OECD Economic Survey of Estonia 2019 - Presentation

2019 OECD ECONOMIC SURVEY OF ESTONIA Tallinn, December 17th 2019

Seizing the digital dividend

http://www.oecd.org/economy/estonia-economic-snapshot/

@OECDeconomy @OECD

Estonia is doing well • • • • •

Growth is strong.

Social and environmental conditions have improved.

Public debt is the lowest in the OECD. PISA results are the highest in the OECD. Estonia is a champion of e-government.

2

Strong growth boosts incomes Solid growth boosts incomes Real GDP per capita, Thousand USD, 2015 PPPs 50 45 40 35 30 25 20 15 10

EST

FIN

2009

2011

LTU

LVA

OECD

5 0

2005

2007

Source: OECD Economic Outlook database.

2013

2015

2017

2019 3

Employment has reached new records Employment rate

% of population aged 15-64

80

EST

FIN

LTU

OECD

LVA

75 70 65 60 55 2005

2007

Source: OECD Economic Outlook database.

2009

2011

2013

2015

2017

2019 4

Skills of 15-year olds are high % 40

Share of low- achieving 15-year olds in science, reading and mathematics

% 40 35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

COL MEX CRI TUR CHL GRC ISR SVK HUN LUX LTU FRA CZE USA AUT ISL OECD BEL ITA SWE AUS NLD PRT NZL LVA ESP CHE GBR DEU NOR POL SVN RUS KOR DNK IRL FIN CAN JPN EST

35

Source: OECD, PISA 2018 Database.

5

Key messages • Fiscal policy support should focus on growth-enhancing measures.

• Inequalities of incomes, health and skills across genders and socio-economic groups need further attention.

• Further advancing digitalisation in the non-ICT private sectors is key to boost productivity growth.

6

MACROECONOMIC POLICIES

7

Growth remains strong, but will ease somewhat (annual growth rate unless specified)

2018

2019

2020

GDP at market prices

4.8

3.2

2.2

Private consumption

4.4

2.7

3.2

Government consumption

0.8

2.4

1.5

Gross fixed capital formation

0.9

14.1

1.7

Exports of goods and services

4.3

4

1.1

Imports of goods and services

5.7

3.8

2.2

Unemployment rate (% of labour force)

5.4

5

5.1

Harmonised index of consumer prices

3.4

2.4

2.3

Current account balance (% of GDP)

2

1.4

0.9

-0.6

-0.3

-0.4

General government financial balance (% of GDP)

Source: OECD Economic Outlook 106 database.

8

High wage growth needs to be matched by productivity growth Y-o-y 3m moving avg 20

Real wage rate EST

FIN

LTU

OECD

15 10 5 0 -5 -10 -15 2005

2007

Source: OECD Economic Outlook database.

2009

2011

2013

2015

2017

2019 9

Public finances are in excellent shape General government debt as a percentage of GDP %

120

% 120

100

100

80

80

60

60

40

40

20

20

0 2009

2011 EST

Source: OECD Economic Outlook database.

2013 FIN

LTU

2015 LVA

2017

2019

0

OECD 10

Borrowing increased more than warranted by the fiscal rule Government net lending as a percentage of GDP % 8

8

7

Structural fiscal balance

6

%

7

Fiscal balance

6

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

-2

2010

2011

2012

Source: OECD Economic Outlook database.

2013

2014

2015

2016

2017

2018

2019

2020

11

Recommendations on macroeconomic policy • Avoid pro-cyclical fiscal policy and allow the free play of automatic stabilisers.

• In case of a strong downturn, fully use the exemption clause built in the existing fiscal rule.

• Increase spending on measures boosting the long-term growth potential and inclusiveness such as infrastructure connectivity, innovation and education.

• Introduce a recurrent tax on the ownership of residential real estate. Reduce labour and consumption taxes.

12

REDUCING INEQUALITIES

13

Income inequality is around the OECD average Gini coefficient for the population aged 18-65, 2017 or latest year available Points 0.6 0.5 0.4 0.3 0.2

Gini (market income, before taxes and transfers) Gini (disposable income, post taxes and transfers)

0

MEX CHL TUR USA LTU GBR GRC ESP KOR LVA JPN ITA PRT ISR OECD CAN AUS IRL LUX DEU EST FRA POL NLD CHE AUT HUN FIN NOR SWE BEL DNK ISL CZE SVN SVK

0.1

Source: OECD Income Distribution Database (IDD).

14

The wage gap between women and men is high

% 40 35 30 25 20 15 10 5 0

KOR EST JPN ISR LVA CAN USA FIN GBR DEU AUT CZE SVK PRT CHE NLD MEX OECD CHL LTU AUS ISL ESP FRA POL HUN NZL SWE NOR TUR IRL ITA DNK SVN GRC BEL LUX

Unadjusted gender wage gap for full-time employees, 2018 or latest available % 40 35 30 25 20 15 10 5 0

Note: The gender wage gap is unadjusted and defined as the difference between median wages of men and women relative to the median wages of men. For Estonia, latest available data are as of 2014.

Source: OECD Labour Force Statistics database.

