Economic growing pains

By Ashley Brettell

TALLINN - Estonia is facing a significant challenge with economic activity contracting, unemployment rising and the budget running into negative territory as a consequence.
The government has the difficult task of steering the ship through the current crisis.  At some point the economy will again enjoy positive growth, but people are asking in what form this will come and how can it be encouraged.

Though the government is responsible for development and future economic growth, strong voices from the business community, and more recently the citizens, are suggesting a new course for Estonia.
The government though, has no plans to develop specific economic sectors.  In fact some ideas have been received with some hostility.

TRADITION

Since independence the various Estonian governments have focused on creating an environment they believed was conducive for economic growth. 
A favorable and simple tax system has been one of the government’s key policies for creating growth.

In doing so, they have not focused on setting targets for growth in specific parts of the economy, but have stuck to their theory that good market conditions will promote growth. 
Some experts say this is a good policy.

Eva Srejber, Vice-President of the European Investment Bank told The Baltic Times that “all the governments of the Baltic region had created such an environment and that it could be no coincidence that all the Baltic States had achieved significant economic growth during recent years.”
However, the real estate bubble has burst and the subsequent banking crisis has starved organizations of cash flow. Now a new economic era waits.

Juhan Parts, Minister of Economic Affairs and Communications, told TBT he agreed that the overall strategy remained as it had been over many years – to: “create the right environment through having an open economy, where the governance is good and public finances are reliable.”
However, he did identify some problem areas in need of attention. 

“[There needs to be]…better cooperation between government and business sectors.  For example, business sectors needed advice on how best to approach government,” said Parts.
“There were methods that needed to be followed to fully explain their proposals and how government could support them. This could be as varied as marketing support or long term infrastructure development,” he said.

Parts said his department is financing cluster groups of business, academia and government to try and improve cooperation and develop a common vision.
In addition, 1 billion kroons (64 million euros) to establish new technology development centers will be invested over the next four years. 
There are to be eight such centers the details, of which will be announced in the near future.
“We are working with business to improve their relationship and ability to attract foreign investment,” Parts said in regard to foreign investment.

He also said that projects were under way to “further strengthen the relationship with Estonia’s closest neighbors particularly Finland and its high-tech sector.”

IDEAS

Senior figures in the business community are seeking more direct action. They would like to see the government develop key sectors within the economy and produce some measurable results.
Developing Estonia’s position as a transit point and rebuilding the trade relationship with Russia and encouraging China to choose Estonia as an entry point to the region are two major ideas that have been tabled.

However, these suggestions have been met with some resistance by government.
 “Such a large container terminal is not feasible since Port of Tallinn has not resolved the issue of to where the containers unloaded in Tallinn will be forwarded,” Prime Minister Andrus Ansip told Postimees.

Ansip said that Estonia does not have the capacity to ship millions of containers by road or rail.
“No one wants to see queues of trucks waiting on the Estonian-Russian border extend to Port of Muuga,” he said.

An alternative proposal came from Viljar Jaamu, former head of Enterprise Estonia.  Prior to the economic crisis, he wanted to see Tallinn become a financial center and attempt to attract the ten biggest banks to Estonia.
“The vision needs a thorough plan, which would mean Tallinn Financial Services Centre, improving logistics and infrastructure. New flight and boat connections would be required also legislation and regulations would need amending,” told  Eesti Ekspress.

Senior IT specialists heralded the cyber attacks on Estonia in 2007 as another opportunity.  Estonia could become a world expert in cyber defense and sell these skills to the rest of the world.
Business leaders such as Kristel Kivinurm-Priisalm, managing partner of asset management company Avaron, would like to see a more attractive tax regime.

She believes the introduction of zero-rated capital gains tax in Estonia would promote the country as a tax efficient location to attract foreign investment and support the home business sector.
Due to the economy’s small size (Estonia ranks 35th in Europe), the government would only be able to focus on a few sectors being suggested by business people. Conversely, if it runs a balanced economy as the current government is suggesting, it is unlikely to rise much higher up that list.

PEOPLE POWER

The lack of action from above has prompted citizens to start asking whether a more creative approach should be adopted. Estonia is one of the most e–friendly countries in the world.  During the recent ‘Minu Eesti’ (My Estonia) initiative, tens of thousands of citizens got together online, or in person to brainstorm national and local issues.
The initiative ranged from local issues to complicated national challenges. Interesting suggestions that could have a positive effect upon future economic activity came out of the brainstorming session.

Some people suggested that Estonia should develop a niche or a unique identity to develop a more successful economy and society.  Minu Eesti participants mentioned countries such as Monaco and the United Arab Emirates (UAE) as models to follow.
Although only a principality, Monaco developed its wealth from establishing a favorable tax regime and hence attracting investment.

The UAE is a rich country.  But in order to develop its long-term prosperity and compete with its neighbors it developed itself as a tourist destination and transit hub. 
Estonia’s favorable geographical position - close to Scandinavia and bordering Russia provides excellent logistical and trade opportunities.  It also has an enviable record of embracing information technology.

Participants in Minu Eesti also focused on a number of economic activities that might have a positive affect on their country.
Commentators are skeptical about whether or not many of the ideas generated are feasible, however, they show that the country at a grass roots level is dissatisfied with the government and wants to develop the economy.