Nordic countries would consult each other regularly in major foreign policy issues, and a marked dislike for unilateral decision-making.

There are also various informal constraints in the ways in which states interact with each other despite the anarchic nature of the international system. These constraints can among other things be seen behind liberal notions such as the impossibility of democratic nations to go to war against each other and the related concept of the so called 'democratic peace'. 

Sources and data 

The research is based mostly on official trade data and statistics and the material of the central policy-making organisations in Sweden and in Finland. In both countries the foreign ministries have been central co-ordinating authorities, which means that their archives contain extensive documentation on Finnish-Swedish trade, trade policy and trade promotion also beyond their executive remit. Classified material is available until 1975 in both countries. 

The institutional and organisational setting 

The post-war period began very differently in Sweden and Finland. The way in which Finland eventually closed the gap between them, exemplified by rising living standards and their simultaneous membership in the European Union in 1995, was at best a utopian vision and not held by many in the 1940 and the 1950s. Sweden had remained outside the Second World War, its economy intact and its political leadership willing to engage its country positively in the post-war reconstruction of Europe. Finland, on the other hand, had fought two wars against the Soviet Union, 1939-40 and 1941-44, the outcome of which led to formidable challenges in the reconstruction of the country’s political and economic life. Whereas Sweden in 1944 seemed to be a source of stability in a war-torn Europe, Finland seemed dangerously unstable.

            Compared to Sweden, Finland’s room of manoeuvre in international trade policy was limited. Until the peace treaty was signed with the Soviet Union and the Allied powers in 1947, the making of independent Finnish international trade policy was hamstrung in several ways. The strongest influence was the fact that it was committed to large reparations deliveries to the Soviet Union that were to last until 1952. Due to Soviet attitudes also, Finland could not participate in the Western-led attempts in Europe’s economic reconstruction and integration that took shape from 1947 onwards.[10] This raised Finnish decision-makers’ expectations about Swedish assistance also on the political field more than would have otherwise been the case.

            Finland’s domestic affairs were also complicated by the needs to settle more than 400,000 refugees from the eastern territories acceded to the Soviet Union, by the reconstruction of its economic and social infrastructure and the management of its political system which faced severe tension between the non-socialist parties and the communist left. Especially the emphasis put on agriculture, which was largely a result from the needs to solve the immediate refugee and resettlement problem, placed Finland’s agricultural protection high on the agenda of its international trade negotiators.

            The bilateral relationship between Finland and Sweden was closely connected to their overall policy orientations in international economic policy. Bilateral economic relations were in principle governed by the policies and regulations concerning international trade and economic interaction in general. Sweden’s and Finland’s behavior in economic and financial organisations established after the war under the umbrella of the United Nations (UN) was similarly dependent on their general foreign trade policies, where they followed widely different strategies until 1961.

Finland aspired to avoid being drawn into discussions on trade liberalisation and sought to preserve the levels and forms of protectionism defined domestically by the government and the relevant interest groups.[11] Sweden, compared to Finland, was prepared to accept an increased degree of flexibility in the international trade and financial regimes and could follow more easily the drive towards liberalisation in the 1950s, despite its reservations to quota liberalisation and exclusive European-wide schemes which conflicted with aspirations to global liberalisation of international trade.

            After the Second World War Sweden followed low tariff policies and participated closely in the trade and financial institutions that were created both on a global and regional basis. Besides favouring continuing liberalisation of world trade, Sweden was apprehensive lest politically as well as economically motivated economic blocs emerged in Europe and elsewhere. In the first post-war years it promoted East-West trade and sought to enhance economic co-operation under the umbrella of the UN. It subsequently participated in the Organisation of European Economic Co-operation (OEEC) and benefited from American Marshall-aid in its balance of payments position. In the 1940s and 1950s Sweden’s trade policy was marked by low tariffs and reliance on quotas in its trade regulation.

