Estonia

Launch of Economic Survey of Estonia

 

Speech by Angel Gurría, OECD Secretary-General, delivered during the launch of Economic Survey of Estonia

 

28 January 2015 • Tallinn, Estonia

(As prepared for delivery)

 

Dear Prime Minister, ladies and gentlemen,

 

It is a great pleasure to be in Tallinn today to present the 2015 Economic Survey of Estonia. I have had the opportunity to meet a number of your Ministers today, and I am struck by their shared belief about the reforms Estonia needs for even stronger, fairer growth.

 

Its underlying strengths helped Estonia recover from crisis, but challenges remain

 

Estonia was among the countries hardest hit by the crisis, but it is bouncing back strongly. Despite a challenging international environment, we expect GDP growth to accelerate to 2.4% this year and 3.4% in 2016.[i] It has been a long way, but  real GDP per capita is likely to exceed the pre-crisis peak by next year. At the same time, the unemployment rate has fallen dramatically from its 17 per cent peak in 2010 to 7.5 per cent today.[ii]

 

This solid performance is founded not least on the growth-friendly framework conditions in place. Product and labour market regulations are conducive to a dynamic private sector, while the public administration is relatively effective. The fiscal position is very strong and corporate taxation is both low and simple. The banking system is financially sound. Education outcomes are good. Together, these underlying strengths have helped vibrant, innovative start-up firms to emerge, notably in the ICT services sector.

 

Nonetheless, Estonia is still a ‘catch-up country’, with some distance to travel before it closes the income gap with top-performing OECD countries. Skills mismatches and declining labour supply, in part reflecting emigration, pose risks to competitiveness. Poor households have benefited relatively little from the post-crisis recovery. Estonia is more unequal than the OECD average while, at 30%,[iii] the gender pay gap is the highest in the EU! Moreover, the economy is among the most greenhouse gas-intensive in the OECD, largely due to dependence on oil shale. The challenge, therefore, is to put the country on a growth trajectory that is steeper, more inclusive and more sustainable.

 

To support this goal, our Economic Survey identifies two broad avenues for reform:

(1) to raise productivity growth and

(2) to make the most your rich human capital endowment.


Boosting productivity will help Estonia converge faster with top OECD performers

 

In advanced economies, productivity growth is the main driver of GDP growth, while in catch-up countries it is the key ingredient for sustainable income convergence. Despite its thriving private sector and rich human capital, GDP per hour worked in Estonia is less than half the average of the top half of the OECD[iv], and this gap is closing only gradually. To accelerate convergence in living standards, productivity growth needs a shot in the arm. Let me highlight three priority areas from our Survey:

 

  • First, facilitating knowledge transfer is critically important to help firms raise their productivity, especially in a small open economy like Estonia. This should be promoted both among domestic institutions and across borders.

  • Second, eliminating remaining infrastructure gaps will help raise productivity. Good energy and transport connectivity to the rest of the EU is essential. Plans to connect to the European high-speed railway network should be implemented swiftly while the domestic rural road network needs upgrading.

  • Third, energy efficiency is crucial both to increasing productivity and greening growth. Emissions could be reduced by fully two thirds just just by processing oil shale into lighter oil products, while you could reap significant benefits by improving the energy efficiency of buildings.


Estonia needs to make the most of its human capital

 

The PISA scores of Estonian youth are among the best in the OECD. Adult literacy and numeracy skills are also above average. Meanwhile, Estonia has reduced the share of youth who drop out early from education to 10%, but too few leave school with a degree that prepares them for the labour market.

 

The experience of other OECD countries shows that education and training provided at the workplace is an effective way for youth to acquire the skills employers need. Improvements have been impressive in Estonian vocational education, but it is still not sufficiently workplace-based. Students from disadvantaged backgrounds also need stronger support, for example to be able to attend vocational schools far from home.

 

Estonia clearly has excellent human capital to build on! One major challenge, however, is that the way the tax system is structured makes it harder to reap the benefits. Despite welcome government efforts to reduce taxes on work, the overall  tax burden on labour remains high, especially for lower-paid workers. Reducing the burden of social security contributions on this cohort would be a particularly effective way to make work pay and help fight poverty.

 

Estonia is also failing to benefit from the economic potential of its women, by limiting their capacity to fulfil their potential. Providing incentives to share childcare responsibilities more equally between men and women, and overcoming remaining shortfalls in the supply of childcare facilities,  would help bridge the yawning gender pay gap.

 

It’s important to stress that reforms that let Estonia reap the benefits of its human capital have a double dividend: they not only make growth stronger, they can make it fairer too by further reducing unemployment, improving the incomes of low paid workers, helping young people and women into the workforce, and by reducing the gender pay gap!

 

Using fiscal policy to raise long-term growth

 

Of course, reform isn’t easy – and it rarely comes cheap! This means that more resources ultimately need to be devoted to addressing the policy priorities we have identified. Luckily, you are starting from an enviable position: Estonia is one of few OECD economies with almost no government debt!

 

Reflecting its commendable commitment to sound government finances, Estonia aims for budgets which are balanced, or in surplus, over the course of the economic cycle. But in a catch-up economy, well-targeted investment can generate comparably higher returns in terms of higher growth. So, over the longer-term we think that Estonia could afford to run a modest fiscal deficit to make room for investments that will enhance productivity and wellbeing.

 

Prime Minister, ladies and gentlemen,

 

Let me conclude by congratulating the Estonian government for their sterling efforts in helping the country on its long road to economic recovery, and by paying tribute to the Estonian people who have sacrificed so much to come this far.

 

Building on these achievements, and your solid underlying strengths, now is the time for the  next steps. Now is the time for a new generation of reforms to boost productivity and harness human capital to put Estonia on a fast-track to full convergence with the living standards of the OECD’s high-fliers. We stand ready to support you in this quest to design, develop and deliver better policies for better lives for all Estonians!

 

Thank you.



[i] Economic Outlook 96.

[ii] Eurostat, monthly Labour Force Survey data.

[iii] Eurostat

[iv] Economic Survey of Estonia 2015; OECD National Accounts Database and OECD Productivity Databases.