First of all, I would like to thank the American Chamber of Commerce in Estonia very much for inviting me once again. It is an honor. Both because of the wonderfully attentive audience present here today and also because of the great work that you do enabling companies to become part of the US business community in Estonia.
Compared to last year, this September is different for both of our countries due to presidential elections. The choices we make will influence the political and economical landscapes for the coming years. Yet, for governments and also for companies alike, autumn means budgeting. It is time to asses and diagnose, and then to look ahead and plan.
So today I have planned to speak briefly about just that - the budget preparation process. I will look at where we were a decade ago, what has changed, which decisions have enabled Estonian business climate to grow and I will also look forward at what else could be achieved to improve it further.
So where do we stand as compared to ten years ago?
Estonia regained independence 25 years ago. We have clearly progressed during those interesting and inspiring years of freedom but lately there has been talk of a standstill and I find it essential to look at facts for reassurance. To be able to make sustainable and growth-triggering economical decisions, we must first assess and diagnose accurately.
Let’s take a look at wages, which have increased by 46 percent in real terms within the last decade from 2005 to 2015. At the same time employment rate in the labor market has increased from 58 percent to 65 percent. Labor market has been performing strong, providing substantial welfare gains.
Nevertheless, labor market tightness is perhaps the most frequently mentioned bottleneck to economic growth. The labor market has already absorbed most of the internal resources. There might still be some exploitable pockets, especially among inactive people who take care of their children or disabled. I am glad to say that the capacity of work reform has taken the effect, enabling people to return to the labor market and providing workings hands for the economy. We have also considerably relaxed the constraints to hire people from abroad lifting the tech sector underneath the quota.
Our GDP has gone up by almost a fifth in real terms in ten years, notwithstanding the fact that this period includes the deepest global economic slump – the
Great Recession – since 1930s when the Great Depression took place, which hit the Estonian economy hard.
We do not know to what extent the global economy will revert back to the previous growth pattern. It has been for a long that global trade has grown faster than global GDP. Unfortunately, this relationship has broken since the onset of the Global Financial Crisis. Global trade growth, which has been a crucial element to our economic success story, has remained unfortunately subdued. Under such circumstances, it is a way more difficult for small open economies like ours to maintain high growth.
Now, a few words about Estonia’s trading partners.
Last year, Estonia exported 71 percent more than in 2005. In an interlinked global economy, we all depend on each other. Estonia pays a heavy toll on economic malaise in the Russian economy. The IMF says that Russia’s ’medium-term prospects remain subdued due to long-standing structural bottlenecks’.
When it comes to Finland, Estonia’s second largest export partner, again according to the IMF ’Finland has suffered from a unique confluence of structural and cyclical factors, which has taken the economy into recession’ in recent years. Now Finland is in gradual recovery but it has to revive competitiveness. Estonia’s export to Finland has been stagnant; there has been almost no growth in export value since 2012. The most recent news includes Brexit, an unexpected shock to everybody. Indeed, external growth environment has not been and will likely not be as benevolent for us as it used to be. Does not sound especially encouraging, does it?
Against the background of weak global growth, I would like to quote Paul Samuelson, the first American who won the Nobel Prize in Economics. He has said „Globalization presumes sustained economic growth. Otherwise, the process loses its economic benefits and political support.“
Estonia has always been a strong believer in economic freedom that goes beyond borders - there is no turning back from globalization.
Despite the recent news about TTIP negotiations being stalled, I believe politicians on both sides of the Atlantic feel that it is extremely important that the negotiations would continue. Surely the trade negotiations today are more complicated than they were 3 years ago, yet I am convinced the interest to continue and conclude is there and we have a lot to loose if the talks came to a halt.
Coming back to the Estonian economy, the external shocks need to fade to strengthen the recovery. Last years’ decline in oil price has benefitted many households with cheaper gas or heating bill. Unfortunately, our energy sector has been hit hard. Mining and energy sectors have been contributing to the decline. In 2015 the production declined in the energy sector by 7 percent. In July 2016 production in the mining sector was down by almost 60 percent. The mining sector accounts only about 1 percentage point in our GDP but a 60 percent decline in this sector means already 0,5 percentage point decline for GDP.