            In contrast to Sweden, up to 1961 Finland followed a policy of intensive protection of its home markets and wide-ranging regulation of its economic interaction with the outside world in general.[12] Main instruments in Finnish post-war trade protection in addition to tariffs were quotas and payments arrangements, which gave the official authorities a pivotal position in managing the in- and outflow of goods and payments. In addition, a significant part of Finland’s foreign trade was managed through bilateral trade arrangements with the Soviet Union, which was continued until 1991. Due to its special relationship with the Soviet Union, Finland was barred from closer co-operation with Western regional economic organisations, until to the signature of the association treaty with the EFTA in 1961. In the same vein, Finland could not participate in the discussions for Nordic economic co-operation until mid-1950s. As it did not receive Marshall aid, it did not have to take part in the liberalisation process of the OEEC and quietly dragged its feet in the General Agreement of Tariffs and Trade also, which it joined in 1950.[13]

            In addition to the attempts towards a global liberalisation of trade and payments, Sweden and Finland were closely affected by the institutional changes in Europe aiming at regional economic co-operation, and ultimately, economic and political integration. Sweden’s relationship with European integrative processes from 1950 onwards was more complex, but compared to Finland Sweden had a larger room of manoeuvre in the definition of its position towards Europe.[14] However, both countries found the linkage of regional economic co-operation with the cold war blocs problematic. Sweden’s problems with the institutional development were explained on the basis of its foreign policy of ‘non-alignment in peace aiming at neutrality in war’, or neutrality policy, which was interpreted to preclude participation in economic blocs with political underpinnings, such as the European Economic Community (EEC).[15] Finland’s problems arose primarily from its special relationship with the Soviet Union, which was based on political ties and geo-strategic realities as well as economic dependencies, and secondly from its attempts to establish and follow a credible neutrality policy.[16]

            By the early 1960s several developments brought Finland into a similar position in institutional terms with Sweden towards Western economic organisations. But in actual economic and political terms, Finland’s situation continued to depend on the closeness to the Soviet Union on the one hand, and the current stage of its economic development on the other. This was seen again in 1968-70 during the abortive NORDEK-negotiations, and in 1970-72, when Finland and Sweden negotiated their trade agreements with the European Economic Community (EEC).

            The differences in the countries’ economic and international political circumstances notwithstanding, both countries could identify common interests politically and economically in these contexts. Despite the condition and the stage of development of their respective economies, both were small, open economies in the sense of their dependence on large-scale international in- and outputs of factors of production. Both of them were exporters of raw materials and semi-finished goods, a significant share of which was based on their forestry sectors. Access to world markets was imperative for their economic well-being, but this need had to be balanced with domestic constraints and goals, which in both countries were linked to the political management of their modernisation processes, establishing a consensus over common social and political goals and in particular the building of the welfare state. In these social management projects, increased interaction and cooperation with Nordic neighbours enjoyed wide popular support and legitimacy. Hence, by strengthening the popular base for a particular policy, the tactical ‘cooperation case’ for small state behaviour in international negotiations was strengthened. With failures in the multilateral Nordic arena, such as was seen in the faith of NORDEK in 1970, the bilateral relationships became even more important. Cooperation as a strategy of survival for these countries was not just useful, but it was also, to use a phrase from an age yet to come, politically correct. 

Expanding trade 1945-1975 

During the war Sweden was the only foreign country Finland had trade relations independent of its relations with Germany or its allies and occupied countries. The termination of German trade in 1944 isolated Finland economically, as in practice also trade with Denmark ended and trade with the Soviet Union was at first largely confined to reparations payments. Significantly, trade with Sweden continued uninterrupted, behind which was found considerable political goodwill in Sweden. Before the Baltic Seas opened again for foreign trade in the spring of 1945, Finland’s foreign trade was almost solely concentrated to Sweden, where important provisions of foodstuffs and other necessities were made available for Finnish reconstruction.[17] The abnormal conditions of 1945 were seen in the trade figures, which gave Sweden a 36 % share of Finnish foreign trade, with as much as 51.3 % of Finnish exports going to Sweden in 1945.

            On the Swedish side, and despite reconstruction aid and the prominence given to domestic stability in Finland, the economic relationship looked very different than in Finland. Finland’s economic importance for Sweden was very low as it represented a mere fraction of Sweden’s exports and imports. In 1947 Sweden’s imports from Finland were 1.3 % of its total imports, and its exports to Finland were 1.8 % of its total exports.[18] After the abnormal conditions of 1944-45 the figures were only slightly higher in Finland too. Still in mid-1950s Sweden’s share of Finnish total imports was c. 5 % and the share of Sweden of Finnish total exports a modest 3-4 %. Finnish exports to Sweden concentrated on few basic raw materials, whereas exports from Sweden were more diversified.

