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the economy. Lead by Fundacion Chile, the state assumed many functions related to the development of technology and sanitary regulations. Currently, Japanese money and know-how has been invested in the fish farming. In the specialised literature, this cooperation is considered to be an example of experiment-based structural policy. It seems that the consensus regarding the need for an innovation policy in the state, is working, and that the investments in innovation have increased, despite the period of economic crisis. One of the courses for moving forward is the establishment of regional innovation and growth centres. An interesting example of how start-up high-tech firms were invited to join a Chilean research park that is under development – the Chileans adopted the slogan: “If you can’t make it in California, come to us. We care about your ideas!” References 1. Freeman, Chr. (1995). “The ‘National System of Innovation’ in Historical Perspective,” Cambridge Journal of Economics, 19, 5–24. 2. Funding Research and Innovation in the EU and Beyond: Trends during 2010–2012. Technopolis Group, Brussels & Tallinn 3. INNO Policy TrendChart with ERAWATCH (2011-2012) 4. Innovation Policy in Times of Austerity (2012). INNO Policy Trendchart. Brussels. 5. Innovation Union Scoreboard (2011). EC DG Enterprise and Industry. Brussels 6. Reid A., Varblane U. et al. (2011) Innovaatiline tegevus ettevõtetes aastatel 2006–2008. Tallinn: Enterprise Estonia. 7. Rothwell, R. (2002). “Towards the Fifth-Generation Innovation Process,” Henry, J., Mayle, D. (eds.). Managing Innovation and Change. London: The Open University & SAGE Publications. 8. Schwab, K. (ed.) (2012). The Global Competitiveness Report 2012–2013. World Economic Forum. Geneva. Summary Jüri Sepp Despite a transition that has lasted for 15 years, as well as Estonia’s accession to the EU, the actual development level of the economy is one of the lowest in Europe. Based on the latest data, income per capita, even when adjusted for purchasing power parity, is in 47 th place in the world. At the same time, the international indicators for development potential, as well as the economic growth to date, point to Estonia’s possibilities for convergence with the developed states. The composite indicators for human development and competitiveness, which synthesise all the developmental preconditions, give Estonia a position in the 40s. The general indicators for the quality of governance put Estonia in the 30s, in the ranking of the same states. The situation is even better when based on the indices for economic freedom that focus on economic institutions, where Estonia is even positioned in the 20s. In regard to the labour market, one can say that Estonia is in a poor position in comparison to the others, due to low marks for the availability of skilled labour. On the one hand, this is a result of the small size of the labour market, but based on various international comparisons, the problem is also the fact the workers’ education levels do not correspond to the demands of the economy. Another reason is the modest level of active labour policies. Population ageing and a reduction in the working age population, which is amplified by negative net migration, is having a long-term impact on the labour market. However, it is good that Estonia’s labour market institutions have not caused a rigidity of the labour market. Rather, the problem is the small role played by active labour policies in the education of skilled labour, and the high risk of poverty that accompanies unemployment. In summary, the rules of the game for Estonia’s economy can be seen to foster competitiveness and economic growth. However, this is only true in the current stage of development. In order to reach the top, the great lag in business sophistication and the productivity gap that has developed as result, must be overcome. Above all, it is necessary to arrive at a situation where the economy gets firm support from industry, which is not very large based on total employment, but is very productive. Unfortunately, the productivity of Estonia’s manufacturing industry continues to be low, and its growth will not enable Estonia’s level of productivity to catch up to the European Union average within the next few decades. For example, if Estonia maintains the current level of absolute growth, we will catch up with Finland in about forty years. It would take about a hundred years to reach the EU average. At the same time, productive growth cannot be achieved by simple means. The interaction of a large number of factors is required, and both business enterprises and the state, with its economic policies, must make a contribution. The latter must definitely consider the existing reference system. The capital-based production of the states with high standards of living requires significant capital replacement, in order to maintain the current standard of living in the future. For sustainable growth, states with extensive mineral deposits and large mining sectors need institutions, among other things, that enable resource rents to be converted into investments in other sectors and in human capital. The same problem is faced by the states that are dependent on foreign capital, which require 190 Estonian Human Development Report 2012/2013
mechanisms for increasing their standard of living that would convert the profits earned from foreign capital into investments into the state’s infrastructure and human capital. Production that causes extensive emissions of pollutants requires compensation, and should be replaced by other types of economic activity. Today, Estonia’s development is between the efficiency- and innovation-based stages, and therefore, the success factors for both of these stages must be considered, if we want to take advantage of all the development opportunities. Although Estonia’s productivity has increased at a very fast pace, to date, the labour costs have increased at an even faster rate. In Estonia’s case, the most problematic period is 2005 to 2008, when the unit labour costs increased by almost 50%, i.e. the gap between the growth in productivity and the increase in unit labour costs was alarmingly large. The efficiency-based competitiveness of Estonia’s economy was seriously endangered. In the subsequent period, from 2008 to 2011, Estonia succeeded in returning to a sustainable path of development. However, to ensure and increase Estonia’ competitiveness in the innovation-based stage, efforts must be made not only to work better, but to do better work – to produce goods and services with have greater added value. In addition to investments in research and development activities, this also presupposes the ability to implement the technologies, management methods and production organisation used in the rest of the world in local enterprises. By no means should innovation be viewed narrowly as just new product development. First, it obviously assumes that changes need to occur in the thinking of company managers, and lifelong learning must become the norm. In summary, the key to the growth of productivity in Estonia is its people – the development of their knowledge