Strengthening Place-Based Regional Development Policy in Estonia

2. Laying the foundations for place‑based regional development in Estonia

Abstract

This chapter focuses on the opportunities for the Estonian Government to more fully embrace a place-based approach to regional development. It explores how, on the national level, enhancing cross-ministry working and introducing greater place sensitivity in sector policy making can better equip the government to address multi-dimensional regional development challenges. It also considers how the national government can help municipalities participate more fully in a place-based approach, including by addressing capacity gaps and providing new pathways for national and subnational planning processes to be complementary and mutually enforcing. The government’s ability to realise these opportunities comes down to capacity and incentives, ensuring that all relevant actors have the resources and skills to participate and the motivation to work together. The chapter examines how Estonia can build capacity and establish incentives to support a more place-based approach.

Introduction

While Chapter 1 builds a case for place-based policy for regional development in Estonia, Estonia is missing three prerequisites to pursuing this approach (Table 2.1). The first is that place-based policy must be intentionally spatially targeted. This is rare in Estonia: while the Estonian Government focuses on regional development driven by sector policies, the fact that sector policy tends to be spatially blind limits line ministries from tailoring interventions to regional and local needs. The second prerequisite is that the different parts of the government must be able to work together for regional development, taking a cross‑cutting approach to address multi-dimensional regional development challenges that transcend individual policy areas. In Estonia, national policy is not only spatially blind but also tends to operate without a strong connection to the Ministry of Regional Affairs and Agriculture, the ministry with a mandate for advancing regional development. The third prerequisite is the capacity for place-sensitive policy design and implementation taking into account the needs and opportunities of places when designing national policies. In Estonia, opportunities remain to better align national and local planning and policy making to leverage regional tools and opportunities for development (such as those identified in Chapter 1). Without these three foundations in place, Estonia’s ability to take a place-based approach for regional development remains limited.

This chapter explores each of the three prerequisites, offering recommendations for how to lay these foundations. To enable a place-based approach to regional development, the Estonian Government can focus on building capacity and creating clear incentives for doing so on the national and subnational levels. On the national level, this means that the Ministry of Regional Affairs and Agriculture, with the support of the centre of government, sets incentives for line ministries to take a co-ordinated, cross-sector approach for regional development, and supports this with strong institutional processes. On the subnational level, building capacity for planning, implementation and investment can help put local authorities in the driver’s seat for regional development efforts. Capacity building is particularly important in three areas: strategic planning, spending and investment and stakeholder engagement. At the same time, bridging the national-local divide requires that Estonia make dialogue and aligning planning processes among levels of government systematic.

Table 2.1. Three missing prerequisites for place-based policy for regional development

Prerequisites for place-based policy for regional development	How Estonia reflects – or does not reflect – these prerequisites
Intentionally spatially targeted policy Tailors policy tools – resources, government intervention – to specific places within the country.	Mostly spatially blind policy Sectoral policy on the national level is mostly spatially blind. Intentionally spatially targeted policy focuses on two regions.
Policy designed to respond to multi-dimensional regional development challenges Requires a cross-cutting approach to address complex, multi-dimensional regional development challenges, aligning different sectors to take advantage of complementarities and guard against spillover effects.	Sectoral silos hinder a multi-dimensional approach Weak links between sectoral ministries and the Ministry of Regional Affairs and Agriculture limit the government’s ability to respond to multi-dimensional regional development challenges.
Place-sensitivity to regional conditions and opportunities Builds an understanding of regional context, conditions and opportunities to design policy that drives regional development.	Gaps in vertical co-ordination and capacity limit tailoring to regional needs and opportunities A disconnect in strategy setting between the national and local levels means that bottom-up input does not usually contribute to national strategy. In addition, local governments face capacity constraints that limit their own ability to plan for and act on regional challenges and opportunities.

Sources: Adapted from OECD (2020[1]), Regional Policy for Greece Post-2020, https://doi.org/10.1787/cedf09a5-en and OECD (2025[2]), Place-Based Policies for the Future, OECD Publishing, Paris, based on Estonian Ministry of Regional Affairs and Agriculture (2023[3]), Regional Development and Policy, https://www.agri.ee/en/regional-development-and-policy; Estonian Government (2021[4]), Regional Policy Program 2021-2024 [Regionaalpoliitika programm 2021-2024], https://www.fin.ee/media/2654/download; OECD (2023[5]), “Questionnaire completed by the Estonian Ministry of Regional Affairs and Agriculture”, OECD, Paris.

Driving a co-ordinated regional approach across the national government

For place-based policy to flourish in Estonia, interventions must be tailored to regional needs and sectors must work together to drive regional development – two of the prerequisites introduced above. In practice, however, line ministries tend to take a spatially blind approach1 to strategy setting and policy making, without working closely with the Ministry of Regional Affairs and Agriculture to integrate a regional perspective into their work. This persists despite the ambitions of Estonia’s national development strategy Estonia 2035 which promotes a cross-sectoral approach – often with a regional dimension – to implementing national objectives. However, there is a gap between the intention of the strategy and the reality of its implementation, with ministries reverting to a sectoral approach to take it forward. In addition, there are few arrangements that help to facilitate cross-government working to support regional development in Estonia. Ultimately, a sector-focused and spatially blind approach can limit Estonian ministries’ ability to tackle complex and multi-dimensional regional development challenges.

This section is dedicated to how the Estonian Government can take a more co-ordinated regional approach across the national government. It discusses the barriers to cross-government working that is sensitive to regional needs and opportunities, focusing on misaligned incentives as a key challenge. It provides recommendations for how Estonia can overcome this challenge, including by creating regular opportunities for ministries to come together to consider regional issues, strengthening regional impact assessments and developing financial incentives that encourage joint working.

Sector policy tends to be spatially blind in Estonia

This sub-section examines how a predominantly spatially blind approach to planning and policy limits ministries’ ability to positively influence regional development. Even though ministries are asked to complete regional impact assessments for new strategies or legal texts, sector strategy and policy do not generally consider regional challenges and opportunities. However, when line ministries default to a spatially blind approach, their plans and policies may be less effective in promoting balanced regional development. The sub-section ends with recommendations for how to strengthen the role of regional impact assessments as a tool to encourage line ministries to consider how their plans and policies affect regions.

Countries take different approaches to organising government action to meet regional development objectives. One approach hinges on a comprehensive national regional development policy that sets a clear direction to guide regional interventions within sector policies. Another focuses on well-coordinated sector policies that promote specific sectoral goals while also supporting regional development (OECD, 2020[6]). Estonia takes the latter approach. Following in the tradition of its first regional strategy (Box 2.1), which emphasised the “purposeful linking of sectoral policies with the objectives of regional development” (Estonian Government, 1999[7]), the Estonian Government has framed sector policy as a force to shape and drive regional development. Taking this approach requires strong cross-sector co-ordination to help find alignment and complementarities among individual sector policies strategies and regional development objectives (OECD, 2024[8]). The Estonian Regional Policy Action Plan recognises this, stating “without the participation of sectoral policies and effective co-operation, achieving the country’s comprehensive regional development goals is not realistic” (Estonian Ministry of Finance, 2021[9]).

Box 2.1. A brief history of regional development policy in Estonia

Over the past decades, the Estonian Government has increasingly recognised the importance of regional and local initiative and potential in improving development outcomes across the country, at least in principle.

Following independence in 1991, Estonia’s approach to regional development, dubbed a “passive regional policy paradigm”, relied on market forces to drive regional development rather than direct intervention. It downplayed the roles of regions in policy making by using centralised decision making and top-down implementation.

Starting in the mid-1990s, policy makers began to pivot towards a more active approach that considered how to harness the endogenous potential of regions. The 1994 Regional Policy Concept marked a symbolic shift from a passive to a more active approach to promoting regional development. The Estonian Government formulated this concept against a backdrop of uncertainty generated by transitioning to a market economy and the impact this could have on regions. In addition, the government had limited state funding for regional initiatives. Given these constraints, the Regional Policy Concept represented a “light touch” approach to regional development. For example, it specified that any “regional economic incentives [from the national government] are, as a rule, viewed as temporary measures to strengthen or restore local coping capacity.”

Estonia’s first regional development strategy in 1999 advanced the regional approach further. Funding for regional development had grown and a suite of development strategies were prepared on the national and subnational levels (including the Estonian Economic Development Plan 1998-2002, the Estonia 2010 national plan and development plans for all counties). With these enablers in place, the strategy was able to be more ambitious and concrete than the first concept. For example, it tried to strengthen the focus on local initiatives introduced in the 1994 Regional Policy Concept by ensuring adequate resources for county development activities and focusing on increasing the innovation capacity of all the regions.

With the prospect of European Union (EU) accession on the horizon, Estonia introduced a diverse array of regional programmes, focusing on small island development, industrial areas, agricultural regions, central networks, local initiatives and cross-border co-operation. Estonia’s accession to the European Union in 2004 brought with it a series of reforms that supported regional development policy influenced by EU standards. These included the development of local governance and financing systems, improving public services to comply with EU requirements and building EU statistical standards for administrative units.