            One of the most remarkable developments in the following years was how fundamentally this situation changed. After Finland’s return to multilateral trade in 1955-57 and the FIN-EFTA agreement in 1961, Finnish exports began to diversify. The character of Finnish-Swedish trade was transformed over the next couple of years. In the early 1970s Sweden alone bought 30 % of Finnish metal exports, which previously had mostly been sold to the Soviet Union.[19] In step with diversification the volume and the relative significance of Finnish-Swedish trade grew too. In the 1970s Sweden’s share of Finnish imports had arisen to 15-20 %, from where it continued to grow in the 1980s.[20]

            The main turning point can be seen to have been 1957, the year when multilateral trade was introduced again in Finland. Sweden's relative position in Finnish foreign trade was however still on the same level as that of France and the United States, whereas the United Kingdom, the Soviet Union and West Germany were dominant trade partners. A chronic problem in Finland's trade was still its deficit, which increased after 1957 rapidly.

            After the inclusion of Finland in the FIN-EFTA agreement, trade with Sweden began to increase rapidly. From 507 million FIM in 1960 Finland's trade with Sweden grew to 1080 million FIM in 1965 in current prices. The deficit grew in step from 201 million FIM in 1960 to 395 million FIM in 1965.

            In 1966-1969 Finnish trade with Sweden grew from 1 204 million FIM to 2 592 million FIM, which was mostly based on the increase in exports. The trade deficit decreased from 358 million FIM in 1966 to 277 million FIM in 1969.

            In 1970-1975 Finnish trade with Sweden grew in real terms more slowly, from 3 568 million FIM in 1970 to 8 711 million FIM in 1975. The deficit again grew from 381 million FIM in 1970 to 1 490 million FIM in 1975. Trade with Sweden grew roughly in step with the growth of Finland's foreign trade as a whole. But as a result of the boom years 1965-1970 Sweden became Finland's biggest trade partner for the years 1970-74, replacing the Soviet Union, the United Kingdom and West Germany. 

Motivations and goals of international trade and economic policy 

What were the expectations, goals and motivations of policy-makers regarding the development of Finnish-Swedish economic interaction after the Second World War, and in particular during 1957-1975? What political outcomes did the intensification of these contacts have by the end of the period? The following sections seek answers to these questions in three main areas: reconstruction aid immediately following the war, their behaviour and policy-making in multilateral organisations and integration processes, and official trade promotion and industrial policy. 

Reconstruction aid 

Despite the political, social and economic distance between Sweden and Finland in 1944, Swedish reconstruction policy was intended to help to bridge the gap between the two economies and political systems. Sweden was well placed to do this, albeit its resources were insufficient to achieve it alone.

            Throughout the war, Sweden had given Finland humanitarian, and, during the Winter War in 1939-40 also significant military help in the form of materiel and volunteers. After the armistice in September 1944, humanitarian assistance continued, but it increasingly began to take the character of reconstruction assistance. Most of the assistance was organised by voluntary associations in Sweden, such as Rädda Barnen, Hjälpkommittén för Finlands Barn, Fadderortsrörelsen, Hjälpkommittén för Finlands Invalider and the so called Europahjälpen (Svenska Kommittén för Internationell Hjälpverksamhet), who acted with governmental blessing but without its direct involvement.[21]

The most important help from the Swedish government in Finnish reconstruction were the loans of 1944-46. The first and the most important loan agreement was signed in October 1944, in which the Swedish government gave Finland a loan of 150 million crowns for reconstruction on liberal terms. This was followed by a smaller 9 million crown ‘Soteva loan’ in January 1945, which was intended to assists Finnish efforts to meet its reparations deliveries. The 1944 reconstruction loan was used for purchases of essential goods from Sweden, which were not normally imported from there, such as coal and coke. Initially the war reparations industry bought steel and machinery from Sweden too. In the autumn of 1944 the needs for grain for bread were fulfilled with Swedish provisions, which came from Swedish storages originally intended for Swedish consumption.[22]

The first loan was followed in 1945 by a further credit of 61,5 million crowns (‘förskottskredit’) to cover Finland's short term import surplus, of which half, 30,8 million crowns, was due to Finland's inability to cover the annuities of its other loans. In the beginning of 1946 Sweden gave a further short-term credit of 30 million crowns, but by that point it was made understood that Finland should turn elsewhere for credits as well, such as the United States.[23] In all, Swedish credits to Finland between 1939-1945, together with interest, were ca 542 million crowns.[24]

            While there is hardly any need to question the basic motives of Swedish humanitarian help or reconstruction help to Finland during or after the war, it could not be separated from the overall economic and political calculus of the time. The consensus in Sweden in 1944-45 was that the end of the war did not mean the end of economic and political trouble in Europe and in the world. Even if many leading Swedes – as well as many leading Finns – considered the adventures of the Finnish leadership in 1941-44 alongside Hitler’s Germany ill judged and at least in part unnecessary, Finland’s plight in 1944 was a reality on its own backyard and something had to be done with it lest further trouble arose.

