This chapter focuses on the distinct regional development needs and opportunities of Estonia’s regions. It analyses how current patterns of urbanisation, population and economic activity differ across Estonia’s regions and identifies gaps in economic, labour market and well-being outcomes. Recognising that place-based policies can target not only regional disadvantages but also regional assets and ambitions, the chapter also considers the unique strengths and development goals of Estonia’s two pilot regional councils in Central and South Estonia. It highlights opportunities for how national policy can better respond to regional contexts. This includes recognising regional assets and opportunities and aligning tools and resources to support them. In doing so, this chapter makes the case for how a more place-based approach can strengthen Estonia’s regional development efforts.
Strengthening Place-Based Regional Development Policy in Estonia
Abstract
Estonian regions have different needs, assets and ambitions for development. In Estonia, headlines about regional inequality often focus on the stark contrast between the capital region and the rest of the country (e.g. “Tallinn continues to account for more than half of Estonia’s GDP” (ERR, 2024[1])). Certainly, the capital region plays an outsized role in the country’s economy and tends to perform better in major indicators of health and education. Remove this hub from national statistics and the scale of difference among the remaining regions is less dramatic. Even among non-capital regions, however, distinct development patterns and priorities emerge. A closer look at both data and testimony from residents reveal that Estonia’s regions have their own distinct needs, assets and ambitions that can be addressed and harnessed for regional development. These distinct features began to take shape in the European Union-funded OECD project with the Estonian Government - Strengthening Regional Competitiveness and Specialisation (Annex A) - which covered 2 regions, together encompassing 9 of Estonia’s 15 counties.
Taking a place-based approach in Estonia will mean recognising and responding to the diverse conditions and opportunities of Estonia’s regions, beyond the binary of Tallinn versus the rest of the country. Over time, place-based policy for regional development has evolved from a focus on less-developed regions towards place-sensitivity encompassing all regions. It increasingly takes a more proactive approach, helping regions navigate shifts in industry or demographics for example (Suedekum, 2023[2]). Central to this approach is the national government’s development of a deep understanding of local context, acting on and responding to the conditions and opportunities of a given place (OECD, 2025[3]). In Estonia, this means that a place-based approach should not just aim to address regional disadvantages but also build on the distinct regional assets and ambitions of all Estonian regions.
This section begins by exploring differences in major demographic, economic and well-being indicators among Estonian regions. It describes patterns of settlement and urbanisation across regions, showing how population and urbanisation are concentrated in one large urban hub (centred around Tallinn) and two smaller cities (Narva and Tartu), while the rest of the country is predominantly rural and sparsely populated. The section then explores differences in the economic bases of each region, showing how each region relies on different mixes of agriculture, industry and services. It shows that labour market outcomes across regions are uneven, with the capital region outperforming other regions. Finally, the section identifies disparities in health, education and connectivity, shaped in part by differences in access to services. This report uses small, Territorial Level 3 (TL3) regions1 as the scale of its analysis.
The final part of this chapter shows that Estonia’s regions differ not only in their development profiles but also in their assets and ambitions for development. It focuses on Central and South Estonia, the two regions that participated as pilots in the Estonian Government’s experiment with regional councils as a means to foster a more place-based approach to development. These regions participated in interviews and focus groups with the OECD, sharing their perspectives on regional assets and ambitions. For example, participants in South Estonia wanted to build on the region’s proximity to Tartu’s universities to drive innovation and knowledge-based growth. Participants in Central Estonia, meanwhile, wanted to leverage its strong vocational education system and cultural heritage to position the region as a family-friendly place for entrepreneurs and workers. In parallel, each region was developing a formal expression of their development ambitions through the process of negotiating and drafting regional development agreements (Chapter 3). These two regions are examples of how different combinations of assets can be leveraged – including through place-based policy – to support regional development that reflects each region’s unique context and potential.
Despite its relatively small territorial and population size, Estonia’s regions have different urbanisation or population patterns, which in turn have a differentiated effect on their development. These differences are reflected in their TL3 classifications, which show how regions differ in their access to functional urban areas (FUAs) and their rural or urban makeup (Table 1.1). These territorial distinctions provide context for understanding the regional development challenges Estonian regions face – particularly in economic output, labour market outcomes and public service delivery. Policy makers should consider these differences when designing regional development interventions, be they sector-driven or cross-sector in nature. In addition, it is these differences – and how they are experienced on the ground – that lead regions, their enterprises and residents to seek development solutions tailored to their own distinct needs, assets and ambitions.
Source: OECD (n.d.[4]), OECD Geographical Definitions, https://www.oecd.org/en/data/datasets/oecd-geographical-definitions.html.
Urbanisation and population in Estonia
Patterns in urbanisation and population data help to explain why some regions face greater challenges in their development than others. Agglomeration – where people, businesses and activity concentrate in an area – shapes regional development by reinforcing productivity advantages in cities and places connected to cities. In short, agglomeration economies occur when “productivity rises with density” (Glaeser and Gottlieb, 2009[5]). Urban agglomerations – cities – tend to generate higher economic output not only because they attract more skilled workers but because they create productivity gains through mechanisms like knowledge spillovers, labour market matching and shared infrastructure (Ahrend et al., 2017[6]; Ahrend, Lembcke and Schumann, 2017[7]). This advantage grows as cities grow: labour productivity tends to increase with city size. In addition, the benefits spill into the regions that surround cities, which benefit from “borrowed size” (i.e. they capture some productivity benefits without being large themselves) (Ahrend, Lembcke and Schumann, 2017[7]). In general, as connections between cities and surrounding areas become thinner, however, these spillovers weaken (Marshalian, Chan and Bournisien de Valmont, 2023[8]). In Estonia, the concentration of people and economic activity in a small number of urban centres (discussed in the next section) provides economic advantages for these centres and their surroundings,2 while large parts of the country that are remote and sparsely populated may not benefit from urban spillovers.
Estonia’s regions differ in terms of their urbanisation and proximity to cities (Figure 1.1). The country includes one very urbanised region – North Estonia – centred around the capital city of Tallinn. This is the country’s most urbanised and populous region. It forms the only major metropolitan FUA,3 home to close to one-half of the national population (646 315 people) in 2024. South Estonia, anchored by the city of Tartu, contains a secondary though mid-sized urban hub, with a FUA of 164 460 inhabitants (OECD, 2024[9]). The large rural area surrounding Tartu and its FUA earn it a classification of “predominantly rural, close to a city” in the OECD Extended Regional Typology (Brezzi, Dijkstra and Ruiz, 2011[10]). Northeast Estonia contains the small city of Narva and its own small FUA (population of 53 360) (OECD, 2024[9]). While Narva is relatively small in terms of population, the Northeast Estonia region is dense enough4 to be classified as predominantly urban. The remaining regions – Central and West Estonia – are more rural and remote, lacking large cities and facing more limited access to urban centres (Fadic et al., 2019[11]).
Source: OECD (n.d.[4]), OECD Geographical Definitions, https://www.oecd.org/en/data/datasets/oecd-geographical-definitions.html.
Estonia’s population is concentrated in its two dominant urban centres but it also has a substantial rural population. Nearly 70% of Estonia’s total population of close to 1.4 million lived in urban areas in 2023 (CIA, 2023[12]; Statistics Estonia, 2023[13]), with about a third residing in Tallinn alone. The next largest city – Tartu – accounted for a little more than 7% of the national population (Statistics Estonia, 2023[14]). Young people are also concentrated in Estonia’s urban areas: 33% of the country’s young people (aged 0-29) live in Tallinn, with Tartu accounting for an additional 8% (Statistics Estonia, 2024[15]). Despite the high – and highly concentrated – urban population, among OECD countries, Estonia has one of the highest shares of population living in non-metropolitan remote regions: 21%, compared to the OECD average of 8.1% (Fadic et al., 2019[11]). This reflects Estonia’s unique territorial profile: while urban centres dominate demographically (and economically, as explored below), much of the country remains sparsely populated with residents that are geographically distant from these major urban hubs.
Except for the capital region, all of Estonia’s regions face the challenge of a shrinking population. Estonia’s total population has already shrunk by 15% since 1991 (OECD, 2022[16]). Recent years, however, have seen national population increasing slightly (close to 4% between 2014 and 2023), due largely to population increase in North Estonia (nearly 12% during this period). The population of other regions has either hovered around the same value or declined during this period, with the largest decline occurring in Northeast Estonia (nearly 11%) (OECD, 2024[17]). There are exceptions within the regions: some counties within the four non-capital regions – notably Pärnu and Rapla counties in West and Central Estonia respectively – have experienced population growth (Estonian Ministry of Finance, 2021, p. 20[18]). Projections suggest further shrinking in non-capital regions: only one region is projected to continue growing – the capital region – while other regions are projected to lose upwards of 15% of their population by 2050 (Figure 1.2). A shrinking population has wide-ranging consequences for affected regions and Estonia’s national government (Box 1.1), including increasing the cost of public service delivery and straining local budgets.
