Estonia's Inflation Problem

The situation in Latvia described in this post is to some extent paralleled in Estonia:

The Estonian central bank said soaring real estate prices and ``tension'' about wage increases risk destabilizing the economy and fast inflation may keep the Baltic state from adopting the euro before 2011.

The bank forecast in April the $15.1 billion economy will grow 8.4 percent this year, following last year's 11.4 percent expansion, and slow to 6.5 percent in 2008. The central bank today said there was a risk of an even ``sharper'' slowdown in growth.

Estonia's inflation and a widening current-account deficit, at 14.8 percent of gross domestic product in 2006, has raised concern among foreign investors and credit agencies earlier this year that the $15.1 billion economy may overheat, triggering a sudden decline in growth. Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate.

The central bank also said that the inflation rate, at 5.7 percent in May, is still too high and the risk of a slowdown in wage growth has increased after a 20 percent increase in average wages in the first quarter. It expects consumer prices to rise 5.1 percent this year, well above euro entry criteria, after 4.4 percent in 2006.

House prices in Estonia's capital, Tallinn, jumped 24.5 percent in the first quarter from a year earlier, the second- fastest growth globally after neighboring Latvia, according to data published last month by Knight Frank residential research in London.

Last month, the cabinet approved a four-year spending plan last week, cutting budget surplus targets in 2008-2011 from 1.5 percent of GDP, announced during a visit by the International Monetary Fund's mission, to 0.5 percent of GDP.

Urmas Paet, Minister of Foreign Affairs of the Republic of Estonia made the follwing points in a speech in May:

Before joining the European Union, there was much talk in Estonia about a large number of employees moving abroad after accession. According to a poll conducted at the time, 42% of the working age population was interested in working abroad, although, only 3% had any serious intentions of actually doing so. The majority of them were interested in working abroad either temporarily, or from time to time.

Actually, the number of those eventually going abroad proved to be quite manageable – it is estimated that about 20,000 Estonians presently work abroad, which is about 3.3% of the working population. Although this number may increase, it must also be kept in mind that many Estonians have already returned home.

It can be assumed, that the main emigration destinations for Estonians will, for the near future, remain: Finland and Sweden due to their cultural and geographical proximity; and the United Kingdom and Ireland due to their language and fair and comprehensible administrative requirements as well as established networks. While many lower skilled workers go abroad for short periods, then in the case of highly qualified workers, it can be assumed that they remain abroad on a more permanent basis, although this is no rule.

The number of foreigners currently employed in Estonia is considerably smaller. It is estimated, that at least 5,000 foreigners are working in our country. The majority of them are from Finland or Ukraine, 35% work in various managerial positions, and 17% are in shipbuilding. When studying their gross wages, it can be said that our fairly strict policy has ensured, at least until now, that the immigration of labour is in most cases limited to qualified and well paid workers. But, at the same time, the question has been raised quite audibly, whether the bureaucracy involved in bringing highly qualified specialists into the country is perhaps too burdensome and time consuming for businesses.

Thus, the main problems with the shortage of workers are associated not with emigration, but more so with the decreasing and ageing of the population, the lack of required qualifications, as well as the fast development of certain sectors, such as the metal industry, manufacturing, electronics and optical equipment. During the last five years, thanks to the improved family support system, the birth rate in Estonia has increased considerably. But unfortunately, the ratio still remains negative – in 2005 the population decreased by 2,966 people. In the long term, the best means for ensuring the longevity of the population is a sound family policy that promotes a higher birth rate.

It has been predicted that, in the next few years, an average of 11.2 thousand people will irreversibly leave our labour market due to various above mentioned factors. At the same time, for rapid economic development, it is necessary to create about 3,800 new jobs a year. The majority of them are being created in the service and industrial sectors, while the number of workers in agriculture is continuing to diminish. Thus, we will require for about 14.5 thousand additional workers every year, primarily technicians, qualified specialists, and specialised managers.