            How then did reconstruction aid to Finland fit in the overall thinking of the Swedish government of Europe’s economic future? What political significance aid to Finland was hoped to have? Should Sweden’s actions in Finland be considered as some kind of ‘mini-Marshall-plan’, which also had several economic and non-economic goals? Or did the Swedish government just do what was necessary at minimum, and left it to that?

            There are several observations that can be made about the ways in which reconstruction needs influenced the ways in which both countries adapted to the changes in the international system after the war. In Swedish-Finnish trade, which at first was about asymmetric flows of goods from Sweden to Finland, domestic and in particular Finland’s domestic political needs were paramount from the beginning. When looking at the benefits the political and administrative elites hoped to achieve from all this besides tangible economic goods, one has to look at the political goals that were set on increased economic interaction and co-operation.

            Increased interaction – and not only economic, but the movement of people in general – was hoped in both countries to have a stabilising influence on Finland. Finland’s economic relationship with Sweden could be seen as a counterweight balancing Finland’s position between the East and the West. This view over the significance ordinary material interaction between nations and economies was shared by key decision-makers in both countries and largely set the agenda for subsequent trade and integration policies when the reconstruction needs had surpassed in the 1950s. 

 Multilateral organisations and integration policy 

Post-war economic reconstruction would have had very different political meaning had there not been a cold war. The deterioration of superpower relations in 1946-47 had economic as well as political and security repercussions to Sweden and Finland. Their bilateral relations in such widely separate spheres such as culture, economic interaction and high politics could all in the cold war be construed in the terms of how their international position was defined in the outside world. In Soviet eyes, Finland's participation in even rather modest forms of Nordic co-operation with no military or political implications was treated with deep suspicion during the first post-war decade.

On the other hand, Sweden's abortive attempts to increase its trade with the Soviet Union in 1946-47 could be seen by US policy-makers as a sign of its lack of resolve and its submissive attitude in confronting the communist menace. In the post-war world, international politics influenced economic interaction, and international economic interaction was irreversibly tied up with the struggles for power, status and influence, all of which could be justified in terms of the maximization of the well being of people and nations.

            In Finland the Nordic region was generally seen as its most favoured international point of reference, gave as it did the nation a way to identify itself outside the rigid East-West divide. Although not nearly as significant politically or economically in the 1940s and 1950s as the Soviet Union was, for many Western-oriented Finns Sweden was the first and most favoured foreign country, a psychological counterweight to the increased influence emanating from its eastern neighbour. Gradually, especially from the 1960s onwards, Sweden became more directly important in economic terms too when liberalisation of trade within EFTA proceeded and mutual integration and interaction intensified between them. The political significance of Nordic cooperation and bilateral relations with Sweden increased in step with deeper interaction.

            At the same time, Finland gained something of a special position in Swedish foreign policy, something that influenced its integration and security policies. In the cold war Finland’s precarious position within the Soviet sphere of influence was frequently used as an argument for Sweden’s policy of neutrality by Swedish diplomats trying to convince suspicious Western statesmen about the wisdom of its foreign policy, although the exact position and significance of Finland’s position in Swedish foreign and security policy was far more complex than that. Sweden’s policy towards European integration was foremost influenced by its own foreign political and domestic concerns, but its choices were of paramount importance to Finland as well, which could be used as an additional argument for its non-committal attitude towards European integration.[25]

Swedish policy goals regarding Finland in the foreign economic sphere can be summarised as follows. 

-     Trade with Sweden should decreased the negative political potential embedded in Finland’s eastern trade;

-     Sweden should act in broad terms benevolently towards Finland in most, if not all, issues relating to trade policy, mainly for two reasons:

-     own political and economic immediate and long-term self-interest

-     to maintain Nordic (not merely Scandinavian) co-operation on the political agenda (as long as Finland was involved) 

The Finnish government on its side, sought close communication and coordination with Sweden in European economic and trade policy questions, and also in GATT from the early 1960s onwards. This was seen also when the Nordic countries operated with a joint negotiator in GATT in the mid-1960s. Whereas many other fields of economic activity were characterised by intense competition between economic actors, the economic and trade policy field was one of cooperation. This was a typical small state strategy, which was seen between other Scandinavian countries as well. In the Swedish-Finnish case, it was embedded in the reconstruction experience and Sweden’s role in it.

