No. 32




The Problems Faced by Estonian Economy and the Ways for Solving Them

14 December 2015


RiTo No. 32, 2015

  • Katrin Pihor

    Katrin Pihor

    Head of the Financing and Organisation Task Force for Research and Higher Education

  • Helena Rozeik

    Entrepreneurship Cooperation Coordinator, Project Manager, Tallinn University of Technology

  • Miko Tammik

    PRAXIS analyst

  • Mari Rell

    PRAXIS analyst

Estonia has set itself the objective to achieve 80 percent of the average level of productivity1 of the EU by 2020. Although the increase of the productivity of Estonian labour force has been faster than the average in Europe, in recent years the growth rate has slowed down signifiantly and the achieving of this objective has become unlikely.

In the article, we discuss what the main problems are and what the sources of the increase of productivity could be in order to avoid Estonia’s getting into the so-called medium income trap. Increase of productivity is inflenced by several factors; we focus on three of them: development of technology, knowledge-based entrepreneurship and business environment favourable to enterprises.

One of the reasons of low productivity is that the structure of Estonian economy and export is still inclined towards production with low added value and the Estonian entrepreneurs are still too dependent on labour-intensive activities. Although the percentage of innovative enterprises in Estonia is at the same level as the EU average, most of them are connected with process innovations, and by product, organisation or marketing innovation we are clearly below the EU average. As a solution, the article highlights the need for cooperation and knowledge transfer between enterprises (especially SMEs) and research institutions, expanding the use of ICT in all spheres of business, increase of the sale capabilities of enterprises and supporting the upwards movement in value chain.

As the second important challenge, the article points at the need to fid solutions for helping the early stage entrepreneurs reach the stage of developed entrepreneurship, especially taking into account the ambitions of early entrepreneurship in regard to innovation and internationalisation. The solutions the article proposes are the following: developing entrepreneurship attitudes and skills, extending the availability of capital and supporting innovation.

The third problem the article discusses is the impact of the tax system on the creation of jobs, asking the question whether it is time for Estonia to think of imposing higher taxation on property. The impact of possible changes of social tax is also dealt with.

1Calculated as added value per employee

Full article in Estonian