Estonia: Greater economic stability and resilience can be achieved by investing in the Estonian people


Opening Remarks by Angel Gurría, OECD Secretary-General, delivered at the launch of the Economic Survey

01 October 2012, Tallinn, Estonia

(As prepared for delivery)

Prime Minister, ladies and gentlemen:

It is a pleasure to be in Tallinn to present the latest Economic Survey of Estonia.

It is an even greater pleasure to be in a European country where the recovery has clearly taken hold! While much of Europe remains in stormy waters, the Estonian economy has bounced back strongly from a very deep recession.

And there are important reasons for this strong performance: Estonia’s public finances are robust, with almost no public debt; the labour market is flexible; regulations are business friendly; the banks are well capitalised.

In fact, you have much to be proud of. In the last decade, Estonia has achieved one of the highest medium-term growth rates in the OECD, accompanied by rapid improvements in living standards.

Estonia is among the top-ten most successful countries in terms of PISA education attainment scores and has perhaps the most sophisticated E-government in the world. There are companies that started in Estonia, that are now household names across the world. I will not mention any names here, but yes, I also use Skype to talk to my family and friends!

But let’s not be complacent: you may be tempted to rest on your laurels. You shouldn’t. It is in good times that you should prepare for future storms.

Let me tell you how the OECD thinks Estonia can become more resilient to external shocks and achieve even stronger, more sustainable and inclusive growth.

Greater economic stability can be achieved by mitigating boom-and-bust cycles.

Estonia has experienced considerable volatility over the past decade which could threaten growth and well-being, as well as contribute to high unemployment.

Like many advanced economies, Estonia must mitigate excessive credit cycles. Prior to the crisis, Estonia experienced large inflows of capital from abroad. The availability of international financing allowed domestic borrowing to triple over that period. This breakneck pace of foreign-financed credit growth was unsustainable. Policymakers intervened, but the cross-border financial flows were just too large!

Better supervision of financial markets is therefore a priority. I agree this is not so easy for Estonia with the majority of banks being foreign-owned. However, European efforts towards a more centralised model of banking supervision, and improved cooperation with your partners in the Nordic countries, will certainly help.

Within these frameworks for cooperation, it will be important to consider how macro prudential tools, such as countercyclical capital buffers can be best designed and implemented to ensure the stability of the Estonian Economy.

Fiscal policy can also be a key line of defence against boom-and-bust cycles. Yes, Estonia ran sustained fiscal surpluses in the boom prior to the crisis. Yes, public debt was kept close to zero. But given the sheer scale of the boom, it was still not enough.

The independent fiscal institution, soon to be established, will help to make more informed assessments of the fiscal policies required to counter future boom-and-bust. Such an institution works best when it has a clear mandate, adequate funding and true independence.

We also recommend complementing the currently planned structural balance rule with a multi-year spending ceiling. Such a ceiling would constrain over-spending in boom years but would also allow the automatic stabilisers (mainly on the tax side) to work.

Even then, you should remain prepared to act when the economy is showing signs of overheating by accumulating larger reserves for potentially stormy days ahead.

Greater economic resilience can also be achieved by investing in the Estonian people

The Estonian labour market was hit hard by the crisis. The unemployment rate increased from less than 5% in 2007 to almost 17% in 2010. The subsequent recovery has been impressive, but our Survey shows that long-term unemployment remains high and skills mismatches have become a barrier to growth and well being.

Support for the unemployed should be a priority. Spending on training, job search assistance, and other employment services continues to be among the lowest in OECD countries. But increased spending on high-quality services for job-searchers on its own does not guarantee success. Efforts are also needed to better evaluate the effectiveness of programmes and to target them at the most vulnerable: low-skilled, young and non-Estonian language speakers.

There should also be a greater focus on young people. Too many young people leave school without a diploma, especially in vocational education. As a result, both young people and the country loose out. The government has made important efforts to improve the transition from education to employment through vocational training.

But more needs to be done to better engage employers in these efforts. This means providing financial incentives for creating apprenticeship places. A commitment to provide formal education, workplace training or apprenticeships to every person below the age of 18 years would also be welcomed.

Effective investment in lifelong-long learning will also reap considerable rewards. In a volatile economy, those in work need to maintain and upgrade their skills to keep up with the changing needs of the labour market. In 2011, 12% of workers in Estonia participated in lifelong learning compared with 7% five years ago.

However, our Survey found that those without formal professional education as well as older workers tend to fall behind in terms of training. These workers need this investment the most. Efforts should therefore be focused on these workers, especially those at small and medium enterprises.

The poorest were also particularly hard hit by the crisis. The share of Estonians living in poverty increased rapidly and almost doubled among children. The situation is improving, but Estonia stands out amongst OECD countries both in terms of low social spending and a low proportion of means-tested transfers. This reflects your belief in self-responsibility and work incentives. We share these beliefs. But poverty can be a vicious circle.

Many can become trapped, relying on long-term benefits without seeking employment and lacking opportunities to develop their skills. The large inflows into the Estonian disability benefit system, which is among the highest in the OECD, is the most worrying example of this.

Stronger short-term income support backed by strict job-search requirements and training opportunities can help people to break the shackles of poverty. At the same time, the tax burden for low-earners should be kept low to promote their employability.

More broadly, resources need to be better targeted, in particular for children, and agencies need to be better coordinated. A one-stop-shop for social services is one potential solution. There also needs to be a focus on addressing those areas with the greatest inequalities. For example, Estonia is among the countries with the largest health inequalities. Strengthening health spending efficiency, promoting healthy lifestyles and improving access for disadvantaged groups is therefore important.

Ladies and Gentlemen,

Estonia is a model for a flexible, market-based and externally open economy. These strengths have helped the country recover from the world’s greatest economic crisis in the post-war period.

But more can be done to set Estonia on a path towards more inclusive long-term growth. For Estonia, this means proactively combating volatility and putting in place the structural and social policies required to deliver strong, sustainable and inclusive growth and jobs.

The OECD stands ready to work with and for the Government and people of Estonia to deliver “better policies for better lives”.

Thank you.