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Estonian economy –
implications of “smallness”
Eve Parts (PhD)
University of Tartu, Estonia
NBSS Economic Workshop, Reykjavik, November 18, 2011
Structure of the presentation
• Estonia’s basic economic decisions in
1990s
• Characteristics of “smallness” in case of
Estonia (as defined by the World Bank)
• Future economic prospects
Basic economic decision in 1990s
• Strict fiscal policy
– Yearly balanced state budget
• Tight monetary policy
– Currency board system
• Simple and clear tax system
– Proportional income tax
– Relatively low general tax level
• Balance between wage increase and
productivity growth
Basic economic decision in 1990s
• Main purposes:
– Economic and financial stability
– Higher credibility
FDI !
– Lower country risk ratings
– … leading to faster economic growth
• Other outcomes:
– Flexible labor market
– … but still not enough restructuring …
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Economic freedom 2011 (14.)
Source: http://www.heritage.org/Index/Country/Estonia
100
90
80
70
60
50
40
30
20
10
0
Changes in economic freedom
80
78
76
74
72
70
Joining EU
Economic
crisis
68
66
64
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Characteristics of “smallness”
•
•
•
•
•
•
•
•
Remoteness or isolation
Openness
Income volatility
Limited diversification
Access to external capital
Natural disasters
Limited public and private capacity
Poverty and inequality
Remoteness or isolation ?
Remoteness or isolation ?
• … are not the problem
• But Russian neighborhood is …
– Communist past
– Economic security (trade embargo in 1998)
– Energy issues
• One of the (main) reasons to join EU and
NATO
Openness – total trade (EX+IM)
200,00
25000,00
180,00
160,00
20000,00
140,00
120,00
15000,00
100,00
80,00
10000,00
60,00
40,00
5000,00
20,00
0,00
0,00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Value in current prices, mln EUR (left axis)
Share in GDP, current prices, % (right axis)
But (statistically), total effect of trade on GDP growth has been
negative (-6% in 2006)
Limited diversification of foreign trade
• Main trading partners (2010)
– Finland, Sweden, Latvia, Germany, Russia:
• 56.5% of total exports
• 57.3% of total imports
– EU27: 67.6% of imports, 79.8% of exports
– Euro area: 31.0% of imports, 37.6% of exports
– Trade balance: negative with Latvia, Lithuania,
Germany, EU27 and Euro area
• Principal exports:
– Machinery and equipment, wood and paper, textiles,
food products, furniture, metals and chemicals
Size and importance of export sector
• 1% of largest exporters gave about 46% of total
export in 2009
• 5% of largest exporters – 72% of total export
• 10% of largest exporters – 84% of total export
BUT (manufacturing, average 1995-2002):
• Export accounts for ~70% of Estonian GDP
• Exporting firms are much more productive:
– 22% higher TFP (total factor productivity)
– 58% higher sales per employee
– 53% higher value added per employee
Access to external capital
• Extremely important!
• FDI
– FDI position 12.3 bn euros 2010
(4,3x increase since 2000)
– Top investors: Sweden (35%), Finland (23%),
Netherlands (9%)
• EU financial support (infrastructure
development)
Current account balance (% of GDP)
15
% SKPst
10
5
0
-5
-10
-15
-20
-25
-30
1999
Kaubad
goods
2001
2003
Teenused
services
2005
2007
Tulud
returns
2009
Ülekanded
transfers
2011*
2013*
Jooksevkonto
CA
Income growth and volatility
SKP kasv, 1990=100
120
GDP 1990 = GDP 2001
110
?
100
90
80
SKP reaalkasv võrreldes eelmise aasta sama perioodiga (%)
70
60
14
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
12
10
8
6
4
2
0
-2
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
Pre-crisis volatility,
1996-2007
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Convergence with EU
(Real GDP per capita as % of EU15 average)
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Czech Republic
Hungary
Slovakia
Estonia
Poland
Bulgaria
Latvia
Portugal
Romania
Lithuania
Slovenia
Real versus nominal convergence
(Real GDP per capita as % of EU27 average)
Boom and crisis: GDP2009~GDP2005-2006
Productivity and wages
(% as compared to the same period in previous year)
Employment and unemployment
tuhat inimest
%
700
18
650
15
600
12
550
9
500
6
450
3
400
0
1996
1998
2000
2002
Hõivatud
Töötuse määr - RM prognoos aug
2004
2006
2008
2010*
2012*
Töötuse määr - RM prognoos dets
Registreeritud töötus
Other vulnerabilities?
• Possibility of natural disasters?
• Emigration
• …
Future economic prospects
(Estonian Development Fund)
• Main problem of Estonian economy: low valueadded production structure
• Possible solutions:
– Moving ahead within or between value chains
– New business areas with greatest growth potential
(global as well as local/regional)
– Exploring new markets
• Solutions might be (largely) outside the economy
– education, migration, values, …
Additional statistics (%)
2006
2007
2008
2009
2010
Real GDP
growth
10.1
7.7
-3.7
-14.3
2.3
Inflation (CPI)
4.4
6.6
10.4
-0.1
3.0
Unemployment
5.9
4.7
5.5
13.8
16.9
GOV/GDP
16.2
16.5
19.2
22.0
20.9
Public
debt/GDP
4.4
3.7
4.5
7.2
6.7