Estonian economy on the rocks: look to Lithuania?
For a long time Estonia had the strongest economy among the Baltic states. But it has been in recession since 2022 whereas neighbouring Lithuania's economy is experiencing 3.5 percent growth. The downturn is probably related to interest rate hikes which have a bigger impact on private individuals and companies in Estonia because they have taken out more loans. But commentators see other reasons in play.
Caught in the middle-income trap
In LRT, social scientist Marius Kalanta sees Estonia in what is known as the
“'middle-income trap', a situation in which a country stagnates at a middle level of income after a phase of rapid economic growth because it can't make the transition to an innovation-driven, highly productive economy quickly enough. Numerous studies show that more innovative countries are more resilient in their reaction to different types of shock. They adapt better, recover more easily and restructure more quickly. So why didn't this happen in Estonia?... Perhaps Estonia has not yet become a fully developed country and is experiencing the middle-income trap. It has already become very expensive, but innovation is not yet the driving force behind economic growth.”
Political inaction distorts competition
The inflation is also due to the fact that several EU competition rules have yet to be implemented in Estonia, Eesti Päevaleht complains:
“The latest inflation figures for September confirm that prices for telecommunications services have risen by as much as 7.7 percent over the last year. ... In the same period, [market leader] Telia alone distributed 80.9 million euros in dividends. ... Continued inaction due to a lack of political will is in no one's interest: the fines imposed on Estonia by the EU Commission are getting bigger, law-abiding companies are suffering as a result of unfair competition, and consumers are feeling the effects of inflation in their wallets.”
Effective management of investments and subsidies
Estonia could learn a thing or two from Lithuania, economist Raul Eamets comments in Postimees:
“Lithuania supports foreign investment and has created a green corridor for major investments that are classified as important for the country. Investments must amount to at least 20 million euros and create 150 jobs. ... If these conditions are met, permits are fast-tracked and investors enjoy a 20-year tax exemption. ... Already in 2017, Lithuania introduced the EU's NUTS 2 geographical framework. NUTS 2 divides countries into different regions and is the basis for allocating EU funding for regional policies.”
Cut taxes and spending and privatise
Postimees prescribes radical economic measures to get out of the recession:
“Estonian industry and exports can't bring in as much money as the Estonian state can spend. So it is important to pinpoint the areas where the state can freeze or postpone spending now. ... Postimees recommends that the government look at what the Lithuanians have done or what the Argentinians are doing. And use the tried-and-tested wisdom of economic recovery: cut taxes and government spending and privatise. Do all the things we did in the early 1990s that brought success. The rules of the economy have not changed since then.”
Slow growth is better
In Eesti Päevaleht, economics expert Heido Vitsur analyses the different approaches of Estonia's friends:
“The fact that Lithuania is doing better than us in the current crisis should come as no surprise. After all, Lithuania also emerged from the financial crisis with fewer scratches and has embarked on a growth trajectory that has put the country on a fairly straight upward curve in terms of stable GDP per capita, which in 2021 was at our 2014-2015 level and has been above ours ever since, although we also continued to grow. ... Lithuania and Estonia have pursued broadly similar goals, but Estonia has been more liberal, faster and more radical in its approach. ... Lithuania has been slower and more cautious.”
Dogged by dogmatic approach to national debt
Estonia is taking a misguided approach to tackling the recession, argues Nerijus Mačiulis, chief economist at a Swedish bank based in Lithuania, in Verslo žinios:
“Instead of investing in renewables and infrastructure or taking measures to promote business investment and exports, Estonia is doing exactly what economic textbooks and the EU's experiences of recent years warn against: implementing fiscal consolidation and trying to quickly reduce the budget deficit. Instead of using [the low level of national debt as] a strength and taking out loans to boost the economy in the short term, the country is taking the opposite path. ... The dogmatic approach to public debt, once Estonia's pride and joy, has now brought the country to its knees.”