According to the International Monetary Fund, Estonia needs to find ways to balance productivity and wage growth, and to promote competitiveness.
The IMF came to that conclusion, also expressing concerns about weak productivity growth, after finishing their annual official mission to Estonia.
“Economic prospects for trading partners are more likely to be weaker rather than stronger relative to the baseline,” the IMF said in a statement marking the conclusion of the mission. “On the domestic front, continued divergence between productivity and labour cost developments in Estonia could undermine exporters’ ability to profitably tap into foreign demand. Moreover, robust growth of Estonia’s economic potential cannot be taken for granted.”
The fund said Estonia already had a lot to offer investors. “…several commendable new initiatives that will make the country even more attractive are in train: more public investment is planned in the 2017 draft budget, which should help fill some remaining infrastructure gaps; local government reform aims to improve service delivery; and the Company Development Program is assisting promising firms to advance.”
Nevertheless, the fund said that more could be done to increase the private sector’s take up of existing programs for innovation and learning through financial incentives and easing eligibility criteria. Active labour market programs also remain modest by European standards.
Productivity growth lagging behind wage increases
The business-friendly environment, high public investment, stability-oriented policy making, and very strong public finances are all highly attractive features,” the agency asserted.” To help ensure commensurate results, a strong productivity unit in the Prime Minister’s office could be set up that reviews, monitors, and guides the various productivity promoting programs. In this context, the recent establishment of a productivity working group is a positive development.”
However, according to the IMF, the current divergence between labour cost and productivity developments is unsustainable. “A continuation would put competitiveness further at risk and could increasingly shift resources into non-tradable sectors where productivity growth may be lower. Rapid wage growth mainly reflects labour market tightness that only additional labour supply can permanently address, but government wage policies and momentum are also playing a role.”
The Estonian central bank shares the IMF’s view, pointing out that it has “long observed with concern how productivity growth has been lagging behind wage increases and how corporate profits have been shrinking”.
Cover: the sky’s the limit? (Rotermann business district in Tallinn/the image is illustrative/courtesy of EAS.)