On Tuesday, the Riigikogu Economic Affairs Committee and its advisory expert group introduced the newly completed competitiveness report at a press conference, offering recommendations for addressing Estonia's economic challenges.

Committee head Jaak Aab, along with expert group members Ülo Kaasik, Priit Vahter, Kadri Männasoo and Uku Varblane, provided an overview of the report's content and the recommendations.

The report highlights that the primary concern is the competitiveness of Estonia's manufacturing industry. "The underutilization of production capacity offers hope that, with the recovery of markets or the discovery of new ones, it is possible to increase production volume and productivity without significant investments," the report states.

The experts who compiled the report believe that Estonia still has many strengths and competitive advantages that should be maintained and reinforced, such as a well-educated and innovative workforce, a strong legal framework, an efficient business code and a flexible labor market.

The expert group identified several key areas where attention could enhance the competitiveness of Estonian companies and the economy:

• Companies in Estonia face difficulties in finding qualified labor.
• There is a significant skills gap compared to actual work, and labor turnover is higher than in other European countries.
• The level of digitalization and automation in Estonian companies is low, with few adopting artificial intelligence.
• The economic resource productivity is low, and companies have limited knowledge in dealing with technology-intensive businesses.
• There is excessive bureaucracy and a lack of clarity in government priorities and policies.
• The cost of capital for Estonian companies is higher than in most other EU countries.
• The green transition may lead to additional cost increases.
• Estonia's small open economy is highly susceptible to external shocks.

The report's authors provided recommendations for addressing each of these issues.

The expert group emphasized that the lack of qualified labor is often cited as the main reason companies do not invest in technology development or expand production. They suggest a more precise definition of how this issue should be addressed.

The report outlines three ways to solve the labor shortage: better utilization of the existing workforce, increasing the productivity of the current workforce and involving foreign labor.

Better utilization of the existing workforce could involve various measures to increase labor market participation, such as raising the retirement age or shortening parental leave, according to the experts.

"Additionally, the analysis revealed that the skills gap between actual work and required skills is quite large in Estonia compared to other countries, which could present opportunities for better workforce utilization. Labor turnover is also higher in Estonia than in other European countries – employees stay in one job on average two years less than in Europe. This could mean that the benefits of work experience on employee productivity are lower in Estonia, suggesting a need to encourage employee self-development in the workplace," the report states.

The report identifies the lack of engineers as the most frequently cited issue in the industry. Therefore, it suggests increasing the training of engineers, integrating this training more closely with ICT disciplines and supporting their employment in the industry.

Experts also recommend considering making higher education partially fee-based to encourage more deliberate career and study choices. Additionally, they suggest finding more opportunities to utilize artificial intelligence in teaching and skill acquisition, both in schools and companies.

When prioritizing the inclusion of foreign labor, the goal should be to increase the productivity of companies by ensuring that the skills and knowledge of foreign workers complement rather than replace those of local employees, according to the report.

The report mentions a points-based immigration regulation system for third-country nationals, where immigrants would be selected based on their skills (including language proficiency), education level, work experience or other criteria.

Experts highlight that studies clearly indicate that increasing digitalization and automation would significantly boost company productivity.

The expert group's calculations suggest that the implementation of artificial intelligence has increased productivity by more than 7 percent among Estonian companies that use it. Therefore, more attention should be paid to harnessing the potential of AI, such as improving data collection and utilization capabilities, the experts noted.

According to the report, complaints from companies about bureaucratic obstacles and economic policy uncertainty have been steadily increasing. Additionally, the regulatory burden is expected to grow further due to the green transition, as more information and data will be required for planning and managing the transition process.

Experts suggest that it would be beneficial to strengthen the incentives for responsible officials to expedite and simplify the work of government agencies and reduce reporting requirements. "Savings can come from eliminating outdated information obligations, as well as automating data collection and processing. It is also necessary to increase the incentives for local governments to foster local business development," the report states.

The expert group believes that the government should strive to use EU structural funds more evenly over time. The report notes that the adoption of the current period's cohesion funds has been significantly slower than in previous periods. "More consistent use of cohesion funds would help reduce large fluctuations in orders."

The report highlights that government measures to improve the budget situation have harmed the economic environment. "Similarly, the stability of the economic environment has been reduced by government measures aimed at improving the budget position. Therefore, more predictable and sustainability-supporting budget rules, which are reviewed regularly, could be beneficial in the future."

The expert group notes that in recent years, the situation for Estonian companies has been worsened by the fact that a large portion of loans have variable interest rates, making the impact of monetary policy more immediate.

The report highlights that entrepreneurs face difficulties in finding suitable loan collateral. "This market failure can be somewhat alleviated through state guarantees. Wider use of these guarantees would help improve the availability of financing for Estonian companies and make the terms more favorable."

Estonia's capital market is small due to structural reasons and offers little competition to the banking market as a source of financing, the report states. "Institutional investors, including pension funds, play a crucial role in the development of the local capital market. Added flexibility in the use of the funded pension has reduced the volume of pension assets and shortened the investment horizon. Government liquidity guarantees could, for example, enhance the weakened incentives for pension funds to make long-term investments in Estonian companies."

Economic policy measures aimed at meeting climate goals will bring both revenue and costs to the Estonian economy, which may change over time, according to the report's authors.

"Analyses indicate that the average cost of renewable energy will start to rise once the volume of produced renewable energy exceeds 60-80 percent of consumption in the Baltic States. Specifically, a higher share of renewable energy may lead to production exceeding consumption at certain times, increasing the need to limit production. If each country optimizes only its own system, it could result in higher prices for consumers."

The experts who compiled the report recommend considering the installation of an electric cable between Estonia and Sweden. "To optimize costs, it is necessary to coordinate the development of renewable energy production volumes with neighboring countries. To maintain electricity prices at a favorable level, it is important to continue establishing external connections, including considering the installation of an electric cable between Estonia and Sweden."

"With the increasing relevance of climate issues, investor interest in renewable energy, green economy raw materials and recycled materials in the circular economy is growing. Estonia could better utilize its emerging competitive advantages in bioresources and the circular economy. Additionally, there is potential in research and development related to green technologies, where business opportunities lie in developing new exportable technologies or products. This would be facilitated by a long-term national vision and reliance on state priorities," the report states.

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