Sources: Sootla, G. and K. Kattai (2018[10]), “Institutionalization of subnational governance in Estonia: European impacts and domestic adaptations”, https://doi.org/10.1080/13597566.2018.1511979; Estonian Ministry of Regional Affairs and Agriculture (2023[3]), Regional Development and Policy, https://www.agri.ee/en/regional-development-and-policy; OECD (2023[5]), “Questionnaire completed by the Estonian Ministry of Regional Affairs and Agriculture”, OECD, Paris; CoR (n.d.[11]), Division of Powers - Estonia, https://portal.cor.europa.eu/divisionpowers/Pages/Estonia-Introduction.aspx; Estonian Government (1999[7]), Estonian Regional Development Strategy (Approved by the Government of the Republic of Estonia on November 16, 1999, Agenda Item No. 24), https://web.archive.org/web/20140513132451/http://www.siseministeerium.ee/failid/reg_strateegia.rtf, Estonian Government (1994[12]), Regional Policy Concept, https://www.riigiteataja.ee/akt/30494.

In reality, sector strategies and their associated policies tend to be largely spatially blind (Loewen, 2018[13]; Estonian Ministry of Regional Affairs and Agriculture, n.d.[14]). This begins when ministries set their own strategies. Estonia 2035 encourages ministries to adopt a regional lens – i.e. taking into consideration the impact of a strategy and its implementation on a region, and/or adjusting to regional needs and capacities – and foresees collaboration among leading line ministers and the Minister of Regional Affairs and Agriculture to achieve goals related to regional development (Table 2.2). However, this does not always extend to its implementation. National civil servants note that Estonia 2035 is primarily implemented through specific strategies and programmes, mostly managed by the originating line ministry. For example, the Estonian Ministry of Education and Research takes forward relevant parts of Estonia 2035 through its own strategy – the Education Strategy 2021-2035 – and related programming (Estonian Ministry of Education and Research, 2021[15]).2 This ultimately reinforces a sector-driven focus to regional-level policy or programming interventions (OECD, 2024[16]). Indeed, the sector strategies that advance Estonia 2035 do not tend have a strong regional dimension (OECD, 2024[16]). Take the example of Estonia’s transport plan: it acknowledges urban and rural challenges and the importance of connecting urban and rural areas, but otherwise has a strong national spin. It contains mostly national-level quantitative monitoring indicators, aside from a handful of targets related to – for example – urban areas and specific airport developments (Estonian Ministry of Economic Affairs and Communications, 2020[17]).

The predominant “one Estonia” approach to sector policy has two main motivations. For some, a “one Estonia” approach is rooted in the belief that Estonia – with its population of 1.3 million inhabitants – is small enough to be treated as a relatively homogenous territory. Others may believe that a regional approach adds complexity and costs to policy making, as it requires collecting regional data and engaging with many actors across all regions (OECD, 2024[16]). Some may be motivated by a combination of both views.

Table 2.2. Estonia 2035 frames sectoral activities as primary contributors to regional development goals

Selected examples of activities related to regional development outlined in Estonia 2035

Area of change	Activities	Leading ministers	Other responsible ministers
Skills and the labour market	Designing a harmonised upper secondary education system	Education	Regional Affairs
	Reorganising the network of upper secondary schools and basic schools in co-operation with local governments and empowering them in reviewing and reorganising the basic education network
	Supporting the labour markets in Northeast and Southeast Estonia3 to ensure a regional balance	Economic Affairs; Regional Affairs	Social Affairs; Climate; Education
	Providing higher education in regional colleges and expanding their functions, taking into account regional policy objectives	Education	Regional Affairs
Sustainability of the nation, health and social protection	Developing cross-sectoral and community-based integrated prevention and counselling services to improve the awareness of people, change their attitudes and behaviour, and prevent deaths due to accidents and injuries	Health; Interior	Culture; Education; Climate; Regional Affairs; Justice; Economic Affairs
	Shaping a living environment that supports health	Climate; Regional Affairs; Health	Education
	Developing needs-based social protection	Social Affairs; Economic Affairs	Culture; Regional Affairs;
	Developing care services	Social Affairs	Regional Affairs; Interior; Education
Economy and climate	Launching a package of services in the county of Ida-Viru to support the exit from oil shale energy	Regional Affairs	Economic Affairs; Climate; Culture; Education; Social Affairs
	Ensuring research and development (R&D) co‑operation between R&D institutions and enterprises in focus areas important to the economy of Estonia and its regions	Economic Affairs; Education	Climate; Regional Affairs, Finance
	Developing the regional business environment in co‑operation with local governments	Regional Affairs	Economic Affairs; Education, Climate
Space and mobility	Increasing the regional accessibility of cultural areas to ensure a more attractive living environment also outside the centres of attraction and to support the cohesion of society and well-being of people	Culture	Regional Affairs; Education; Economic Affairs; Climate
	Continuously implementing solutions that contribute to the green transition and supportive planning in co‑operation with local governments to mitigate, reduce the effect of and adapt to climate change	Regional Affairs; Climate	Economic Affairs
	Developing a sustainable waste management and public water supply as well as sewerage infrastructure and services in co‑operation with local governments	Climate	Regional Affairs
Regional development	Organising the regulatory framework for strategic planning (at the national, local and regional levels) and for preparing the national budget	Secretary of State; Finance	Regional Affairs
	Reducing regional inequalities and strengthening the administrative and development capacity of local governments	Regional Affairs	Economic Affairs; Education; Social Affairs; Health; Culture; Climate
	Building the capacity of local governments and the community as partners of the state in creating a safe living environment and improving crisis preparedness	Defence; Secretary of State; Interior	Justice; Economic Affairs; Regional Affairs; Climate

Note: “Education” refers to the Minister of Education and Research, “Economic Affairs” to the Minister of Economic Affairs and Information Technology, “Regional Affairs” to the Ministry of Regional Affairs and Agriculture.

Source: Estonian Government (2023[18]), Estonia 2035: Action Plan of the Government of the Republic (11 May 2023), https://valitsus.ee/media/6506/download.

Recognising sectoral policy as a key driver of regional development is one thing; ensuring its impact aligns with regional needs is another. Successfully using sectoral policy as an instrument for regional development requires understanding its potential regional impacts (Ferry, 2021[19]). With this in mind, the Estonian Government also tries to encourage line ministries to systematically review regional impacts as part of their impact assessment protocol. This represents a rules-based co-ordination mechanism to complement Estonia 2035’s strategy-based co-ordination. Together, the two tools should (in theory) encourage ministries to adopt a regional lens when they are planning and when they are creating legal acts to further their objectives. Despite provisions and guidelines for considering regional impacts in new laws and policies (Box 2.2), however, regional impact assessment is weak in practice. Stakeholders report that the requirement to consider the regional impact of new laws and strategies is too often treated as a “check-the-box” exercise by line ministries, with limited impact on decision making (OECD, 2023[5]; 2024[16]).

Box 2.2. Regional development and Estonia’s Rules for Good Legislative and Regulatory Process

Regional development is one of the six key impact areas highlighted in Estonia’s Rules for Good Legislative and Regulatory Process for evaluators to consider. The accompanying impact assessment checklist provides greater detail on what the Estonian Government considers good practice for evaluating regional impacts: it asks for evaluators to consider, for example, whether a policy or measure has different effects across regions related to access to services, economic opportunities and spatial development. It also asks evaluators to consider whether the proposed approach may widen or reduce interregional disparities and how it affects the capacity of local actors to participate in policy making and regional development.

Source: Estonian Ministry of Justice and Digital Affairs (n.d.[20]), Impact assessment of legislative acts,https://www.justdigi.ee/oigusloome-arendamine/hea-oigusloome-ja-normitehnika/oigustloovate-aktide-mojude-hindamine.

Relying in large part on spatially blind policies to drive balanced development, as Estonia is in effect doing, comes with some risks. They can contain a hidden urban bias and fail to address local market conditions and spillovers, ultimately having different impact in different regions (OECD, 2011[21]). In Estonia, some sectoral policies that do not account for regional differences have been found to work against the objectives of regional and rural policy measures. The implementation of these spatially blind policies is sometimes concentrated in already rapidly developing growth centres, such as Tallinn and Tartu (Kattai et al., 2020[22]). The Estonian Government, for example, points to the urban concentration of sector support measures,4 a long list that includes expanding labour market services to new target groups and providing new labour market services, organising the school network and modernising schools, and developing health centres in tourist areas. Only 20% of this support targeting businesses and 40% of the measures aimed at infrastructure development have reached beyond the counties of Harju and Tartu (those surrounding Tallinn and Tartu) (Estonian Ministry of Finance, 2019[23]). As a result, instead of fostering balanced development, spatially blind policies may exacerbate existing regional inequalities, contradicting Estonia’s goals for balanced growth.

Line ministries have something to gain from thinking regionally, too: the possibility of better outcomes in their sectors. Different regions have unique challenges, strengths and opportunities; sector policies that are sensitive to regions can enhance policy effectiveness. Take the example of healthcare, where regional approaches support national governments’ efforts to address healthcare workforce shortages. Significant inequalities in the distribution of healthcare staff among regions have prompted many countries to put in place programmes encouraging or requiring healthcare staff to work in underserved areas. France, for example, offers financial support for doctors to set up their practices in so called “medical deserts” (OECD, 2021[24]). In short, by tailoring their approaches to take into account regional needs and opportunities, sector ministries can contribute to meeting their own policy objectives.