Projected population growth by TL3 region, 2024-50
Source: Eurostat (2024[19]), Population on 1st January by Age, Sex, Type of Projection and NUTS 3 Region, https://ec.europa.eu/eurostat/databrowser/view/proj_19rp3$defaultview/default/table.
Population decline has far-reaching implications for regional economies, service provision and governance. As the report Shrinking Smartly in Estonia: Preparing Regions for Demographic Change highlights, shrinking populations in Estonia, particularly in rural and remote areas, lead to higher per capita costs for infrastructure and public services, such as education and healthcare, while simultaneously reducing municipal revenues (OECD, 2022[16]). It has a myriad of other impacts as well, including housing vacancies, deteriorating built environments and labour market shortages. Ultimately, these effects can reinforce regional disparities, making it harder for these regions to attract investment or retain young people.
In the report, the OECD provides recommendations for Estonian regions to prepare for a shrinking population. These include the following:
The Estonian Government could do more to promote integrated and effective multi-level governance, overcoming fragmentation among levels of government and silos between policy areas on the national level. This includes providing fiscal transfers to inter-municipal bodies instead of municipalities.
Municipalities have little financial independence, which weakens decision making and discourages discretionary decision making that can result in efficiency gains. The report suggests reducing the proportion of earmarked grants. Other fiscal recommendations include revisiting land tax exemptions and criteria considered in transfers from the national government to reduce distortions.
Providing quality public services – including public education – proves a challenge in shrinking areas. The report recommends that Estonia harness inter-municipal co-operation – currently only used on a limited scale – to improve the quality of services.
Municipalities sometimes lack the tools they need to plan and implement service provision. The report highlights open information systems and administrative support as areas for attention.
An increase in built areas is largely disconnected from local population trends – instead driven by, for example, second home ownership – which leads to inefficient land use. The report recommends that Estonia promote densification of central areas (town centres).
Demolition and renovation projects are key targets for better planning, and should align with the countywide spatial plans.
Source: OECD (2022[16]), Shrinking Smartly in Estonia: Preparing Regions for Demographic Change, https://doi.org/10.1787/77cfe25e-en.
Two factors linked to migration contribute to population change in Estonia’s regions. First, Estonian residents are leaving to live in the capital region. In 2023, the greatest net internal migration, i.e. migration among Estonian regions (Figure 1.3), could be found in North Estonia. In some regions, the outflow of population to the capital region is particularly pronounced: for example, 80% of internal migrants from Northeast Estonia migrated to North Estonia in 2021 (Statistics Estonia, 2022[20]). Data from 2017-23 (Annex B) show the same pattern holds over time,5 with North Estonia leading in internal migration, although its lead has narrowed during this period. Second, although net external migration (international immigration) was generally positive in all regions between 2017 and 2023,6 it is primarily concentrated in North Estonia. The region received the largest share of immigrants during this period, and nearly half of all international migrants who moved to Estonia in the last decade settled in Tallinn (OECD, 2022[16]; Statistics Estonia, 2022[20]). In short, even if external migration is generally net positive across all regions, it remains too limited outside of the capital region to compensate for natural population decline.
Net internal and external migration as a share of population by TL3 region, 2023
Source: Statistics Estonia (2023[21]), RVR02: Migration by Administrative Unit/Type of Settlement Region, Sex, and Type of Migration, https://andmed.stat.ee/en/stat/rahvastik__rahvastikusundmused__ranne/RVR02.
These settlement and demographic characteristics will affect the performance of Estonia’s regions – not only in economic terms, but more broadly in socio-economic terms and overall well-being. The businesses regions can attract and retain, their available labour force, the distances travelled to and from jobs or education centres, and the services and amenities provided are all influenced by place (where regions and populations are located) and people (who lives in the regions). To advance the performance of a country or region, considering the unique characteristics of a place and its people (i.e. a place-based approach) is fundamental in order to more accurately respond to development needs. The following sections examine how regional differences in areas like gross domestic product (GDP), labour productivity, and specific dimensions of well-being may inform a place-based approach to territorial development.
There is a divide in economic performance among Estonian regions. The capital city of Tallinn – and the broader North Estonia region – has long acted as the country’s primary economic driver, contributing over 60% of national GDP and consistently outperforming other regions in GDP per capita and productivity. While Tartu in South Estonia represents a secondary economic hub, most other regions offer a much smaller contribution to Estonia’s economy. Nevertheless, all of the regions are distinct in their economic bases and examining these individually helps to explain the broader economic patterns considered in this section.
Estonian regions have distinct economic bases
Estonian regions differ in terms of what sectors are driving their economies. North Estonia stands out for its strong service economy, while Northeast Estonia is heavily reliant on industry, particularly the energy sector. Central and South Estonia show a more mixed economic structure, with notable roles for agriculture and manufacturing. West Estonia combines industrial activity with a substantial tourism-driven service sector. Table 1.2 describes the distinct profile of each region’s economic bases, drawing on the value‑added from services, industry and agriculture (Annex B). These differences provide context to interpret the regional economic performance data that follow. It is also important to bear in mind that North Estonia alone accounts for nearly two-thirds of Estonia’s total value‑added; South Estonia accounts for just under 19%, and Central, Northeast and West Estonia each contribute less than 10% (Annex B). These differences help contextualise sector shares: a high percentage in a smaller region may reflect specialisation in that sector, while in North Estonia, even a modest sector share corresponds to a large absolute value.
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Central Estonia has a mixed economy with a notable share of agriculture. Its value‑added from agriculture (9%) is the highest among all regions. While it is not the largest producer of Estonia’s main agricultural products, cereals and milk – that distinction goes to South Estonia – it comes a close second (Statistics Estonia, 2019[22]; 2017[23]). The labour market in Central Estonia, however, is more dependent on the sector than that in other regions, with nearly 8% of employment in the agriculture, forestry and fishing sector alone in 2022 (compared to a national average of 3%) (OECD, 2022[24]). Activity in the industry (37%) and services (54%) sectors is also significant (Statistics Estonia, 2023[25]). |
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Northeast Estonia is the most industry-intensive region in the country, driven by its energy sector. Just over half (51%) of its value‑added comes from industry and construction, driven primarily by its energy sector (Statistics Estonia, 2020[26]). The oil shale sector is the heart of the region’s economy and 40% of the regions’ largest employers are oil shale companies (EC, 2023[27]; Praxis, 2020[28]). Services account for 48%, the lowest share nationally (Statistics Estonia, 2023[25]). As discussed in greater depth in the section on labour markets, the region’s dependence on one industrial sector makes it vulnerable to changes affecting the sector, whether market- or policy-driven (it is already experiencing changes due to the green transition). |
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North Estonia – with the capital city Tallinn – has an economy that is dominated by the service sector. It generates about 81% of its value‑added from services, driven by trade, information and communications, real estate and financial and insurance activities in the region (ERR, 2024[29]). Industry contributes 19% of the region’s value‑added – a smaller share than in other regions – led by manufacturing, energy and electronics. Agriculture is not an important contributor in this region (Statistics Estonia, 2023[25]; Invest in Estonia, n.d.[30]). |
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South Estonia is a service-oriented region, with its university town of Tartu. The service industry generates 68% of the region’s value‑added, anchored by Tartu’s education, trade, health and real estate activities (ERR, 2023[31]). Industry accounts for 27% of its value‑added, with large timber and food industries (Statistics Estonia, 2023[25]; Invest in Estonia, n.d.[32]). South Estonia is the country’s top producer of wood and wood products (excluding furniture) and falls just behind North Estonia in furniture production (Statistics Estonia, 2023[33]) While South Estonia has a modest share of value‑added from agriculture (5%), it is the country’s top producer of cereals, milk and many other agricultural products (Statistics Estonia, 2023[25]; 2019[22]; 2017[23]). It contains two of the most agriculturally intensive counties in Estonia, Jõgeva and Põlva (ERR, 2023[31]). |
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West Estonia is another region with a more mixed economy, with a substantial tourism industry. Services account for 63% of its value‑added. Tourism is an especially important contributor to West Estonia’s service sector. The region comes second only to North Estonia in the number of accommodated tourists: while North Estonia accommodated about half of tourists in 2023, West Estonia accommodated 21%. It surpasses South (17%), Northeast (6%) and Central (5%) Estonia (Statistics Estonia, 2023[34]). In addition to its substantial service sector, 31% of the region’s value‑added comes from industry (including forestry and wood processing). Agriculture is not a strong overall contributor but remains more prominent at 6% than in Northeast Estonia (1%) (Statistics Estonia, 2023[25]). |
As Estonia considers a more placed-based approach to its development, it would be important to support growth based on the industrial capacities, assets and priorities of each region. While Estonia showed strong convergence with other OECD member countries before a recent economic downturn, there is scope for greater productivity convergence (Box 1.2). The sector compositions of the five regions suggest that different levers will need to be pushed to help further increase productivity. For instance, in Estonian regions with a strong manufacturing base, there may be particular opportunities to move up global value chains, where digitalisation can help firms (especially those with more routine tasks) capture more value and generate broader productivity spillovers (OECD, 2024[35]; Mosiashvili and Pareliussen, 2020[36]). A concerted effort to maximise the value of existing sectors can include working with regions to identify where investment could have the greatest impact in the short, medium and long terms – be it for efficiency, infrastructure, innovation or human capital.
