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2011 OECD Economic Surveys: Estonia 2011

image of OECD Economic Surveys: Estonia 2011

The 2011 edition of OECD's periodic economic survey of Estonia's economy.  This edition includes chapters covering emerging from the recessions, fiscal policy, public sector spending efficiency, and making the most of globalisation. It finds that Estonia continues to show a remarkable determination in policy making.  It has established business-friendly regulation, avoided fiscal deterioration during the crisis and made it into the euro area despite being hit by an accumulation of external shocks.  Nevertheless, it has not fully reaped the benefits of globalisation.

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Emerging from the recession

In the wake of an enormous boom and bust cycle, Estonia faces the challenge of ensuring the nascent recovery that began at the end of 2009 broadens out into a sustainable return to high growth rates. Such a return cannot be taken for granted, not least because the economy faces significant restructuring challenges following the construction bust. Households need to deleverage, bad debts wait to be dealt with and policy has an important role to play in fostering a return to high growth rates. This will require Estonia to tackle the significant fallout from the severe recession, including a marked rise in non-performing loans and high unemployment. If not dealt with adequately these factors may respectively impede credit growth and result in a permanently higher rate of unemployment that would undermine the recovery. Progress is being made in resolving non-performing loans but procedures are overly expensive, slow and bureaucratic. Estonia’s labour market is flexible but serious skills and jobs mismatches threaten to make the large increase in unemployment structural. It will be important to continue improving and expanding training tailored to individual needs as well as the efficiency of the public employment service’s job matching capacity. Labour tax cuts targeted to the low-paid would help to boost labour demand for those whose skills will be difficult to upgrade quickly. Once established, maintaining high growth path will require improving macroeconomic management tools to deal better with the hazards of irrational exuberance and excessive credit growth.

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