The Estonian Government can favour sector policy that is sensitive to regional impacts by encouraging a more meaningful regional impact assessment. External accountability measures can build ministry commitment to strong regional impact assessments. One option for external accountability is to display a “regional impact dashboard” on the Ministry of Regional Affairs and Agriculture’s website that shows all of the different regional impacts of proposed laws and strategies. The Estonian Government can also signal that it is serious about this requirement by making it clear that failing to consider regional impacts could be considered grounds for corrective measures (OECD, 2020[25]). While this is an action for a different part of government than the Ministry of Regional Affairs and Agriculture – one with the authority to make pronouncements about regulatory policy or legislative process, such as the Ministry of Justice or the Government Office – doing so creates an additional incentive for ministries to carry out the impact assessment and to do it well.5

Finally, capacity building has a role to play in ensuring strong regional impact assessment. To build the necessary skills and ensure that those conducting the assessments have the data that they need, the Estonian Government could provide specific guidance and training on regional impact assessment for the civil servants in each ministry that produce such reports (Box 2.3). These learning materials could, for example, provide information about regional data, templates or lists of what to include and examples of strong regional impact assessments.

Box 2.3. Northern Ireland in the United Kingdom promotes high-quality assessment of policy impact on rural areas

Northern Ireland’s Rural Needs Act (2016) requires public authorities to “have due regard to rural needs” when developing, implementing or revising policies, strategies and services. Public authorities can complete a Rural Needs Impact Assessment to help them fulfil the requirement, although following the template for this assessment is not strictly necessary if public authorities can still show that they have fulfilled their “due regard duty”.

The Department of Agriculture, Environment and Rural Affairs (DAERA) supports civil servants in producing meaningful rural impact assessments by providing guidance materials and training. It also provides a template. While DAERA does not have a role in assuring the quality of these assessments, it does play a role in opening the assessments to additional scrutiny. Public authorities must report on how they have paid due regard to rural needs in their annual reports and DAERA compiles these reports to show how rural needs have been addressed across public bodies to lay before Northern Ireland’s legislature.

Sources: DAERA (2018[26]), A Guide to the Rural Needs Act (Northern Ireland) 2016 for Public Authorities (Revised), https://www.daera-ni.gov.uk/publications/guide-rural-needs-act-northern-ireland-2016-public-authorities-revised; Bryce, B. (2024[27]), “Rural Proofing: Lessons from OECD countries and potential application to health”, https://doi.org/10.1787/4011899a-en; Shortall, S. and E. Sherry (2019[28]), Rural Proofing in Northern Ireland: An Overview and Recommendations on Guidance, Implementation and Governance, https://www.afbini.gov.uk/publications/rural-proofing-northern-ireland-overview-and-recommendations.

There are few arrangements that help to facilitate cross-government collaboration for regional development in Estonia

This section discusses how Estonia’s existing cross-government co-ordination mechanisms lack a strong focus on aligning national policies with regional needs. None of the Estonian Government’s co-ordination mechanisms, including its national Regional Development Action Plan, systematically promote cross-sector consideration of regional development. This gives little reason for line ministries to work together to improve regional development outcomes. Without this type of inter-ministerial co-ordination, the Estonian Government may struggle to tackle the interconnected challenges of regional development. This section presents recommendations for strengthening co-ordination for regional development, including by introducing new formal agreements between ministries and introducing a regional perspective to existing fora for cross-sector collaboration.

The Estonian Government introduced a Regional Development Action Plan in 2021, administered by the Ministry of Regional Affairs and Agriculture, with the intention of co-ordinating activities across government in support of balanced territorial development (Estonian Ministry of Regional Affairs and Agriculture, 2024[29]). To date, the plan has been used primarily as a monitoring tool. The most recent monitoring report, for example, observes how ministries’ policies contribute to regional development but does not issue targeted recommendations or binding requirements for how ministries should improve their contributions. The plan states that line ministries are expected to consider the monitoring review when developing their own plans and policies (Estonian Ministry of Regional Affairs and Agriculture, 2024[30]). However, a lack of concrete guidance for how to do so, along with few incentives to take the guidance onboard, may limit its impact on shaping sector policy.

Steering committees and the Government Office serve as champions for co-ordination across ministries, but regional development remains largely outside the scope of their efforts. A primary tool for co-ordination across the Estonian Government is steering committees, created and maintained by line ministries to engage with each other in specific areas (OECD, 2024[16]; Estonian Government, 2021[31]). These are often devoted to strategy implementation: there is, for example, a steering committee to support the Culture Development Plan 2021-2030, which includes representatives from a wide range of ministries6 (Estonian Ministry of Culture, 2021[32]). The Government Office is also viewed as a facilitator of cross-government co-ordination, with a special strategy unit dedicated to co-ordinating and monitoring activities related to Estonia 2035 (SGI, 2024[33]).7 None of these co-ordination tools serve to “connect the dots” for regional development, however, leaving ministries to continue to pursue their own sector-specific goals with little consideration for regional development.

Among Estonia’s various inter-ministerial co-ordination mechanisms, the Economic Cabinet stands out as a high-level co-ordination mechanism with great relevance to regional development. It is the newest addition to Estonia’s inter‑ministerial co-ordination structures, established in 2024 to bring together cabinet members to discuss economic and security issues every two weeks (ERR, 2024[34]). However, the cabinet currently does not have a strong regional focus, despite the Ministry of Regional Affairs and Agriculture’s interest in bringing a regional perspective to the cabinet by inviting representatives of the pilot regional councils (Chapter 3) to meetings.

The fact that Estonia’s cross-government co-ordination tools do not have a strong regional development focus limits the ability of the Estonian Government to work together to address multi-dimensional regional development issues. These issues require a co-ordinated approach to ensure policies are coherent and, ideally, complementary and prevent negative spillover effects. Empirical research on the country level suggests that co-ordinating policies can help maximise development outcomes (Braga de Macedo, Oliveira Martins and Rocha, 2014[35]). Evidence suggests the same may apply on the regional level. In a study of 23 regions, poorer regions successfully converging with their peers had a formula: parallel improvements in horizontal co-ordination of policies, infrastructure, human capital and regional institutional capacity (OECD, 2012[36]). Without a co-ordinated approach to help ensure that policies are aligned and mutually reinforcing, policy makers risk unintended spillover effects. For example, research shows that improving transport alone can backfire: if there are no local jobs, better connectivity simply makes it easier for people to leave the region (OECD, 2012[36]).

One way Estonia can improve cross-sectoral co-ordination and collaboration is by expanding the use of agreements to make explicit how ministries will work together for regional development. It can do so by: i) making the most of the existing pilot development agreements that focus on two Estonian regions; and ii) considering creating new contracts to formalise working relationships across government. These two options are described below:

• Ministries can create a co-ordinated action plan outlining how they will work together to fulfil their commitments in pilot regional development agreements (Chapter 3). Many of these commitments already entail collaboration among signatory ministries. For example, an action in the Central Estonian Regional Development Agreement for the Ministries of Climate and of Economic Affairs and Communications is to create favourable terms for electrical connections for start-ups establishing in the region, in collaboration with local governments (Central Estonian Pilot Regional Council, 2024[37]). A cross-government action plan will help make concrete how ministries will work together to fulfil these commitments.

• Ministries can also consider entering into other contracts with their peers to advance regional development objectives. For example, the Ministry of Regional Affairs and Agriculture could propose using a contract to make explicit how the ministries invoked in the Estonia 2035 objectives relevant to regional development (Table 2.2) will work together to implement the objectives.

The government can also create regular opportunities for ministries to come together and “connect the dots” for regional development. There is no official regional policy council, advisory group or other such institution at the national level to convene line ministries in order to collaborate on the design and implementation of regional policy. The Ministry of Regional Affairs and Agriculture has already proposed that regional development topics be discussed regularly in the Economic Cabinet. This arrangement would give regional development policy greater prominence and set the foundation for more active, regular co-ordination. Italy’s cross-ministerial committee for its National Strategy for Inner Areas (Box 2.5) provides an example of inter-ministerial co-ordination and collaboration at the highest level. Regional development co-ordination and collaboration can also benefit from dialogue at the civil servant level, as in Sweden (Box 2.4). To this end, the ministry could consider developing its own steering committee for regional development. This option may require more resources and time but is a way to make space for cross-sector co-ordination that is within the power of the ministry.

Alternatively, the ministry could focus on advocating for adjustments to existing steering committees in order to create space for discussion specifically related to regional development (OECD, 2025[38]). It could, for example, advocate that a meeting of relevant steering committees (e.g. the steering committees for Estonia 2035, for the Education Strategy, for the Transport and Mobility Strategy) periodically be dedicated to the regional impacts of the activities under the steering committees’ purview, facilitated by the Ministry of Regional Affairs and Agriculture. Making space for discussion focused on regions requires that the members of the steering groups – generally from several ministries across government – apply a regional lens.

