DEVELOPMENT

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4.1 Economic environment Jüri Sepp, Clemens Buchen, Helje Kaldaru Today, two viewpoints of economic development can be identified within the framework of economics: 1) the growth theory based on production functions and factors, and 2) an institutional approach that places importance on the motivation of individuals. The first course is characterised, somewhat, by a mechanical approach to the economy (Leschke 2011, 95–96). The interests and incentives of the economic subjects are ignored. However, the efficiency of using production factors may vary to a great extent under different social conditions. It is enough to allude to the relatively modest results produced by developmental aid to date, to be convinced that large investments may turn out to be a waste of money, if the social preconditions for development, in the form of purposeful and functional formal and informal institutions, are lacking. 1 Essentially, the decisive role of institutions is demonstrated by the analysis of specific nations’ wealth in sub-chapter 4.2, where this role is determined indirectly, as a certain residual value of wealth. In the context of this study, the intertwining of two approaches to development theory, within the framework of the UN human development concept, deserves special attention. In the 1996 and 2003 Human Development Reports, a qualitative model was presented to illustrate the specific connection between human capital and economic development, which also confirms the importance of institutions (HDR 1996, 68; HDR 2003, 70). Namely, the reciprocal impact of human capital and economic development can be viewed as functioning through several filters or catalysts. The inhibitors and accelerants in both directions are the private and public institutions that guide human behaviour. In some states, a relatively harmonious process of human development and economic growth becomes evident, while in others, one or the other development factor becomes an inhibitor (Sepp, Eerma 2011). In the following empirical analysis we will try to focus on those institutions, which clearly have a positive impact. At the same time, we should not lose sight of the fact that various institutions may be substantively equivalent, and develop complicated mutual connections and dependencies. In this study, the possibilities for making the quality of institutions measurable from the viewpoint of economic development are explored 2 . Methodologically and empirically, this is based on the rankings compiled by international organisations, which are regularly available for forming assessments 3 . The best known are three generalising indicators: • Economic competitiveness, which is expressed in the indices of both the World Economic Forum (WEF) and the International Institute for Management Development (IMD); • Economic freedom, which is examined empirically by the Heritage Foundation (HF) in the U.S. and the Fraser Institute (FI) in Canada. Entrepreneurial freedom is measured, in detail, by the World Bank, in its series called Doing Business. In principle, the integrated index on the regulation of the commodities market, compiled by the OECD, can be considered to be a reverse indicator of economic freedom; 4 • Quality of governance, which the World Bank measures with its Worldwide Governance Indicators (WGI), and based on which, economic and political institutions are also assessed. Assessments of transition states are provided by the European Bank of Reconstruction and Development (EBRD). 5 The connections of these three criteria to economic development differ. Economic freedom and the quality of governance are essentially directed to opening up the state’s institutional development potential. However, competitiveness is a construction in which the achieved level of development (the ability to earn) and its factors – the ability to sell and the ability to attract – are combined (Trabold 1995). Therefore, the general indicators of competitiveness are relatively endogenous (derived internally), and as such, are not very informative. However, some of the sub-indicators (components) of competitiveness pro- 1 Institutions include all the rules and standards that affect cooperation between individuals, and, based on North’s (1990) often quoted statement, are the social stimulation systems. As influencers of human behaviour, institutions may promote economic growth or inhibit it. Therefore, any growth theory that is based on production factors will be only a conditional abstraction, if it is not supplemented by an analysis of the interests and stimuli of the economic agents. 2 Therefore, the data provided by Freedom House is not included, because its main focus is on political conditions. 3 The Ifo Institute’s Institutions Climate Index, which assesses the OECD states would, actually, warrant attention, but unfortunately, its authors have not considered it necessary to include Estonia. See Eicher ja Röhn (2007) and http://www.cesifo-group.de/ifoHome/facts/DICE/Other-Topics/Basic-Country-Characteristics/Institutions-Climate-Indices/ins-clim-inde-11.html. We have also not included the data available from individual researchers, the sustainability of which is questionable, i.e. Kuncic (2012). 4 Unfortunately, this is only a periodically available indicator, the last level of which characterises 2008. See Wölfl et al. (2009) and http://www. oecd.org/eco/regulatoryreformandcompetitionpolicy/indicatorsofproductmarketregulationpmr.htm 5 http://www.ebrd.com/pages/research/publications/flagships/transition.shtml 150 Estonian Human Development Report 2012/2013
vide a valuable connection for making assessments of the state’s institutional quality as a developmental factor. At the same time, the endogenous nature, or dependence on economic development, of the institutional development cannot be denied. This makes the identification and exploration of causal connections extremely complicated. 4.1.1 Competitiveness In the case of competitiveness, the two levels of competition, or “competitive classes”, must be differentiated. At the micro level, entrepreneurs compete, primarily, as providers in the sales markets. At the macro level, on the other hand, governments, at both the national and local levels, compete for mobile production factors. In the latter rivalry, the role of the instruments is primarily filled by public (formal) institutions and the infrastructure. If the focus is on institutions, the term institutional system-competition among jurisdictions (or a part therefore) is preferred; however, if the focus is on infrastructure, (geographical) locational competition is referred to. 6 Unfortunately, infrastructure is the factor that is strongly endogenous, being directly dependent on economic development and the financing opportunities based thereon. Essentially, this duality of competitive subjects is also reflected in the leading empirical studies of competitiveness. For instance, the World Competitiveness Yearbook (WCY), which has been regularly published by the International Institute for Management Development since 1989, divides competitiveness into four fields of activity, each of which has five basic components: • economic results: domestic economy, foreign economy, foreign