Meanwhile in Estonia

Also published on a french blog In Eco Veritas: Le succès des réformes économiques en Estonie

It was about four years ago when the Estonian economy started to show signs of slowing down from the boom that had gotten a strong grip on the entire world. Though the signs of the pending crash were clear it still took almost another year for the economy to really go into a free fall. In the last quarter of 2008 it finally happened and the downturn in the local GDP reached 9,7%. The following year was one of the worst performances of the Great Recession with our GDP slumping by 14,3%. But as quickly as the crisis came it also disappeared in a rather similar fashion. Already in the second quarter of 2010 the GDP was back to climbing upwards and the growth in 2011 has been close to 9%, taking the economy closer to its peak levels during the boom. Still, these are only simple aggregated numbers that are far from telling the real story of what really happened in Estonia.

Ever since breaking away from the Soviet Union Estonia has been on a progressive road trying to catch up to the Nordic and Western economies that were comparable to us during the first republic in the early 20th century, before the soviet times. Pro-market reforms and open economy have enabled to acquire modern technologies and kick-start local entrepreneurship. Also no small role has been played by foreign investors, who came to Estonia in search for lower taxes and cheaper workforce. And no one can doubt the help of the European Structural Funds either. But with all the benefits of western finances we also got the vices.

When domestic banks where bought by Scandinavian financial institutions our economy became largely dependent on international financial markets. This makes it obvious how the boom emanating from the American real-estate sector made it all the way over here. Easily acquired funds thus had their impact in Estonia by starting boom of their own in the local housing business. Perhaps this wouldn’t have been a problem in case the finances had gone somewhere else like into developing new technologies and other projects that would build a groundwork for the entire economy. But instead it went into housing and consumer spending, both of which are quite stable over long-term. Which of course means that a fast growth in the shorter run has to be corrected by a contraction.

The lack of strong base for the economy in the producing industry and service sectors is why the recession in Estonia was so steep. But on the other hand this is also the reason that made it so easy to bounce back. There was plenty of room for new start-ups and businessmen to expand their operations. All related behaviour was also strongly promoted by the Estonian government who in place of bailing out enterprises in trouble decided to promote fresh entrepreneurship instead. This was accomplished through various programs and business-friendly legislation that for example included a revised labour legislation making it easier to cut-back on excessive workforce and eliminating some bureaucracy among other changes.

But of course, opening up new businesses is not enough to get the economy back on track as there also has to be people who are willing to purchase the products and services provided. As local consumers lost their purchasing power during the shake-up new markets had to be reached. That’s were the openness of the Estonian economy proved beneficial. Western countries who were focused on dumping money into enterprises that were proven inefficient in through competition made it possible for Estonian exports to enter their markets. And this is precisely what has shouldered the above mentioned fast recovery. During the last year the real value of exports has already exceeded the record levels of the boom years.

Although the free market oriented policy of the Estonian government has brought great success until now there are still some threats one has to be aware of. Despite the pending recovery in local consumer spending, the economy is still strongly dependent on foreign markets making it vulnerable through possible set backs in the economic climates of corresponding countries. To lower those risks it’s important to have a widespread grasp on different destinations and also continue to strengthen the Estonian economy on a local level. Latter again doesn’t mean that it would be wise to focus completely on internal markets as foreign trade provides a good boost for the growth of peoples welfare.

In conclusion one could say that the situation in Estonia seems rather good. Despite the relatively high risk from international markets the economy has bounced back well and has a far better basic structure than the former short-term housing bubble with local consumption boom. What the future has planned for the country remains to be seen.