Box 2.4. A co-ordination platform for the political and operational sides of regional development in Sweden

In Sweden, it is the job of regional development policy makers to convince other ministries that they should adopt a territorial lens when planning and designing sector policies. The Forum for Sustainable Regional Development 2022-2030 – part of the implementation plan for the National Strategy for Sustainable Regional Development throughout Sweden 2021-2030 – is one important co-ordination platform to accomplish this. The Swedish Agency for Economic and Regional Development is its secretariat.

The forum is divided into two groups: one that promotes dialogue between national- and regional-level politicians, and one that fosters dialogue among national- and regional-level civil servants. There are about 50 regular participants at the political level, who convene 4 times a year. Additional participants, such as ministers, state secretaries and directors within state agencies, can be invited on an ad hoc basis, depending on the agenda topics. The civil servant meeting, which brings together regional-level civil servants at the director level, occurs three times a year.

Having two levels of conversation means that the right people are at each table. The political forum ensures that the highest-level decision makers are engaged on high-level regional development issues, making these issues visible on the political level and favouring political buy-in. Discussion on the civil servant level brings the right people to the table for the strategy’s implementation.

Sources: OECD (2017[39]), OECD Territorial Reviews: Sweden 2017: Monitoring Progress in Multi-level Governance and Rural Policy, https://doi.org/10.1787/9789264268883-en; OECD (2020[6]), The Future of Regional Development and Public Investment in Wales, United Kingdom, https://doi.org/10.1787/e6f5201d-en.

Political support and financial incentives are missing to favour cross-government co‑ordination and collaboration for regional development

This section explores two missing puzzle pieces for cross-government working to advance regional development in Estonia: political support and financial incentives. National civil servants recognise that these two forces would help to encourage ministries to work together for regional development, but both are hard to come by. Political support is difficult to secure due to political turnover and shifting priorities, and civil servants often lack channels to elevate regional concerns to high-level decision makers. Financial incentives to work together on regional development are currently largely limited to one region. The section ends with recommendations for putting these two puzzle pieces in place by embedding regional priorities in high-level political discussions, providing more direct financial incentives to work together on regional development and making indirect financial incentives more explicit.

In Estonia, political buy-in is considered a precondition for sustained cross-government co-ordination and collaboration for regional development, but it is hard to secure and maintain (OECD, 2025[38]). Political turnover and shifting political priorities compound the difficulty of sustaining long-term, cross-ministerial co‑ordination and collaboration. At the same time, civil servants who want to co-ordinate more meaningfully across ministries sometimes struggle to be heard by the political level: they may lack the channels, motivation or time to elevate their discussions to high-level decision makers within their respective ministries (OECD, 2024[16]; 2025[38]). Without political awareness and buy-in, efforts to enhance cross‑government co-operation for regional development stand little chance of becoming high-priority or institutionalised. The Economic Cabinet presents a good example of how political awareness and buy-in results in a formal co-ordination platform at the highest level (its focus on high-profile economic questions, such as how to improve Estonia’s competitiveness, and on rising security concerns certainly helps to raise political awareness and buy-in).

Another missing piece of the puzzle is a financial incentive for ministries to take a co-ordinated regional approach. Estonia’s experience with regional policies shows that financial incentives work to encourage ministries to take this kind of approach. The Estonian Government funds a handful of regional programmes (Estonian Ministry of Regional Affairs and Agriculture, 2023[3]). One of its regional programmes is dedicated to Ida-Viru county in Northeast Estonia, a region bordering Russia that has experienced a dwindling oil shale industry (Invest in Estonia, n.d.[40]; Estonian Ministry of Finance, 2023[41]). The region is the focus of the Ida-Viru County Action Plan, an initiative involving multiple ministries that outlines the central government's activities targeted at the development of the area (Estonian Ministry of Regional Affairs and Agriculture, 2023[42]). It receives funding through regionally specific national budget contributions and EU Just Transition Funds to support initiatives in the region8 (Estonian Ministry of Regional Affairs and Agriculture, 2025[43]). Funding for this region provides an incentive for ministries to adopt a regional lens for Ida-Viru county (OECD, 2024[44]) A variety of ministries have already introduced and participated in interventions tailored to the region. For example, the Ministry of Economic Affairs and Communication issued a regulation that provides financial support for Ida‑Viru business investment to diversify the economy, promote renewable energy and create new jobs (Eurofound, 2022[45]; Estonian Ministry of Economic Affairs and Communications, 2024[46]). In addition, the Ministry of Social Affairs created a fund for laid-off shale oil workers (Just Transition, 2021[47]). The example of Northeast Estonia shows that financial incentives help to encourage ministries to co-operate with their peers on planning and implementing regional development.

Filling these two gaps means raising the prominence of regional development at the political level and expanding financial incentives to work together:

• To raise the political prominence of regional development, a recommendation from the previous section is also relevant here: the Ministry of Regional Affairs and Agriculture could work to integrate a regional perspective into the workings of the Economic Cabinet. This approach makes sense not only because the cabinet is a cross-government body with significant influence over regional economic development but also because it would increase the political visibility of regional issues by ensuring they are regularly discussed at the highest levels of government.

• To create financial incentives to work together for regional development, the ministry could identify opportunities to link sectoral activities to funding opportunities through subnational development strategies, as Italy has done through its National Strategy for Inner Areas (Box 2.5). For example, the Ministry of Regional Affairs and Agriculture could allocate some of its own funds to support initiatives under the pilot regional development agreements (Chapter 3). This initial funding could encourage other ministries to contribute if they recognise that it is also in their sector’s interest (as in Iceland, Box 3.3). For example, the Ministries of Climate, of Transport Administration and of Regional Affairs and Agriculture all have an interest in optimising regional transport. Sharing the cost – including with other stakeholders like local authorities – of regional transport improvements foreseen in regional development plans can help them all meet their own objectives. EU funds can also serve as a powerful incentive for pooling sectoral investments into more regional projects, as shown in the above example of Just Transition Funds in Ida-Viru; several national and local government stakeholders mentioned the possibility of regionalising some EU funds to encourage co-ordinated national government action for regional development (ERR, 2025[48]).

Box 2.5. Creating a financial incentive to work together to implement Italy’s National Strategy for Inner Areas

Italy’s National Strategy for Inner Areas is an integrated strategy tailored to reduce demographic decline and land abandonment in many rural areas by improving the quality of essential services – education, health and mobility – and promoting opportunities for economic activity and jobs. The funding for the implementation of the strategy comes from multiple sources. It draws from EU funds (the European Regional Development Fund, the European Social Fund and the European Agricultural Fund for Rural Development) as well as national resources.

The governance of the strategy ensures that the way the strategy is executed – including how it is funded – requires cross-government collaboration. The national government created an inter-ministerial committee to align objectives, adapt sectoral policies to specific territorial needs and match different sources of financing. In addition, it set up a technical committee to select inner areas to be funded under the strategy. This technical committee consists of representatives from the Ministries of Education, of Health and of Agriculture, the Department for Cohesion Policy and subnational levels of government. The technical committee first assessed the various proposals of inner area projects submitted by regions, based on a framework with specific indicators to evaluate candidate area specificities (e.g. an area’s distance to infrastructure and services, demographic trends, local authority capacity to implement projects, etc.). Second, the committee and other relevant experts conducted field missions to candidate areas to discuss development challenges and opportunities and specific project proposals with territorial actors. Following these two phases, the Technical Committee issued an investigation report for each area and a framework programme agreement was established for each project area as an implementation tool for inter-institutional co‑operation. It lists all interventions to be conducted, the financial resources covering them, their schedule and related expected results.

Sources: Rossitti, M. et al. (2021[49]), “The Italian National Strategy for Inner Areas (SNAI): A critical analysis of the indicator grid”, https://doi.org/10.3390/su13126927; Agenzia per la Coesione Territoriale (2022[50]), National Strategy for Inner Areas, https://www.agenziacoesione.gov.it/strategia-nazionale-aree-interne/?lang=en; OECD (2017[39]), OECD Territorial Reviews: Sweden 2017: Monitoring Progress in Multi-level Governance and Rural Policy, https://doi.org/10.1787/9789264268883-en; OECD (2020[6]), The Future of Regional Development and Public Investment in Wales, United Kingdom, https://doi.org/10.1787/e6f5201d-en; European Network for Rural Development (n.d.[51]), Strategy for Inner Areas, Italy, https://ec.europa.eu/enrd/sites/enrd/files/tg_smart-villages_case-study_it.pdf.

Summary of recommendations

To create structures and processes that favour cross-cutting and regionally focused policy, a prerequisite for a place-based approach, Estonia can:

1. Strengthen the existing regional impact assessment mechanism. The Estonian Government can increase accountability with a public “regional impact dashboard” on the Ministry of Regional Affairs and Agriculture website that displays anticipated regional impacts of new laws and strategies. Finally, it can provide guidance and training for staff conducting impact assessments in line ministries, including regional data, methodologies and good practices.