15

Perceived health status differs by income

Lowest income quintile Highest income quintile

KOR LVA LTU JPN EST PRT CZE HUN POL DEU SVN CHL FIN BEL SVK AUT FRA NLD GBR TUR DNK LUX SWE CHE NOR ISL ESP IRL USA ITA GRC ISR CAN AUS NZL

% of population 100 90 80 70 60 50 40 30 20 10 0

Health status by income quintile % of population reporting good/very good health, 2018 or latest

Source: OECD Health database.

16

Ageing will create challenges Ratio of population aged 65 and above to the working-age population aged 15-64 %

65 60

%

Slovenia

Slovenia

Lithuania

Estonia

Latvia

Finland

65 60

55

55

50

50

45

45

40

40

35

35

30

30

25

25

20 2010

2020

2030

2040

2050

Note: Medium fertility variant (instant-replacement-fertility, constant-mortality and zero-migration).

Source: United Nations World Population Prospects 2019 database.

20 2060 17

Recommendations to reduce inequalities • Do not allow withdrawal from the second pillar of the pension system before retirement.

• Extend health insurance coverage for the entire population.

• Relax eligibility conditions for unemployment insurance.

• Continue to scale up and improve access to active labour market policies.

• Require the reporting of the gender wage gap and action plans to reduce it, including in private firms.

18

TACKLING ENVIRONMENTAL CHALLENGES

19

High CO2 emissions and rising amounts of landfilled waste contrast an overall clean environment kg/USD, 2010

A. CO2 intensity CO2 per GDP

B. Municipal waste treatment 2017 or latest available

kg/capita

600

0.8

500

0.6

400

0.4

300 200

0

100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0.2

Estonia (demand-based) OECD (demand-based) Estonia (production-based) OECD (production-based)

0

Estonia OECD Recycling and composting Landfill Incineration Total municipal waste in 2000

Note to Panel A: Included are CO2 emissions from combustion of coal, oil, natural gas and other fuels. Gross Domestic Product (GDP) is expressed at constant 2010 USD using PPP. Source: OECD Green Growth Indicators database.

20

Recommendations for a greener Estonia • Review taxes and charges on oil shale mining and use to reflect costs and externalities, while addressing social welfare and energy security concerns. • Improve waste collection infrastructure and raise fees on domestic mixed waste going to incineration or landfills to incentivise recycling and waste prevention.

21

FURTHER STRENGTHENING TRANSPARENCY AND ANTI-MONEY LAUNDERING

22

Control of corruption is steadily improving A. Control of Corruption (2018) Scale: -2.5 (worst) to 2.5 (best) 2.5

B. Evolution of "Control of Corruption", WGI

lower corruption 2.5

EST

2.0

OECD average

2.0

1.5

1.5

1.0 0.5

1.0

0.0

0.5

-1.0

0.0

RUS BRA CHN IDN IND CZE ESP ISR CHL FRA USA EST BEL AUT AUS ISL CAN DEU CHE NOR FIN

-0.5

Source: World Bank Worldwide Governance Indicators (WGI).

higher corruption 23

Banks are well-capitalised, and anti-money laundering efforts are being strengthened % 18 16 14 12 10 8 6 4 2 0

Source: BIS.

CAN SWE NLD CZE FRA ITA DEU DNK AUS BEL PRT ESP ISR AUT CHL LUX FIN OECDยน LTU TUR BRA RUS POL SVK MEX GRC USA EST LVA IRL ISL

Capital to assets, 2018Q3

24

Recommendations to further strengthen transparency and anti-money laundering efforts • Continue strengthening regulations and allow the freezing of assets by the regulator in the case of suspected money laundering and increase fines to deterring levels. • Continue to strengthen Baltic-Nordic coordination in the fields of financial sector supervision and anti-money laundering.

25

SEIZING THE PRODUCTIVE POTENTIAL OF DIGITAL CHANGE

26

Productivity growth has slowed considerably across the OECD, including in Estonia Labour productivity growth 1998-07

2008-17

GRC LUX MEX ITA GBR FIN NOR BEL CHE NZL NLD SWE FRA SVN PRT AUT DEU JPN DNK CAN ISR USA CZE CHL ESP AUS ISL EST HUN LVA SVK TUR LTU POL KOR IRL

% annual average 8 7 6 5 4 3 2 1 0 -1 -2

Source: OECD Economic Outlook 105.

27

Speeding up digitalisation can boost productivity Percentage points annual productivity growth premium associated with digital adoption % 3.5 3 2.5

Direct effect from adopting firms Sector spill-overs

2 1.5 1 0.5 0

High-speed broadband

ERP software

CRM software

Computer use share

ICT training

Note: Regression coefficients are re-scaled to represent a 10 percentage point higher adoption rate at the sector level for illustration.

Source: Pareliussen and Mosiashvili (2020).

E-government is advanced 100

Online availability of government services

90 80 70 60 50 40 30

SVN

EU28

LVA

FIN

LTU

EST

Note: Panel A: Indicates if a service is online. Ranging from offline (0%), only information online (50%), fully online (100%).

Source: European Commission eGovernment Benchmark 2018 and European Commission 2018 PREDICT Dataset .