An economic downturn followed years of convergence, but recovery is expected soon
After a relatively severe economic downturn beginning in 2022, driven by trade disruptions, weaker export demand, high inflation and tight monetary conditions, the Estonian economy is expected to begin recovering as external demand improves. Since 2000, living standards in Estonia have doubled and the country made steady progress in income convergence prior to the pandemic. Nevertheless, per capita GDP and productivity still remain below OECD averages. The 2024 OECD Economic Survey of Estonia cites “[delivering] an economic recovery and return to stronger growth and economic convergence, while ensuring more inclusive outcomes” as an objective for Estonia (OECD, 2024[35])..
Real GDP, Estonia and OECD, 2015-24
Source: OECD (n.d.[37]), OECD Economic Outlook Database, https://www.oecd.org/en/topics/economic-outlook.html.
There is scope for greater productivity convergence
Estonia has made strong progress towards convergence in productivity with OECD peers over the past decades, but growth slowed before the pandemic and has become more volatile since. The country still lags in labour productivity, with a 30% gap to the upper half of OECD countries due to weak multifactor productivity. With an already-high employment rate, reviving productivity growth will be important to support future gains in living standards. As discussed further in the next section, additional productivity gains can be realised through integrating into global value chains and moving up value chains (including through improvements in digitalisation).
Sources: OECD (n.d.[37]), OECD Economic Outlook Database, https://www.oecd.org/en/topics/economic-outlook.html; OECD (2024[35]), OECD Economic Surveys: Estonia 2024, https://doi.org/10.1787/33e6beee-en.
Economic activity concentrates in North Estonia
Economic data for Estonia’s regions reveal large differences among regions in terms of GDP, GDP per capita and productivity. North Estonia stands out as the clear economic hub, accounting for 62% of Estonia’s GDP (Table 1.3). That most of the value of goods and services in Estonia comes from North Estonia may reflect a concentration of high-value firms (e.g., finance, information and communication technology), skilled workers, infrastructure and institutions in Tallinn and its surroundings. South Estonia’s economy, while substantially smaller than that of North Estonia, comes second, accounting for 19% of GDP. The remaining 3 regions generate 6-7% of GDP each (Statistics Estonia, 2023[38]). Combined, these figures show just how dominant the capital region is in the national economy.
TL3 regions and whole country, 2023
Source: Eurostat (2023[39]), Gross Domestic Product (GDP) at Current Market Prices by NUTS 3 Region, https://ec.europa.eu/eurostat/databrowser/view/nama_10r_3gdp$defaultview/default/table.
The gap between the wealthiest and poorest regions is substantial (Table 1.3): in 2023, GDP per capita in North Estonia was roughly twice as high as in Central Estonia. South Estonia had the second largest per capita income, followed by Northeast, West and Central Estonia. In recent years, however, non-capital regions have experienced larger relative gains in GDP per capita than North Estonia. For example, GDP per capita in West Estonia grew by 50% in the 2018-23 period, compared to 33% in North Estonia (Eurostat, 2023[39]).
In 2020, Estonia was among the OECD countries7 with the greatest disparities in labour productivity between metropolitan regions and regions far from cities (OECD, 2022[40]). In 2022, productivity in Estonia’s top region (North Estonia, with a gross value added [GVA] per worker8 of USD 84 279) was nearly 53%9 higher than that of the least-productive region (West Estonia, with a GVA per worker of USD 55 224)10 (Figure 1.5) (OECD, 2022[41]). Regions that are far from cities – Central and West Estonia (see Figure 1.1) – have the lowest overall labour productivity.
Sector-specific labour productivity data tends to reflect the same pattern (Annex B). The lead position of North Estonia in labour productivity is consistent across most sectors, with the effects of agglomeration (discussed further below) as one potential contributor.11 Northeast Estonia currently leads in industry (excluding construction) and manufacturing, likely reflecting, in part, the concentration of oil shale activity in the region. It also led in agriculture in 2022, though this appears to reflect the small size and volatility of the sector rather than a consistent labour productivity advantage in the region over time. However, it lags behind other regions in the labour productivity of construction. South Estonia shows mid-range performance across most sectors and leads in the labour productivity of real estate activities. Central Estonia shows relatively strong labour productivity in construction, manufacturing and agriculture, but lower productivity across the other sectors. West Estonia has the lowest labour productivity across several sectors,12 but is middle-of-the-pack when it comes to: construction; professional, scientific and technical activities; and arts, entertainment and recreation, other service activities, activities of household and extra-territorial organisations and bodies. These patterns highlight that regional disparities in productivity are not only due to differences in sector composition but also to differences in productivity among firms within sectors.
North Estonia’s labour productivity has fluctuated in recent years, with a percent change of 0% between 2018 and 2022. In the same period, West Estonia’s labour productivity grew more than in any other region (Figure 1.5). This is consistent with a broader trend among OECD member countries: while capital regions often lead in productivity levels, the fastest productivity growth in many countries has occurred in non-capital regions (OECD, 2022[40]). In Estonia, however, non-capital regions still have a long way to go before they can match North Estonia’s labour productivity.
Labour productivity, national average and TL3 regions, GVA per person employed, 2018-22
Note: PPP: purchasing power parity.
Source: OECD (2022[41]), Regions, Cities and Local Statistics, https://www.oecd.org/en/topics/regions-cities-and-local-statistics.html.
Large differences in labour productivity among regions – and among sectors in regions – point to a potential role for place-specific interventions to boost performance. Addressing differences in labour productivity requires that policy makers take into account the different characteristics of different regions. For example, metropolitan regions generally have a built-in advantage for productivity: agglomeration effects mean that factors like shared infrastructure, higher quality public services and knowledge spillovers offer benefits that drive productivity growth. Other regions, especially rural ones, do not benefit from these advantages. Given the large structural differences across regions, it is “unrealistic to fully eradicate all inequality in productivity” (OECD, 2023[42]). However, these gaps can be narrowed through approaches that account for the distinct characteristics and economic profiles of each region. This rationale underpins the policies to increase rural productivity in Box 1.3.
Policy makers stand to benefit from considering labour productivity across all regions. Improving the productivity of regions has implications for national productivity: the productivity of peripheral and even lagging regions can contribute to aggregate productivity (Garcilazo and Oliveira Martins, 2013[43]). Doing so can also deliver benefits beyond productivity growth alone. Regions with high productivity tend to have greater resources, a better ability to provide better material conditions for workers (through quality employment and higher wages), as well as more effective public services, all of which contribute to the well-being of the region’s population (Tsvetkova et al., 2020[44]; OECD, 2020[45]).
The OECD emphasises that rural policies should be designed through a place-based approach: tailored to the unique characteristics of each area, taking into account, for example, its specific assets, key industries, labour mobility constraints and connections to nearby cities. This is evident in policies to increase rural productivity, which can be grouped into four main areas:
Building value in tradeable activities: These policies encourage rural regions to move up the value chain in tradeable sectors (like manufacturing, agriculture and tradeable services). These may include enabling smart specialisation and diversification in rural economies, fostering innovation ecosystems in rural areas and supporting productivity increases in rural companies.
Helping small and medium-sized enterprises (SMEs) access global value chains: Policies in this area may, for example, favour greater links between SMEs and global companies or support the transition to high-value-added activities.
Retaining more value in rural areas: These policies help distribute the gains from tradeable activities to the population. These may include benefit-sharing measures, like revenue transfer mechanisms in some mining regions.
Strengthening rural skills: These policies help rural areas develop skills that can meet the skills demands of the local economy and help unlock new economic opportunities (e.g. through digital skills acquisition that can prepare workers for higher-value-added activities).
Sources: OECD (2018[46]), “Rural 3.0: A Framework for Rural Development”, https://doi.org/10.1787/618f702b-en; OECD (2020[47]), Rural Well-being: Geography of Opportunities, https://doi.org/10.1787/d25cef80-en.