2. Use regional development agreements to promote cross-government action. Ministries can create a co-ordinated action plan outlining how they will work together to fulfil their commitments in pilot regional development agreements.

3. Consider formalising cross-government co-ordination in new contracts. Ministries can enter into contracts to make explicit how they will work together to realise Estonia 2035 objectives relevant to regional development.

4. Create regular opportunities for ministries to come together and “connect the dots” for regional development, at the political and operational levels. Regular, high-level dialogue among ministers about regional development – to take place, for example, during dedicated meetings of the new Economic Cabinet – can help ensure that regional development remains a strategic priority across government. Creating a regular opportunity for civil servants to come together on regional development issues through a steering committee for regional development can complement high-level dialogue. As an alternative, the government can strengthen the regional perspective in existing steering committees, for example by hosting a periodic discussion with the Ministry of Regional Affairs and Agriculture on the regional dimensions of the committee’s work.

To set up the right incentives to motivate ministries to make policy in a cross-cutting and regionally focused way, Estonia can:

5. Provide financial incentives to favour cross-government co-ordination and collaboration for regional development. The Ministry of Regional Affairs and Agriculture could allocate initial funding to pilot regional development agreements, encouraging other ministries to co-invest in mutually beneficial initiatives within the agreements (e.g. regional transport improvements). This may involve regionalising some EU funds, replicating a positive effect in Ida-Viru where EU funds for the region encouraged ministries to co-operate with their peers on a regional plan and introduce their own initiatives to implement it.

Empowering subnational actors to enable a place-based approach

Strengthening subnational capacity and providing new opportunities to align planning among levels of government would further support a place-based approach in Estonia. Equipping municipalities with the strategic planning capacity, stakeholder engagement capacity and financial capacity to help them plan and invest for their region is an important step in this direction (although recommendations on local finances lie beyond the scope of this report). Meanwhile, county development plans could be used more effectively as a platform for fostering inter-municipal collaboration and aligning national and subnational priorities. With continued focus on capacity building and partnership, local governments could play an increasingly active role in shaping the development of their regions.

This section is dedicated to how to empower subnational actors to enable a place-based approach. Empowering Estonian local authorities and other subnational actors (e.g. the pilot regional councils discussed in Chapter 3) requires that they have the capacity to plan and implement themselves, as well as the right levers to influence national decision making. This section considers these two facets. First, it explores how the Estonian Government can help local authorities overcome capacity challenges that limit the role of municipalities as strategy setters and implementers for regional development. Second, it considers how to strengthen vertical co-ordination between the national and local government levels to allow greater alignment between levels of government and greater bottom-up input for national sector policy. Ultimately, empowering subnational actors in these two ways will help both levels of government be better equipped to address regional needs and take advantage of regional opportunities.

Local capacity gaps limit the ability of local authorities to shape and drive regional development

To be able to drive regional development efforts, regions and their constituent municipalities need the capacity to contribute to the design and implementation of regional development initiatives. “Capacity” in this context encompasses the skills, structures, processes, time and resources necessary for municipalities to plan and implement. This sub-section analyses three areas in which local government capacity gaps limit the role of local authorities in shaping and driving regional development, namely spending and investment, strategic planning and stakeholder engagement. It includes recommendations to help the Estonian Government strengthen local capacity in these areas, including by strengthening guidance and skill building for strategic planning, and investing in competencies for stakeholder engagement among local authority staff.

There are limits to how much capacity building can achieve for small municipalities. Despite the 2017 Administrative-Territorial Reform, which reduced the number of municipalities and increased their average size (Box 2.6), many are too small to plan and implement effectively for regional development. During the reform, the Estonian Government used population size as a rough indicator of municipality capacity, establishing a threshold of 5 000 residents as a benchmark for a municipality’s ability to function independently. The reform reduced but did not eliminate the number of municipalities falling below this threshold (15 remained) (Estonian Ministry of Finance, 2021[52]). Thus, based on national criteria, some municipalities remain that are too small to generate sufficient revenue to support the professional staff that would allow them to manage key functions effectively (Estonian Ministry of Finance, 2018[53]). This is where regional governance shows its value. Working at a regional scale, including through cross-jurisdiction co-operation as is the case with the pilot regional councils, can fill capacity gaps by providing expertise, administrative support and strategic co-ordination that smaller municipalities simply cannot develop or access on their own. Chapter 3, focused on pilot regional councils, picks up on this thread.

Box 2.6. Territorial administrative reforms in Estonia

In 2017, Estonia undertook a significant territorial-administrative- reform to enhance the capacity and efficiency of local governments. Prior to the reform, Estonia had 213 municipalities, many of which were small and lacked the resources to effectively provide public services. In 2016, the Administrative Reform Act stipulated that local government units must have more than 5 000 residents. The roll-out of this reform was initially conducted on a voluntary basis: the government promoted mergers for smaller local units, providing financial incentives to do so. After 2016, the government was empowered to take a more active role in organising mergers. The primary motivation was to strengthen local governance by creating larger, more capable municipalities that could ensure consistent regional development and improved service delivery.

Key changes include:

• Fewer and larger municipalities: The reform reduced the number of municipalities from 213 to 79, resulting in 15 urban and 64 rural municipalities. This consolidation was achieved through voluntary mergers, with some required by the state, to meet the criteria set forth in the Administrative Reform Act. The reform led to fewer and larger municipalities: the median population of municipalities increased nearly fourfold.

• No more county governments: The reform also affected Estonia’s counties. County governments and governors were abolished as of 1 January 2018 and their responsibilities were transferred to relevant ministries and local governments. A new department in the Ministry of Finance – the Department of Regional Administration – adopted certain functions previously held by county governments (such as administering land privatisation processes, supervision over local vital statistics, electoral management and more). County development organisations, which take different legal forms (Chapter 3), maintain county planning functions. In addition to their use as planning regions, counties are also used as statistical regions for many government statistics.

Sources: CoR (n.d.[11]), Division of Powers - Estonia, European Committee of the Regions, https://portal.cor.europa.eu/divisionpowers/Pages/Estonia-Introduction.aspx;Kattai, K. et al. (2020[22]), “Analysis of Estonian regional development: Proposals for shaping regional governance models – Final report (Eesti regionaaltasandi arengu analüüs: Regionaalse valitsemise mudelite kujundamise ettepanekud – Lõpparuanne)”, https://skytte.ut.ee/sites/default/files/2022-05/1.%20Regionaalne%20valitsemine%20lopparuanne_final.pdf; Noorkõiv, R. (2021[54]), “How Estonia’s reforms empowered local government”, https://decentralization.gov.ua/en/news/13820; OECD (n.d.[55]), Country and Territory Profiles - Estonia, https://www.sng-wofi.org/country-profiles/.

Limited local spending and investment capacity: Estonian local authorities have very little leeway to spend beyond executing their immediate competences

As decentralised government entities, Estonian local authorities play a significant role in managing public services and functions. Administrative decentralisation, i.e. redistributing tasks and functions from central to subnational governments, brings decision making closer to the people, allowing local governments to tailor services to the specific needs of their communities (OECD, 2019[56]). The European Committee of the Regions Decentralisation Index ranks Estonia second among EU Member States for administrative decentralisation (Denmark ranks first) (CoR, 2020[57]). In Estonia, local authorities manage a substantial number of responsibilities, some of which are shared with the national government (Table 2.3). Estonia’s local government workforce comprised 52% of the total public sector in 2017, roughly in the middle of the distribution among OECD countries (OECD, 2019[58]). Maintaining an adequate local government workforce is critical to ensuring that municipalities can manage delegated responsibilities.

Table 2.3. Estonian local authorities manage a significant share of competences, many of which are shared with the national government

	Central government	Municipalities	Shared competence
General public services (administration)	Basic research activities	Issuance of building ordinances and permits	Administrative services (marriage, birth, etc.)
Public order, safety and defence	Police, firefighting, defence (military and civil)	Supervision of local regulations	Civil protection and emergency services, road traffic control (traffic signs and lights)
Economic affairs and transports	Construction and maintenance of national roads and railways; airports; support to enterprises; agriculture, rural development, irrigation; telecommunications; tourism, commerce, energy	Construction and maintenance of local roads and rails; special transport services (e.g. pupil and student transport)	Ports (waterways are financed by central government while local ports belong to municipalities); public transport administration; employment policies/services; manufacturing and construction; mining;
Environmental protection	Parks and green areas; soil and groundwater protection; climate protection	Waste management, sewerage, street cleaning	Nature preservation; noise and vibration abatement; air pollution; disaster management
Housing and community amenities	Electricity networks	Drinking water supply; public lighting; heating and amenities; cemeteries; housing and utilities (construction, renovation, management)	Spatial planning
Health	Pharmaceutical and medical products; general and specialised medical services; hospital services; preventative healthcare; public health services		Primary healthcare
Culture and recreation	Cultural heritage/monuments, national cultural facilities	Cultural facilities (local theatres, zoos, etc.); youth work; libraries; community centres; sports facilities	Museums
Education	Higher education; vocational education/training; special education; R&D	Maintenance of pre-school childcare institutions, primary schools	Secondary schools
Social welfare	Unemployment subsidies/benefits; immigration and integration of foreigners; support services for families	Provision of social services; social benefits grants and other social assistance; welfare services for the elderly; shelters and care homes; nurseries; social housing; child protection	Services for disabled persons

Source: OECD (2023[5]), “Questionnaire completed by the Estonian Ministry of Regional Affairs and Agriculture”, OECD, Paris.

