Report: Estonia's competitiveness compromised by weak social protection

Pensioners at a park in Lasnamäe. Photo is illustrative.
Pensioners at a park in Lasnamäe. Photo is illustrative. Source: Ken Mürk/ERR

Estonia's welfare state and its ability to function in an aging society are holding back the country's future competitiveness, despite its above-average digitalization and data usage, a new report from the Riigikogu's think tank the Foresight Center published on Tuesday found.

Estonia is rated 22nd on Swiss IMD Institute's World Competitiveness Ranking, which compares 63 countries.

The county has an entrepreneur-friendly tax system and business environment and high-quality education, the report says. It also benefits from the government and businesses' global outlook and integration into international networks.

However, the Foresight Center's head of research Uku Varblane said the main challenge Estonia faces in retaining its future competitiveness is to ensure the functioning of the welfare state in an aging society.

"Estonia is already placed among the bottom third of EU countries insofar as expenses on social protection and health care are concerned. Considering the aging population, even more attention needs to be given in the future to organizing these fields sustainably," he said.

Uku Varblane. Source: Foresight Center

In international comparisons, Estonia's low rise in productivity, which lags behind labor cost increases, is a red flag.

"A rapid increase of labor costs in itself does not harm national competitiveness, providing the businesses are able to continue increasing production at the same pace. However, in Estonia, productivity has grown at a lesser speed than labor costs. Because of the demographic situation in Estonia, the increasingly critical challenge of the next decade will be how we manage to ensure the international competitiveness of our businesses despite the salary pressure caused by the labor shortage," Varblane said.

Between 2014 and 2020, labor costs increased in Estonia by 40 percent, while labor productivity only increased 27 percent.

In Latvia, the relevant indicators were +55 percent and +33 percent, and in Finland, +6 percent and +15 percent.

One positive note was 2021, when labor productivity grew 18 percent in Estonia and significantly exceeded the growth of labor costs (+2 percent), preliminary results show.

Estonian ID Card and card reader. Source: Siim Lõvi/ERR

Other crucial aspects for long-term competitiveness include digitalization and transfer to a more sustainable economy, the report says.

While Estonian businesses' emission volumes are decreasing, they remain 1.6 times higher than the EU average.

In the digital economy and society index, Estonia is ranked high, at 9th place, among EU countries. However, it has fallen behind most EU countries in the digitalization of businesses.

"Clearly, the digitalization level of Estonia's businesses has increased at a slower pace than in other countries of a similar level of development," Varblane said.

In the future, national competitiveness will be determined by a wider array of factors than has been considered so far.

In its latest report, the Foresight Center examines nine factors that saw Estonia score well for three, the average for three, and badly for the remainder.


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Editor: Helen Wright

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