ISSN: 2560-1601

Vol. 35, No. 2 (EE)

December 2020

Estonia economy briefing: Wrapping the year up: in search for a productive economic reform E-MAP Foundation MTÜ

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+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. [email protected] Szerkesztésért felelős személy: Chen Xin

Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01

Wrapping the year up: in search for a productive economic reform

When your country’s economy is reasonably small but, to an extent, diverse, even a major crisis would not seem to be too problematic. Another story is when the pandemic substitutes ‘a major crisis’ – then there may be a dual problem of analysing the present and forecasting the future. In one of his main interviews (if not the main one), which was supposed to be wrapping the difficult year up, Estonian Prime Minister Jüri Ratas was into memorable metaphors when it would come to pure politics, but distinctly shy when a question was on economics1. During 2020, in political terms, the country was getting involved into discussing way more intra- political scandals than it would have been necessary to test the ‘health’ of a democracy.

As for the process of running the economy, apart from borrowing more to survive the pandemic, the only major economic reform that the current governmental coalition managed to ‘squeeze’ through the ‘hurdles’ of the Riigikogu’s passing and the presidential approval was the so-called second pillar pension reform. The idea of the Government was to respond to a particular societal call that was, in a way, ‘inspired’ by Pro Patria and some other proponents of the prospective reform. In 2019, a poll showed that about 215,000 people would be willing to withdraw their money from the second pillar of the country’s pensions fund, keeping in mind that membership in the pillar was made to be mandatory from 2010 and for most wage earners2. As reported, by the end of 2020, about 12,000 people have already applied to take their second pillar-associated savings3, and it will lead to a substantial injection of financial resources back into the spending segment of the economy during the year. Objectively, this is pretty much it on economic reforms in during 2020.

The macro-economic data for the outgoing year, which was literally ruined by the COVID-19 in many senses, is still very raw and, in most of the cases, preliminary. Only in December 2020, the final digits for 2019 came through in all sorts of analytical details. For example, in the pre-pandemic year, the country’s GDP at current prices was EUR 28 billion

1 Jüri Ratas in Nele Kullerkupp, ‘Jüri Ratas: I’m the prime minister and I dance to the republic’s tune’, Postimees, 21 December 2020. Available from [https://news.postimees.ee/7138492/juri-ratas-i-m-the-prime-minister-and-i- dance-to-the-republic-s-tune]. 2 ‘Paper: 12,000 people applied to opt-out of pensions second pillar so far’ in ERR, 5 January 2021. Available from [https://news.err.ee/1228252/paper-12-000-people-applied-to-opt-out-of-pensions-second-pillar-so-far]. 3 ‘Paper: 12,000 people applied to opt-out of pensions second pillar so far’.

1 euros, with , the capital city, contributing EUR 15 billion to the total figure4. This economic disbalance between Tallinn (and Harju country where the capital city is situated) and the rest of the country has been proven in the per capita cluster of the data as well – the last year’s GDP per capita was EUR 21,186 euros (EUR 1,566 more than in 2018), but the -associated figure is 43 per cent higher than the Estonian average5 (for details, see Figure 1 ‘GDP per capita, change in 2019 compared to 2015 (per cent)’ and Map 1 ‘GDP per capita by region, 2019’).

Figure 1

4 ‘The main driver of economic growth in 2019 was the service sector in Harju county’ in Statistics Estonia, 14 December 2020. Available from [https://www.stat.ee/en/node/4557]. 5 ‘The main driver of economic growth in 2019 was the service sector in Harju county’.

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Map 1

Objectively, the Tallinn-bound higher prices for accommodation as well as higher salaries that are fuelled by a fair share of job accessibility are constantly colliding with the data on the same indicators but taken elsewhere in Estonia (especially, in the eastern fringe of the country, except perhaps, Ida-Viru where industrial concentration makes this county very special for the economy). The ‘almost everything here vs. almost nothing over there’ situation is leading to a relatively high number of people who live at risk of poverty – currently, the 2019-analysed data shows that 20.7 per cent of Estonian residents contribute to the ‘at-risk-of-poverty’ rate, while 39.7 per cent are ‘at-risk-of-poverty’ before social transfers, including pensions6. At the same time, there are some positively intriguing signs that might be suggesting about a very particular level of resilience that the country’s economy is featured by. Let us take the issue of unemployment, for example.