Regional labour markets show unevenly distributed opportunities and vulnerabilities
Labour market data for Estonia’s regions paint a picture of uneven labour market outcomes. The data show differences in employment and participation, as well as pointing to some areas where individuals may not match with vacancies efficiently. These differences are most pronounced between North Estonia and other regions. Combined, these figures may indicate that labour market potential in lagging regions is underutilised. At the same time, a lack of employment diversification in some regions may increase vulnerability to shocks affecting the sectors that are these regions’ biggest employers (OECD, 2021[48]). Demographic change, which is projected to hit hardest in regions already facing weaker labour market outcomes, may dampen growth in the years to come (Bodnár and Nerlich, 2022[49]). These labour market disparities, especially when compounded by demographic change, may influence the long-term growth prospects of Estonia’s regions in different ways.
Northeast Estonia faces the greatest labour market challenges. The employment rate has been lower outside of North Estonia in recent years, with Northeast Estonia consistently having the lowest employment rate (Figure 1.6) (OECD, 2023[50]; Statistics Estonia, 2024[51]). Northeast Estonia also has the highest share of unemployed individuals in the labour force: 14.3%. While the Northeast is an outlier, the unemployment rate of other regions does not differ significantly as of most recent data (ranging from nearly 7% in South Estonia to 8% in West Estonia in 2024) (Eesti Pank, 2024[52]; Statistics Estonia, 2024[51]). Northeast Estonia’s labour market challenges can be explained in part by the decline of region’s oil shale industry, which has historically been a major employer in the region (Ferraro and Kommer, 2023[53]).
Employment rate for 15-74 year‑olds, national average and TL3 regions, 2018-24
Note: This time series begins in 2018, the first year for which Statistics Estonia has compiled regional employment data.
Source: Statistics Estonia (2024[51]), TT4645: Labour Status of Population Aged 15‑74 by Region, County and Age Group, https://andmed.stat.ee/en/stat/sotsiaalelu__tooturg__tooturu-uldandmed__aastastatistika/TT4645.
Northeast Estonia shows signs of a labour market mismatch, where unemployed individuals are matching with job vacancies less efficiently than in other regions. The county of Ida-Viru (which corresponds to the region of Northeast Estonia) has a significantly higher unemployment rate than the national average, as well as the lowest matching efficiency, a proxy for mismatch in the labour market between job seekers and vacancies. In an index of matching efficiency,13 the county of Ida-Viru receives 0.8 while Harju county (which corresponds to the region of North Estonia) receives 1.0 (Ferraro and Kommer, 2023[53]). The regional labour market mismatch that these data suggest is likely driven in part by a decline in oil shale and mining industries, which have historically dominated the local economy and are now contracting due to national and European Union (EU) climate goals (Fina, Heider and Masso, 2021[54]). Hiiu, Valga and Võru counties in West and South Estonia also show signs that the unemployed struggle to find suitable vacancies, which may relate more to their seasonal employment (in West Estonia) and distance from Tallinn (in South Estonia) (Ferraro and Kommer, 2023[53]). Supporting this, Estonian Government data confirm that job availability commensurate to education, skills and needs is lowest in the county of Ida-Viru (Northeast Estonia) and sparsely populated regions (Estonian Ministry of Finance, 2021, p. 8[18]).
A low degree of diversification in the mix of sectors forming the economic base in some regions increases their vulnerability to decline or disruption. In several regions, employment tends to be concentrated in just a few sectors. In Central Estonia, for example, 54% of the workforce was employed in industry and manufacturing in 2022. Northeast and West Estonia follow right behind, with around 50% of their workforces employed in industry and manufacturing (OECD, 2022[55]). This may leave the labour market of these regions vulnerable to shocks affecting these sectors (as the labour market of Northeast Estonia has already proved vulnerable to the transition away from oil shale (OECD, 2021[48]).
Demographic trends may exacerbate regional labour market challenges. A declining working-age population and a growing ageing population are projected to slow Estonia’s potential growth in the coming years (OECD, 2024[35]). This will be felt differently in different regions. The old-age dependency ratio, which measures the proportion of elderly people relative to the working-age population (those aged 15-64), is particularly high in Northeast Estonia: in 2021, the elderly dependency rate in Northeast Estonia was nearly 43%, meaning there were 43 elderly individuals for every 100 working-age individuals. The old-age dependency rate was also higher than the OECD average (30%) in all other regions except for North Estonia (28%) (OECD, 2023[50]). This trend is expected to continue. Even North Estonia is projected to see its old-age dependency ratio rise to 33% by 2040. The increase may be even more pronounced in other regions: South Estonia is expected to see a 14 percentage point rise (from 33% in 2020 to 47% by 2040), while Northeast Estonia faces the steepest projected increase of nearly 34 percentage points (from 41% to 75% by 2040) (Eurostat, 2021[56]). These demographic changes can potentially slow the labour contribution, especially in the most affected regions, which may restrict potential growth (they also have wider implications – such as for service delivery – as discussed in Box 1.1) (Bodnár and Nerlich, 2022[49]).
The disparities in Estonia’s labour market – particularly affecting Northeastern Estonia – point to potential opportunities to take a place-based approach responsive to specific regional challenges. In addressing these disparities, the Estonian Government can benefit from recognising the distinct labour market conditions across Estonia’s regions. Place-based policies are particularly relevant to labour and skills (Box 1.4) because employment challenges and opportunities vary significantly with geography. Factors like local industry composition, transport access and educational infrastructure shape both the supply of and demand for labour and skills. A one-size-fits-all national approach often fails to account for these variations (Green, 2023[57]). Place-based policies, on the other hand, can help to address spatial mismatches between firms and regions (OECD, 2025[3]). In Estonia, this could, for example, take the shape of policies to increase the flow of investment and jobs to regions other than the capital region (Ferraro and Kommer, 2023[53]), based on the regions’ industrial and skills compositions.
Neighbourhood-level employment policies aim to bring employment services directly into communities that need them, making them easier to access and more relevant to local needs. These policies are particularly relevant for addressing entrenched labour market disadvantages in small areas, where challenges are both complex and long-lasting. These areas often face fragmented service provision that is difficult to navigate not just for individuals, but also for employers and policy makers. Place-based interventions at this scale can provide holistic support that is responsive to community needs. To be effective, however, these policies must be connected to broader systems, with feedback loops to national policy.
Neighbourhood employment hubs are one example of a place-based intervention for labour and skills. These hubs offer multiple services in the same location that are accessible and tailored to local needs. They integrate employment assistance, skills training and often additional support such as childcare or transport advice. Another approach involves using discretionary local funding to design initiatives that directly target specific barriers to employment within communities, for example improving job accessibility in disconnected neighbourhoods, developing “pathways to employment” with local employers or offering targeted training for the long-term unemployed.
Source: Green, A. (2023[57]), “When should place-based policies be used and at what scale?”, https://www.oecd.org/cfe/regionaldevelopment/place-based-policies-for-thefuture.htm.
Conclusion: A country of distinct regional economies but one economic engine
The data in this section show that North Estonia, the country’s capital region, remains the country’s economic engine and has pulled far ahead on most economic indicators (including GDP and productivity). It also shows that Estonia’s other regions have distinct economic structures and varying growth trajectories. Despite promising signs of economic growth in recent years (for example, in West Estonia), non-capital regions have remained behind. The data also show how major transformations have affected or are expected to affect Estonia’s regions differently (OECD, 2025[3]), such as in economic and labour market challenges facing Northeast Estonia with the green transition and non-capital regions with demographic change. These differences can help to reveal potential opportunities for place-based policy to respond to the specific characteristics, assets and challenges of Estonian regions. As the next section will show, regional gaps in a number of well-being dimensions highlight the potential for a more place-based approach to help address non-economic outcomes across Estonia, as well.
Designing and implementing policy or programmes to help less-performing regions boost their performance, while also fostering growth among strong performers, are not mutually exclusive endeavours. To do so successfully, however, can depend on actively pursuing a place-based approach where regional assets, needs and constraints are considered in tandem with national development objectives. For Estonia, this may take the shape of place-based approaches to help address spatial mismatches and underutilised assets, tailored to the unique features of each place, including labour market structures, sector specialisations and institutional capacity (OECD, 2025[3]).
How is life in Estonia’s regions? To answer this question, this section delves into 3 aspects of the 11 dimensions of regional well-being studied by the OECD. Examining these well-being dimensions complements the economic and labour market indicators presented earlier by assessing whether prosperity is, in fact, translating into better lives (OECD, 2014[58]). While each region will interpret and prioritise well-being dimensions differently based on its development goals, identifying where disparities exist – and what may be driving them – can help both levels of government in Estonia consider how to integrate well-being considerations into their regional development efforts. In particular, it can help show areas where line ministries (such as those responsible for labour, transport, health, education, housing and related areas) can consider more regionally sensitive approaches to policy design and implementation.