investments, employment, prices; • effectiveness of governance: state finance, fiscal policy, public institutions, business law, social network; • business efficiency: productivity, labour market, finance, management practices, attitudes and values; • infrastructure: physical, technological and scientific infrastructure, healthcare, education. The latter are made measurable with the help of various individual indicators (a total of 329) for 59 states and the composite evaluation is given on a scale of 100. The maximum 100 points were achieved in 2012 by Hong Kong, which narrowly outpaced the U.S. Of the European states, Switzerland (3) and Sweden (5) achieved the best positions. Although, at the individual indicator level there could be some scepticism, in principle, that the economic results characterise the ability to earn, the effectiveness of governance and infrastructure, the government’s ability to compete at the macro level (the attractiveness of the state) and business efficiency, the situation at the micro level in company competition (ability to sell). Before the crisis, Estonia’s competitiveness was rated, by the IMD, to be in 22nd place in the world (IMD Figure 4.1.1 Components of Estonia’s governance effectiveness and business efficiency 2012 (ranking: the larger it is, the worse it is) Management practices Financing Source: IMD Attitudes and values Labour market State finance 2007). By 2009, Estonia had fallen to 35th place, but in the last few years has climbed four places, and, in 2012, achieved 66.9% of the maximum level (IMD 2012). This is a better position than was achieved in the Human Development Index. An even larger difference exists in the position for the income level. Of the institutional factors, the ones on the plus side are effectiveness of governance, especially public finance and business law (Figure 4.1.1), which has positioned Estonia, during the last few years, between 20th and 24th place. On the other hand, the economic results, during the crisis, have sporadically even dropped us into the 60s. The second well-known measure of competitiveness originates from the World Economic Forum (WEF), which publishes the annual Global Competitiveness Report (GCR). Starting in 2006, the Global Competitiveness Index (GCI), compiled by Xavier Sala-i-Martin, has been included in the report, which differentiates the development factors based on three levels of development: the resource-, efficiency- and innovation-based stages. At each stage of development, separate development factors are differentiated: four at the first stage; six at the second; and two at the third. In the general indicator, greater weight is given to those factors, for each state, that correspond to the developmental stage of the given state. Of course, the developmental stage itself is determined in quite a primitive way – based on the achieved income level. Based thereon, Estonia is positioned between the second and third stages of development. All 144 states are studied. The leading states are shown in the Annex. Based on the Global Competitiveness Index (GCI), Estonia has the greatest potential of the transition states. Before the crisis, Estonia’s position held steady at 25 to 27; after the crises, we have had to reconcile ourselves to positions 33 to 34. 60 40 20 Productivity and efficiency Fiscal policy Social network Institutional network Business law 6 Specifically in the Estonian context, see Wrobel (2000). Estonian Human Development Report 2012/2013 151
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ESTONIAN HUMAN DEVELOPMENT REPORT 2
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Table of Contents 1 Human Capital /
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Dear Reader Since the moment when E
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1Human Capital Estonian Human Devel
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the HDI’s content has also been h
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Figure 1.1.1 The human development
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Figure 1.1.7 The income sub-index:
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The results of the Princeton Projec
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the hypothetical generation. The to
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Figure 1.2.3 Life expectancy. Eston
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Table 1.2.2 also presents the most
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The new trends that are appearing i
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Figure 1.2.8 Components of populati
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New features were introduced into E
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Initiation of Voluntary Birth Contr
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Table 1.3.1 Best-known educational
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(OECD 2012b). Therefore a certain r
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The reciprocal dependence of the pr
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Figure 1.3.8 Percentage of students
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Table 1.3.4 The quality of educatio
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1.4 Health Raul-Allan Kiivet Change
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Table 1.4.1 Usage of prescription m
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allude to the fact that approximate
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promote healthy lifestyles among th
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Figure 1.5.1 The World Values Surve
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Table 1.5.2 Estonia’s participati
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Figure 1.5.3 The percentage of the
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Figure 1.5.5 Percentage of the Esto
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The fact that Estonia’s position
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Summary Mati Heidmets The global vi
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2People and Society Estonian Human
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Table 2.1.1 Structure of the Bertel
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tioning market economies (15 states
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2.2 Freedom and democracy Martin M
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Table 2.2.1 Democracy indicators Po
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Figure 2.2.2 The distribution of th
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would be something that none of the
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political participation are general
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strongest, while a very small perce
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is concerned, Estonia is one of the
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Figure 2.4.2 Average circulation of
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2.5 Corruption Jüri Saar In accord
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Lithuania, 61%; and in Russia, 69%.
