Speech of Juhan Parts, the Minister of Economic Affairs and Communications of the Republic of Estonia, at the Investment conference 29.01.2010
It is a great pleasure to deliver this opening speech at this investment conference with such an inspiring name. Rise and shine Estonia! The title of my presentation today was suggested to be about what Estonian government is doing for the economy to recover. True, there is no other priority for the government than to do its utmost in order to help Estonian economy to get back to its growth track again. Especially for the minister of economic affairs, this is the question, the challenge that has been guiding my work.
Of course, there is something I’d like to be clear about from the beginning. Everybody is looking towards the government during tough times and this is justified by any means. Government has many instruments that can be used for reigniting the economy and bringing it out from the crisis. However, I must stress that it is not government who can create new competitive jobs, it is not government who can increase exports and it is not government who can start-up new fast growing companies. This was a different system at a different time when everything was done only by the government. We need entrepreneurs, free markets and innovative spirit to really overcome these challenges!
Still, even if I admit that government cannot directly tackle the current challenges I am not saying that government should stay passive. We have not been passive in Estonia! Bad government can be a disaster to the economy, so there is a definite need for leadership and vision from the government. The first and the foremost responsibility for the government is to make sure that businesses can enjoy a competitive environment, which is nurturing their abilities and making it possible to become more competitive, to grow and to create new quality jobs.
Government needs to understand the needs of companies and be flexible enough to react to the changing environment by adjusting its policies according to the new needs. In contrast, there are also things (like taxes) where we need to be conservative and if something needs to be changed, the decisions need to be based on quality studies and calculations.
WHAT ARE ESTONIAN ADVANTAGES?
I would like to bring out three key policy directions where Estonian government has been working hard and which will contribute towards the increasing competitiveness of our economy.
1) Estonia has kept public finances in order even during most difficult times.
I am talking about public finances but it also means euro accession. Yes, I have no doubts that Estonia is going to join euro-zone in 2011. We will be the only country in European Union that can meet Maastricht criteria and refrain from excessive budget deficits. Euro is important but as everybody here today also understand; it is not a silver bullet that will erase all our worries. Nevertheless, euro is a symbol that demonstrates our control over public finances and overall efficiency of the administration that could win this challenge during the most difficult times.
Joining euro-zone will be a major factor influencing the investment climate in the post-crisis Estonia.
First of all it will provide credibility. Not only credibility about the currency risk (which is also important)or credibility about being able to repay our debts (which translates into interest rates on loans available to companies).
The credibility is also about the business climate and the tax environment. Estonia is the country in Euopean Union with the lowest level of public debt. We are keeping our running budget deficits under 3% of GDP, thus avoiding the trap where governments need to increase revenues after the crisis in order to repay all the loans they took in order to revitalize their economy. Everybody in Europe is today thinking about exit strategies, fiscal consolidation and about the need to adapt to the new realities. We have already taken the most painful decision for adaptation! We can repay our loans easily and there is no need to increase taxes to do that. The confidence it gives to the companies is the fact that Estonia does not need to increase the overall tax burden as a part of the exit strategy. No! Instead of that we are thinking how to make our taxation system more attractive for investments. Estonia has been a tax innovator in the past and I believe that we can also move forward in increasing its attractiveness even in the future.
2) Estonia is not an average Eastern European country – and this is increasingly understood among foreign investors.
What is “Eastern Europe?” I can completely agree with a recent article in the journal “Economist” where it was concluded that Eastern Europe as such is only a myth. This is a region that is often labeled so because of the unfortunate common experience during the second half of 20th century and because of these countries used to be” in transition” – politically and economically. I argue that this construction is no more valid today.
This is a personal example why I think so. Bit more than a year ago, at the end of 2008, I made a presentation at an investment fair in Germany. The focus of the event was on investments into Eastern Europe and Russia. German businessmen who spoke after me gave overview about their experiences in “Eastern Europe” – countries where there is rampant corruption, where you have to bribe officials to be able to get licenses and permits. Countries that are attractive because of their cheap labor but unattractive because of the old-fashioned administration and overburdening red tape.