This section zooms in on three aspects of well-being: health, education and transport connectivity. Each of these areas can either help or hinder regional development. The health of a region’s population is a critical factor in regional development, directly affecting people’s quality of life and productivity. Education also plays a crucial role, equipping individuals with skills necessary for employment and creating human capacity for innovation. Finally, transport connectivity is an enabler for regional development by improving access to health services, education and jobs (OECD, 2014[58]).
Among Estonia’s regions, gaps in these three areas risk holding back regional development if left unaddressed. Disparities in healthcare access and outcomes, uneven educational access, attainment and skills, and poor transport connectivity – particularly in rural areas – may restrict the ability of residents of some regions to live fulfilled lives and contribute to the development of their region. Place-based policies that are responsive to local needs may have a role to play in addressing these disparities.
Uneven health outcomes and access to healthcare services across Estonia’s regions
North Estonia consistently performs better than the other regions in most major health indicators, apart from infant mortality, while Northeast Estonia tends to fare the worst. Regional differences in access to healthcare services also shape health inequalities among Estonian regions. As rural populations are projected to age more rapidly in Estonia, these disparities are expected to place even greater strain on health systems in those regions. Importantly, the nature of these pressures may differ from one region to another, depending on factors such as healthcare infrastructure and baseline population health. This means that a single national health policy or intervention may not effectively address the diverse healthcare challenges across the country, especially as demographic pressures play out differently across regions. The following section considers regional health and healthcare patterns in greater detail, highlighting that addressing these challenges may require a place-based approach that takes into account the unique conditions of each area to ensure that policies and interventions are better aligned with local needs.
The capital region tends to fare better in terms of health outcomes than the other regions. In 2022, there was nearly a 5-year gap in life expectancy between North Estonia and Northeast Estonia (OECD, 2025[59]). The difference in disability-free life expectancy between the highest- and lowest-performing region was more striking: nearly 12 years between North Estonia (62.3 years) and Northeast Estonia (50.7 years) (Statistics Estonia, 2022[60]). In other words, people in Northeast Estonia may live nearly as long as those in North Estonia, but they spend more of their lives with a limiting long-term illness. Obesity rates in 2016 were also notably higher in Central and South Estonia (nearly 22%) compared to North Estonia (around 16%). Infant mortality in 2017 was lowest in West Estonia (1.5 deaths per 1 000 live births) and highest in Northeast Estonia (4 deaths per 1 000 live births) (OECD, 2025[59]). The best and worst performing regions differ depending on the indicator, but the data suggest that health outcomes tend to be better in the capital region.
Healthcare access – measured in terms of healthcare staff and hospital beds – also varies across Estonia’s regions. Access to healthcare is shaped in part by the availability of healthcare professionals. In 2021, Central Estonia had just over 2 active physicians per 1 000 inhabitants, while South Estonia had around 5. Similarly, there were fewer than 4 practicing nurses per 1 000 inhabitants in Central Estonia, compared to over 8 in South Estonia. Hospital bed availability follows the same pattern, with around 3 beds per 1 000 inhabitants in Central Estonia, and 6 in South Estonia (OECD, 2025[59]). Experts expect that ageing populations in Estonia’s rural regions – as well as an ageing workforce of doctors (OECD/European Observatory on Health Systems and Policies, 2023[61]) – will add greater pressure on health systems in these regions in the future (OECD, 2024[35]).
Disparities in health outcomes and healthcare access across Estonia have prompted experts to call for approaches that are tailored to regional needs. These approaches recognise that social, economic and environmental conditions in the places people live and work shape health outcomes and that policies tailored to different regions can help to reduce inequalities. A major focus in Estonia is the uneven distribution of healthcare workers, especially in regions outside of North and South Estonia. The OECD Economic Survey of Estonia (2024[35]) recommends expanding financial incentives in underserved areas to support the creation of primary health centres and attract staff, including doctors and nurses. Estonia has begun to move in this direction: it has already introduced regional salary differentiation and co-operation agreements between health colleges and regional hospitals – such as those between Tartu Health Care College and Narva Hospital – aim to expand nursing training outside of urban centres (OECD, 2024[35]).
Educational outcomes are highest in the capital region
There are significant regional disparities in educational attainment, access to higher education and adult skills across Estonia. North Estonia outperforms other regions in terms of educational attainment and literacy, while Central and Northeast Estonia tend to fall behind. These disparities are shaped in part by geography: higher education institutions and vocational schools are heavily concentrated in the urban centres of Tallinn and Tartu, limiting post-secondary options elsewhere and encouraging youth outmigration from less-served regions. In addition, some regions suffer from teacher shortages – especially in rural areas – which can affect the quality of education. Education access and quality affect the ability of regions to build human capital. The following section explores these patterns in more detail, highlighting where place-based policy can play a role in ensuring that education serves as a driver of regional development in all regions.
While Estonia tends to perform well on skills assessments overall (OECD, 2023[62]), significant regional gaps in literacy could limit the ability of individuals in some regions to find good jobs. Northeast Estonia has the lowest reading proficiency and North Estonia has the highest. Proficiency is measured on a scale where 500 represents the highest possible score, and scores are reported as ranges based on a 95% confidence interval. North Estonia scores 289-292, placing it in Proficiency Level III. In contrast, Northeast Estonia scores 238-244, which falls in the lower part of Level II, a full skill level below. The second highest performing region is South Estonia (274-278), on the threshold between Levels II and III, followed by West Estonia (266-271) and Central Estonia (257-262). These differences are not only large but also statistically significant across all regions, showing clear regional differences in adult literacy skills (Estonian Ministry of Education and Research, 2023[63]). Weaknesses in skills have a bearing on an individual’s ability to access quality jobs, participate fully in the labour market and contribute to the economic development of their regions. In addition, these gaps risk becoming self-reinforcing, as Estonia shows a strong link between adults’ skills and their parents’ education levels, meaning that the concentration of low-skilled individuals in certain regions may perpetuate disadvantage across generations (ERR, 2024[64]).
North Estonia stands out with the highest share of residents holding a tertiary degree (51%) and the lowest share with only basic education (8%), with very little change in these figures from 2017 to 2021 (Figure 1.7). Patterns of tertiary education attainment follow the concentration of universities and enrolment in higher education in North and South Estonia. Tallinn in North Estonia and Tartu in South Estonia dominate the higher education landscape. The main campuses of Estonia’s universities are all in these 2 regions: North Estonia hosts 1114 and Tartu hosts 615 (Study In Estonia, 2024[65]). For this reason, enrolment in higher education is much higher in North and South Estonia than in the other regions. In the metropolitan region of North Estonia, there are nearly 60 higher education students per 1 000 inhabitants, compared to just under 39 in Central and West Estonia, regions located far from an FUA (Figure 1.1) (OECD, 2024[66]). Regions outside of North and South Estonia still have universities, but they tend to be branches of institutions based in Tallinn or Tartu.16 The concentration of universities and university enrolment in North and South Estonia gives these regions an edge in regional educational attainment (Russell, Yu and Andrews, 2021[67]).
Educational attainment by TL3 region, percent of the population from 25 to 65 years, 2021
Source: OECD (2025[68]), Educational Attainment - Regions, http://data-explorer.oecd.org/s/1l0.
Similarly, the number of vocational schools in a region and enrolment in vocational programmes goes hand in hand, with North and South Estonia leading in school availability and student numbers. North Estonia has the highest enrolment in vocational education, accounting for more than a third of all vocational students (10 106 students) and hosting the largest number of vocational schools (13). South Estonia also has substantial enrolment in vocational programmes (8 472 students) and a relatively large number of schools (11 schools). In contrast, Central and Western Estonia show more modest enrolment, with around 3 300 students each (3 323 and 3 228 respectively) and a smaller number of schools (4 and 5). Northeastern Estonia stands out for its low figures on both fronts, with just 2 475 students and only 1 vocational school (Statistics Estonia, 2024[69]).
These figures show how access to education may inadvertently encourage outmigration of youth from other regions to North and South Estonia. Post-secondary educational opportunities – both vocational and higher education – are concentrated in North and South Estonia. As a result, youth in other areas often must leave home to continue their studies, regardless of the path they choose. This effect is felt most keenly in rural areas: a 2001 paper found that in particularly poorly-served counties – Hiiu, Järva, Rapla and Valga – more than four out of five students reported a lack of suitable vocational training opportunities. As the authors of the report observed, Estonian education is “a channel that primarily leads young people to leave their rural homes” (Dsiss and Taru, 2001[70]).
