The latest Competitiveness Report from Eesti Pank describes how total factor productivity is the key to economic growth and to increasing wealth in the future as the population ages in Estonia. Total factor productivity is the part of economic growth that comes not from direct investment or increasing employment, but from factors such as technological progress, innovation, the business environment, and increasingly the climate policy choices that countries make.

Wealth in Estonia has so far grown largely through relatively large inflows of capital, which have been among the largest in the European Union, and faster growth in labour productivity than the European Union average. However, capital intensity in Estonia, which is the amount of capital per employee, is still around a third below the European Union average. The demographic outlook for Estonia as the population ages puts limits on the growth in employment. This means the desired growth rate will not be attainable with investment remaining at the levels where it has been. Total factor productivity in the form of technological progress and innovation will become an ever more important source of growth in the years ahead.

“Being a competitive country does not simply increasing the economic success of a country and growth in its incomes, as the well-being of its people is becoming more important through rising living standards and improved livelihoods, good health, access to education, and inclusive democracy. Attention is increasingly focusing on improving well-being while leaving the smallest possible environmental footprint”, said Mari Rell of Eesti Pank, one of the authors of the report.

Estonia’s competitive position had improved in the years before the Covid-19 pandemic broke out. The market share of Estonian exports in foreign markets has gradually increased, doing so even last year when the crisis erupted. The range of international cooperation of businesses has increased, as has their ability to export. Exports of goods and services play a large role in the Estonian economy, at 73% of GDP in 2020.

The investment environment in Estonia is favourable as the vulnerability of the Estonian economy has been reduced over the past decade. The Estonian current account has been in surplus since 2009. “The partners of Estonian businesses are increasingly from Europe, and so we have become part of the European economy and the risk level of the country has fallen. The savings of Estonian companies have over the past decade grown constantly, while investment activity has tended to decline, which is a sign of a country that is doing well”, said Ms Rell.

Climate change and developments in climate policy will more and more drive the choices of the central bank. The connections between the climate and the economy need to be understood better for the right monetary policy to be set. The Competitiveness Report analyses the green revolution in the economy from the point of view of the central bank, looking at which development trends and impact factors may result from climate policy and the European Green Deal.

One of the key areas of the European Green Deal is reducing carbon emissions, including those from energy and electricity production. A rise in the price of CO2 would have a substantial impact on the Estonian economy as producing electricity from oil shale would become unprofitable and producing oil shale oil would be much less viable. “Investments made to exit oil shale must support the environment, but as the transition to a green economy will be costly for society then decisions taken during the green revolution must be well thought out over the long term to reduce the negative and lasting impact on Estonia’s potential economic growth and electricity prices”, said Maris Leemets.

Additional information:
Ingrid Schmuul
Communications Specialist
Eesti Pank
Tel: 668 0965, 5697 9146
Press enquiries: press@eestipank.ee