A Study of Cluster Impacts and the Future of the Shipping Industry in Aland Islands

Aland, a small autonomous island province of Finland with 28,000 inhabitants, is base for commercial shipping employing - in and outside Aland - about 6 100 people, onboard and ashore, with an annual gross salary volume of 243 million euros and capital income of 275 million euros (2009). In the same year, gross sales of the shipping sector amounted to more than 870 million euros. These are impressive figures in relation to the total labour market and economy of Aland. Aland is one of the few places within EU, where tax-free sales onboard are still allowed. The right to tax-free was enabled by Aland's permanent exemption from the EU tax rules written in the Finland's EU-accession treaty. Another important factor for shipping is the EU-sanctioned system of subsidies for crewing costs that decreases the manning cost of domestic seafarers. Apart from measuring the size and effects of the Aland shipping cluster, we analyse the outcome of different scenarios for the shipping industries and the society of Aland using a dynamic one-region computable general equilibrium model. We the following scenarios are studied: i) Increasing number of passengers in the Baltic Sea. ii) Growth in the demand for shipping of goods. ii) The EU-sanctioned system of subsidies for crewing costs is abolished iv) Increased bunker costs (IMO-decision on low sulphur fuel) v) The Aland tax exemption within EU and, therefore, tax-free sales onboard are abolished It is shown that the manning subsidies mainly benefit the seafarers, but seen from the point of the macro economy, shipping companies or all households, abolition of manning subsidies could have positive impacts as well, depending on the manner of adjustment of shipping to new conditions. We show that from the point of view of the Aland economy and society, the first two scenarios are positive for almost everybody. The negative consequences of iv) are widespread, but the abolition of the Aland tax exemption would have disastrous consequences for the passenger ferry industry and for the economy as whole.