            Another important issue was Sweden’s attitude towards Finland’s relationship with regional economic co-operation in the Nordic area and in Western Europe. Swedish policy was particularly significant towards Finland’s specific requirements in both the Nordic Customs Union discussions from 1947 and 1955 onwards, and in the process leading first to the Stockholm Conventions establishing EFTA in 1959 and the subsequent negotiations with Finland of its association agreement in 1961. These were later followed with the question of Finnish OECD membership in 1968, NORDEK in 1968-70 and the simultaneous negotiations for their trade agreements with the EEC in 1970-72.

            To what extent did Sweden play a special role when Finland established its relations with the regional economic arrangements in Europe? To what extent were considerations over Finland’s position taken into account in Swedish integration policy? Mikael af Malmborg and Tapani Paavonen have in their research found evidence that the Swedish role in the negotiations leading to Finland’s association treaty with EFTA in 1961 was crucial.[26] It seemed that the Swedish government identified the Finnish interest almost completely with its own, promoting Finland’s cause with more sceptical Western partners as if the cause of Finland was its own. The difficulties arising from Finland’s exceptional arrangements with the Soviet Union, i.e. the need to continue Soviet Union’s preferential treatment despite its not being a member of the GATT, could have remained insurmountable lest Sweden lobbied in its favour in other EFTA countries and the US. This was also the contemporary observation in other EFTA capitals and in the US. 

Trade promotion and industrial policy 

During bilateral trade in the 1950s trade negotiations and agreements were somewhat strained, mainly due to the problem of trade imbalances and Finnish indebtedness, which were difficult to solve as long as Finland had few exportable goods and experienced its own domestic economic problems. From the early 1960s onwards, following Finland's successful attachment to EFTA, the political and administrative framework was marked by co-operation on various levels, including political decision-makers. But as the NORDEK-negotiations in 1968-70 and Sweden's announcement to apply for EU-membership in 1990 without consulting the Finnish - nor the Norwegian - government showed, towards the end of the period the relationship was not entirely free from trouble.

            There are various explanatory factors behind the startling change in the Finnish-Swedish economic relationship under 1957-1973. The most important single factor may have been the relatively rapid growth rate of the Finnish economy and the development of its industrial base, which created opportunities for further trade and investment between the countries. The general liberalisation process facilitated greatly the opportunities within the trade field in the 1960s. Here, however, another element behind this phenomenon can be found: political and administrative goal-setting and activity.

            The Finnish and Swedish governments in general, it can be argued, favoured closer economic relations and co-operation between Swedish and Finnish businesses. Here the historical experience was not altogether encouraging. In the inter-war period, trade negotiations between Finland and Sweden had been fairly difficult even when compared to other problematic partners, such as Germany.[27] But already before the war reduction of competition in the forestry industry was clearly seen to have been in the interests of both, and later in the 1960s also the benefits of intra-industry trade became an important consideration for policy-makers too. With liberalisation under the EFTA underway in the 1960s, home market industries in both countries found new opportunities, as well as challenges, in the neighbouring country. The success of many businesses in establishing themselves in what gradually became an expanded home market showed the distinctive advantages of such interaction.

            All of this was favoured in principle by governmental authorities, and endorsed in joint statements by leading political decision-makers and representatives of industries and their organisations. In Sweden there is evidence of this kind of ‘Nordic home market’ thinking already in the 1940s, when in Norway and Finland attitudes were more reserved, but in the 1960s Finnish policy-makers began to endorse the principle quite enthusiastically too.

            Political benevolence, aiming at enlarging the home market base of industry in a closely regulated manner, could, for example, take the form of favourable treatment by the regulatory authorities. This indeed was the guiding norm amongst Swedish trade officials, who regulated Sweden’s imports from Finland on a de facto preferential grounds until the end of bilateral trade in the late 1950s, despite the fact the trade regime was otherwise severely restricted due to the inherent imbalance in favour of Sweden and the loan payments that reduced the Finnish import potential.

