David
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Joined: 26 Jan 2006
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 Posted: Tue Oct 31, 2006 6:00 pm Post subject: ESTONIA: mastering a booming economy |
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Abstract from the article “Getting It Right” by Peter Gumbel, Time Magazine, 28. Sept, 2006
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ESTONIA: mastering a booming economy
Since the three Baltic republics regained their independence in 1991 with the collapse of the Soviet Union, Estonia has managed to put itself on the edge of far more than just geography. The tiny nation of 1.36 million was the first former Soviet republic to introduce its own currency, and the first European country to adopt a flat tax system, now widely copied in the rest of Eastern Europe.
It has also become one of the most technologically advanced places on the planet. You can use your mobile phone to pay for parking your car, buy bus tickets and check your children's school grades. More than 80% of taxpayers file their declarations online, wi-fi hot spots are ubiquitous — and free — and the nation's most famous start-up is Skype, the Internet phone titan, which was acquired last year by eBay for $2.6 billion. That amount is slightly more than the annual output of the entire Estonian economy 15 years ago.
The economy, once a basket case, is now one of Europe's most dynamic, racing along at a 12% growth clip — faster than China. Estonia is one of only two new European Union members to have a budget surplus, and its national debt will have all but disappeared by the end of the decade.
Tight labor market
Naturally, there are growing pains: the unemployment rate has fallen so sharply, from 14% in 2000 to about 5% today, that businesses are scrambling to find workers. But even if growth slows a little to a more sustainable rate, Estonia could catch up with Portugal and Greece on a per-capita basis in about a decade.
Tight labour market has become one of the main challenges for the economy - so much so that the country's tech employers are hugely grateful for the workers they have. "Every evening I'm almost standing at the door and asking everyone as they leave: Did you enjoy yourself and can I expect to see you tomorrow?" says Teet Jagomägi, not entirely joking. He runs a mapping software company in Tartu, the second largest city. It's doing good business in partnership with Swedish telecommunications giant Ericsson, and has 70 employees. Jagomägi says he would like it to grow to about 150, but he's already lost a few of his people to the two other big technology firms in the country, Skype and Playtech, which develops the software for online casinos. Skype has 250 people in Estonia and reckons it will have exhausted the local job market once it gets up to 350. Thanks to its hip reputation — and the package of eBay options offered to staff — it has managed to lure about 50 people from abroad. But other firms have a tougher time following suit.
And it's not just IT-companies who are feeling pressed. Estonian doctors, nurses, construction workers and bus drivers are being lured to higher-paid jobs abroad, leaving some gaping holes at home.
Good at getting innovation to work
The country’s true innovative edge is believed to have more to do with the willingness of the public to use technology than with any particular national skill at developing it. Estonians are fast early adopters and very good at getting innovation to work. For example, the whole financial system leapfrogged into electronic banking in the mid-1990s, bypassing all messy dealings with checks and other paper transactions. And the government has done its best to boost computer literacy, including running free two-day classes that have been attended by 100,000 people.
The government now issues national ID cards with a computer chip that contains the owner's digital signature. That enables Estonians to gain access to an ever growing range of electronic services, by networked computers and even mobile phones.
Soaring consumption
A booming economy has also lead to a fast increase in domestic consumption and a soaring real estate market. Much of this is being done on credit; banks report that their lending is up by a startling 50% this year, leading some to worry about a bubble economy, especially in real estate. The opinions in the country range from those who think they are part of a never-ending fairy tale to those predicting that if the pace of growth will not slow down to more sustainable levels, the economy will hit a wall in the next 18 to 24 months. It is difficult to say who will be right since there are not many countries that have experienced such impressive growth - it has accelerated from an annual rate of 7.1% in 2003, to 8.1% in 2004 and 10.5% in 2005.
One should not forget the low starting level of Estonia. Fast growth is not a luxury but a necessity for the country - there's still a lot of catching up to do. Productivity remains below the E.U. average, as does the average monthly wage of NOK 4500.
Foreign investors undeterred
Visible signs of overheating have fortunately not deterred investors. Foreign money is pouring in and now totals more than $12 billion. Companies partly or wholly owned by foreigners account for one-third of Estonia's total economy and more than 50% of exports. About three-quarters of the funds have come from just two countries, Finland and Sweden. Can the money continue flowing? Most seem to think it can, under at least one condition: Estonia needs to resolve its increasing shortage of labor.
Will the country be able to continue mastering its growth? Estonians believe they will. No wonder, for 15 years, the country has shown that it can improvise and adapt in much more difficult conditions. |
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