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RESEARCH PRODUCT

Tackling Market Failure or Building a Cartel? Creation of an Investment Regulation System in Finnish Forest Industries

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Government intervention in the economy is often justified by the need to correct market failures. This study analyzes one case, the investments of Finnish forest industries, in which, in the late 1960s and early 1970s, both policy makers and the trade association representing the sector reasoned that intervention was particularly necessary because otherwise, the only substantial natural resource in the small country would be overexploited. In the long run, however, the growth of forest resources turned out to be higher, and the demand for wood lower, than expected. Furthermore, the most influential industrialists managed to “capture” the regulatory system and make it a component of their network of cartels and other restrictive practices. Regulatory capture is usually seen as a something that should be avoided, but in this case, it helped the Finnish forest industries to transform themselves from a supplier of bulk goods into the world’s leading exporter of high-end paper grades. Recent decline in demand has, however, raised doubts about the wisdom of this strategy.