            The motivation behind this general benevolence was partly economic, as any increase in Swedish exports to Finland required special arrangements to let Finnish goods in Sweden during bilateral trade. But in fact the Swedish policy of favouring Finnish imports had political grounds too, as it continued Swedish reconstruction aid to Finland after the immediate post-war period in a sustainable manner. As further loans and outright grants were deemed impossible from Sweden after 1947, the furtherance of trade could be seen as an substitute to a more active, but unsustainable, Swedish involvement in the Finnish economy.

            Besides concrete administrative action, this attitude could also be seen in high-level encouragement or promotion of Finnish-Swedish trade or moral support from key decision-makers in the public sphere, whenever a common interest could be defined, pursued or defended. None the less, the exact dimensions and meaning of these ideas and actions need to be established. A case in point of the limits of such a preferential approach was seen in 1961-64, when a proposed merger between the electro-technical company ASEA Ab of Sweden and its much smaller counterpart Oy Strömberg Ab in Finland, was called off due to apprehension by Finnish businessmen and in particular the lobbying activities of the more nationalistic oriented Finnish-speaking section of the engineering profession. Faced with mounting domestic pressure the Finnish government hesitated to grant the necessary licenses to allow for the purchase of Strömbergs stock by ASEA, which eventually cancelled the operation. As is known, the merger eventually took place in changed circumstances in 1986. 

Finn Finland campaign 1966 

What was typical to the Finnish economy in the decades following the Second World War was the penchant for balance of payments problems, which were particularly severe after Finland's foreign trade was liberalised beginning in 1957 and gaining in speed in the 1960s. The problems resulted from the heavy reliance on the forestry sector as the main exporter, and hence the diversification of Finnish exports was a strategic goal for economic planners in the public and private sectors alike. One method that proved particularly useful in Sweden was the active promotion of trade, which culminated in the massive Finn Finland campaign in 1966.

The results of the campaign were studied simultaneously using polling methods. The main conclusion was that the competitive edge of Finnish exporters in the Swedish consumer's mind was in particular in design and in co-ordinated marketing between different producers so as to gain more visibility for the individual products and companies.[28]

Contemporary observers went as far as to describe the Finn Finland campaign as a 'wake up call' for both Finnish exporters of the opportunities in Sweden, and for Swedish consumers and importers of the potential that existed in Finland. The 280 % increase (in nominal figures) in Finnish exports to Sweden in 1965-1969 would indeed be difficult to explain otherwise, as there was no corresponding expansion in Finnish production capacity to explain it. Neither were Sweden's initial tariff levels such that EFTA liberalisation would have had much effect on the entry possibilities of Finnish exporters in Sweden. The low tariffs had already in the 1950s given Finnish exporters access to Sweden, but in the absence of exportable goods this was not realised. The most plausible explanation is in efficient marketing and the distribution of information.

This also led into permanent changes in the attitudes of consumers and producers. Until 1950s many Finnish home market industries operated in a closed system and only rarely were business opportunities explored abroad. The experience of success in Sweden in the later half of the 1960s was a mental watershed for many Finnish producers outside the traditional export sector. Later this encouraged many Finns to reach out for more distant markets as well. In Sweden, a revision of Finland's image as backward and a relatively poor neighbour was required before it could be realised what benefits imports from nearby Finland could bring about.[29]

The end result of the expansion of Finnish-Swedish trade (as Swedish exports to Finland grew also) was, that by 1970 Sweden's share of Finland's total exports was overemphasised according to calculations made by Tuomas Sukselainen. In 1960 the share of Sweden was very close to its share of the total Western markets (EEC + EFTA + USA) and then Denmark, for example, was clearly overemphasised. By 1970 this situation had changed clearly in Sweden's favour.[30] 

Outcomes of international trade and economic policy: Finland’s Nordic orientation 1957-1973 and Soviet responses 

One of the issues that have vexed historians of the former Soviet bloc has been the question why did the Soviet Union squander the political leverage afforded by its trade subsidy to Eastern Europe. Why did Soviet officials fail to bargain with resolve, to link subsidies to salient political issues, to make credible commitments, and to monitor the satellite’s policies? As Randall W. Stone has recently shown in a study based on extensive primary material and interviews, the Soviet Union did make an effort to reduce its implicit trade subsidy and increase the efficiency of the bloc, but the satellites managed consistently to outmaneuver Soviet negotiators.[31] The implicit trade subsidy resulted from the way in which prices were distorted and the satellites could profit from trading on the margin between prices on the Western market and those in the Soviet bloc.

