Speech at International Investment Forum in Ukraine
9.12.2011
Europe is in an economic crisis. Again. Or perhaps - still. This is not even the most important question. The important aspect of it is that no country in Europe can say that it is isolated or unaffected from this crisis. Some countries, like Estonia, have much stronger economic fundamentals than three years ago, but still, also our economic growth forecasts for next years had to be downgraded, because of the worsened external conditions. Same applies for most of Europe, therefore our duty is to understand where are the new growth areas and what kind of policies bring new opportunities in these new settings.
Let me give you a short overview how Estonia, the country I know the best, has managed through this crisis and offer you some of my ideas how we should go on from here.
The crisis hit Estonia hard in 2008. Liberal ecenomic reforms of the ‘90ies, accession to the EU in 2004 and some other elements in the development of the Estonian economy brought us a period of very high economic growth, 8-10% a year over 6 or so years period. It was an unsustainable growth, as we can tell today. A bubble in the real estate market, unrealistic wage expectations, overoptimistic future prospects cried for adjustments. Global reccession just exaggerated our problems. Our export markets collapsed. The GDP shrunk by 3.6% in 2008 and by 13.9% in 2009. The unemployment reached close to 20%.
Because of our currency board based monetary system devaluation was never even an option for Estonia to reestablish its competitiveness. Therefore there was only one solution, though many of our European partners still think it is not doable, to cut spending, meaning, go through internal devaluation and regain the competitiveness in the hard way. But you should call this “the hard way” only in a short term, I need to add.
This was what government planned and this was what government did. The plan consisted five important elements and prerequisites. First, Estonia had kept the public sector debt level low during the boom years. Second, the government had run constant budget surpluses that enabled Estonia to build up a considerable emergency reserves (12% of GDP in 2010).
Third, we have learned from history that in times of a crisis it is good to have some anchors to provide stability. For Estonia one of the most important anchors has been a fixed peg of our currency first to the Deutch mark and later to the euro (Estonia now has joined eurozone) – therefore the government knowingly opted for the internal devaluation in a period of need. This gives the government, but also the companies, only a limited time to increase efficiency, make structural reforms, in short - make changes and make them fast.
Thus, forthly, we chose to fix our weaknesses during the crises. As I said, we cut spending, including salaries of the public sector. Also my wage was cut. We carried out labour market reforms (making them more liberal, but also increasing funds for training).
But in parallel to cutting spending, Estonian government increased its investment programs, in order to revitalise economy, to reemerge stronger from the crisis. In principle, we want our economy to be smarter. This is the fifth point in Estonia’s own action plan.
What were the results? Quick eceonomic recovery, plus 3.1% in 2010, and about 7% growth this year. Labour productivity grew almost 20% in 2010, without a real growth in wages. This has increased the competitiveness of Estonian businesses in the world markets. Our exports grew by 22% in 2010 and 30% this year. But it is important to underline that the overall structure of the economy has changed. Our exports is now much more in the high added value spectrum than it was before the crisis.
Now I come back to where I started. Despite those positive changed in our economy we have had to downgrade our growth prospects. Our fundamentals are strong but prudence is definitely neccessary.
We all know the challenges, in Estonia and here in the Ukraine, finding your strenghts and finding your markets. Hitting the right balance between your strenghts and markets. For Estonia one lesson is clear. Openness is a formula to a success. Open up your economy, learn to adapt, and move up in the added value ladder. Going up is the only way. Even we, in Central and Eastern Europe, cannot compete with a labour intensive and cheap products from Far East Asia. And we do not want to. Estonia is a small country, people is our limited resource. We have to concentrate on training them, teaching them to make more sophisticated stuff. You can try fighting globalisation, by becoming concentrated on your internal market, or you can start seeking your opportunities abroad. For Estonia this is the only path to take.
In this respect Estonia’s foreign and economic policy objectives go hand in hand. We want to see more integrated EU internal market to make it bigger. And we also want to have closer ties with our partners in the neighbouring countries, like the Ukraine, to make the market wider.
Governments have a very important and particular responsibility in this. If government fails it is almost impossible for the private sector to succeed. If the government follows sober, prudent policies there is a high chance that the private sector can and will copy. Therefore we support strong measures planned for the eurozone. Writing rules is not writing poetry for social clubs. Rules that have been agreed need to be implemented. Full stop.
Businesses, the drivers of our economies, need stable, transparent environments to prosper. They need fixed, and kept rules to make investment decisions. In short, it is common knowledge that businesses need smart government to prosper and government needs strong ambitious businesses to thrive. Governments and businesses should not get lost in translation in their interactions. We need to speak and we need to listen. I am here to speak and also to listen.
