Estonia is a lowland country that borders with Russia and Latvia and is washed by the Baltic Sea ("Official Gateway to Estonia" n.p.). According to BBC (2013), Estonia is the most northerly of the other former Baltic republics. The country is surrounded by forests and is rich for water sources like lakes and rivers draining into the Gulf of Finland. The official name of the country – Republic of Estonia ("Official Gateway to Estonia" n.p.).
The country is small having area 45,228 square kilometers of population of 1,340,415 as of 1 January 2012. Its length is 1450.2 km with a land border of 681.6 km and a sea border of 768.6 km ("Official Gateway to Estonia" n.p.). The population of Estonia is mostly monolingual having official language - Estonian. The capital of Estonia is Tallinn.
Until 1990, Estonia was a part of former Soviet Union. In March, 1990 Estonia declared independence from Soviet Union and entered European Union in May of 2004. The type of state is parliamentary democracy. The Constitution of Estonia was enacted in 1992. The President elected by the parliament for the term of 5 years is the Head of the State.
- Analysis of Estonia’s Business Cycle
According to Heritage Foundation (n.p.), Estonia’s economic freedom score is 75.3 placing it on the 13th position in the overall rating of 177 countries. Estonia joined the group of the mostly free countries having a score of 70-79.9 that follows the group of free countries with the score of 80-100 like Hong Kong, Singapore, and Australia. Recently, economic freedom index of Estonia increased by 2.1 points. According to the latest data obtained from Official Gateway to Estonia (n.p.) real GDP made up 17.0 billion of euro at current prices as of 2012. GDP per capita was 13 172 euro and its growth rate made up 3.2% in 2012.
The growth of GDP for the years 2006-2012 is shown in Appendix A. It can be observed that Estonia had experienced a period of stable growth since 2010. A slight decline can be seen for the years 2009-2010 that could be explained by the global financial crisis of 2007-2008. Before, in 2007-2008 when the global financial crisis started, the country GDP a little bit exceeded the level of 2011. The GDP growth started in 2006 when GDP is lowest in comparison to other years analyzed. The line of GDP per capita trend repeats the trend of the GDP line (Appendix B).
As it can be seen from Appendix C, GDP growth rate experiences fluctuations during the period from 2006 to 2012. The ascending period started in 2006 when highest GDP growth was observed. Beginning from 2007, when the global financial crisis span up, the GDP growth started to decline and was negative in 2008 for the first time proceeding to decline even more in 2009. In 2010, Estonia recovered from crisis and GDP reached the level a little bit higher than that of 2012. The GDP growth was second highest after 2006 – 8.3% - in 2011. Thus, a conclusion can be made that at the present time Estonia is on the expansion phase of business cycle after a decline observed after crisis. The expansion phase is characterized by increase of consumer spending and demand for goods and services, decline of unemployment rate, and increase of business activity (Mankiw 23).
- GDP Decomposition by Expenditures
GDP of Estonia can be decomposed by the following expenditures: consumption, investment, government purchases, exports, and imports taken from the equation:
GDP = C + I + G + (X – M),
where C – consumption, I – investment, G – government purchases, X exports, M – imports.
This approach to GDP decomposition is called expenditure approach involving calculations of expenditures on good and services by different groups in the economy.
According to data presented by Statistics Estonia, consumer spending in Estonia a little bit decreased from €2002 million in 2008 to €1697 million in 2013 meaning that consumers spent by 15.23% less on goods and services (Trading Economics, 2013). Consumption decrease had negatively influenced the value of GDP showing slight decline tendency in the fourth quarter in comparison to the second and the third quarters (Appendix D). Household consumption is supposed to remain weak with projections of insignificant growth in the near future (Lauri 5).
According to information presented by Lauri, investments in Estonia showed development starting from 2010 (5). Gross capital formation grew in several subsectors: an increase of 11% in the metal and machinery sector in 2010 is a considerable development. Also, investments in construction industry showed positive dynamics resulting in the most significant growth among other industries in Estonian economy. According to Eurostat estimation, investments are supposed to contribute positively to the development of the economy during the next few years (Lauri 5).
