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to the conclusion that differences in economic freedom cause an approximate 2% fluctuation in economic growth annually. The author of this study has also reached the same conclusion (Sepp 2006). The Heritage Foundation rankings are led by Hong Kong and Singapore; in Europe, by Great Britain and Ireland. Estonia’s position in the HF ranking is also good; in 2005, even culminating with 4th place in the world. In 2007, Estonia was 12th, and 16th in 2012, between Finland and the Netherlands; Estonia places seventh, when the ranking is limited to Europe. Starting in 2007, the impact of the economic crisis has caused a negative trend in the composite index of Estonia’s economic freedom, which on a scale of 1 to 100 fell from 78 to 73 points. The main reason is the decline in the assessment given to government spending, which fell to 38.8 points. This was lower only in 2000. Another problem is labour market freedom and freedom from corruption. The remaining components steadily score over 70 points, and therefore are not directly affected by the economic situation (see Figure 4.1.3). A more detailed ranking of business freedom is provided by the World Bank (see Annex). The ranking is led again by Singapore and Hong Kong, and Denmark and Norway in Europe. In the ranking of the world’s states during the last year, Estonia has dropped two places, being 21st in the world in 2013, and 14th among OECD states between Germany and Japan. Figure 4.1.4 shows that Estonia’s weaknesses and strengths are quite graphic. If goods markets are very open, and the registration of property is simple, greater problems are related to bankruptcy proceedings and investor protection. It is noteworthy that the World Bank is no longer assessing business freedom in the context of the labour market. Earlier research gave Estonia a damning assessment in this regard. Therefore, the situation in the labour market is dealt with separately, in sub-chapter 4.3. 4.1.3 Quality of governance Another possibility for assessing the quality of institutions is related to the concept of governance. The empirical basis for this is provided by the World Bank’s Worldwide Governance Indicators (WGI). Essentially, Kaufmann, et al. (2010) defines governance as traditions and institutions by which the authority in a state is exercised. Thereafter, it is divided into three dimensions, each of which is characterised by two indicators. Unlike the concept of business freedom, the political institutions are also considered. The first two indicators are related to the rules for electing a government, controlling it and dispersing it. The first indicator, called Voice and Accountability, measures the participation of the citizenry in democratic processes, and the freedom of opinion and assembly. The second dimension characterises political freedom, and the extent of terror and political violence in each state, and examines the ability of the government to formulate and execute economic policy. The first indicator of this dimension measures the general effectiveness of the government, including assessments of the quality of officialdom, and of political independence. The second indicator characterises regulatory quality, based on the impact of regulations on economic development, primarily by supporting the private sector. The third dimension of the quality of governance presumes that the citizenry and the state respect the economic and political institutions. In this connection, the rule of law is first evaluated, which is related to the protection of property rights and the enforcement of contracts. At the same time, corruption is also measured as a means of abusing public office for private economic gain. Thereby a total of six indicators are assembled, behind each of which there are numerous sub-indicators, a total of 31. 10 The sources include surveys of individuals and companies, expert opinions from officials (e.g. the World Bank, African Development Bank, U.S. State Department, etc.), information from nongovernmental organisations (e.g. Reporters Without Borders) and economic information from commercial sources (e.g. Economist Intelligence Unit). In this report, when assessing the Figure 4.1.5 The development reserve of the reference states as the difference between the rankings for income and the average of the economic environment indicators. Slovenia Israel Singapore Hungary Austria Slovakia Netherlands Czech Republic Uruguay Switzerland South Korea Costa Rica Canada Denmark Ireland Finland Estonia Chile New Zealand -20 -10 0 10 20 -20 -10 0 10 20 10 Here we also conducted our own factor and regression analysis. By using the data on the reference states, two latent factors appeared, whereas the first of these is related, primarily, to economic traits, and the other, to political traits. The previously mentioned regularity was confirmed, namely, that political factors by themselves do not correlate with economic development. On the other hand, the quality of economic institutions (first factor) was closely connected to the achieved level of earning, and statistically significant. 154 Estonian Human Development Report 2012/2013