Despite their strong role in administration and service provision, local authorities have very little leeway to spend beyond their immediate competences. Subnational public spending is low in Estonia, only accounting for 9.6% of gross domestic product (GDP) and 24.3% of total public expenditure. This is significantly below OECD (16.6% and 39.5% respectively) and EU (17.1% and 34.4%) averages (OECD, 2024[59]). When combined with substantial delegated responsibilities, local authorities are left with little limited spending autonomy. With mandatory tasks taking up a large share of the budget – education alone accounts for more than a third of local budgets (OECD/UCLG, 2016[60]) – there is little room for discretionary spending.

In theory, local governments could increase their spending and investment capacity with greater own‑source revenue, but this revenue has remained low and stagnant. Article 157 of the Estonian constitution grants local authorities the ability to manage their own budgets, levy and collect taxes, and impose duties (CoR, 2020[57]). The most significant source of own-source revenue comes from user charges and fees, and revenues from economic activities, a category that accounts for 8.7% of municipal revenues and can include, for example, school fees or property leasing (OECD/UCLG, 2022[61]). Municipal land tax has a small impact on municipal budget sheets, representing only 2.1% of total revenue in 2019 and only 0.22% of GDP (well below the OECD average of 1.0%) (OECD/UCLG, 2022[61]). This land tax, while not a significant source of revenue, is the largest local tax, accounting for 83.1% of municipal tax revenue in 2019. Municipalities set rates within central government limits (0.1-2.5% in 2021), though rates have remained largely unchanged since 2012 (averaging 2.4%). Other municipal taxes, including advertisement, road closure and parking charges, collectively made up just 1.1% of municipal tax revenue in 2020 (OECD/UCLG, 2022[61]). Overall, Estonia ranks at the bottom of all EU and OECD peers in terms of subnational own tax revenues (OECD, 2024[59]). In short, Estonian municipalities have a limited ability to generate their own revenues, leaving a core principle of decentralisation unmet: for decentralisation to function, decentralisation of spending responsibilities must be in tandem with increasing subnational capacity to generate own-source revenue (OECD, 2019[56]).

Low municipal own-source revenue as well as a tax reclassification have left Estonia’s municipalities heavily reliant on national transfers. In 2022, Estonian subnational governments (municipalities) derived an average of 88.4% of their income from intergovernmental transfers and subsidies, compared to 44% across EU peers and 40% across OECD countries (OECD, 2024[59]). Estonia’s revenue ratio (the share of subnational own-source revenues relative to total government revenues) is just 4%, one of the lowest in the European Union (CoR, 2020[57]). A 2014 change in the classification of taxes, which reclassified some national taxes shared with local authorities as grants rather than tax revenue, also contributed to the high proportion of national grants in local government revenue (OECD/UCLG, 2022[61]). The most significant of these taxes was personal income tax. It is important to note that the local government level has no discretion in setting rates for the personal income tax; the national government determines both the income tax rate and the municipal share of the revenue (OECD, 2022[62]). Ultimately, local authorities remain overwhelmingly dependent on the national government for their funding, with very limited ability to influence the amount of these transfers.

With most funding tied to earmarked grants, local authorities are effectively paid by the national government to deliver specific services that are national-level tasks (OECD, 2024[16]). Local governments not only depend on national transfers, but the bulk of these funds – 81% in 2021 – are earmarked for specific purposes by the national government (OECD, 2023[5]). Earmarked grants weaken flexibility in local decision making, which can have the perverse effect of penalising rather than rewarding efficiency. For example, a municipality that consolidates schools to cut costs cannot redirect the savings to other priorities; instead, it faces a cut in its grant in the subsequent budget period (OECD, 2022[62]). In recent years, small pots of money have been “unearmarked”, notably funds for waste management and some social assistance (Congress of Local and Regional Authorities, 2023[63]), but the changes are marginal, leaving local authorities with little real autonomy to tailor spending of most national funds in a way that is responsive to local needs (OECD, 2024[16]).

Estonian local authorities do not have a sufficient revenue margin to invest in local and regional development, with some struggling to fund basic services (EC, 2024[64]). Estonian local governments spend less as a percentage of total public investment than their OECD and EU peers: in 2022, Estonian local governments contributed around 24% of total public expenditure compared to the nearly 40% contributed by subnational governments in OECD countries and about 34% in EU Member States (OECD, 2024[59]). Inflation has outpaced revenue increases in recent years, leaving local authorities in poor fiscal health (Minuomavalitsus, 2023[65]). Many struggle to deliver on their competences: data from 2019 show that many municipalities were struggling to meet basic service levels (as defined by the Estonian Government) in critical areas like crisis preparedness, child welfare and social welfare. For example, 58% were not meeting basic service expectations in providing social services for adults (Minuomavalitsus, 2020[66]).

Municipal finance reforms are beyond the scope of this report but Estonia can revisit previous recommendations for how to strengthen municipal finances. OECD reports have suggested that Estonia consider introducing a local income tax – for example, a surcharge “piggybacking” on top of the personal income tax levied by the central government – to provide municipalities with a stable, predictable revenue source (OECD, 2022[62]; 2011[67]). Other recommendations include adjusting the equalisation system and reducing earmarked grants (OECD, 2022[62]; 2011[67]). Estonia has made some progress towards providing municipalities with greater revenue in recent years. The 2017 Administrative-Territorial Reform came with measures to increase municipal revenues, including increasing the share of income tax going to local governments and the volume of the equalisation fund (ERR, 2019[68]; Estonian Ministry of Finance, 2022[69]). Additionally, in 2024, the government amended the Income Tax Act to gradually increase the share of pension income allocated to municipalities (Riigi Teataja, 2024[70]). The Ministry of Regional Affairs and Agriculture is also preparing a proposal to increase the revenue base of local governments, with a draft law expected in 2025 (Estonian Ministry of Regional Affairs and Agriculture, 2024[71]). For the moment, however, Estonia’s fiscal decentralisation framework still largely leaves local governments dependent on the national level for their revenues and spending decisions.

Planning capacity: Estonia has low local and regional strategic planning capacity

Gaps in local and county planning could undermine Estonia’s ability to make place-based policy. Municipalities are required to produce five-year development plans. They also participate in the development of county development strategies, which, in theory, align one municipality’s planning with the planning of their neighbours. On paper, this system promises that municipalities co-operate to distil regional (county) priorities. These regional priorities could then create a common thread among municipalities to favour joint collaboration (and the efficiencies and new opportunities it could bring). In doing so, it could also attract entrepreneurs and investors whose needs align with a county’s vision for local development. In practice, as discussed in this section, county development plans (Box 2.6) are not the drivers of local and regional development that they should be.

County development plans do not necessarily represent a strategic view of regional priorities. The guidelines for designing such plans suggest that each include a vision – a short statement of the future towards which the county is working (Estonian Ministry of Finance, 2018[72]). However, interviews with local authority staff suggest that the process of developing county development plans focuses more on reconciling diverse municipal interests than considering how to advance a collective vision (OECD, 2024[16]). In the planning process, there is no effective mechanism for local stakeholders to negotiate and identify collective interests around which to build the plans (Sootla and Kattai, 2018[10]; National Audit Office, 2017[73]). Instead, county development planning tends to aim for compromise among the priorities of all municipalities in each county to avoid hard trade-offs and political friction. Sometimes, according to focus group interviewees, county development plans were prepared not to guide action but to ensure eligibility for EU funding (OECD, 2024[16]). The result is a document that one local government staff member described as “a shopping list” (of local authority wishes), which does not necessarily reflect the collective development priorities or needs of the county (OECD, 2024[16]).

To help favour practical, strategic plans, the Ministry of Regional Affairs and Agriculture can consider updating its guidance for the preparation of county development plans. New guidance can encourage county development organisations to use a participatory process to create the collective vision, a step that is not currently addressed in detail in national government guidance. County development organisations can draw inspiration from the participatory foresight and vision-setting sessions that underpinned the development of pilot regional development agreements in Chapter 3. These sessions featured broad participation (involving a range of stakeholders beyond local governments themselves) and structured processes to explore potential futures and envision how to work together to bring about desired futures. Updated guidance can also introduce structured processes to help municipalities prioritise objectives collectively. It can, for example, introduce the range of decision support tools that counties can use to evaluate the regional impact of proposed objectives, from scenario planning to basic quantitative methods for impact analysis. To guard against a tendency to include objectives as a way to ensure eligibility for EU funding, updated guidance can urge the county development organisations to clearly distinguish between funded and unfunded initiatives when they draft the plans. Ultimately, these adjustments can help show local authorities a clear pathway to results, giving them a clear sense of how their decisions and actions will lead to change (Horlings, Roep and Wellbrock, 2018[74]).