Government purchases or spending are supposed to remain subdued since the revenues were down starting from 2009 forcing the government to apply strict fiscal policy (Lauri 3). As shown in Appendix E, general government consolidated debt has strong tendency to growth.
Analysis of export and import tendencies can be tracked in the Appendices F and G. Both export and import curves showed tendency to growth (Appendix F, G). The most significant growth is observed in export of services sector. Merchandise exports started to recover after sharp decline in 2009 (Lauri 2). Export growth is projected for the next few years. Import stabilized showing slight increase in comparison to 2011.
- Analysis of Labor Market
According to Statistics Estonia (n.p.), the total number of population made up 1,340,415 as of 2012. The slight decrease of population was observed in 2011 because of increase of the emigration and deaths. For 15,244 deaths only 14,679 live births were registered. Besides, 6,214 persons emigrated from Estonia to other countries in 2011. Gender decomposition was as follows: 610,300 men and 707,700 women. The working age in Estonia is from 15 to 64. The number of people of working age showed continuous tendency to decline: 7,000 working-age persons left Estonia in 2012. However, the number of children and urban population is increasing. Thus, the share of urban population made up 63% in 2012. Decomposition of Estonian population is shown in Appendix H. The rate of unemployment can be derived from Appendix I. Unemployment rate showed strong tendency to decline. However, it is almost twice as large as the unemployment rate before global financial crisis. The rate of unemployed was projected to decline in 2013 down to 8.9% (Statistics Estonia n.p.). The rate of employment of people aged 15-74 was projected to increase from 624.4k to 626.3k in 2013. As it can be seen from Appendix J, unemployment rate among males is a little bit higher than that of females during the whole period from 2006 to 2012. Labor participation ratio decomposed by age and gender can be seen in Appendix M. According to the labor market survey conducted by the Bank of Estonia, as the number of employed people had recently increased, the rate of unemployment declined below the natural unemployment rate in 2013 (Estonia Review n.p.).
- Analysis of Inflation, CPI and PPI
Fluctuations of inflation rate in Estonia can be seen in Appendix O. According to data obtained from Statistics Estonia (n.p.), the rate of inflation had dropped from 4.2% to 1.5% in 2013 or reduced by 2.8 times meaning that the process of economy decline has stopped and the country started to recover from the consequences of financial crisis of 2007-2008. Decrease of inflation by 2.7% means that economy was stabilized by fiscal policy imposed by Estonian government aiming to put inflation under control. The decline of inflation indicators and consumer price index evidenced that the government succeeded to cease inflation pressure. Inflation pressure may come from both internal and external economic processes. For example, changes of pricing strategy of food retailers (internal reason of inflation pressure) and changes in price for crude oil (external pressure). As it can be seen from Appendix P the increase in producers’ prices at the end of the 2013 made up 6.21% compared to the level of 2012 meaning that inflation is restrained artificially and new way of inflation threaten if fiscal policy cannot be employed anymore. Thus, PPI can be the main source of inflation pressure in the nearest time (Mankiw 52).
GDP deflator is a measure of all final goods ad services produced in the economy. GDP deflator and CPI are measuring inflation or deflation with relation to the previous year. GDP deflator is not based on a fixed basket of goods allowing changes from year to year with changes in investment and consumption patterns unlike the CPI. The projections for GDP deflator can be seen from Appendix Q. The trend of GDP deflator is downward meaning that deflation is projected for the next five years starting from 2012 (Mankiw 56).
- Fiscal Policy
Tax laws are enacted by Parliament, the tax system is regulated by Law on Taxation. Eurostat (n.p.) reported that Estonian tax burden made up 34.2% of GDP in 2010. Despite average tax burden is 4.2% lower than in EU, the share of indirect and social insurance taxes is 3.2% greater than another countries of EU. The government expenditures by type can be derived from Appendix R. The largest government spending is social protection that made roughly one-third of total expenditures. General government gross debt as percentage of GDP made up 12.1% in comparison to that on of OECD -74.2% - as of 2010 (OECD n.p.). The public deficit to GDP ratio can be seen in Appendix S. As it can be seen from Appendix S, deficit of state budget can be observed starting from 2008.
