Annual EBHS Conference, 39th Annual Economic and Business History Society Conference

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The Virtuous Circle of Social Spending and Structural Change in the 20th Century Finland
Matti Hannikainen

Last modified: 2014-03-10


The growth of social spending was one of the most remarkable changes in Western society during the 20th century. The growth was linked to three other great social transformations: the transition to fuller democracy, sustained economic growth and ageing population. Like many other European countries, Finland transformed politically from absolutist to parliamentary regimes. The transformation included development from a fiscally fragmented public sector to a more central one. Because economic growth was faster than in the leading countries, Finland experienced rapid catch-up growth. The demographic transition has paved the way for a discussion on slower economic growth and the renewal of the welfare states in Europe. The paper links to the historical and theoretical discussions on the virtuous circle of the welfare state and inclusiveness of economic growth and how they may explain the success story of the Western welfare state – and its limits. Especially in the Nordic countries, there has been a widely shared trust in a ‘virtuous circle’ between economic growth, social equality and the widening of democracy. The paper explains how structural change increased the need for a new kind of social security, and economic growth increased resources for reforms. In the transition period, social spending created safety nets and decreased resistance to structural change. A higher standard of living, social security and better education made it easier for people to move from agriculture to more productive industries. As a consequence, it became easier to implement further economic growth.