Clarifying requirements and investing in skill building can also help favour high-quality county plans. The Ministry of Regional Affairs and Agriculture can also consider how to strengthen the skills of subnational actors to develop high-quality plans. The Estonian Government’s action plan for local authority human resources development, which aims to ensure that local officials have the skills and knowledge necessary to achieve national and subnational strategic goals, is a good starting point. Indeed, a skills assessment featured in the action plan ranks development planning competences as one of its top priorities (Estonian Ministry of Regional Affairs and Agriculture, 2023[75]). Putting in place an online hub dedicated to resources on data-driven planning and prioritisation could help to build subnational strategic planning capacity. This could include – like in Czechia (Box 2.7) – links to sources of data for strategic planning, self-guided trainings, guidelines for good practices and examples of other county plans.

Box 2.7. A digital platform to support municipal planning in Czechia

The Ministry of Regional Development of Czechia created ObcePRO (https://www.obcepro.cz/), a web‑based application to support municipalities in designing their municipal development strategies and programmes. The platform offers local governments practical planning tools such as statistical data, templates, samples of supporting documents and studies, e-learning courses, handbooks for municipalities, etc. Complete municipal development strategies are published on the webpage, so municipalities can learn from their peers. Since 2015, over 500 municipal development strategies (individual municipality or joint strategies) developed using the templates or guidance from the platform have been published on ObcePRO.

Sources: OECD (2023[76]), OECD Public Governance Reviews: Czech Republic: Towards a More Modern and Effective Public Administration, https://doi.org/10.1787/41fd9e5c-en; ENRD (n.d.[51]), “Strategy for Inner Areas - Italy”, https://enrd.ec.europa.eu/sites/default/files/tg_smart-villages_case-study_it.pdf; Rossitti, M. et al. (2021[49]), “The Italian National Strategy for Inner Areas (SNAI): A critical analysis of the indicator grid”, https://doi.org/10.3390/su13126927.

Engagement capacity: Local authorities could reinforce stakeholder engagement practices for regional development

Local authorities do not always exhibit strong and strategic engagement with local stakeholders, which limits their ability to understand and meet the needs of local businesses and residents. Some local stakeholders (entrepreneurs and representatives from other non-government organisations) believed that they were not engaged in a strategic way in the design and implementation of the local development plans (OECD, 2024[16]). One entrepreneur thought they were being asked to engage too much, at the expense of a more data-driven approach to decision making by the local authority (“Don’t just ask entrepreneurs” was this entrepreneur’s request) (OECD, 2024[16]). The need to strengthen data-driven and evidence-based decision making for development is also highlighted by local governments themselves9 in a declaration on data-driven governance that underscores the importance of strengthening the competencies of local authority staff to make data-driven decisions (Rae Noortekonverents, 2023[77])). Building the ability of local authorities to engage meaningfully and strategically with stakeholders is critical to ensuring that local and regional development planning and initiatives reflect the actual needs and ambitions of residents and businesses.

With its emphasis on bottom-up input, a place-based approach relies on strong stakeholder engagement. Place-based policy should draw upon the perspectives of local actors – including the private sector and non-governmental organisations – to understand and address the challenges that communities face (OECD, 2025[2]). Placing stakeholder engagement at the centre of place-based policy development processes helps to ensure that policy is tailored to local conditions, contributing to the effectiveness of the policy. Strong stakeholder engagement can also help governments find unlikely allies. For example, in the Greater Copenhagen Region, Denmark, universities have acted as a neutral mediator between pharmaceutical companies and governments to foster industry growth (Beer, 2023[78]; Collinge and Gibney, 2010[79]). Realising the benefits of stakeholder engagement, however, requires meaningful and long-term strategic planning with stakeholders at the local level. Communities can best influence their own development when stakeholders actively participate in governing relevant initiatives, and where they are able to use their diverse knowledge sets to “collectively tackle complex policy problems” (Eversole, 2011[80]).

The national government can help build stakeholder engagement capacity by investing in the skills local authorities need to engage effectively with local actors. The examples shared above suggest that there may be capacity gaps – in skills, workforce or financial resources – that hinder stakeholder engagement at the local level. Increasing the human and financial resources of local authorities is beyond the scope of this paper. However, the national government can begin to address stakeholder engagement capacity gaps through skill building among local authority staff. To increase the ability of local authorities and county development organisations to develop meaningful and productive stakeholder engagement practices, the training hub for strategic planning (introduced above) can include a focus on stakeholder engagement. It can offer training or guidance materials on clarifying objectives for engagement, identifying and reaching stakeholders, manage stakeholder engagement processes and nurturing stakeholder relationships.

There are opportunities to further enhance strategic co-ordination among national and local governments

This section considers how national and local government planning and policy making for regional development can become more closely aligned. One of the factors that shapes vertical co-ordination – the lack of a regional level that can serve as an intermediary between national and local governments on regional development issues – is the focus of Chapter 3. This section focuses on another lever for vertical co-ordination: links between the strategies of the two tiers of government. Better alignment would allow both levels of government to find new opportunities for their activities to be more complementary and mutually reinforcing, and identify and manage trade-offs among the priorities of different levels (OECD, 2024[81]; 2014[82]). In addition to the recommendations to strengthen Estonia’s use of regional councils (Chapter 3), this section presents one recommendation to help bridge the gap: making explicit the strategic planning links between government levels.

Estonia could enhance its strategic planning processes to find greater common ground between national and local priorities. Strategic planning for regional development is one potential mechanism to co-ordinate national and subnational interests and priorities (OECD, 2019[83]). According to the national planning law, a county plan’s purpose is both to “express the interests of local governments and to balance national and local spatial development needs and interests” (Parliament of Estonia, 2015[84]). In Estonia, local and county development plans must be consistent with the relevant national strategic plans (Parliament of Estonia, 2015[84]; OECD, 2024[44]). However, subnational stakeholders suggested that national government could go further in consistently incorporating regional and local priorities into broader national strategies and policies (OECD, 2024[16]; ESPON, 2021[85]). Of course, with 79 local authorities, expecting ministries to fully accommodate every local nuance is unrealistic (Estonian Ministry of Regional Affairs and Agriculture, 2025[86]). Instead, the Estonian Government can focus on finding new areas of common ground between national and local plans and activities, to find new opportunities for mutually beneficial collaboration.

Finding new opportunities for common ground starts with clarifying links between the plans of the three different levels: national, county and local. The Estonian Government already maintains a national strategy platform that presents all of the government’s strategic plans in one place (Estonian Government, 2021[87]). This platform could expand to include county development strategies, explaining how these and national strategies link, and where objectives at each level are complementary. Doing so can provide the national government with greater visibility on how its priorities complement subnational objectives. Estonia can draw inspiration from Czechia and Poland, which instituted strategic databases and integrated planning platforms that harmonised national and subnational priorities (Box 2.8).

Box 2.8. Tools to ensure strategic coherence across levels of government in Czechia and Poland

Czechia

The Ministry of Regional Development of Czechia has been tracking the compatibility of strategic goals at each level of government, including municipalities, through the Strategies Database. This database helps capture the linkages among already developed strategies. Building on this database, the OECD recommended that the Ministry of Regional Development further provide support to subnational governments in the early stages of planning to ensure the alignment of objectives and priorities. This could include, for example, training or workshops on how to “localise” regional/national policy objectives and frameworks, e.g. if a municipality aims to boost education, how can it design a strategy that addresses local needs while pursuing the national education policy objectives?

Poland

In 2020, the Polish parliament passed a number of amendments to the Act on Principles of Implementation of Development Policy. These include the introduction of the notion of a local development strategy (LDS) and the requirement that the spatial planning document and the socio‑economic development diagnostic need to be included in the LDS to ensure stronger relations between the two policy documents, as in the past they were separated and not fully co-ordinated. The act also included a detailed process for elaborating a development strategy at the voivodeship, supra-local and municipal levels. A detailed process for consultation across levels of government for elaborating the LDS was also put in place. A municipal LDS needs to be submitted to the voivodeship board to ensure alignment with the voivodeship development and spatial policy and, in this case, with the supra-local development strategy.

Sources: OECD (2023[76]), OECD Public Governance Reviews: Czech Republic: Towards a More Modern and Effective Public Administration, https://doi.org/10.1787/41fd9e5c-en; OECD (2021[88]), Better Governance, Planning and Services in Local Self-Governments in Poland, https://doi.org/10.1787/550c3ff5-en.

Strategic alignment among levels of government can be reinforced through financial incentives set by the national government. In Estonia, the challenge is not only articulating broad developmental goals but agreeing on the tactical steps to achieve them (OECD, 2025[38]). Reserving resources for regional- or local‑level projects that help advance national strategies can serve as an incentive for local authorities to align their initiatives with and actively contribute to the national agenda (the Korean New Deal featured in Box 2.9 provides an example). To do so, governments can make alignment with national priorities a condition of receiving funding, as demonstrated in the Swiss Federal Agglomeration Programmes (Box 2.9). Currently, Estonian municipalities can apply for EU funds under Cohesion Policy Objective 5 (“Europe closer to citizens”) to support collaborative projects under county development strategies, including for projects related to vocational training, supporting start-ups, research centres and rental housing stock. To support more integrated investment that advances national regional development objectives, Estonia could consider piloting a call under its EU Cohesion Policy national programme to select and support a set of complementary investment projects that also address cross-cutting regional development issues (e.g. the creation of specialised vocational training centres in renewable energy, with support for clean technology start-ups and research centres in a region, coupled with affordable housing schemes to provide students and new workers with housing). This approach – not currently in use in Estonia – gives concrete incentives for local authorities to be creative and develop projects that meet the needs at the local level and also advance national priorities. If the pilot call succeeds, this collaborative approach could contribute to advancing regional-level strategic planning and implementation (see Chapter 3).