29

Estonian enterprises lag behind in digital adoption A. Businesses using ERP % (Enterprise Resource Planning) software

% 70

% 45 40

60

35

50

30

40

25

30

20 15

20

10

10 0

B. Businesses using CRM (Customer Relationship Management) software

5 FIN

LTU

OECD

SVN

EST

LVA

0

FIN

LTU

OECD

SVN

EST

LVA

Source: OECD ICT Use by Business database.

30

Policies affect digital diffusion Productivity growth potential from policy factors boosting digital technology adoption Higher use of e-government Estonia

Reducing barriers to digital trade

OECD average

Easier financing for young innovative firms Reducing regulatory barriers to competition and reallocation Upgrading skills (technical and managerial) Higher use of high-speed broadband 0.0

1.0

2.0

3.0

4.0

Effect on MFP after 3 years in % 31

Source: Sorbe et al. (2019), “Digital Dividend: Policies to harness the potential of digital technologies�, OECD Economic Policy Papers, No. 26.

Non-ICT firms lag behind in digitalisation Share of enterprises that employ ICT specialists (2018) % 35

% 40

30

35 30

25

25

20

20

15

15

10

10

Source: Eurostat Digital economy and society database (accessed 25 July 2019).

TUR

POL

EST

LVA

ITA

LTU

FRA

NOR

SVK

ESP

SWE

PRT

CZE

SVN

AUT

DEU

EU28

GRC

GBR

LUX

FIN

HUN

NLD

0

DNK

0

BEL

5 IRL

5

32

Digital user skills are improving for younger generations Digital problem-solving skills by age PIAAC score points

320 310 300 290 280 270 260 250 240 230 220

16-24

Note: % of individuals aged 16-74 in employment (2012).

Source: OECD Survey of Adult skills (2012 and 2015).

Estonia

25-34

PIAAC average

35-44

45-54

55-65 33

The use of work practices boosting skill use and innovation is around the OECD average

Source: OECD Employment Outlook 2016 fig 2.10A, calculations based on the OECD Survey of Adult Skills (PIAAC) 2012 and 2015.

GRC

TUR

ITA

SVK

KOR

FRA

CHL

GBR-NIR

IRL

SVN

POL

ESP

DEU

JPN

EST

OECD

AUS

NOR

CZE

CAN

GBR-ENG

USA

ISR

NZL

NLD

AUT

BEL

SWE

FIN

Percentage of jobs with high high-performing work practices

DNK

% 45 40 35 30 25 20 15 10 5 0

% 45 40 35 30 25 20 15 10 5 0

34

Few firms provide ICT training to staff Percentage of businesses providing ICT training to their employees by size class (2015) % 90 80 70 60 50 40 30 20 10 0

Small firms

Medium firms

Large firms

% 90 80 70 60 50 40 30 20 10 0

Note: Businesses with 10 or more employees that provided any type of training to develop the ICT related skills of their employees within the last 12 months. Businesses with 10-49, 50-249 and 250 or more employees are defined as small, medium and large, respectively.

Source: OECD (2017) ICT Access and Usage by Businesses Database.

35

Recommendations to seize the productivity potential from digitalisation - skills • Implement a programme to improve managerial practices and organisational performance of firms with a strong element of network-building.

• Strengthen cooperation between the public sector, labour unions and employers in skill supply and training.

• Strengthen the quality and relevance of teachers’ training and professional development in teaching digital skills.

• Tailor ICT classes and voluntary ICT hobby activities to better match the interests of both girls and boys.

36

Streamlining regulations further can boost digitalisation and productivity Regulatory barriers to competition and reallocation (EPL, PMR, insolvency regimes) Effect on productivity (through digital adoption) of closing half the gap to best-performing country % 4.0

3.5

effect after 3 years

effect after 1 year

% 4.0 3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

Note: Estimated effect on multi-factor productivity (MFP) of the average firm from reducing employment protection legislation (EPL) on regular contracts, reducing administrative burdens on start-ups and streamlining the insolvency regime.

Source: Sorbe et al., 2019, “Digital Dividend: Policies to harness the potential of digital technologies�, OECD Economic Policy Papers, No. 26.

37

Availability of finance is an obstacle to SME’s longterm investment Share of firms reporting availability of finance as a major obstacle to long-term investment, 2017

% 60

SME

% 60

Micro

50

50

40

40

30

30

20

20

10

10

0

0

SVN

Source: EIB Survey.

FIN

CZE

HUN

EST

SVK

LTU

EU28

PRT

GRC

LVA

38

Recommendations to seize the productivity potential from digitalisation – planning and financing • Formulate policies for industry digitalisation in a holistic way as a means of productivity catch-up and reflect those in government planning documents. Monitor implementation. • Promote alternative financing to fill the funding gap for SMEs.

39

For more information Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

Pareliussen, J. and N. Mosiashvili (2020), “Digital technology adoption, productivity gains in adopting firms and sectoral spill-overs – Firm-level evidence from Estonia”, OECD Economics Department Working Papers, OECD Publishing, Paris, forthcoming.

http://www.oecd.org/economy/estonia-economic-snapshot/

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