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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

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Estonian economy implications of smallness

Estonian economy – implications of “smallness”

Eve Parts (PhD)

University of Tartu, Estonia

NBSS Economic Workshop, Reykjavik, November 18, 2011


Structure of the presentation

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

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 1990s1

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 …


Economic freedom 2011 14 source http www heritage org index country estonia

Economic freedom 2011 (14.)Source: http://www.heritage.org/Index/Country/Estonia


Changes in economic freedom

Changes in economic freedom

Joining EU

Economic crisis


Characteristics of smallness

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 ?


Remoteness or isolation1

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

Openness – total trade(EX+IM)

But (statistically), total effect of trade on GDP growth has been negative (-6% in 2006)


Limited diversification of foreign trade

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

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

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

Current account balance (% of GDP)

goods services returns transfers CA


Income growth and volatility

Income growth and volatility

GDP 1990 = GDP 2001

?

Pre-crisis volatility,

1996-2007


Convergence with eu real gdp per capita as of eu15 average

Convergence with EU(Real GDP per capita as % of EU15 average)


Real versus nominal convergence real gdp per capita as of eu27 average

Real versus nominal convergence(Real GDP per capita as % of EU27 average)


Boom and crisis gdp2009 gdp2005 2006

Boom and crisis: GDP2009~GDP2005-2006


Productivity and wages as compared to the same period in previous year

Productivity and wages(% as compared to the same period in previous year)


Employment and unemployment

Employment and unemployment


Other vulnerabilities

Other vulnerabilities?

  • Possibility of natural disasters?

  • Emigration


Future economic prospects estonian development fund

Future economic prospects(Estonian Development Fund)

  • Main problem of Estonian economy: low value-added 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

Additional statistics (%)


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