OECD Economic Surveys: Estonia

2221-2302 (online)
2221-2299 (print)
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OECD's periodic reviews of Estonia's economy.  Each survey examines recent economic developments, policy and prospects, and presents a series of recommendations.
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OECD Economic Surveys: Estonia 2015

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28 Jan 2015
9789264228382 (EPUB) ; 9789264227224 (PDF) ;9789264226807(print)

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OECD's 2015 Economic Survey of Estonia examines recent economic developments, prospects and policy. Special chapters cover openness and raising productivity and making the most of human capital.

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  • Basic statistics of Estonia, 2013

    This Survey is published on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Estonia were reviewed by the Committee on 5 November 2014. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 15 December 2014.The Secretariat’s draft report was prepared for the Committee by Andrés Fuentes Hutfilter and Andreas Kappeler under the supervision of Andreas Wörgötter. Research assistance was provided by Seung-Hee Koh and Eun Jung Kim. Heloise Wickramanayake formatted and produced the layout of the document.The previous Survey of Estonia was issued in October 2012.Information about the latest as well as previous Surveys and more information about how Surveys are prepared is available at www.oecd.org/eco/surveys.

  • Executive summary

    Estonia experienced strong growth of loan-financed domestic demand after EU accession in 2004, followed by the burst of the real estate bubble and the international financial crisis. The economy recovered quickly. Regulatory settings are generally favourable to sustain growth and the government is initiating further substantial structural reforms. The fiscal position is strong and macroprudential policies have been strengthened. However, in recent years economic growth has slowed, in part due to weak external demand. Real GDP per capita is still lower than in the boom peak of 2007. The productivity gap with respect to high-income countries is currently diminishing only slowly. Skill mismatches contribute to structural unemployment and emigration is reducing labour supply. At unchanged policies higher income growth will tend to raise greenhouse gas emissions, which are among the highest in the OECD in relation to GDP. Key challenges for Estonia are therefore to raise productivity growth, including by making the most of human capital, while containing greenhouse gas emissions.

  • Assessment and recommendations

    The Estonian economy experienced a sharp contraction of output in the context of the global financial crisis in 2008 and 2009, deepened by a domestic credit-based boom-bust cycle in the construction sector and reinforced by procyclical fiscal policy (Economic Surveys of Estonia 2011, 2012). Real GDP per capita and household incomes fell markedly (Figure 1). In the following years, the economy recovered quickly, led by exports. The banks, mostly owned by Scandinavian financial groups little affected by the global financial crisis, cleaned up their balance sheets rapidly which helped restore access to credit. Private sector indebtedness fell to sustainable levels. A very strong fiscal position also helped restore financial market confidence. However, economic growth started slowing in 2012 mainly due to weaker exports. Real per capita GDP and household incomes remain below the peak of the preceding boom. Moreover, poor households have barely benefited from the postcrisis recovery since 2010.

  • Progress in main structural reforms

    This annex reviews action taken on recommendations from previous Surveys. They cover the following areas: fiscal policy, labour market policies, education policies, health policies, public sector efficiency, globalisation, financial sector and green growth. Each recommendation is followed by a note of actions taken since the October 2012 Survey. Recommendations that are new in this Survey are listed in the relevant chapters.

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  • Expand / Collapse Hide / Show all Abstracts Thematic chapters

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    • Raising productivity and benefitting more from openness

      Estonia can revitalise productivity growth and reap more benefits from its openness. Productivity is relatively low in manufacturing and in large firms, as the manufacturing sector focuses on low-technology goods exports to only a small number of destinations. The economic impact of the Estonian R&D system still appears to be limited, also because of a lack of knowledge transfer. Building on Estonia’s favourable business environment, productivity growth could be raised by promoting smart specialisation and innovation; removing remaining barriers to entrepreneurship and competition; ensuring access to finance for SMEs; upgrading infrastructure; and improving energy efficiency.

    • Making the most of human capital

      Labour input in Estonia remains lower than before the crisis. Skill mismatches between workers and jobs contribute to structural unemployment. Emigration, notably among young, employed workers, has reduced labour supply. Although the government has lowered labour taxes and further reductions are planned, government revenues still rely heavily on taxing employment. Shifting some of the tax burden on labour to real estate would make the tax system more employment friendly. High costs reduce the returns workers earn on the assets in the compulsory private pension system, effectively raising the tax burden on labour. There is scope to reduce costs. In the public pension system, phasing out early retirement schemes for workers in specific sectors or professions would make room for lower social security contributions. They pay gap between men and women is substantial and further steps could be envisaged to reduce it. Reforms to improve the skills of Estonian workers have a high pay-off in view of increased demand for skilled workers. The recent initiatives of the government to foster life-long learning and improve financial support for students from low-income families in tertiary education are welcome. There is scope to promote apprenticeships, for example by fostering cooperation between local firms and local schools. This would help reduce skill mismatch. More financial support is needed for students, especially to ensure youth have access to upper secondary vocational education.

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