Overview of the Economic Survey of Estonia 2012 | Previous Releases | Additional information
Notwithstanding the deep 2008-9 economic crisis, Estonia has achieved one of the highest medium‑term growth rates in the OECD, accompanied by rapid income convergence. The strong recovery from the crisis has benefited from structural strengths of the economy: a flexible labour force, business friendly regulation, well capitalised financial institutions, a successful transition from the currency board to euro area membership, and sustained credibility of fiscal policy.
Nevertheless, the Estonian economy is exposed to considerable volatility, which could threaten growth and well‑being and contribute to high long‑term unemployment. While this volatility is attributable in part to a series of external shocks, domestic factors have also played a role, both in terms of amplifying external shocks but also in terms of swift reactions favoured by high flexibility of the economy.
Fiscal policy could be made more countercyclical. Automatic stabilisers should be allowed to operate fully and additional discretionary policy action might be needed in the event of another severe boom or bust cycle. Spending ceilings would contain increases in outlays in booms, but would also allow the automatic stabilisers to work, as these are mostly on the revenue side. An independent fiscal institution, which is to be established soon, would play a key role in assessing the fiscal position both over the business cycle and in terms of long‑term sustainability. Experience suggests that such institutions work best when they have a clear mandate, are adequately funded and are independent.
While microprudential regulation of financial markets is well established, existing macroprudential instruments turned out to be insufficient during the build‑up of the recent boom/bust cycle. Cross‑border co‑operation of financial sector regulation needs to be further strengthened and the tool‑kit for macroprudential intervention needs to be widened. The possible tools should ensure effective and efficient achievement of macroprudential objectives in the integrated regional banking market.
Larger active labour market programmes would accelerate the re‑employment of job‑seekers, reducing the risk that they leave the job market permanently. Reducing the labour‑tax wedge would increase employment opportunities for the low‑skilled. Lifelong learning would strengthen employability. Vocational education should be further focused on equipping graduates with employable skills by intensifying co‑operation with employers, and access to tertiary education should be widened further. The enterprise support framework should increasingly target innovation, thereby contributing to productivity‑driven export growth.
All support programmes should be designed to maximise the prospects of re‑integrating beneficiaries into employment. Social benefit recipients should therefore become regular clients of the unemployment insurance offices, and they should benefit from job search assistance and active labour market policies. Scarce resources should be more targeted to those in greatest need. Addressing the large inflows into the disability system is a priority.
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For further information please contact the Estonia Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Arthur Radziwill and Lilas Demmou under the supervision of Andreas Wörgötter. Research assistance was provided by Seung-Hee Koh.