Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Finland Turned Forest Waste Into a Productivity Engine
Transcript
- Lucas: Finland is roughly 75 percent forest. That makes it one of the most forested countries on earth, and for most of its modern history, it did what you'd expect — cut trees, sold timber, maybe some paper and pulp. Luna: Right, the classic commodities play. Sell the raw stuff, buy the finished goods. Lucas: Exactly. And that worked for a long time. But around the early 2000s, the industry hit a wall. Global paper demand was starting its long decline — digital was creeping in — and timber prices were volatile. Finland realized that if it kept doing what it had always done, its most valuable natural asset would become a low-margin trap. Luna: So what did they do instead? Just start making better paper? Lucas: No, they went much further. They essentially said: wood is not just timber and pulp. It's a chemical factory. A single tree contains cellulose, hemicellulose, lignin, extractives — each of which can be turned into something far more valuable than a two-by-four. The challenge is that separating those components economically is hard. So Finland invested heavily in research and development, and they created what's now called the 'bioproducts' concept. Luna: Can you give me a concrete example of a bioproduct that's come out of this? Lucas: Sure. One of the biggest is lignin-based resins. Traditionally, plywood and particleboard are glued together with formaldehyde-based adhesives. Formaldehyde is toxic, and it's derived from fossil fuels. Finnish researchers developed a way to extract lignin from black liquor — that's the byproduct of pulping — and turn it into a bio-based adhesive that performs just as well, with lower emissions. Now, several mills produce lignin commercially, and it's being used in everything from flooring to car parts. Luna: So they turned a waste stream into a revenue stream. That's classic productivity thinking — get more output from the same input. Lucas: Exactly. And that's just one example. There's also nanocellulose — which is basically wood fibers broken down to the nanometer scale. It's incredibly strong, lightweight, and can be used to reinforce plastics, create biodegradable packaging, even medical implants. Finland is now one of the world leaders in nanocellulose production. Luna: But this kind of R&D is expensive. Who paid for it? Private companies, the government? Lucas: Both. A key institution is CLIC Innovation, a public-private partnership that coordinates research among companies like Stora Enso, UPM, and Metsä Group, plus universities and research institutes. The Finnish government also put significant funding through Tekes — now called Business Finland — which co-finances high-risk projects. The idea was to share the upfront cost while letting the companies commercialize the results. Luna: So it's a cluster approach. Like how they did with mobile phones and Nokia. Lucas: Exactly the same playbook. And it worked. Between 2000 and 2020, the productivity of Finland's forestry sector — measured as value added per employee — grew by over 60 percent. Meanwhile, the share of high-value bioproducts in total forestry exports went from almost nothing to about 15 percent. Not bad for an industry many thought was sunset. Luna: I want to zoom in on the numbers. Sixty percent productivity growth over twenty years — that's roughly 2.4 percent per year compounded. That's higher than the overall Finnish economy, right? Lucas: Significantly higher. Finland's overall labor productivity growth over that period averaged around 1.5 percent per year. So forestry was outperforming the rest of the economy by a full percentage point annually. And remember, this is a sector that was supposed to be in decline. Luna: What about employment? Did all this automation and process improvement cost jobs? Lucas: Employment did drop — by about 20 percent from 2000 to 2020. But the remaining workers are much more skilled and better paid. The industry basically traded volume for value. And because the new bioproducts require specialized knowledge, the sector now employs more chemists, engineers, and biotechnologists than it did before. So it's a classic case of creative destruction within an industry. Luna: That's a really important distinction. A lot of people hear 'productivity growth' and think 'job losses'. But here, the pie got more valuable, even if fewer people are slicing it. Lucas: Right. And the Finnish government was proactive about retraining. They had programs to help displaced paper mill workers transition into the new bioproduct mills. It wasn't perfect, but it was better than just letting them go. Luna: Let me ask a skeptical question. Isn't this just a story about a small, wealthy country that can afford to invest in fancy research? What can other countries learn from Finland? Lucas: That's fair. Finland does have advantages — a strong education