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Figure 4.1.2 Components of Estonian competitiveness 2006-2013 (ranking: the larger it is, the worse it is) 2006—2007 2009—2010 2012—2013 Innovation Business sophistication Size of the market Technological maturity Developement of financial markets Labour market efficiency Efficiency of the goods markets Higher education and in-service training Health and primary education Macro economy Infrastructure Basic institutions Source: World Economic Forum 0 20 40 60 80 0 20 40 60 80 Estonia’s strengths included both technological readiness and macro economy (Figure 4.1.2). Meanwhile, the crisis caused a great decline in the assessment results, but now a position among the top twenty has been regained. Unfortunately, we have partially lost our technological advantage. However, according to the GCR, our newest strength is labour market efficiency, which the other indices do not always confirm. Apparently, we have to reconcile ourselves to the poor position achieved due to the size of our market. However, we should be worried about the poor rating for sophistication, and also its decline. This refers, primarily, to the low developmental level of business networks and clusters in Estonia, which is accompanied by a modest role in the value chain (see chapter 4.5 for details). As a whole, the favourable institutional base for economic development created by Estonia, and also its sufficiently good “marketing” to the international public, was reflected in the competitiveness indicators. This may be sufficient for development in the resource- and efficiency-based phase, but would, unfortunately, not be enough to rise to the level of the world’s top countries in the innovation-based stage of development. 4.1.2 Economic freedom The fact that the assessment of institutional development is often executed under the label of economic freedom results from the central role played by the guarantee of individual property rights and the rule of law in an effective market economy model. Without this, there is no hope of entrepreneurial activity, which presumes motivated individuals. Undoubtedly, there is a need for competences and capabilities, but without motivation, this is only (unused) potential. Without initiative and entrepreneurship, there is no innovation or development. Economic freedom does not mean that everything is permissible, but rather, that the environment for these activities is transparent and secure. We can also speak about real freedom when the economic agents do not need to fear attacks on their person or property (Gwartney, Lawson 2006: 5). This is the principal condition for avoiding all kinds of dilemma structures, or rationality traps, which inhibit development (Homann, Suchanek 2012). At the same time, the risk of attack from both the state as well as private individuals must be precluded. Economic freedom is a complex phenomenon, in which the excessive development of one component can damage the others. In any case, the goal cannot be to minimise the size (spending) of the state, which may be detrimental to other aspects of economic freedom (for example, the rule of law). 7 The measurement of economic freedom does not have a long tradition. The Fraser Institute (FI) started dealing with this concept in the 1980s, and compiled its first summarised comparative analysis in 1996. This analysis retrospectively assessed economic freedom back to 1975. The Heritage Foundation (HF) has been compiling summaries of economic freedom since 1995. Before that, economists tried to examine the impact of institutional frameworks indirectly, by using indicators about the spread of democracy. Unfortunately, the empirical studies showed that the impact of democracy on economic development was far from unambiguous (Apolte, Peters 2009). 8 On the other hand, the positive impact of economic freedom on the objective indicators of economic development – on both the level (GDP per capita) as well as the growth – has supposedly been confirmed empirically, including, by the author of this essay (Sepp 2006 and Sepp, Eerma 2007). The last study by the Fraser Institute rated the economic freedom of 144 states in 2010, on a scale of 1 to 10, 7 The descriptive factor and regression analysis conducted by us, as a background study, confirmed that the size of the state itself (if all the other conditions are equal) does not correlate with the economic development level. 8 The current discourse on this topic is significantly shaped by Acemoglu and Robinson, with their book Why Nations Fail (2012), which analyses the importance of extractive and inclusive institutions in both the economy and politics, as well as the connection between these two spheres, whereas one of the central themes is the struggle related to the distribution of well-being in society. Essentially, this approach can be considered to be an elaboration of the concept of open and limited access societies (North et al., 2006). 152 Estonian Human Development Report 2012/2013
Figure 4.1.3 Components of economic freedom in Estonia 1995–2010, on a scale of 1 to 10 (FI) 2010 2005 2000 1995 Kokku Regulation incl. business incl. labour market incl. credit market Free trade “Health” of money Rule of law Size of government Source: Fraser Institute 0 2,00 4,00 6,00 8,00 0 2,00 4,00 6,00 8,00 Figure 4.1.4 The components of business freedom in Estonia in 2013 (ranking: the bigger it is, the worse it is) based on 42 individual indicators, in the following five basic areas: • Size of Government: Expenditures, Taxes, and Enterprises • Legal Structure and Security of Property Rights • Sound Money • Freedom to Trade with Foreigners • Regulation of Credit, Labor, and Business The ranking (see Annex) is led by Singapore and Hong Kong, and Switzerland in Europe. Finland was at a respectable 9th position. Estonia (Figure 4.1.3) has been given this composite evaluation since 1995, when it achieved 5.6 points, on a scale of 10, and placed 75th. By 2005, Estonia had risen to 8th place, with 8 points, and was, thus, especially mentioned in the report. The greatest improvement has appeared in the loan market, and in the “health” of money. A small backslide was noticeable in the freedom of foreign trade, which was related to the implementation of the EU’s uniform trade policy. Unlike the World Economic Forum, the Fraser Institute considers the weakest link in Estonia to be the freedom of the labour market. 9 During the crisis years, Estonia’s economic freedom declined to 7.7 points, and it ranked 16th and 17th, in 2009 and 2010, respectively. The main culprit is the size of the government, which, nevertheless, achieved a level of more than 6 points. It is here that the endogenous nature of institutional quality evaluations becomes apparent, i.e. dependence on real economic development, which does not make it possible to consider these assessment results to be purely indicative of development potential. Another well-known measure of economic freedom is the Heritage Foundation’s Index of Economic Freedom, which includes ten components with 50 individual indicators. Starting in 2006, it also uses a scale of 1 to 100. In 2012, the ten components were grouped into four main categories: • Rule of Law (property rights, freedom from corruption); Fulfilling contracts Bankruptcy proceedings Summary 80 60 40 20 0 Business start-up Getting a building permit • Limited Government (fiscal freedom, government spending); • Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and • Open Markets (trade freedom, investment freedom, financial freedom). Cross-border trading Paying taxes Source: World Bank Investor protection Getting loans Getting electricity Property registration The composite index is the arithmetic average of ten components. In 2012, 184 states were included in the survey, with 179 providing full sets of data. Here too, numerous studies have confirmed that economic freedom has a significant statistically and substantively positive connection to economic development – with both its level and growth. The Heritage Foundation itself has examined the impact of the changes in economic freedom on economic growth, and has come 9 Contradictory assessments, in various rankings, are one of the reasons why the labour market has warranted a separate chapter in this report. Estonian Human Development Report 2012/2013 153
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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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of the state’s development are en
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
Page 119 and 120: and explanations of the extent of i
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
Page 133 and 134: a uniform composite indicator has n
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 and 152: 4The Economy Estonian Human Develop
Page 153: vide a valuable connection for maki
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
Page 173 and 174: who lose their jobs. These ensure i
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
Page 181 and 182: Figure 4.4.1 Annual average increas
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
Page 191 and 192: It is characteristic of the South K
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
Page 201 and 202: Table 5.2.2 Support of the differen
Page 203 and 204: 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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