The situation regarding distorted prices, limited political leverage and the negotiation strategies outlined by Stone applied to Finland as well, although the Finnish position was not entirely analogous with the satellites. What made the Finnish bargaining position even better than that of the satellites in the latter half of the 1960s and thereafter, in contrast to a more strained situation in the Soviet-Finnish trade negotiations in the 1950s, was the leverage the diversification of Finnish exports and its trade in particular with Sweden gave to Finnish negotiators. It can be argued, although research here is still incomplete, that improved terms of trade in Fenno-Soviet exchange resulted from the way in which Swedish – and later also other western – markets served as a potential or actual substitute to the Soviet market. During the last years of the 1960s Finnish exporters realised what potential there was in other markets in particular in the field of so called “new exports” (products outside the traditional forestry export sector). This gave Finnish trade negotiators distinctive leverage, which in turn created additional leeway for Finland when compared to the Eastern European satellites.

This change in Finland’s bargaining position had also general political implications in Fenno-Soviet relations. New research has discovered how there were several factors behind the Soviet Union's new policy towards Finland after the occupation of Czechoslovakia in 1968. According to Kimmo Rentola, the Soviet leadership sought to consolidate its positions in Finland politically in 1968-70 and hence to tie the country closer to its sphere of interest.[32] This challenged the Finnish political leadership, which had hoped for more room for Finland's neutrality policy and independence. The Soviet strategy remained a far cry from a shining success, and in 1971 a new policy was formed which stressed economic factors, such as increasing trade and technological co-operation with Finland. Instead of openly challenging the Finnish leadership politically, the Soviet Union decided to 'buy' Finland instead.

            The changes that had happened and were happening in Finland's economic relationship with Sweden were an important contributing factor in the Soviet policy change in 1968, and can be argued in the revision in 1971 as well. The Swedish ambassador to Finland, Ingemar Hägglöf, noted that the Soviet Union would not swallow  ungrudgingly the fact that Sweden overtook it Finland's most important trade partner in 1969.[33] And as Kimmo Rentola has discovered, they did not. Commenting Sweden's increased economic weight in Finland, Prime Minister Alexei Kosygin told Prime Minister Olof Palme the next summer that 'you are not a small country ... you keep on saying that, but look what you are doing'.[34]


The increase of economic activity between Sweden and Finland since the Second World War has in this paper been understood within the wider frame of  international politics as well as the institutions of bilateral, regional and international economic system as a whole.  

Main results of the paper can be summarised as follows: 

Among Swedish policy-makers three issues attached to the development of mutual economic contacts were paramount:  

1)      The maintenance of Nordic co-operative structures in which Finnish participation was necessary;

2)      The creation of a Nordic home-market base for Swedish industry;

3)      A policy seeking for and favouring internal stabilisation and economic modernisation in Finland.  

On the Finnish side policy-makers considered the intensification of economic contacts with Sweden: 

1)      As an important aspect and ingredient of the Finnish foreign policy of neutrality;

2)      A necessary stabilising force and am economic counterweight to Finland’s trade with and its politico-economic dependency to the Soviet Union;

3)      A manifestation of Finland’s character as a Nordic country.


[1] As this paper is a draft it does not contain adequate documentation about the sources and the relevant secondary literature. It's main aim is to serve as a basis for discussion and to test the main hypotheses with an expert audience.

[2] Robert Gilpin, The Political Economy of International Relations (Princeton: Princeton University Press, 1987).

[3] Robert Gilpin, Global Political Economy. Understanding the International Economic Order. Princeton: Princeton University Press, 2001, 23 – 4.

[4] Robert Gilpin, Global Political Economy. Understanding the International Economic Order. Princeton: Princeton University Press, 2001, 24.

[5] Ibid.

[6] Douglass C. North, Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press, 1990, 3.

[7] Ibid., 3 - 5.

[8] Ibid.,  4 - 5.

[9] Juha-Antti Lamberg, Taloudelliset eturyhmät neuvotteluprosesseissa: Suomen kauppasopimuspolitiikka 1920-1930-luvulla. Helsinki: Suomen tiedeseura, 1999; Tapani Paavonen, Suomalaisen protektionismin viimeinen vaihe: Suomen ulkomaankauppa- ja integraatiopolitiikka 1945-1961. Helsinki: Suomen Historiallinen Seura, 1998.