system, a history of collaboration, and a small homogenous population that makes consensus easier. But there are lessons that apply more broadly. One is the idea of 'mission-oriented' innovation policy: instead of just funding basic research and hoping for the best, you set a clear industry-wide goal — in this case, turning wood into high-value chemicals — and align public and private efforts behind it. Luna: So it's not just about the money, it's about the coordination. Lucas: Exactly. Another lesson is patience. The first lignin-based adhesives took over a decade to go from lab to commercial scale. Governments and companies that expect quick returns would have given up. Finland didn't. They kept funding the research even when the payoff wasn't immediate. Luna: And that's tied to something we've talked about before — the long-term orientation of Nordic economies. Lucas: It is. And there's a third lesson: don't just improve what you already do. Reinvent the product. Finnish forestry companies didn't just make paper more efficiently; they asked 'what else can we make from a tree?' That's a mindset shift, not just a process improvement. Luna: So if I'm a policymaker in, say, Brazil or Indonesia, with huge forestry sectors, what's the first step? Lucas: I'd start by mapping the full chemical composition of your local wood species. Different trees have different lignin structures, different cellulose properties. Then identify which bioproducts are most viable given your infrastructure and labor skills. Then create a consortium of companies, universities, and government to fund pilot plants. And be prepared to wait ten years. Luna: It's a long game. But then again, so is planting a forest. Lucas: Exactly. And that brings me to something I wanted to mention. If you enjoy hearing stories like this — how real economies actually improve productivity — and you want to support the show staying ad-free and independent, listeners have been asking how to chip in. There's a simple way: buy me a coffee dot com slash fexingo. It's a one-time thing, no subscription. Totally optional, but it helps us keep doing the deep dives. Luna: Yeah, and it really does make a difference. We put all that support into research and production time. Lucas: So back to Finland. One of the most interesting recent developments is the so-called 'bioproducts mill' concept. The newest mills, like the one UPM built in Kymi, are designed to produce not just pulp, but also biochemicals, biofuels, and even textiles from wood. They're essentially integrated biorefineries. And they're incredibly efficient — using almost every part of the tree, including bark and branches that used to be left in the forest. Luna: So the productivity gains aren't just from higher value products, but also from higher resource utilization. It's a circular economy approach. Lucas: Exactly. And the energy efficiency is impressive too. These mills generate much of their own power from waste biomass, reducing their carbon footprint. In fact, the Finnish forestry sector is now close to carbon neutral on a lifecycle basis, which is remarkable for a heavy industry. Luna: Let's talk about the export numbers. How big is this sector now relative to the Finnish economy? Lucas: Forestry-related industries — including pulp, paper, and bioproducts — account for about 5 percent of Finland's GDP directly, and up to 15 percent when you include indirect effects. Exports of forest products are around 20 billion euros annually, which is roughly a fifth of total exports. And the share of high-value bioproducts is growing at about 8 percent per year. Luna: That's a significant chunk. And it's interesting that this transformation happened despite the decline of paper. They basically replaced a dying product line with new ones. Lucas: Yes, and that's the key insight. The paper decline was actually a catalyst. It forced companies to innovate or shrink. Many didn't survive — Finland lost about a third of its paper mills. But the ones that adapted are now stronger than ever. Luna: So there's a kind of Darwinian selection at work. The crisis cleared out the weak players and freed up resources for the innovative ones. Lucas: Exactly. And that's a lesson for any industry facing disruption. Sometimes the best response isn't to defend the old business, but to use the crisis as an opportunity to reinvent yourself. Luna: To wrap up, what's the one number or image you'd want listeners to remember from this episode? Lucas: The 60 percent productivity growth over twenty years. It shows that even a mature, resource-based industry can dramatically improve its output per worker if it's willing to rethink what it produces. And the image I'd leave you with is a Finnish forest — not just as a source of timber, but as a chemical treasure chest that's only beginning to be unlocked. Luna: That's a nice way to put it. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to all of you for listening.