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2017 OECD Economic Surveys: Estonia 2017

image of OECD Economic Surveys: Estonia 2017

The Estonian economy displays numerous strengths, including an excellent business environment, high educational attainment, and solid public finances. However, around a quarter of the population is still at risk of poverty and productivity growth has slowed down. Fiscal room should be used to make growth stronger and more inclusive.

Estonia is well integrated into global trade, and export potential and value-added drawn from trade can improve further. Efforts should concentrate on strengthening adult education, immigration of talents, and cooperation between businesses and researchers.

Investment has weakened, particularly in projects required to increase business productivity. Addressing skill shortages and inefficiencies in the insolvency regime can help raise firms’ investment capacity. Improving the quality of infrastructure projects and developing green investment further is a priority.

SPECIAL FEATURES: GETTING THE MOST OUT OF TRADE; REVIVING INVESTMENT

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Reviving productive investment

Since the crisis, Estonia has experienced one of the most pronounced declines in the ratio of non-residential investment to GDP in the OECD. In addition, investment in intangible capital has remained well below OECD standards, partly explaining the low innovative capacities of typical Estonian firms. Uncertainty created by regional geopolitical tensions has played a role but poor investment performance stems from domestic factors too, such as a normalisation after the boom years, the lack of adequate skills and insufficient incentives for risk-taking. Improving lifelong learning and maintaining skilled mothers in employment can contribute to reducing shortages in skills needed by investors. Restructuring of insolvent firms should be eased to increase credit recovery and redirect capital to the most productive ones. Developing alternatives to bank funding can support investment in small and innovative firms. While there is room to improve the quality of infrastructure further, selection and prioritisation of projects should improve. Incentives for green investment, in particular to reduce pollution emitted by the oil shale industry and to achieve energy efficiency gains, could be strengthened.

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