In 2019, the share of unemployed persons in the economically active population was 4.4 per cent7. Arguably, this remarkable result truly helped Estonia to end the third quarter of 2020 at 7.7 per cent, almost never being at risk to have the employment rate to be plummeting into

6 ‘At-risk-of-poverty rate’ in Statistics Estonia. Available from [https://www.stat.ee/en/find-statistics/statistics- theme/well-being/social-exclusion-and-poverty/risk-poverty-rate]. 7 ‘Unemployment rate’ in Statistics Estonia. Available from [https://www.stat.ee/en/find-statistics/statistics- theme/work-life/labour-market/unemployment-rate].

3 something that the country had been experiencing a decade ago (in 2010, Estonia’s unemployment rate was 16.7 per cent)8. Correspondingly, Figures 2 and 3 show ‘Unemployment rate by region, 2019’ and ‘Males and females unemployment rate, 2007-2019’.

Figure 2

8 ‘Unemployment rate’.

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Figure 3

As a significant contributor to the economy’s good heath, a favourable ‘export vs. import’ ratio has also a boosting psychological effect. In December 2020, the data came to wrap up the third quarter, and, if compared to October 2019, the exports of Estonian goods increased by 10 per cent, while imports showed a 5 per cent decrease9. A report quoted Evelin Puura, leading analyst at Statistics Estonia, who noted that the exports exceeded the imports for the second month in a row: The goods of Estonian origin accounted for three quarters of the total exports, and their dispatches increased by 21 per cent year on year. The growth was driven to a large extent by the exports of communication equipment, processed heavy fuel oils, shale oil and wheat of Estonian origin.10 Top destinations wise, Estonia sends its goods predominantly to Finland, the United States (the figures went up 2.4 times if compared to 2019), and Sweden; as for the process of importing the needed goods, the main countries of consignment were Finland, Germany, and

9 ‘Exports exceeded imports for the second month in a row’ in Statistics Estonia, 10 December 2020. Available from [https://www.stat.ee/en/node/4526]. 10 Evelin Puura as cited in ‘Exports exceeded imports for the second month in a row’.

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Latvia. Intriguingly, “[t]he imports of goods increased the most from China on account of the import of electrical equipment”11. Figure 4 outlines the foreign trade-related digits in Estonia as recorded in the period from 2018 until the end of the third quarter in 2020, showing that the pandemic was not an obstacle for the country’s export to surpass the import.

Figure 4

Finally, as the Bank of Estonia reported, the country’s household savings totalled EUR 10.3 billion by the end of November 2020 – this represents a significant increase of EUR 1 billion “over the year despite the coronavirus crisis”12. In itself, it is yet another positive signal for the country’s economy to recover swiftly after the pandemic is over. At the same time, as suggested by Taavi Raudsaar, an economist at the Bank of Estonia, there are two following factors that led to this remarkable increase in public savings:

11 ‘Exports exceeded imports for the second month in a row’. 12 ‘Bank of Estonia: ' savings increased during coronavirus crisis’ in ERR, 4 January 2021. Available from [https://news.err.ee/1227223/bank-of-estonia-estonians-savings-increased-during-coronavirus-crisis].

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The first is that there is increased uncertainty. Due to the uncertainty about the near future, people have reduced their consumption and started to save more. This is common behaviour in most crises. […] The second thing in the current crisis is that some services and goods - for example, travel and entertainment – are difficult or impossible to consume at the moment, which means that people have more of their money leftover.13

Throughout the year, the Government attempted to respond to the global crises-generated difficulties, imposing all sorts of different measures – from ad hoc to a range of relatively focused mechanisms. What was really lacking in the every-day management of the country’s economy – a desire to look after Estonia’s economic development in a strategic manner, making the economy prepared to experience a well-forecasted ‘jump’ when the crisis will be over. A promise of the Prime Minister that “Estonia will […] be contributing 1 per cent of GDP to R&D in the coming years”14 is by far not enough to be called a strategy. Therefore, the country enters 2021, still searching for a long-run economic perspective.

13 Taavi Raudsaar as cited in ‘Bank of Estonia: Estonians' savings increased during coronavirus crisis’. 14 Ratas in Kullerkupp.

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