1. Estonia - Tere Tulemast!
Welcome to our 15 minute tour of the fine nation of Estonia!

2. Estonia – What is it?
Location
Language
History

3. Location
Estonia is a “Baltic” republic, located on the Baltic Sea in North-eastern Europe (same land mass as Russia, across the Baltic from Finland, sweden, Denmark, and north of the other two baltic republics of Latvia and Lithuania.
It is about the size of the U.S. States New Hampshire and Vermont combined, and has a population of about 1.3 million – just over the population of Montana.

4. Estonia – What is it? Location Language History
Estonians speak Estonian! It, combined with Finnish and Hungarian, make up their own language group!
Estonians have seen many foreign occupiers. In 1918 they gained their independence, but were only able to hold onto it for 32 years when in 1940 they were once again forcibly occupied – this time by the Union of Soviet Socialist Republics (USSR). The strong desire to be independent for decades, if not centuries still comes into play today, as we will explain later.
In 1991, Estonia once again gained its independence, and the last soviet troops left in 1994, leaving estonians to start, in many ways from scratch to build democracy and capitalism. Kirk will begin to discuss how they have performed with regard to the latter.

5. Recent Macroeconomic Performance
GDP has grown every year since Averaged 7.2% a year since 2000
Unemployment peaked at 13.6% in 2000, down to around 9.7% in 2004
Solid Export Growth – Increased by 80% since 2000, exports valued almost $6B in 2004

6. Annual GDP Growth

7. Annual Unemployment Rate

8. Recent Macroeconomic Performance
Economic Concerns
Rising inflation – after reaching a low of 2.1% in 2003, it is currently on the rise
Current account balance - $1.4B deficit in 2004 was over 12% of GDP

9. Annual Inflation Levels

10. Joining the European Union
Scheduled to adopt the Euro on Jan. 1, 2007
Meets criteria regarding interest rates, public finances, and currency stability
Rising inflation may cause delay

11. Strengths and Vulnerabilities
Dependence on External Partners
Labor Force issues

12. Dependence on External Partners
Few limitations to investment
Limited Natural Resources
Imports and Exports
Estonia has set itself apart in its openness to foreign investment. There exist no tariffs, subsidies, or bail-outs to protect local industries or locally-produced goods. There are also no restrictions on foreign ownership.
This has been a huge contribution to Estonia’s growth since its most recent independence.
Virtually all investment in the country is due to foreign direct investment.
For example, virtually 100% of Estonian banks are owned by non-Estonians
While no economic reason to believe this is very bad thing, cause for resentment among locals, “soft colonization” by Swedes and Finns, who do much of the investing. Matter of national pride, but also wonder what implications this might have.
As I mentioned earlier, Estonia is not a large country and much of its surface is covered by forest. Much of its exports (tangible) are timber, furniture, etc. Cause for concern mostly is how derive their energy  sustainable? The growing portion of their exports are actually the higher-end service sector, such as banking, financial services, and high-tech, such as software, etc.
As a result, about 80% of Estonia’s GDP is accounted for by imports and exports. This reliance on external supply and demand leaves the country’s economy very vulnerable to how the economies of its neighbors are faring. While Estonia has maintained health growth through Europe’s recent stagnant growth, it is questionable how long this can continue. Also, as Kirk mentioned, this is contributing to a very high current account deficit (about 12.6% of GDP), which is troubling for a small nation (not the U.S. or mexico – won’t necessarily be bailed out of problem).

13. Labor Force Issues Unemployment Rate Skill Mismatch
Declining Population
Estonia’s unemployment rate has been steadily declining over the last few years from its high of 13.6% in 2000, but it is still quite high at about 9.7%
Despite this high unemployment rate, according to the Bank of Estonia, about 67% of companies say they lack a qualified workforce!
There is an obvious skills mismatch between the population and the fast-growing sectors of the economy.
Adding to this situation is a population decline. According to an article in the New York Times last year, by 2050 (45 years), Estonia’s population will halve to 657, % of those 657,000 will be more that 60 years old!
This will certainly cause the capital to labor ratio to increase. If we looked at the Solow growth model alone, we may conclude that Estonia’s output will only continue to grow. However, there likely will reach a time when capital to labor has become saturated and growth will stagnate.
In addition to capital to labor and growth concerns, the population decline may pose risks to the country’s pension system. As we know from recent debate here in the United States, to support a pension system, a country needs a strong working-age population paying into the system.

14. Recommendations Address Current Account Deficit Invest in Labor Force
Encourage Immigration
Recommendation 1: Address current account deficit
Possible limitation of this policy: The very nature of the economy in a country such as Estonia with limited natural resources makes it difficult to limit importing of domestic goods. The current account may always be an issue with which the government must grapple. It is imperative, however, that the government find some solution to this issue, as it may in the long-run affect the investor confidence that has been so crucial to Estonia’s recent growth
Recommendation 2: Invest further in labor force
Possible limitation of this policy: The prevailing research demonstrates that job-training programs in the United States tend to have low success rates for adults, although it is unclear if this is also the case abroad and specifically in Estonia. Additionally, if the country’s budget surpluses do not continue, it may be difficult to direct funds in this manner.
Recommendation 3: Encourage Immigration from Other Fledgling EU Countries in the Future
Possible limitation of this policy: Estonians possess a strong sense of national pride and the country currently faces issues with its minority Russian population due to resentment of previous occupation and a desire to have a homogenous “Estonian” country. Given this attitude, it is unlikely that Estonians will welcome large influxes of people from other countries for permanent residence, as has been the case in countries like Germany. In terms of spurring their own boom in population growth, the tradition of having few children is one faced by other European nations and incentives to have more children seem unlikely to succeed.

15. Vivian Horn and Kirk Sanderson
Tänen Väga!
Vivian Horn and Kirk Sanderson