Estonian Human Development Report

Figure 6.3.1. GDP, government sector costs, billions
of EEK
250
200
150
100
50
0
2002 2003 2004 2005 2006
Source: Estonian Statistical Yearbook, 2007, 2008
GDP
the achievement of socially desirable results (for instance,
well-being) the supply side does not suffice, demand is also
required. 34
Nevertheless, social services are often approached primarily
from the supply side. They are treated as something
that is unconditionally beneficial. The conditions
and limitations predicated on the economic side are often
seen as unpleasant restrictions that inhibit useful expenditures
that promote societal development. At the same
time, we must consider that the removal of these restrictions
and the limitless expansion of social expenditures
have a destabilizing effect on the economic environment
that increases uncertainty, reduces investments and ultimately,
reduces the future tax base from which social costs
are financed. Since institutional activities, such as guaranteeing
lawmaking, the judicial system and public procurement,
are financed, to a great extent, from the budget,
institutional development is directed in relation to the tax
burden. Through taxes, the state guarantees resources to
assure institutional efficiency. Therefore, the sufficiency of
the tax burden is measured by the effective performance
of institutions, which is not directly related to any formal
percentage of the GDP. At the same time, the shortage of
institutional resources also becomes a serious problem
when there are insufficient resources for the protection of
health and ownership, for the effective and speedy work of
the courts, and for guaranteeing the security of the country.
In the case of institutions, the risk of overregulation
in sensitive fields, such as the labour market, must also be
taken into account.
As we saw in the previous subchapter, a disparity
between a relatively low level of the quality of life and a
relatively high subjective indicator of well-being is typical
of Estonia. For a long time, it has been typical of Estonia
that this disparity is objectively expressed by a weak
connection between economic growth and an increase in
social costs (see Figure 6.3.1.).
Under conditions of rapid economic growth, in which
GDP in current prices increased from 121.4 billion EEK
in 2002 to 207.1 billion EEK in 2006, government costs
have also increased, including the nominal costs for
health care, education and social protection. At the same
time, the given cost increase has been much more modest
than the economic growth, which shows that their ratio
of GDP decreased (see Figure 6.3.2.). Government costs
decreased as a ratio of GDP from 35.7% in 2002 to 33%
in 2006, education costs from 6.8% to 6.0%, and social
protection costs from 10.0% to 9.6%. Health care costs
remained at the same relatively low level, constituting 4%
of GDP. Therefore, costs in the social field did increase,
but less than GDP on the whole. This also points to the
fact that a balanced budget was maintained and a surplus
achieved during this period due to the relative restriction
of costs in the social sphere. Keeping in mind the
importance of workers’ education and health in the creation
of necessary human capital in the long run, the relatively
significant reduction in the percentage of educa-
Government
sector
costs
Health care
Education
Social
protection
Figure 6.3.2. Ratio of government costs, social protection,
education and health care costs of GDP, %
2006
2005
2004
2003
2002
4
4
4
4
6
6
6.4
9.6
9.8
10.3
9.9
10
6.8
0 10 20 30 40
Source: Estonian Statistical Yearbook, 2007, 2008
indicators that primarily characterize economic performance,
such as GDP or economic growth.
By utilizing the concepts of human and social capital,
on the one hand, it is possible to correlate the functioning
of the economic and social spheres, and on the other
hand, to provide an opportunity to analyze the policies
directed at these fields of activity. The majority of social
scientists maintain that investments into human capital
– into health, knowledge and skills, and the policies
directed at them – are just as important as investments
into physical capital. At the same time, this statement is
far from self-evident, because it is not simple to statistically
validate this connection (El Erian and Spence, 2008,
p. 37): it is easier to precisely assess the input that shapes
human or social capital (education costs, years of school
enrolment) than the outputs achieved thereby (ability to
learn, receptivity to innovations, socialization, capacity
for empathy, etc.). It is also important to consider that for
33
33.5
34.2
3.9 6.5 34.6
35.7
Government
sector
costs
Health care
Education
Social
protection
34
India is one of the contradictions of this type that are treated in papers on economic growth theories. World-class engineers and
scientists have been educated there for decades, although its impact on economic development has been very modest. The reason was
that domestic industry did not create sufficient demand for the use of this human capital and a great deal of the brain power left India.
A positive impact developed with the creation of a global software industry, and the demand for the skills that resulted from this. This
caused a broader impact on the entire service sector, especially though demand intermediated by the Internet. The impact of human
capital on economic growth and well-being needed an impulse based on demand in addition to the supply; see The Growth Report:
Strategies for Sustained Growth and Inclusive Development (2008).
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