[10] Mikko Majander, ’The Limits of  Sovereignty. Finland and the Question of the Marshall Plan in 1947’, Scandinavian Journal of History, Vol. 19, No. 4 (1994), 309-26.

[11] Paavonen, Suomalaisen protektionismin viimeinen vaihe,  90.

[12] Paavonen, Suomalaisen protektionismin viimeinen vaihe,  41-8.

[13] Paavonen, Suomalaisen protektionismin viimeinen vaihe,  90.

[14] Mikael af Malmborg, Den ståndaktiga nationalstaten. Sverige och den västeuropeiska integrationen 1945-1959 (Lund: Lund University Press, 1994).

[15] Charles Silva, ’An introduction to Sweden and European Integration 1947-1957’, Michael Gehler & Rolf Steininger (Hrsg.), Die Neutralen und die europäische Integration 1945-1995 (Wien: Böhlau Verlag, 2000), 276-308.

[16] Harto Hakovirta, Puolueettomuus ja integraatiopolitiikka. Tutkimus puolueettoman valtion adaptaatiosta alueelliseen integraatioon teorian, vertailujen ja Suomen poikkeavan tapauksen valossa (Tampere: Acta Universitatis Tamperensis A:78, 1976).

[17] Tapani Paavonen, Suomalaisen protektionismin viimeinen vaihe. Suomen ulkomaankauppa- ja integraatiopolitiikka 1945-1961 (Helsinki: Suomen Historiallinen Seura, 1998), 35-6.

[18] Report No. 6/1948, 23 March 1948, G. A. Gripenberg, "Suomen ja Ruotsin taloudelliset suhteet v. 1947”, Microfiches 5 C, The Archives of the Finnish Foreign Ministry (AFFM), Helsinki.

[19] Erkki Pihkala, ”Ulkomaankauppa ja ulkomaiset maksusuhteet”, in Jorma Ahvenainen, Erkki Pihkala and Viljo Rasila (eds.), Suomen taloushistoria 2. Teollistuva Suomi (Helsinki: Tammi, 1982), 376.

[20] Ibid, 377-8.

[21] Report No. 6/1947 from Stockholm, 8 April 1947, G. A. Gripenberg, ”Suomen ja Ruotsin väliset suhteet v. 1946”, Microfiches 5 C, AFFM, Helsinki. On Swedish reconstruction policy, see Cay Sevón, Visionen om Europa. Svensk neutralitet och europeisk återuppbyggnad 1945-1948 (Helsinki: Suomen Historiallinen Seura, 1995).

[22] Paavonen, Suomalaisen protektionismin viimeinen vaihe, 35-6.

[23] Paavonen, Suomalaisen protektionismin viimeinen vaihe, 36.

[24] Hjalmar Krogius, Handelspolitik i krigstid. Finlands och Sveriges ekonomiska och handelspolitiska relationer åren 1940-1945, Helsingfors 1991, 138.

[25] Mikael af Malmborg, ‘Swedish Neutrality, the Finland Argument and the Enlargement of “Little Europe”’,  63-80.

[26] Mikael af Malmborg, ‘Swedish Neutrality, the Finland Argument and the Enlargement of “Little Europe”’, Journal of European Integration History, No. 1, Vol. 3 (1997), 63-80; Paavonen, Suomalaisen protektionismin viimeinen vaihe, 101-115.

[27] Erkki Pihkala, ”Kauppa sotien välisellä kaudella”, in Ahvenainen et al, Suomen taloushistoria 2, p. 263.

[28] Caj Linden, "Ruotsi on löytänyt Suomen", Unitas, 4/1970.

[29] Caj Linden, "Ruotsi on löytänyt Suomen", Unitas, 4/1970.

[30] Tuomas Sukselainen, Suomen vientimenestys 1960-luvulla. Vakio-osuusmallin sovellutus. Taloudellisia selvityksiä, 1972.

[31] Randall W. Stone, Satellites and Commissars: Strategy and Conflict in the Politics of Soviet-Bloc Trade. Princeton: Princeton University Press, 2002.

[32] Kimmo Rentola, "Suomi liu'ussa? Neuvostoliiton Suomen-politiikan kiristyminen 1968-70", Historiallinen Aikakauskirja 2/2002, 137 - 52.

[33] Rentola, 140.

[34] Rentola, 140.

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