and skills. The economy is not just an aggregate of structures and technologies, but the people functioning therein and their knowledge. If the economic environment provides sufficient motivation, the development of people’s capabilities will initiate the changes that will later be reflected in the financial indicators of the business enterprises. Considering the fact that more than a third of our working age population (aged 15 to 64) is out of the labour market – is unemployed or not active – our first task is to focus on supporting the return of these groups to employment. This primarily affects those people who want to work, but have not found suitable jobs, and those who cannot take jobs because of their caregiver burdens or poor health. Here, the state can help, for instance, by ensuring that part-time work is profitable, that the necessary care services are available, and that possibilities exist for self-improvement, as well as retraining, if necessary. Coming back to the state’s tasks in the innovation-based stage of development, first, we see that around the world, state are searching for ways to fund solutions for enterprise policies that would cope with these new conditions and accelerate development. In this connection, attempts are being made not to come into conflict with the market signals, and to take the advantages and strengths of their states’ into account. Some states are continuing to invest in strategically pre-defined preferred areas of activity in developing their research policies and prioritised business sectors. The search for new areas of growth has also intensified (the movement of innovation policy in the direction of selectivity, which was out of fashion for awhile). At the same time, there are states that are continuing their horizontal (broad-based) innovation policies. Some states have reduced their R&D investments, some have not. There is a common aspiration to increase the effectiveness of policies by encouraging cooperation between the public and private sector, and by directing resources to produce the greatest return. What does Estonia look like against this background? Actually, our position in the world’s rankings is not so bad. R&D&I investments have increased, in both the public sector (EU funding) and in business enterprises. There are also some impressive indicators of success in the ICT field. We have introduced many standard measures of innovation policy that are used in other states; most recently, the provision of risk capital (Development Fund), cluster grants, and innovation shares provided to companies. At the same time, Estonia’s position in the innovation rankings is only relatively good – in comparison to the CEE countries, or countries that are located on the periphery of international economic development. The gap with the real innovation leaders is very big, and a reduction is not in sight. If we assume that prices will go up in the future, i.e. wage levels will increase; Estonia will have to be competitive in the league of innovation-based economies, where the demands are much more rigorous. Examining our development potential for the future, we must recognise that the quality of our universities and research institutions is not sufficiently high for innovation-based development. There is little high-tech production. There are few sectors in our economic structure where the possibilities for increasing innovation and productivity are outstanding. Our position in the international business networks is poor, and it is worsening. We have few leader firms, especially technology-based leader firms. The work that is done to attract foreign investments is unsystematic. The funding of research in universities is weakly connected to the perspective needs of the economy. The preferential fields of research are the same as in most other developed states. It is unclear where our relative advantage lies. It seems that we are more oriented to developing, implementing and maintaining the measures of innovation policy, which are actually sensible, than we are to finding and realising courses of action to achieve fundamental breakthroughs. It is also clear that a strategy that can help the state get to a higher level of innovation-related activity cannot be limited to the implementation of innovation policy measures, in the strictest sense, but must be related to the concretisation of the focus of socioeconomic development, in the broadest sense. This must encompass connections to the policies related to enterprise, education and research, the organisation of governance, and to structural policies, which is a category not often discussed in Estonia. At the same time, in the case of the latter, we must not, of course, come into conflict with the EU’s competition policies, especially regarding the rules for state aid. Greater light will be cast upon these issues in the last chapter of this publication. Estonian Human Development Report 2012/2013 191
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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
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3. IEP (2011). Structures of Peace.
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3Welfare and the Quality of Life Es
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choices made, not what people say t
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Figure 3.1.5 Public social spending
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tion agreed upon the social contrac
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References 1. Aidukaite, J. (2006).
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hand, to the “inequality of acces
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and explanations of the extent of i
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5- much more than I deserve. Some d
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people in Estonia consider the inco
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Table 3.3.1 Experienced Well-Being
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at about 70%. In Latvia and Lithuan
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sign. It seems that the usual view
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3.4 Quality of life Anu Toots 3.4.1
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a uniform composite indicator has n
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3.4.6 The components of life qualit
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Figure 3.4.4c Perceived quality of
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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 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
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: It is characteristic of the South K
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
Page 207 and 208: Figure 5.4.1 Support for the possib
Page 209: Summary Erik Terk Estonia is part o
Page 212 and 213: ehavioural patterns. Therefore, it
Page 214 and 215: EDR 2012/2013 authors Clemens Buche
Page 216 and 217: EDR 2012/2013 authors Alari Purju i
Page 218: Editor-in-Chief: Mati Heidmets Prod
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