Rural areas face the greatest difficulties in attracting and retaining qualified teachers (Estonian Ministry of Education and Research, 2023[71]). In 2018, nearly half (44%) of rural teachers worked part-time compared to just 28% in urban schools, which may be due to small school sizes and limited capacity to offer full-time positions. Rural areas also struggled with the retention of teachers: teachers in rural schools were more likely to express an intention to leave the profession, with 30% of rural teachers reporting plans to exit, compared to 22% in Tallinn. Rural teachers also reported feeling their profession was less valued by society: only 23% of rural teachers believed their role was respected, compared to 29% of their peers in larger cities (Estonian Ministry of Education and Research, 2020[72]). These factors, combined with an ageing teaching workforce in many rural municipalities, risk reinforcing educational inequalities between regions and undermining efforts to ensure equitable access to quality education across the country. A shortage of qualified teachers can worsen the quality of education in areas that are most affected (Estonian National Audit Office, 2024[73]), which in turn constrains the development of human capital in these regions.
The provision of education in Estonia appears to be strongly influenced by territorial characteristics and the current concentration of opportunity in a few urban centres risks reinforcing regional inequalities. The data suggest that there are regions – particularly Central, Northeast and West Estonia – where targeted national support can help overcome regional disparities in educational attainment, skills and access. One target for place-based action by the Estonian Government may be a shortage of teachers and support specialists in some regions, especially rural areas, that poses a challenge for equity in education across Estonia (Fina, Heider and Masso, 2021[54]). Experts recommend using evidence-based workforce planning tools to better forecast regional teacher needs and to link this to training provision and recruitment strategies. Estonia has made moves in this direction; for example, the Ministry of Education and Research has increased scholarship opportunities and teacher training places in recent years, and piloted salary increases (e.g. a 30% salary raise in Ida-Viru county) to attract qualified teachers to underserved regions (Leijen et al., 2024[74]). This type of targeted national government action could improve teacher supply in regions where shortages are greatest.
Rural areas have the lowest transport connectivity
Regional disparities in transport connectivity among Estonian regions may limit the ability of rural residents to access jobs and essential services. While residents of cities benefit from frequent and accessible public transport, access is much more limited in rural areas. Expanding public transport coverage to towns and rural areas can play a strong role in supporting well-being, particularly for those without access to a private car, as service provision and opportunity are closely linked to transport access (OECD, 2024[75]). In a country like Estonia – where much of the territory is rural – ensuring good regional connectivity is central to economic participation, social inclusion and territorial cohesion. After all, well-being hinges not just on the presence of jobs and services, but also on people’s ability to reach them. The following section considers these patterns in more detail and explores how a place-based approach to transport can support regional development by improving mobility and access across all parts of the country.
In Estonia, rural areas are affected the most by low public transport access. A 2018 study revealed that only 17% of the rural population lived within 500 meters of a public transport stop that offers at least 1 departure per hour during the working day, compared to 92‑99% in urban areas like Narva, Tallinn and Tartu (EFGS, 2018[76]). The Estonian Government’s 2021 Transport and Mobility Development Plan acknowledges that poor transport access is a key barrier for residents in peripheral areas, limiting their opportunities to participate fully in the economy and social life (Estonian Ministry of Economic Affairs and Communications, 2020[77]).
These disparities in connectivity suggest a potential role for place-based policy in improving transport access to support regional development. A place-based approach in this policy area can start with co‑ordinated planning among levels, something the Estonian Government is already seeking to improve. It has recognised that a disconnect in planning among the national and local levels is a barrier to improving transport services in its Transport and Mobility Development Plan, and underscored the importance of co-ordinated strategy among local authorities and the national government (Estonian Ministry of Economic Affairs and Communications, 2020, p. 26[77]). In addition, experts have come forward with other ideas to better connect underserved areas. For example, in rural and low-density areas, where traditional fixed-route services struggle to remain viable, there is particular potential to expand the use of demand-responsive transport systems (Soe, Atiullah Saif and Agriesti, 2022[78]). By tailoring transport approaches to local conditions in this way, Estonia can help to ensure that mobility is not a barrier for the well-being of its rural residents.
Conclusion: Minding the gaps in regional well-being outcomes
Regional disparities – both between the capital region and other regions, and among non-capital regions – are one justification for taking a place-based approach in Estonia. In many of the economic indicators highlighted in the previous section, the greatest differences tend to be between the capital region and other regions in Estonia. For these indicators – including indicators of regional GDP and labour productivity – if you remove the capital region, the other regions begin to look quite similar. For other indicators – like healthcare access and obesity – there is a greater degree of variability among the regions. Differences among regions are one justification for place-based policy, but not the only one. Regardless of whether regional disparities are large or small, regions differ in how they approach development, what they prioritise and what they have to offer. The next section shows that Estonian regions are not only defined by their needs but also by the assets they can build upon and the ambitions they have for the future. Place-based policy can help align national action with those assets and ambitions to help regions develop.
Recognising the territorial differences that already exist in Estonia – from GDP per capita and labour productivity to well-being indicators – sets the foundation for understanding how the development aspirations of individual regions can differ, even when the overall objective is economic growth and resident well-being. Delivering on these diverse aspirations – be it through national or subnational strategies, plans or programmes – will require regionally adapted or appropriate policy tools grounded in a place-based policy approach. Place-based regional development policy aims to take advantage of a territory’s development potential, by “[d]efining clear objectives based on a deep understanding of current and future needs, characteristics and assets of a place to unlock new pathways for development” (OECD, 2025, p. 58[3]). This means that the national government can apply its policy levers in a way is aligned with how regions experience specific policy challenges (e.g. the economic, labour market and well-being outcomes featured in the previous sections) and that promotes the advantages of each region. Doing so requires working closely with local stakeholders and residents, and even using bottom-up approaches in policy design, where local priorities flow more readily into national decision making through processes like co-design and delivery (OECD, 2025[3]).
This section is a short case study, exploring the regional development aspirations and assets identified by Central and South Estonia. It features these two regions as they both host a pilot regional council and have developed draft regional development agreements identifying how parties will work together to meet their regions’ development ambitions (see Chapter 3). The OECD worked closely with the pilot regional councils throughout the course of the Strengthening Regional Specialisation and Competitiveness in Estonia project, including through foresight and vision-setting workshops with the two regions (Annex A). This process offered a view of how each region defines its own development ambitions and how these ambitions were translated into practical commitments in the draft agreements. It also offered a view of what assets the regions could capitalise upon to help enable regional development. This section gives insights into the ambitions and assets of the regions and how place-based policy can support them. While the section does explore three notable assets for development in the region - education, housing and quality of life - examining exactly how each region can increase its output or productivity by improving on or developing new firms and industries based on existing assets is beyond the scope of this report.
Central and South Estonia have their own ambitions for the development of their regions
During OECD workshops, the two regions sketched out a range of desired futures for their regions. The goal of these workshops was not to arrive at a single vision statement, but rather to explore what characteristics different desirable future scenarios would have. These ambitions (Table 1.4) can be broadly defined into three groups: people, environment and surroundings and business and economy. The regions’ development ambitions in each of these three areas show that they are seeking opportunities to build on their regional strengths, as well as addressing some of the weaknesses identified in the previous sections.
Regionals assets can be leveraged for development, including with the help of national policy levers
Central and South Estonia have distinct assets that can be leveraged – including using national policy tools – towards meeting their unique ambitions for regional development. Three groups of assets stood out as particularly important enablers during OECD interviews and workshops in these regions: i) building on education and skills assets to adapt the labour force and increase innovation; ii) leveraging culture and heritage assets to attract visitors and residents; and iii) building on quality-of-life assets to make each region a good place to live and work. The challenge for these two regions is to make the most out of their distinct assets in order to realise their ambitions for regional development. This section also highlights how the draft regional development agreements propose the national government tailor its policy levers in a place-based way to unlock the full potential of regional assets.
Building on education assets to adapt the labour force and increase innovation capacity
In Central Estonia, a responsive vocational education system is a notable source of support for development in the region. Central Estonia possesses a well-developed network of vocational institutions that serve both local and national labour market needs. These include the Järvamaa, Kehtna, Rakvere and Viljandi17 vocational schools, which offer programmes in areas as diverse as construction, food technology, and software development. Central Estonia does not have the highest enrolment rate in vocational education programmes: that distinction goes to North Estonia and South Estonia (see previous section). However, it has two of the counties with the highest proportion of students continuing their studies in vocational secondary education. In Järva county, 38% of students continue in vocational studies within a year after graduation, and Rapla county, 36% - both well above the national average of 25% (Haridussilm, 2025[80]). Participants in OECD interviews stressed that vocational education in Central Estonia is also distinguished by its responsiveness to industry needs. According to vocational education leaders, these schools work to adjust their offerings to meet regional needs, inviting enterprises to provide input on their curricula (OECD, 2024[81]).
