Email Story
Print Page
June 2007
Country, Regional & City Reports
COUNTRY REPORT: ESTONIA
With economic growth continuing to spiral, Estonia can hardly believe its luck – but rising debts may yet spoil the party, reports Richard Lofthouse
Having left the Soviet Union in 1991, Estonia joined the EU in 2004 and has never looked back. Tourists, enticed by no-frills carriers, throng the slick modern airport of the capital city Tallinn, while a thriving exchange of goods and peoples has grown out of the country’s historic and linguistic link with the Finns, a situation not enjoyed by neighbours Lithuania and Latvia.
While the 3 March parliamentary election returned Estonia’s prime minister to office – itself a novelty for stability-starved eastern Europe – the centre-right Andrus Ansip found himself at the vanguard of the technological revolution: e-voting was a first not just for Estonia, but for the world. Moreover, Estonia is largely Wi-Fi-enabled and has a reputation for innovation in biotechnology and IT – it nurtured the individuals who wrote the software for Swede Niklas Zennström’s VOIP service Skype.
Yet although Estonia is predicted to enjoy 11% GDP growth this year, inflation is now a niggling 4.7%, which is causing many observers to wonder if the economy is overheating. Indeed, Ansip was forced to use his hard-won time at a post-election EU summit to assuage fears that inflation will not slow sufficiently to allow Estonia to join the eurozone by 2010.
Although nowhere near Latvia’s 18% current account deficit, Estonia’s 12% deficit is 2% higher than Lithuania’s. Around half of the headline economic growth figure is fuelled by real estate prices, which rocketed 50% last year. This in turn has dramatically increased personal debt as individuals have scrambled to obtain mortgages, simultaneously leveraging real estate assets to buy imported consumer durables.
Personal loans have risen 62% in Estonia in the past 12 months, prompting Professor Raul Eamets, head of the Tartu University Institute of Economics, to warn that too many Estonians are borrowing too much credit too quickly, making them vulnerable to any rise in interest rates. It’s not just property that is proving a temptation – the vehicle of choice for otherwise dour Estonians who have “made it” is the US-made Hummer SUV, preferably in a bright shade of yellow.
This rise in aspirational borrowing and its attendant risks is perhaps one reason why the classical liberal Estonian Reform Party rose 12% in the recent elections, promising macro-economic stability among other pledges. Meanwhile the acclaimed architect of Estonia’s economic liberalism, Mart Laar, saw his party, Union of Pro Patria and Res Publica, fall 16%.
None of these fears faze a strong cadre of Estonians whose historic ability to withstand abrupt change and hardship is legendary. Indeed, Russia’s current sabre-rattling is a minor inconvenience compared to the deportation of thousands of Estonians to Siberia in the 1940s, or to the German and Russian occupations of the 20th century.
Forty-year-old Rainer Nölvak personifies Estonian stoicism. His grandparents were taken from their homes in the middle of the night in the infamous Russian deportation of June 1944, put on cattle trucks and taken to Siberia. He grew up in the final years of the Cold War, learned science at Tallinn Technical University at a time when no one believed the Soviet line on anything, got kicked out, took part in the “Singing Revolution” of 1989 – so called because the Estonians gathered to sing their protests in vast numbers – and then set up Estonia’s first internet service provider.
Today Nölvak is the founder of biotechnology startup Celecure, which is developing innovative cancer-inhibiting drugs. He says: “Real estate is boring. I want instead to make a real difference, to change the world for the better.”
The same theme is echoed by Gunnar Kobin, CEO of Ülemiste City, an innovation hub situated on a site once earmarked for the Soviet version of Ronald Reagan’s Star Wars programme.
“If this goes as planned, we’ll have 16,000 people working here by 2015,” says Kobin, adding that he envisages the hub as the “most modern innovation city of the Nordics”. But he warns that Estonia is too small to have a heavily academic science park like Kista City, Stockholm’s Silicon Valley. Plus, he notes, “the feeling right now is that Estonia has become too relaxed about innovation amid a roaring economy. R&D spending isn’t high enough, and the danger is complacency.”
Kobin says that too many Estonian students want to take degrees in business management, while too few want to get their hands dirty in a narrow area of expertise leading to the next great invention.
Priit Pallum, director-general of the external economic and development cooperation department of the Estonian Ministry of Foreign Affairs, explains that Estonia grasped the IT revolution as a way of maximising the power of a tiny 1.4 million population. “The view taken from the start of Estonia’s independence has been that if you don’t have a website, you don’t exist,” he says. “We don’t have natural resources other than timber and oil shale.”
As a result, almost 80% of the economy is defined by services; this confirms Pallum’s view, shared by the government, that “the knowledge-based economy is what we want – an evolving process”.
These are exciting times to be an Estonian, tinged with fear that the country’s miracle growth might yet come unstuck or that poor relations with Russia will embroil the small nation in a larger conflict once more.
Not limited in his interests to biotechnology, Nölvak has already worked up a large spreadsheet showing how Estonia can harness offshore wind energy and oil shale to properly secure its future independence from its colossal neighbour to the east. He is helping a friend establish Estonia’s first Greenpeace affiliation.
For the future, the dreaming may continue – but in the short term, everyone is just hoping that the bubble won’t burst.
DATA FILE: ESTONIA
Population 1.4 million
GDP €9.96 bn
Per Capita GDP AT PPP €7,140
Expected GDP growth 2007 11%
Anticipated end-year inflation 2006 4.5%
Investor information www.investinestonia.com
Estimated number of days to open a business 21
Transparency International Corruption Perceptions Index position (out of 163: 1 = least corrupt) 24
CNBC European Business Investor Attractiveness Index score (out of 10) 9
Figures: EBRD, other sources. The CNBC European Business Investor Attractiveness Index is based on macro-economic and other more subjective factors including condition of infrastructure, cost of doing business, ease of access to decision makers, and perceived opportunities.
Behind the contrasting stories of football- driven transformation and persistent poverty, Africa is quietly fostering a burgeoning and acquisitive middle class. Jo Bowman finds these “black diamonds” are giving hope to international marketers of everything from bottled water to designer suits. Continue Reading » Despite much progress since the fall of the Berlin Wall, there is still a stark disparity between the wealth of old and new Europe. Dominic Swire reports on the new European divide. Continue Reading » Twenty years since the reunification of Berlin and the German capital is still Europe's most famous and exciting urban renewal project. William Boston reports. Continue Reading » The burgeoning Gulf region may have suffered in the global downturn but with better management of its oil wealth and cautious investment plans, the area is looking at a bright future. Scott MacMillan reports. Continue Reading »
Sectors:
Country, Regional & City Reports
Related Stories:
AFRICA
Still Out In The Cold?
Slicker City
In Crude Health
Comments
Post a new comment