Estonia’s recovery from the crisis has been has been heralded by the media, but many crucial challenges remain. The European Union’s Competitiveness Report outlines the strong as well as weak areas.
Estonia benefits from its high share of fast-growth enterprises; manufacturing production has regained all the ground it lost; it’s attractive to investors seeking lower income levels and with predominant specialization in labour intensive production. Of this country group, Estonia’s boasts high R&D intensity. In short’s Estonia’s competitiveness is improving. By keeping its current momentum, it’ll join the high income countries that specialize in labour intensive industry.
Seventy percent of the country’s production is exported and this consists mainly of electronic products, fabricated metal, motor vehicles, electrical equipment and machinery. Estonia trades mainly with EU countries, Finland and Sweden being the first two. However, like Latvia and Lithuania, Russia remains an important export destination for Estonia.
Estonia’s share in the low price segments of exports is above the Eu average, but its high price share is below average – an unfavourable position. But the country has been making steady advances from low-tech to medium- to-low tech and medium-to-high tech growth presages good trade development.
Industry specialization in sectors with high innovation and education, such as electrical machinery has increased in Estonia. Trade specialization has decreased in labour intensive (textile weaving) and technology driven industries (aircraft and spacecraft) and increased in mainstream manufacturing (electric motors) and capital-intensive (refined petroleum products, man-made fibres). The report notes that Estonia has substantially improved the R&D levels in the transport, communication and chemicals sectors. As the quality of technology-driven industry has stagnated, quality in labour-intensive industry has improved. While over the years labour productivity has improved, it’s still 38% below the EU average.
Estonia shows a good performance in R&D, reaching 1.4% of the GDP in 2010, in which European funding has been a very important source. The government promises to increase its share to 1.2% of GDP, expecting to stimulate private R&D investment.
Estonia’s business environment is graded as relatively good, scoring above the Eu average in legal and regulatory requirements. It’s also doing well in timeliness of tax payment, the cost of enforcing contracts, property registration and transfer, start-up conditions.
Amongst other negative descriptions in the report, the country seriously lacks in skilled labour, particularly engineers. Estonia also lags 38 percentage points behind the EU average in labour productivity. However, the report also states that all the economic shortcomings that have been identified are being addressed by government initiatives, or by partnerships with academia and business or other programs.
Numerous economic evaluations have given Estonia positive ratings especially as compared to countries with similar short-term histories. The international media has marveled at the stoicism of the people and determination of the Estonian government in facing the economic crisis. But positive observations by foreign authorities does not soothe the anger of lowly paid teachers nor the frustrations of the young and educated who venture abroad (mostly temporarily) to connect with better opportunities. Still, Estonia is much better positioned, than other central and east European states, to be attractive for international trade and foreign investment. It’s also got greater potential to reverse the exodus of the educated and talented with its pro-active programs in boosting R&D and innovation, teaching entrepreneurship, giving priority to knowledge-intensive sectors and improving international competitiveness in general.
EU competitiveness report on Estonia, generally good, but challenges remain