I felt completely out of the place. The experiences these businessmen were talking about were all real but they had nothing to do with Estonia. We have one of the most transparent administrations in Europe if not in the world. According to international rankings there is next to no corruption. This is a country where you don’t even need to leave your office when you want to communicate with governmental institutions – e-government solutions are highly developed. Taxes are declared online in the matter of minutes and tax returns administrated in the matter of days. The business culture is getting closer to Scandinavian countries. The rule of law in Estonia is very strong and laws apply to everybody with the equal strength. These are very basic things and we don’t usually think about them that much but these are also things that set us apart from other countries with similar background.
Joining euro-zone will have a role to play in here as well. By joining euro we are showing that Estonia is able to handle our things independently, we are efficient and our past policies are paying off. When the crisis started it was impossible to convince anybody about the fact that a region should not looked upon as a uniform entity but now we are increasingly receiving international recognition that Estonia has been successful with our response to the crisis and our policies are laying ground for the future competitiveness. Euro is fostering this perception even more.
3) Estonia has great infrastructure and we need to keep improving it!
What do I mean under “infrastructure”? Not only roads and communications but I am thinking about infrastructure in a broader meaning. Infrastructure for education, infrastructure for social protection and infrastructure for transportation.
I believe that the best thing government can do and where it must be active, is in developing infrastructure for future development. In here we have done quite a bit. What kind of projects do we have?
First education. Estonia’s position in education is not bad at all. In PISA study from 2006 Estonia ranked 5th in sciences – meaning that the general level of Estonian education is not bad. Of course this is the level of secondary education, and the picture is a bit different when we look at the options young people have after graduating secondary school. Estonian vocational schools need more attention and we need some consolidation in the higher education –so that Estonian universities could make it to the global rankings. Today we are not there yet.
What I am proud of is the fact that regardless of the time of crisis, Estonia has been able to maintain the planned level of investment into R&D and innovation. If today Sweden and Finland are spending more than 4% of their GDP on R&D, then the number for Estonia is around 1,5%. To give us credit, this number has been increasing steadily over the last years and is projected to do so as R&D financing is planned on a long-term basis and doesn’t depend so much on economic fluctuations. R&D and education will remain among the priorities.
Good education and functional innovation system provides us with many innovative ideas for new products and services. I think that we don’t need to be ashamed about the level in Estonia here –Skype, a 3D camera that was developed in Estonia, even this cheese that is good for the health of peoples’ heart. There are many ideas but today the most successful ones have been the ones where the leadership in commercialization has been taken by foreign competence. In Estonia there is lack of finance, lack of available risk capital. In order for entrepreneurs not to give up their ideas we need to work on this kind of financial infrastructure as well. This is also part of education, part of R&D.
Transportation. We have brought forward some key investments in transportation infrastructure. The availability of transport connections forms a very basic layer in the general competitiveness of a country. In case of Estonia I means improving our road network, leveling up border crossings and also putting more emphasis on air connections. I know that there is a lot of room for improvements there – and we are working to find solutions.
Today it is important also to focus on transporting information, large quantities of information. Government initiated and will implement with the private sector the “EstWin” project – enabling Estonia to be covered with broadband connection as early as by 2012. Fast internet will provide excellent infrastructure for different ICT market solutions.
Government will continue investing in energy infrastructure. Some huge investments are needed and decisions need to taken. The extra capital is needed for investments in Eesti Energia and government is currently working on different options. There will also be investments for improving the connectivity with Scandinavian countries, investments into renewable energy.
The government has also worked on the labor market – there is a new labor contract law from the middle of last year – providing more flexibility for the companies while still looking after the interests of job-takers. The arenas where this investment infrastructure can and should be improved by government are plentiful but we won’t get tired.
Estonian economy can start to recover only if Estonian companies start investing more. Only if there will be more foreign direct investments coming into the economy. New investments mean that new jobs will be created, production upgraded, new markets discovered.
Estonia has some real advantages compared with Scandinavian countries, compared with the UK. Starting from the open and transparent business climate and not forgetting our skilled labor pool with reasonable wage demands.
I believe that globalization is far from being dead and protectionism is definitely the way how to find solutions to the current challenges. Governments need to take lead in making sure that the business climate is entrepreneur-friendly and to keep developing infrastructure, necessary for successful businesses. Estonia has all the necessary preconditions for rising up and shining once again –but this time not because of loan-fueled consumption boom but because of some real innovation based development.
Source: Estonian Ministry of Economic Affairs and Communications
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