Remarks by Angel Gurría, Secretary-General, OECD
Tallinn, Estonia, 15 September 2017
(As prepared for delivery)
Minister Ossinovski, friends from the press, Ladies and gentlemen,
It is a great pleasure to be back in Tallinn, at the buzzing hub of your EU Presidency, to launch the OECD 2017 Economic Survey of Estonia. Let me begin by thanking the Estonian authorities for their support in the preparation of this Survey, and to Minister Ossinovski for hosing the launch.
Our study first of all recognises the numerous strengths of the Estonian economy. Estonia has an excellent business environment, strong initial education as shown by top PISA scores, an innovative ICT sector and solid public finances. Major macroeconomic imbalances, which had accumulated before the crisis, have been addressed. Macro-prudential tools are in place to mitigate the risk of repeated boom-bust cycles. Significant measures have been taken to improve labor market performance, including tax reforms and additional spending on active labor market policies.
Economic growth has disappointed in recent years but is now gaining momentum. We project GDP growth to reach 4.2% this year and 3.2% in 2018 (more than twice the Euro area average projection 1.8% in June 2017). The unemployment rate has declined significantly in recent years, in fact by more than 10% from a peak of 17% in 2010 to 6.6% in June this year, well below the euro area average of 9.1%.
And we must highlight that on many dimensions of well-being, Estonia scores as high as or higher than the typical OECD country. This is an impressive record.
Despite this positive outlook, Estonia is still facing important challenges which must be addressed in order to accelerate convergence with the top OECD performers. Let me highlight three of them here.
Firstly, productivity growth has slowed down significantly, from a yearly average of 6% before the crisis to less than 2% on since 2011 and a large number of firms, even young firms, display only low capacity for innovation. Estonian average productivity is only 65% of the OECD average.
Secondly, high levels of inequalities persist. Estonia has one of the highest poverty rates (16%) in the OECD, a very high gender pay gap (28%), and is still hampered by large income gaps. The average income of the 20% of the richest of the population is about 6.2 times that of the poorest 20%, (the OECD average is 5.3 times). The difference in the share of population reporting good health between the rich and the poor households is above 40%.
Lastly, skills shortages and mismatches have appeared in some sectors, such as ICT and healthcare, as Estonia’s working age population continues to decline. To put this in perspective, around 40% of employees reported insufficient skills for their job at the time of hiring.
Let me now turn to some of our key recommendations to address these challenges and to promote more inclusive and resilient growth.
Fiscal prudence is important for a small open economy like Estonia, to mitigate negative external shocks and to ensure a stable macroeconomic outlook. Yet Estonia can use fiscal policy to improve the long-term potential of the economy.
At 10% Estonia has the lowest gross public debt, relative to GDP, in the OECD. Once assets are taken into account, “net debt” is even non-existent. The government’s decision, therefore, to allow a small fiscal deficit for the period 2017-2020 will not endanger the sustainability of public finances.
In fact, Estonia could afford to run small deficits beyond 2020 to finance measures that boost its long-term growth potential. A small deficit of 0.5% of GDP beyond 2020 would keep the debt ratio constant at its current level. This would allow for more investment in priority areas such as social protection and health, life-long education, and the environment. Life expectancy in Estonia is two years shorter than in the OECD on average. Access to healthcare is being improved, but incentives to reduce work accidents should be strengthened.
Green investment should be strengthened too. Because of its reliance on oil shale, Estonia has the most carbon intensive economy in the OECD. This is not sustainable. Estonia should set appropriate tax rates on oil shale, vehicle and energy use to reflect the environmental damage they generate.
Estonia can also benefit from greater integration into global value chains and stronger productive investment. These are vital in boosting productivity and fostering long-term inclusive growth. With exports at around 80% of GDP, it is highly integrated into international trade, but remains specialised in products of low-to-medium complexity, representing around half of total exports. To increase the export potential and value-added drawn from trade, efforts should concentrate on strengthening adult education, co-operation between businesses and researchers and more investment in research and development (1.5% of GDP in 2015 compared to OECD average of 2.4%).
Estonia must also focus more on unleashing more productive investment. Eliminating remaining barriers to business and trade is crucial to reduce administrative costs for companies. Estonia also needs an efficient insolvency regime to avoid capital being trapped in low-productivity firms.
It is also crucial to expand access to funding. In this respect, our study highlights that the financial industry could be diversified by granting banking licences to savings and loans associations; as well as removing barriers to the development of alternative funding modes, such as peer-to-peer lending and equity-based crowdfunding.
Another factor which remains crucial to make Estonia more attractive for investment is the upskilling of its labour force. Addressing growing skill shortages and labour market inequalities is a priority as they can lead to an improvement of the investment capacity of Estonian firms, as well as drawing more value-added from trade.
People must be equipped with the right skills for the 21st Century and the Next Production Revolution. More efforts should also be invested into eliminating gender gaps, improving the career prospects of women, and encouraging participation rates of young mothers.
To this end, childcare services are being expanded, but Estonia could go further, for instance by addressing the pay-gap and by increasing the share of the parental leave reserved for fathers. In addition, migration can also help in easing skill shortages. To improve Estonia’s attractiveness for skilled migrants, working and settling in Estonia should be made easier – notably by relaxing the annual quota.
Minister Ossinovski, Ladies and gentlemen:
Estonia has made great strides in strengthening its economy and increasing its well-being. It is now crucial to make the most of this positive momentum and focus on targeted reforms for more sustainable and inclusive growth. Let’s work together to achieve better policies for better lives in Estonia.