Estonia finds itself in a complex economic and geopolitical situation. The economic downturn has persisted since the second quarter of 2022. Even now, with the first signs that the recession is halting, there is a lack of ideas for a new engine of economic growth. Where should our next phase of economic growth come from?

In a small country like Estonia, where the domestic market is very limited, sustainable economic growth can only come from new (foreign) investments or exports.

From the perspective of an investor in Berlin, Paris, London or the U.S., it is unfortunately clear that Estonia is situated on the periphery, at the edge of Europe, in a rather dangerous region. We have actively and publicly declared at the highest levels of defense leadership worldwide that there could be a war here in two or three years, despite Estonia being a member of NATO, the world's most powerful military alliance.

To put it mildly, this greatly reduces the appetite of typical investors to make long-term plans in Estonia. Why take a risk on such a small and distant market when a third world war could break out essentially tomorrow?

Regarding exports, a recent review by the Estonian Institute of Economic Research on the broader health of the Estonian economy highlighted that entrepreneurship is most hindered by deteriorating competitiveness, low demand, low confidence in economic policy, lack of innovation and a shortage of skilled labor. The growing distrust in economic policy and lack of innovation are becoming increasingly problematic.

These are complex issues, most of which require very serious political and societal efforts to resolve. Achieving this is challenging, and the effects will only become apparent many years later.

Therefore, it is difficult to foresee new economic growth in the near future, as there are not enough incoming investments and sales in major export markets are not doing well. Estonians' expectations for a more comfortable life and more public services have not disappeared, and against this backdrop, the needs for national defense are skyrocketing, as we ourselves have stated that war is almost at our doorstep.

One option in this situation is to look towards the defense sector, which is currently clearly trending globally, and where Estonia has a good foundation to achieve something at a world-class level in the near future.

The defense industry is not a panacea, but it fits well as a measure in today's turbulent world. The proximity to (potential) conflict zones is not a concern for the defense industry; it can even be a stimulating factor. Israel, South Korea and other countries with complex locations have turned geography to their advantage, developing strong defense industries that draw innovation directly from the front lines, create jobs, contribute significantly to exports, and bring revenue to the country even in turbulent times.

Estonia is in a similar geographical position, and we could replicate this in the defense industry. Moreover, the defense industry can address the issues highlighted in the Institute of Economic Research's review, which plague other sectors of the Estonian economy.

The Estonian defense industry sector, developed through private initiative, is characterized by high global competitiveness, a significantly broader customer base than just our neighboring markets of Finland and Sweden, growing market demand through increasing defense spending and a high level of innovation.

I am pleased that the coalition agreement contains several points that could bring significant changes in the development of Estonia's defense industry by paying more attention to it.

However, other than the coalition agreement, some issues still need to be reviewed if we want accelerated sector growth, as reaching the next level will not happen by itself or will take too long. The current rather small volume of the Estonian defense industry (with a turnover of around €300 million in 2022) also confirms the situation. However, considering that the entire sector started from scratch and only gained momentum in the last 15 years, it shows great growth potential.

The main peculiarity of the defense industry is the business-to-government model, which means that for the accelerated development model of the defense industry to succeed, both companies and the state have an equally important role. In Estonia, this would mean that recent methods for developing the defense industry are insufficient for making a rapid leap in development. These measures were appropriate for starting the sector 10-15 years ago but are not enough to scale the sector globally.

What we need most is a change in our mindset. It is important to add increasingly complex weapon systems to our defense forces' arsenal, but this also has an economic side, usually meaning Estonian taxpayers' money going to a foreign country to the tune of tens and hundreds of millions of euros. Soldiers and officials may not care where the funds for purchasing a weapon system came from, but a carefully managing taxpayer cannot afford this.

A recent cartoon in Maaleht depicting missile systems waiting for the enemy around a dilapidated house was painful but pointed out the correct issue: the defense sector cannot be endlessly prioritized at the expense of other fields.

If more resources are needed for national defense – and I believe there is a broad consensus in society on this – then the defense sector must also contribute more and, whenever possible, bring in money or at least slow down its outflow. The domestic defense industry is an excellent tool for generating revenue, making national defense expenditures easier to bear.

Therefore, in planning the next HIMARS or armored vehicle purchase, we should think about how to first earn the money needed for these purchases through the defense budget and, in the case of purchases from foreign countries, how to bring every possible cent back to Estonia.

In the defense sector, such models are expected and used by all countries worldwide, except Estonia. If Estonia does not use them and chases equal competition and the lowest price from any seller, we may find ourselves in a global boxing ring as the only one not understanding the actual rules of the game. Eventually, we might end up on the mat.

Countries like Israel, South Korea or Finland do not buy the lowest price but rather a strategic relationship and certainty that national defense and the economy are developed with the country's long-term interests and goals in mind. These relationships are built over many years, both domestically and abroad, based on defense policy objectives and value-based alliances.

In real life, this means developing strategic cooperation between the defense industry and the state (carefully selected long-term cooperation partners) instead of a transaction-based approach (the lowest price from any market provider wins). Other details will logically follow from there.

When it comes to providing additional funds for national defense, it would be logical from a political standpoint to say from the taxpayer's perspective, as the owner of the state's purse, that you will get those billions of euros additionally because the security situation seems serious enough, but you must bring as much of those billions back to Estonia through the defense industry.

Personally, I believe that in the long run, our goal should be for the turnover of the Estonian defense industry to be comparable to Estonia's national defense expenditures. It is a matter of taste, courage and ambition how quickly we could reach such a point.

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