ule of law, the sub-indicators for economic freedom and competitiveness have been examined separately. A statistical analysis was used for the integration of the initial indicators, which is known as an unobserved component model. Greater weight is given to those indicators that are more closely correlated to the others. Thereby, six synthesised indictors are obtained in standardised form (with a mean value of zero, and a standard deviation of one), which generally fall between -2.5 and +2.5, whereas the positive direction corresponds to better governance. In addition, a percentile between 0 and 100 is indicated for each state, which indicates how many (what percentage of) states are worse off. Evaluations since 1996, which encompass 215 states, are available. The leading states are shown in the Annex. Estonia’s quality and development of governance, from 2002 to 2011, is shown in Table 4.1.1. All the indicators place Estonia among the top one-third in the world, and generally, a positive development is noticeable in the last decade. Estonia achieves its highest marks in regulatory quality (it has reached the top 10%), which can be considered to be one of the most important governance aspects, from an economic standpoint. The positive dynamics of the rule of law and government effectiveness evaluations are also achievements. At the same time, the political stability assessment has decreased significantly since 2002, which is incomprehensible (the “Bronze Night” did not occur until 2007). 4.1.4 The institutional potential of economic development As we monitor the economic environment, we are dealing with the observed indicators as development factors by examining their relationship with the level of economic development that has actually been achieved. We use the GNI (Gross National Income per capita), which is the economic component of the Human Development Index, to measure the latter. In Table 4.1.2, the reference states are ranked according to their positions in the wealth component of the HDI. Singapore, with its 4th position, gets the highest score. Estonia, with its 47th position, is fourth from the bottom, outpacing only Hungary, Chile and Uruguay. However, at this point, we are more interested in the comparison of the economic development indicators with other indicators, by state, the results of which are reflected in the last column of the table. Here we include the data from those indicators in which the states achieve a better position in international rankings than based on GNI. In Estonia’s case, Estonia’s position in all the other indices is higher than based on the economic development achieved to date. This can be interpreted as the existence of certain development reserves, from the viewpoint of all five observed development factors (HDI, GCI, FI, DB and WGI 11 ). Only Denmark, New Zealand and Chile are also, still, in this Table 4.1.1 Development of Estonia’s governance 2002–2011 (percentiles) Year Source: World Bank GNI HDI GCI FI DB WGI + Singapore 4 26 2 2 1 25 3 Switzerland 11 11 1 4 28 7 3 The Netherlands Voice and Accountability Political Stability and Absence of Violence Government Effectiveness Regulatory Quality 12 3 5 35 31 8 3 Austria 15 19 16 25 29 11 1 Canada 16 6 14 5 17 10 4 Denmark 19 16 12 15 5 4 5 Finland 22 22 3 8 11 2 4 Ireland 26 7 27 12 15 15 4 South Korea 27 15 19 33 8 55 3 Israel 31 17 26 48 38 66 1 Slovenia 32 21 56 90 35 43 1 New Zealand 35 5 23 3 3 1 5 Czech Republic 41 27 39 57 65 35 2 Slovakia 43 35 71 35 46 51 2 Estonia 47 34 34 12 21 33 5 Hungary 49 38 60 65 54 56 1 Chile 58 44 33 11 37 29 5 Uruguay 60 48 74 50 89 49 3 Costa Rica 73 69 57 44 110 64 4 Rule of Law Corruption Control 2002 80.8 77.4 74.6 89.2 72.7 75.6 2006 82.7 67.3 84.9 88.2 84.7 80 2011 83.6 66 84.8 90.5 85.4 78.7 Table 4.1.2 Rankings of the reference states based on some indicators of economic, human and institutional development as well as competitiveness Source: compiled by the authors, based on the most recently available data. GNI – indicator for the wealth component of the UN Human Development Report; HDI – UN Human Development Index; GCI – World Economic Forum’s Global Competiveness Index; FI – Fraser Institute’s Economic Freedom of the World index; DB – World Bank’s Doing Business ranking; WGI – World Bank’s Worldwide Governance Indicators 11 Since the World Bank does not provide summarised indicators for the quality of governance, we ranked the states by the average of the six sub-indicators. Estonian Human Development Report 2012/2013 155
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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
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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 and 154: vide a valuable connection for maki
Page 155: Figure 4.1.3 Components of economic
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,
Page 205 and 206: • 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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