DEVELOPMENT

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.
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