Analysis of Estonian Economic System and Its Main Problems

Estonia is one of the three Baltic Countries, together with Latvia and Lithuania. Three are the important dates for this country that should be mentioned, from a political and economic point of view: i) August 20th, 1991: Estonia becomes an independent country from the former Soviet Union;ii) May1st, 2004: Estonia, together with other nine countries (mostly from Eastern Europe) joins the European Union;iii) January 1st, 2011: Estonia joins the Eurozone, therefore the Euro is adopted as the new currency. The population of Estonia is 1. 3 million (according to the last census made in 2014) and the GDP per capita in 2017 has been estimated as 21,400 € for 2017: this is considered the best performance among the three Baltic countries.

Estonia has severely suffered from the global crisis of 2008-2009, as the total real GDP fell down by 15%, and the recovery in the next years has been quite slow. At 2017, the real GDP’s growth was of 4%, and the expectation for 2018 and 2019, according to the European Commission, is of a growth of about the 3%. Inflation rate has grown in 2017 towards 3. 7%, due to the global increase of prices of goods such as food and energy. The expectation for 2018 and 2019 is a reduction at 3%.

At this point, we analyze deeper some more relevant features and aspects of the Estonian economic system. The country presents a good level of education with a positive reflect into workforce: the unemployment rate has declined by 10% from 2010 (indeed in 2009 there was a peak of almost 20%, while now it is at about 7%), although this change has been favoured also by a parallel shrinkage of the working age population gradually in the last decade. The high employment rate is one of the drivers for the growth in private consumption, and for a relatively low inflation rate.

The country, in addition, have faced a strong increase of wages, both private and public, and of the minimum level of wages, due to the fact that many skilled potential workers preferred leaving the country rather than remaining there. The only issue concerning wages that Estonia is still facing is the gender pay gap, which is at the value of 26. 9%, much above the European average (about 10 percentage points), and this is mainly due to a very flexible parental leave system of Estonia: differently than other countries, the new parent who takes advantage of it (in most of the cases a woman) has the right to suspend her job up to 18 months from the birth of the new child. The effect is that the woman faces more issues to re-insert herself in the job market, creating de facto a breaking point in her career.

We use the wages to introduce one of the main economic problems in Estonia: the income inequality. Indeed, the Gini coefficient, one of the most important indicators for inequality in a specific country, is estimated to be at 0. 35, one of the highest values among the OECD countries. This situation is given from different factors combined: for instance, the distribution after tax and (for the case of old-age people) the low pensions. Therefore, we see that some categories of people are are more likely to become poorer in the upcoming years: in addition to the old-aged people, this is the case also, for instance, of unemployed and of families with three or more children. This does not mean that the State is not doing anything to mitigate this issue: first of all a considerable amount of the social spending is addressed to families, and, more important, it has been planned a reform of the tax system, which is supposed to bring to a fairer post-tax income distribution. It is relevant to make a mention about the financial sector of Estonia: the country has a stable banking system, and indeed loans given to both corporations and private households have increased with a regular growth rate, which, starting from 2012, has been stated to be at about 5%. In addition, Estonia has been facing an increase in the investments made by resident population, even though at the same time it has assisted to a reduction in the investment coming from foreign residents.

The European Commission provides important insights that confirm the well-being of the banking sector of Estonia: first of all, the non-performing loans ratio has remained low, at about 2%. Capital adequacy ratio presented the highest performance in the whole EU, and two other important values such as the average return-on-equity ratio and the return on assets are currently placed at 11% and 1. 5%, definitely higher percentages compared with the respective averages of the European Union. The country has faced a moderate credit growth, about 6%, with a reduction of the loans to households and mortgage loans, mainly due to the reduction of the possibilities for those who took the mortgage to deduct the interest payments from the tax income.

There are more credit constraints for smaller households and small-medium enterprises. At the same time, the government is helping, through agencies and investment funds, the access to finance to the entities that need it and could really benefit from it, such as the start-ups. Regarding the housing sector, the European Commission indicates that the price of houses has grown slowly from 2016 so far, and the supply of the housing sector have been always in line with the demand. The loans for the purchase of houses are stable and aligned with the GDP, and the growth is moderate, therefore we can say that the risk derived from the housing loans is as well low.