Central Estonia’s responsive vocational schools can contribute to its development ambitions by helping its labour force adapt to new demands. With their flexibility and strong local employer engagement, educational leaders feel that the vocational system in Central Estonia has the potential to reorient its offerings to train students and meet skill needs to support regional ambitions, such as an expansion of green business (OECD, 2024[81]). Building on this example, increasing green energy production (the region is interested in wind, solar, hydrogen and biogas) will require staff to develop, operate and maintain new energy infrastructure. Without access to people with sufficient skills in these areas, the region could face a skills bottleneck that constrains its ability to encourage new ventures in this sector (OECD, 2023[82]).
The Central Estonian pilot regional council has outlined how it would like the national government to adapt its policy levers to build on the region’s vocational education asset, with an objective of making greater use of local entrepreneurs in vocational education (as well as basic education). Notably, it has asked the national vocational training agency to complete a survey and forecast of Central Estonian workforce skills. It has also asked the national Ministry of Education and Research to co-ordinate with vocational education institutions and the regional council to select specialisation areas for the schools to meet future workforce needs (Central Estonian Pilot Regional Council, 2024[83]). The agreement itself does not prescribe specialisation areas, leaving them up to the joint decision-making process between employers, vocational institutions and the regional council, but – as mentioned above – one example could be a specialisation in skills for the development, maintenance or operation of green energy infrastructure. This kind of partnership between regional actors and national ministries is an example of how the national government can use its tools to help a region take advantage of its vocational education asset to advance regional goals.
South Estonia’s universities offer a strong foundation for knowledge creation and human capital development. The region benefits from the University of Tartu, the Estonian University of Life Sciences in Tartu and several other institutions of higher learning. The ready access to university education in South Estonia distinguishes the region from Central Estonia, which, apart from a branch of the University of Tartu dedicated to culture (discussed below), does not have any universities. Development specialists in the region note that the presence of universities provides South Estonia with strong human capital, which, combined with its well-educated and often entrepreneurial residents, creates good potential for innovation (OECD, 2024[81]). The research and development (R&D) functions of South Estonia’s universities can also support regional innovation, if the region is able to leverage it. In South Estonia, this educational infrastructure can provide both new knowledge and human capital to support the region’s ability to innovate (Uyarra, 2008[84]).
South Estonia’s strong tertiary education supports the region’s vision for innovation to thrive in strength areas. The region’s desired futures emphasise innovation, envisioning, for example, smart specialisation strategies that are closely aligned with the region’s strengths such as biochemistry, mechanics, forestry, food and biomass (OECD, 2023[79]). Innovation also has an important role to play in developing talent in the region. This point is emphasised in the draft South Estonian Regional Development Agreement, which proposes a range of actions to integrate education more closely with the local entrepreneurial landscape and to allow entrepreneurs to tap into research institutions to increase their innovation capacity (South Estonian Pilot Regional Council, 2024[85]).
South Estonia has ideas for how national policy levers can be used to capitalise on South Estonia’s strong knowledge infrastructure. Its regional development agreement foresees that the national government – the Ministry of Economic Affairs and Communications and the Estonian Business and Innovation Agency – will work with South Estonian development organisations to support low-innovation but high-potential firms to innovate in products, processes and business models by connecting them with external consultants and regional research and education institutions. In addition, like Central Estonia, South Estonia sees a role for the national government in identifying and forecasting skills needs to connect academic pathways more directly to regional development goals (South Estonian Pilot Regional Council, 2024[85]).
Leveraging culture and heritage assets to attract residents and visitors
Central Estonia’s cultural and heritage assets represent a notable development opportunity. The region is home to one of Estonia’s two United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage sites – one of the points of the Struve Geodetic Arc – and has a higher concentration of theatres, museums and tourism centres than most EU regions (OECD, 2024[86]). Viljandi, Estonia’s “heritage capital” and a UNESCO Creative City of Crafts and Folk Art, stands out as a cultural hub in Estonia.18 Viljandi is home to the University of Tartu’s Viljandi Culture Academy, which specialises in heritage skills and creative entrepreneurship (OECD, 2024[81]). The academy works closely with local municipalities to equip students with entrepreneurial skills rooted in local culture. These assets create potential for the region to grow its visitor economy. But, despite these cultural assets, the region trails other Estonian and EU regions in international visitor numbers (OECD, 2024[86]).
South Estonia has leveraged its cultural assets as a driver for tourism. As described by one resident, the region has “strong identity, roots, [and] cultural heritage” (OECD, 2024[81]). The region ranks above OECD peers in the density of visitor centres, theatres, museums and galleries (OECD, 2024[86]). It has more entries in the UNESCO List of Intangible Cultural Heritage than any other region (four, including the smoke sauna of Võromaa and the polyphonic singing tradition of the Seto community) (UNESCO, 2024[87]). It has successfully positioned culture as a pillar of its regional marketing, for example in the Tartu 2024 European Capital of Culture initiative. This initiative brought together 22 municipalities in South Estonia to co-invest in cultural programming. This collaboration raised the region’s profile nationally and internationally, attracting 7% more guests and 15% more foreign tourists compared to the same period the previous year (Visit Tartu, 2025[88]). South Estonia today attracts a relatively high share of overnight stays by foreign tourists and, although overall stays per capita remain just below the EU and OECD median, it is clear that culture is an asset that South Estonia is already putting to work (OECD, 2024[86]).
The cultural assets of both regions have a role to play in realising their development aspirations. Central Estonia’s strengths in heritage skills and creative entrepreneurship provide a solid foundation for its development ambitions, which include creating a stronger regional brand that attracts investment, visitors and residents to the region. During OECD workshops in the region, participants considered that this brand should emphasise culture, building on Viljandi’s reputation as a cultural hub (OECD, 2023[79]). It is important to note, however, that culture does not feature in the draft agreement for Central Estonia, in part because existing cultural assets are concentrated in just one county. In South Estonia, leveraging cultural assets is central to its hopes of attracting visitors. The region has taken significant steps to leverage culture for development in hosting Tartu 2024 European Capital of Culture and the region envisions building on the momentum from this event to raise regional visibility (OECD, 2023[79]).
Building on quality-of-life assets to make each region an attractive place to live and work
Quality of life is important for advancing regional development, making regions places where people want to live and work. Alongside economic performance, the quality of life in a region plays a critical role in attracting and retaining both residents and businesses. In Central and South Estonia, quality-of-life considerations emerged as central themes during stakeholder workshops. In particular, stakeholders identified affordable and adequate housing, work-life balance and satisfaction with the living environment as foundations for the regions’ ambitions. These dimensions of well-being help define the everyday experience of residents and are integral to each region’s attractiveness as a place for families and workers. This section explores how Central and South Estonia are thinking about these assets, the opportunities they present and the areas where targeted action is needed to fully unlock their potential.
Housing tends to be affordable in Central Estonia, but the housing stock needs a refresh to represent an asset. Affordable housing can be a major advantage in attracting both people and businesses to a region. In 2020, households in West Estonia spent the highest share of their income on housing costs (11.7%), followed by North Estonia (10.9%), South Estonia (10.6%) and Central Estonia (10.5%). Northeast Estonia recorded the lowest housing cost burden at 9.5%. In Central Estonia, residents also tend to live in larger dwellings, with nearly 2 rooms per person in 2021, compared to 1.6 in North Estonia (OECD, 2024[89]). Together, these figures suggest that a resident gets more for their housing money in Central Estonia. However, dwellings in the region to tend to be old: 47% of dwellings were built before 1970 (Central Estonia comes second only to West Estonia in the proportion of older dwellings) (Statistics Estonia, 2021[90]). They also tend to have fewer comfort characteristics than dwellings in other regions: the percentage of dwellings without water supply (21%), bathing facilities (13%), toilet facilities (24%) and central heating (57%) are highest in Central Estonia than any other region (Statistics Estonia, 2021[91]). Housing affordability is a driver of regional attractiveness for talent. Evidence from OECD countries, for example, shows that a 10‑percentage-point increase in the share of the population satisfied with housing affordability can translate into a 1.8‑percentage‑point increase in the share of foreign-born working-age people in a region (OECD, 2023[92]). Without adequate quality housing, the region risks missing the opportunity to turn its affordability into a competitive advantage in attracting skilled workers and families.
Central Estonia considers that creating a more modern housing stock is essential to unlock the full potential of the region’s affordability advantage. Central Estonia sees an important role for affordable living in its future, with stakeholders wanting the region to become a place for families to establish and thrive (OECD, 2023[79]). Affordable housing can also be an enabler for the goal of the Central Estonian draft agreement to develop entrepreneurship and attract a qualified workforce (Central Estonian Pilot Regional Council, 2024[83]). However, local stakeholders have expressed concern that the limited availability of quality dwellings could constrain growth: shortages of quality housing may deter new businesses and their employees from settling in the region. For this reason, the Central Estonian Pilot Council has set the “improvement of the quality of living spaces” as one of its objectives. Their agreement proposes, for example, expanding the dispersed settlement support programme, encouraging private housing development and developing “green villages” (sustainable private housing areas near businesses with all necessary infrastructure, such as utilities, roads, etc.). It also calls for clearer guidance and support for the small housing reconstruction support programme. In doing so, it invokes the help of the relevant ministries (including the Ministry of Regional Affairs and Agriculture, and the Ministry of Climate, which plays a role in construction and housing policy in Estonia) (Central Estonian Pilot Regional Council, 2024[83]).
