Estonian Economic Situation and Prospects for Development
On the order of the Estonian Development Fund, a work group set up at the Faculty of Economics and Business Administration in the second half of 2007 investigated the international competitiveness of the Estonian economy and the prospects for its development in a longer, 5-10-year perspective.
The Estonian economy has done superbly so far. Our success is the result of the macroeconomic reforms of the 1990s, which facilitated quick restructuring and allowed to exploit our cost advantage. More particularly, the current success is built on the cost-advantage-based foreign economic competitiveness and a huge increase in domestic demand, supported by the quick increase in private loan volumes. The loan-based demand, however, created wage increase pressure, conditioning a rapid increase in personnel expenses. Since the beginning of 2006, the gap between the wages paid and the labour productivity has rapidly widened. The record growth in wages is not sustainable from the point of view of corporate competitiveness. The new economic growth cycle should be based on the concept that, due to the limited domestic market of a small country such as Estonia, economic growth must be built on successful sales in the global market. Implementation of the concept requires changes in corporate behaviour as well as in the state innovation system.