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2.6.2 Intentional homicides in Esto
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crime. And thirdly, there was a wis
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References 1. Ahven, A. & Tabur, L.
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states included in the EU Kids Onli
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2.8 Public assessments of the state
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Figure 2.8.4 Changes releated to tr
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Page 103 and 104: Table 2.9.1 The positions of Estoni
Page 105 and 106: 3. IEP (2011). Structures of Peace.
Page 107 and 108: 3Welfare and the Quality of Life Es
Page 109 and 110: choices made, not what people say t
Page 111 and 112: Figure 3.1.5 Public social spending
Page 113 and 114: tion agreed upon the social contrac
Page 115 and 116: References 1. Aidukaite, J. (2006).
Page 117 and 118: hand, to the “inequality of acces
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Page 121 and 122: 5- much more than I deserve. Some d
Page 123 and 124: people in Estonia consider the inco
Page 125 and 126: Table 3.3.1 Experienced Well-Being
Page 127 and 128: at about 70%. In Latvia and Lithuan
Page 129 and 130: sign. It seems that the usual view
Page 131 and 132: 3.4 Quality of life Anu Toots 3.4.1
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Page 135 and 136: 3.4.6 The components of life qualit
Page 137 and 138: Figure 3.4.4c Perceived quality of
Page 139 and 140: Figure 3.4.5 Changes in the depriva
Page 141 and 142: 3.5 Environment dimension of well-b
Page 143 and 144: Figure 3.5.1.b Estonia’s position
Page 145 and 146: 3.5.4 Energy intensity The energy i
Page 147 and 148: productivity, which is defined as t
Page 149 and 150: perceive themselves as worse off th
Page 151: 4The Economy Estonian Human Develop
Page 155 and 156: Figure 4.1.3 Components of economic
Page 157 and 158: ule of law, the sub-indicators for
Page 159 and 160: References 1. Acemoglu, D.; Robinso
Page 161 and 162: Development Report employs generali
Page 163 and 164: and pasture land, and this was capi
Page 165 and 166: Basing the total and net savings re
Page 167 and 168: 4.3 Labour market Reelika Leetmaa,
Page 169 and 170: The problems include the very limit
Page 171 and 172: • Expenditures for active labour
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Page 175 and 176: 4.4 Productivity and the economic s
Page 177 and 178: labour costs at the company level r
Page 179 and 180: Table 4.4.4 Comparison of the produ
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Page 183 and 184: 4.5 Innovation Erik Terk, Katrin M
Page 185 and 186: Table 4.5.2 Comparison of innovatio
Page 187 and 188: Table 4.5.4 Comparison of the indic
Page 189 and 190: in order to make the R&D potential
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Page 193 and 194: mechanisms for increasing their sta
Page 195 and 196: Globalisation and Policy Patterns 5
Page 197 and 198: When Estonia regained its independe
Page 199 and 200: 5.2 The impacts of globalisation an
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5.3 Development policies Erik Terk,
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• C -the “Estonia-centred” su
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Figure 5.4.1 Support for the possib
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Summary Erik Terk Estonia is part o
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ehavioural patterns. Therefore, it
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EDR 2012/2013 authors Clemens Buche
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EDR 2012/2013 authors Alari Purju i
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Editor-in-Chief: Mati Heidmets Prod
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