Residents of Central and South Estonia emphasised their regions’ advantages for family life and work-life balance compared to the capital region (OECD, 2024[81]; 2023[79]). Survey data from 2015 support this perception, with 77% of Central Estonian companies and just over 67% of South Estonian companies reporting that work-life balance was important in their workplaces, higher than in the capital region (at just under 67%) (Statistics Estonia, 2015[93]). When looking at actual working hours, South Estonia stands out more clearly: only 20% of enterprises in the region reported high overtime19 among workers in 2021, and 46% reported no overtime at all, the highest share of zero overtime among the regions. These figures suggest a better work-life balance compared to North Estonia, where patterns align closely with the national average (22% high overtime, 43% no overtime) (Statistics Estonia, 2021[94]).
Residents of South Estonia report particularly high satisfaction with their living environment. Overall, 84% of residents in 2020 reported that they were satisfied with where they live, on par with the national average. What sets South Estonia apart, however, are high ratings across a range of quality-of-life indicators. Resident satisfaction with cultural leisure facilities is second only to North Estonia (nearly 73%, compared to nearly 74% in North Estonia). Residents were happy with their surroundings, including architecture (75%, compared to 73% in North Estonia) and public spaces like squares and parks (74%, second only to North Estonia at 75%). Residents also expressed strong satisfaction with outdoor air quality (87%, compared to a national average of 83%) and noise levels (85%, compared to 77% in North Estonia) (Statistics Estonia, 2020[95]). These results suggest that residents value South Estonia for its cultural amenities and its quiet, clean and attractive setting, which sets it apart from the capital region.
South Estonia sees its quality-of-life assets not only as a benefit to current residents but as a part of its value proposition to families, workers and students considering a move to the region. South Estonia envisions itself as a region where people of all walks of life can live healthy and fulfilling lives (OECD, 2023[79]). Its regional development agreement places strong emphasis on attracting and retaining new residents, with the goal of maintaining the population size in the region (South Estonian Pilot Regional Council, 2024[85]). This vision aligns closely with what residents already experience: high satisfaction with public spaces, clean air, low noise levels and cultural amenities, as well as a strong work-life balance, all of which can contribute to a healthier, quieter, more balanced way of life.
Conclusion: Place-based policy can help unlock regional assets and realise regional development ambitions
In both Central and South Estonia, regional assets provide a strong foundation for achieving development ambitions, but leveraging those assets to their fullest potential sometimes requires support from the national government. Each region has articulated ambitions for future development that are grounded in their own strengths. While this section does not present a comprehensive view of each region’s strengths, it highlights three that were particularly prominent in OECD interviews and workshops: education, culture and quality-of-life assets. Yet both regions have also identified barriers – such as outdated housing stock in Central Estonia – that cannot be fully addressed through local action alone. The pilot development agreements present ideas of concrete ways national policy levers can be applied in a place-based way to help unlock the potential of these assets. This illustrates the potential of agreements – discussed further in Chapter 3 – as a way to align national policy tools with regional needs and assets to foster regional strengths.
This chapter shows differences in regional demographic, economic and well-being indicators alongside regional aspirations and assets across Estonia. For economic outcomes, the greatest and most persistent difference is that between the capital region and all other regions. While the capital region consistently outperforms others on many economic indicators, this chapter also shows that important differences exist among non-capital regions – differences that shape their challenges, assets and opportunities. The case studies of Central and South Estonia presented in this chapter also demonstrate that Estonian regions are distinct not only in their needs but by what they can offer, each with its own distinct assets and ambitions for development.
Together, differences in the needs and opportunities of the regions point to the relevance of a place-based approach to regional development that not only responds to regional disadvantages but also builds on local strengths and ambitions. The chapter provides a handful of examples of the national government adjusting its sector policy levers to meet the needs of Estonian regions (like providing targeted support encourage healthcare professionals to establish in underserved regions). It also contains examples of how regional development agreements foresee that the national government will apply its policy tools to leverage regional assets, such as targeted rental housing assistance in Central Estonia to overcome the limitations of its current housing stock. However, the next chapter shows that a place-based approach remains unfamiliar to much of the Estonian Government. Making this approach possible will require laying the institutional, governance and capacity foundations needed to support place-based policy.
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← 1. TL3 is the smaller scale at which the OECD Regional Database collects and publishes statistical indicators. In Europe, TL3 regions are consistent with the European Nomenclature of Territorial Units for Statistics third-level regions (NUTS 3) (Fadic et al., 2019[11]).
← 2. It is also important to note, however, that it is not uncommon for individuals who live and work in one municipality to declare their residence in another, which can make obtaining accurate demographic figures challenging (OECD, 2022[16]). However, since 2022, the Estonian Government has applied a new index to more accurately gauge residence, drawing on multiple datasets to determine places of residence (e.g. looking at addresses in the Population Register, property ownership, electricity connections, education information, healthcare data, etc.) (Statistics Estonia, 2022[96]).
← 3. A functional urban area (FUA) comprises a city and its commuting zone (OECD, n.d.[98]). It is considered metropolitan midsize if more than half of the population live in a FUA of 250 000 to 1.5 million inhabitants (OECD, 2023[42])
← 4. With less than 15% of the region’s population living in a rural place (OECD, n.d.[4]).
← 5. Although care should be taken in considering data from before and after 2022, due to the introduction of a new index to gauge residence; see Endnote 2.
← 6. The exception is Northeast Estonia, where net external migration briefly turned negative in 2020, probably driven by pandemic-related border restrictions. While all regions’ net external migration dipped that year, Northeast Estonia was the only one to fall below zero.
← 7. Of the 26 OECD countries with regional data (OECD, 2022[40]).
← 8. USD per worker, constant prices, PPP converted.
← 9. The difference in labour productivity between the capital region and the lowest-performing region (53%) may seem disproportionate to the difference in GDP per capita (which is nearly double). This may be, in part, due to differences between where people live and where they work. First, North Estonia has a relatively high number of commuters from other regions (Kalle, 2014[99]). It is the only region where the number of workers exceeds the number of employed residents (OECD, 2022[41]). The population figure may also be skewed by residents who are officially registered elsewhere for tax purposes (or by non-residents who have registered in Harju county).
← 10. See endnote 9.
← 11. In 2022, North Estonia had the highest productivity in the following sectors: construction; wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities; information and communication; financial and insurance activities; professional, scientific and technical activities; administrative and support service activities; public administration, defence, education, human health and social work activities; arts, entertainment and recreation; other service activities; activities of household and extra-territorial organisations and bodies. Other regions lead in: agriculture, forestry and fishing (Northeast Estonia); industry excluding construction (Northeast Estonia); manufacturing (Northeast Estonia); and real estate activities (South Estonia) (OECD, 2022[97]).
← 12. With the lowest labour productivity in: agriculture, forestry and fishing; industry (except construction); manufacturing; wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities; trade, transport, and tourism; arts, entertainment and other services.
← 13. This index is based on the matching function, which predicts the number of hires or new job matches each quarter based on the number of unemployed individuals and the number of job vacancies. Any variation in hiring that cannot be explained by unemployment and vacancies is attributed to differences in matching efficiency (Ferraro and Kommer, 2023[53]).
← 14. The Estonian Academy of Arts, the Estonian Academy of Music and Theatre, the Estonian Business School, the Estonian Entrepreneurship University of Applied Sciences, Tallinn Health Care College, Tallinn University, Tallinn University of Technology (TalTech), the Estonian Academy of Security Sciences, TTK University of Applied Sciences, the Estonian Free Church Theological Seminary and the Institute of Theology of the Estonian Evangelical Lutheran Church.
← 15. University of Tartu, Estonian University of Life Sciences, Tartu Applied Health Sciences University, Pallas University of Applied Sciences, The Estonian Military Academy, and the Estonian Aviation Academy
← 16. Northeast Estonia has a TalTech campus and West Estonia has a college of the University of Tartu in Pärnu.
← 17. While Viljandi is a part of the South Estonia NUTS3 region, it opted to be a part of the Central Estonia pilot regional council for the purpose of the preparation of the regional development agreements (Chapter 3). Because this section focuses on these pilot regions, Viljandi is considered a part of Central Estonia.
← 18. Here again, Viljandi is considered within the Central Estonia pilot region (see endnote 16).
← 19. Meaning more than a fifth of their employees worked overtime in the past year.