The Estonian Employers Confederation publishes an index, called an economic speedometer, which assessed the Estonian economy to travel with a 77 kilometers per hour speed in August.
I disagree. In my view 0,6 percent growth in the second quarter is a pedestrian speed for our economy. Our economy is capable to grow much faster. We have ambition to grow much faster. Current speed is a pedestrian speed but definitely not a stall speed, that is the speed below which aircraft wings won’t give enough lift to stay in the air. Our economy is resilient and it has repeatedly shown in the past significant flexibility to adjust when there is a need.
Independent forecasts say that our economic growth will accelerate but we should not expect the repetition of miraculous growth performance that we saw in the middle of the last decade. With our current income level we are now internationally in a more competitive league, in which growth rates are lower. The IMF has projected the cruising speed for our economy to an average of some 3 percent over the next five years and 2¾ percent over the next two decades. The expert forecasts from the Ministry of Finance and Bank of Estonia and private sector experts predict economic growth to reach the same range. I am confident that we will see our economic growth to accelerate.
Let’s now look now at the parameters of the highway that we have built in Estonia:
• Firstly, the International Tax Competitiveness Index has placed Estonia number one country for two consecutive years
• Secondly, in the index on Economic Freedom 2016, Estonia is ranked 9th, being surrounded by other advanced economies.
• Also, doing Business 2016, a broad-based assessment of the business environment, ranked Estonia 16th. We approach steadily to the frontier.
Let me hereby recall an announcement from the last week that the banks of Nordea and DNB will merge their Baltic units into a new independent bank with their headquarter based in Estonia. This news is clearly a complement to our business environment.
• Human Capital Report 2016 produced by the World Economic Forum placed Estonia 15th, the highest positioned new EU member state
• We are doing well in innovation activity rankings, but there is some room for improvement. The Information Technology and Innovation Foundation has ranked Estonia 18th in terms of impact on global innovation. Estonia is number 23 country in the Global Innovation Index.
• Estonia is 30th in the UN Human Development Index, belonging to countries with very high human development.
I believe that these and other similar rankings paint a fair picture of Estonia. We excel internationally in terms of business environment, but innovation performance is something in which we could improve ourselves. Our start-up community is breaking boundaries but digitalization needs to become part of growth strategy in the rest of our economy as well. When economies hit the labor market constraint, there is a need for technological upgrading and innovation. Estonia is on the way to transform into a knowledge-based economy. Our human capital is competitive, our youngsters score very well in PISA tests but we lose positions when it comes to prime working age population . It has been our priority to build a higher education system that is internationally highly competitive; perhaps we could make more use of life-long learning like Nordics.
However, the rankings show that Estonia is often ranked among countries with higher income level compared to Estonia. To me this comparison reveals the potential that our economy has. That is not to say that we can rest on our laurels. Countries renew their competitive advantages and lift growth potential on a continuous basis via various structural reforms. We launched recently the administrative-territorial and governance reform to improve the supply of government services across Estonia and to modernize the governance model.
These decisions are one of the most influential in shaping the state in our recent history. We are also progressing to ease the tax rules on share options to make the taxation more flexible in cases where the entire business is sold to a new owner. This step aims incentivizing employees to contribute harder to company growth.
A year ago I asked 10 very prominent experts to form a task force and commissioned them to answer the question what needs to be done to speed up Estonia’s economic growth. They have been looking for idle resources in our labor market, how to attract more foreign talent, how to speed up the transition to a knowledge-based economy, and how to make our business environment even more attractive. They will, for example, propose the e-worker concept, which is expected to boost the supply of foreign talent. I look forward to their report, due in the end of October, to discuss it with the cabinet ministers.
Last year, at this very event, I said that Estonia has successfully adopted what the text books prescribe. In terms of macroeconomic environment we are on a strong footing. However, textbooks are less clear how to gear various other policies towards country specific needs. That is why I would like to highlight learning as a crucial element in economic policy making. We are in a league in which comprehensive policies and determined action is needed to build a more competitive economy.
With these remarks, I wish you all the best in your future endeavors