Aiming to stabilize Estonian economy, the government had taken several steps including implementation of sound fiscal policy to provide smooth transition to EU, government sector expenditures were cut down to 40% of GDP, the mid-term budgetary objective was set requiring balance or surplus, public sector operational expenditures were cut by 20% in comparison to 2006, pensions increase was rejected in 2010 and 2011, cuts of defense budget, local governments budgets, funding, and road maintenance were carried out, cost reduction in health insurance made up 8%, and borrowing of local governments were decreased by the law from 2009 (OECD n.p.).
- Monetary Policy
- External sector
Appendix A GDP Growth for the Years 2006-2012 (Official Gateway to Estonia n.p.)
Appendix B GDP per capita for the Years 2006-2012 (Official Gateway to Estonia n.p.)
Appendix C GDP growth rate for the Years 2006-2012 (Official Gateway to Estonia n.p.)
Appendix D Consumer Spending for the years 2008-2012 (Statistics Estonia n.p.)
Appendix E General Government Consolidated Debt (% of GDP) (Official Gateway to Estonia n.p.)
Appendix F Analysis of Export Tendency (Official Gateway to Estonia n.p.)
Appendix G Analysis of Import Tendency (Official Gateway to Estonia n.p.)
Appendix H Age Groups of Estonian population for the Years 2000-2012 (Statistics Estonia n.p.).
2012 1 318 005 206 130 882 294 229 494 87
2011 1 320 976 204 308 889 289 227 285 94
2010 1 323 323 201 603 893 581 228 028 111
2009 1 324 260 199 164 896 336 228 640 120
2008 1 325 408 197 382 898 283 229 612 131
2007 1 327 484 198 335 900 773 228 220 156
2006 1 333 028 201 422 907 240 224 171 195
2005 1 339 168 207 369 909 763 221 775 261
2004 1 344 526 215 124 910 986 218 109 307
2003 1 351 527 224 321 912 171 214 679 356
2002 1 358 073 233 440 913 832 210 407 394
2001 1 365 633 242 207 915 473 207 535 418
2000 1 372 438 250 567 916 219 205 211 441
Appendix I Rate of Unemployment in Estonia
Appendix J Rate of Unemployment by Age of 15-74 (Males and Females)
Appendix K Rate of Unemployment by Age Groups (Males and Females)
Appendix M Labor Participation Ratio for the Years 2006-2012 (Statistics Estonia, 2012)
Appendix N Inflation Rate for the Years 2012-2013 (Statistics Estonia n.p.)
Appendix O Consumer Price Index for the Years 2006-2012 (Statistics Estonia, 2012)
Appendix P Producer Price Index for the Years 2012-2013 (Statistics Estonia n.p.)
Appendix Q GDP Deflator (Statistics Estonia n.p.)
Appendix R Government Expenditures by Type as of 2008 (OECD n.p.)
Appendix S Deficit/Surplus of State Budget as Percentage of GDP 2006-2012
Estonia Country Profile. BBC, 2013. Web 27 2013.
Estonian Review. “Unemployment in Estonia Has Dropped Below Natural Rate.” Estonian Review, 9 Oct. 2013. Web 27 2013.
Heritage Foundation. 2013 Index of Economic Freedom. Country Rankings, 2013Web 27 2013.
IndexMundi. Estonia - labor participation rate. IndexMundi, 2012. Web. 26 Nov. 2013.
Mankiw, Gregory N. Macroeconomics. New York: Worth Publishers, 2010. Print.
"Official Gateway to Estonia." Estonia.eu, 2013. Web. 26 Nov. 2013.
Organization for Economic Cooperation and Development. Short-Term Labour Market Statistics: Unemployment Rates by age and gender. OECD, 2013. Web 27 2013.
Statistics Estonia. Estonian estimated population adjusted. Stat, 2012. Web 27 2013.
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