Box 2.9. National-local co-financing as a way to ensure strategic alignment among levels of government

Encouraging local authorities to align with national policy through Korea’s New Deal

In July 2020, Korea adopted the New Deal, aiming to accelerate remote work and education, promote low carbon and eco-friendly manufacturing, and lead the transformation into a green and digital economy. The deal planned to invest KRW 75.3 trillion in projects that are conducted outside of Greater Seoul. The majority of the spending is expected to be funded by the central government, covering KRW 42.6 trillion, or 57%, while local governments match those funds with a total of KRW 16.9 trillion. The balance is made up by private sector investments. The government assigned major projects, such as installing green technology in outdated government-leased apartments or artificial intelligence technology in traffic systems. Some of the planned projects are led by local governments, including the expansion of a robotics factory in Daegu and the establishment of an autonomous vehicle testing site in Sejong. The plan also creates special economic zones by providing fiscal and tax support while lifting regulations. In July 2021, the government announced an upgrade of the Korean New Deal: the Korean New Deal 2.0. Under the plan, the government strengthened the Local New Deal (part of the overall Korean New Deal 2.0) by providing fiscal and administrative support to accelerate a series of selected local government projects.

Competitive grant financing of urban infrastructure in Switzerland

Across Switzerland, agglomeration areas have seen increased development, driving up infrastructure and transport funding needs. Many agglomerations face growing demand to address congestion on local roads and to enhance recreational and green spaces. The Swiss Federal Agglomeration Programmes, funded and administered through the Federal Road and Agglomeration Traffic Fund, provide competitive grants for transport infrastructure in agglomerations. The federal fund contributes 30% to 50% of the funding necessary for selected investment projects, with higher quality projects able to receive a higher share of grants. Whether the projects help address local and regional traffic challenges is one of the evaluation criteria.

As a condition to access the grants, local authorities need to plan and implement projects in a co‑ordinated way to address local needs. They need to harmonise their transportation, urban development and land-use plans and develop their agglomeration programmes jointly across administrative units. Some local authorities developed model projects precisely to generate collaboration and create an agglomeration programme to access the fund. Around 40 agglomerations throughout the country have participated in this programme. Many local authorities are currently developing the fourth generation of their programmes: one example is the programme for the Schaffhausen area, which focuses on promoting pedestrian and bicycle traffic and enhancing settlement street spaces.

Sources: OECD (2021[89]), Korea - Korean New Deal, https://infrastructure-toolkit.oecd.org/wp-content/uploads/Korea_NewDeal.pdf; Ministry of Economy and Finance of Korea (2021[90]), “Government announces Korean New Deal 2.0”, https://english.moef.go.kr/pc/selectTbPressCenterDtl.do?boardCd=N0001&seq=5173; OECD (2022[91]), G20-OECD Policy Toolkit to Mobilise Funding and Financing for Inclusive and Quality Infrastructure Investment in Regions and Cities, https://doi.org/10.1787/99169ac9-en.

Summary of recommendations

To address a local spending and investment capacity gap and increase municipalities’ own‑source revenue so they can invest in local and regional development priorities, Estonia can:

1. Revisit past recommendations on how to increase municipal fiscal autonomy. While municipal finance reforms are beyond the scope of this report, Estonia could revisit past recommendations, including, for example, the introduction of a local income tax in the form of a surcharge “piggybacking” on top of the personal income tax levied by the central government, to reduce local government dependence on state revenues and increase their ability to fund regional and local development.

To address a local strategic planning capacity gap and increase the impact of subnational strategic plans, the country can:

2. Update Estonian Government guidance for preparing county development plans to favour plans that are practical and strategic. Updated guidance can encourage participatory vision setting, promote the use of decision support tools to assess regional impact and ensure a clear distinction between funded and unfunded initiatives.

3. Invest in skill building in subnational civil servants developing county plans, through an online capacity-building hub. An online hub dedicated to strategic planning skills for local government and county development organisations – developed under the leadership of the Ministry of Regional Affairs and Agriculture – can offer training, guidelines and good practice examples.

To strengthen local authority capacity to use stakeholder engagement to capture and act on local needs in local and regional development initiatives, Estonia can:

4. Use the capacity-building hub introduced above to share resources on stakeholder engagement for local civil servants and county development organisation staff. The hub can display resources focused on how local and regional civil servants can engage most effectively with local residents, companies and organisations (e.g. how to design and manage stakeholder engagement processes to benefit from stakeholder input and participation throughout planning and policy cycles).

To strengthen vertical co-ordination between national and local governments in order to favour complementary, mutually reinforcing regional development initiatives, Estonia can:

5. Show the links between national strategies and subnational plans. The national strategy platform can grow to feature county plans in addition to national plans, and identify and visualise the links and complementarities among plans at each level.

6. Use financial incentives to encourage integrated local projects that advance national and subnational strategies. This may include earmarking resources for region-specific projects within national strategies, or developing joint investment packages covering interlinked sectors and initiatives, to ensure that funding addresses local needs while supporting territorial development priorities.

Conclusion

This chapter presents how three factors limit Estonia’s ability to take a fully place-based approach to regional development. First, the “one Estonia” approach taken by line ministries means that the national government does not routinely tailor its interventions to local and regional needs. Second, there are few opportunities for line ministries to come together and co-ordinate for regional development. Third, there is scope for the Estonian Government and local authorities to find new opportunities for mutually beneficial collaboration through strategic planning. At the same time, the capacity of local governments to plan for and act on their own needs and opportunities should be reinforced.

To address these three gaps, the Estonian Government can focus on building capacity and creating clear incentives for national and subnational actors to ensure that both are contributing optimally to regional development. For national ministries, this means ensuring that direct and indirect incentives favour taking a co-ordinated regional approach across the government, supported by strong co-ordination structures for regional development. On the subnational level, building capacity in spending and investment, strategic planning and engagement can help put local authorities in the driver’s seat for regional development efforts. Finally, the Estonian Government can better leverage strategic planning as a way to identify new areas where national and local strategies align.

Estonia’s pilot regional councils, discussed in the next chapter, can also play a role in overcoming these barriers. The pilot regional councils create a platform where national ministries, local governments and stakeholders collaborate on shared regional development priorities. They provide ministries with a focal point around which they can organise cross-sector collaboration for regional development. At the same time, they may build the capacity among local authorities to plan and implement for regional development. As Chapter 3 will explore, these regional councils represent a concrete step toward the place-based approach discussed in Chapter 1.

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Notes

← 1.  I.e. designed and implemented without explicit consideration of geographical context or place-specific characteristics (Barca, McCann and Rodríguez-Pose, 2012[96]).

← 2.  Exceptions exist, such as the Science Programme, which involves both the Ministers of Education and Research and of Economic Affairs and Communications (OECD, 2024[16]).

← 3.  Not to be confused with South Estonia, this is a smaller area consisting of Võru, Valga and Põlva counties (Invest in Southeast Estonia, n.d.[95]).

← 4.  Measures for which county-level data are available.

← 5.  One example of governments imposing consequences for regulations that fail to meet impact assessment “screens” comes from the United Kingdom, where new regulatory proposals must undergo a Small and Micro Business Assessment (SaMBA) to evaluate their impact on small enterprises. Poor assessments can result in – and have resulted in – a negative evaluation by the country’s Regulatory Policy Committee and requests to address specific issues (Strauss and Pickard, 2024[94]).

← 6.  The Ministries of Education and Research, of Justice, of the Environment, of Economic Affairs and Communications, of Finance, of Social Affairs, of Regional Affairs and Agriculture (previously the Ministry of Rural Affairs), of Foreign Affairs and the Government Office. In addition, it welcomes representatives from the Association of Estonian Cities and Municipalities and creative unions, as well as specialised experts (Estonian Ministry of Culture, 2021[32]).

← 7.  Even though the centre of government does not take a primary role in co-ordinating regional development, it is worth noting that experts have pointed to limited capacity on the part of the Government Office and prime minister to co-ordinate and monitor activities associated with Estonia 2035, and to undertake substantial evaluations of line ministry proposals for activities related to Estonia 2025 (OECD, 2011[67]; SGI, 2024[33]).

← 8.  Northeast Estonia is the only region that meets the criteria to receive EU Just Transition funds, which support territories most affected by the transition towards climate neutrality (EC, 2023[92]).

← 9.  Those participating in the 2023 Local Government Day, alongside the Association of Estonian Cities and Municipalities, national government representatives and others (Ühiskonnateaduste instituut, 2023[93]).