On one hand, we here in Estonia are affected by the conventional rules of economic cycles, while we also have our own shortcomings. But to analyze the latter, a look at the big picture is first necessary.

Development is cyclical

That is how it is in nature and in human societies. Both in politics and the economy, both looking at how we think and behave as humans. I'm sure readers who take an interest in history can find myriad examples for themselves.

Countries and economies take the lead, only to take a step back after a while to make room for others at the top. There are several political and economic teachings on this, most of them based on the last 250 years of human history.

When it comes to the economy, it helps to read Nobel Prize winner Kenneth Rogoff and World Bank Chief Economist Carmen Reinhart's book from the days of the last major financial crisis aptly titled "This Time is Different: Eight Centuries of Financial Folly" where the authors prove that while all major financial crises of the past eight centuries have followed a similar pattern, another thing they've had in common is the general belief that everything is different this time.

Even better-known these days is Russian economist Nikolai Kondratiev's business cycles model where he compares them to years and their four stages to the seasons. Joseph Schumpeter's innovation factor, or technological development, which also happens in waves and works to stimulate economic development, also plays an important role. Whereas the cycles are shortening from around 70 years to 50.

The first cycle drew from the invention of the steam engine, which kickstarted Industrial Revolution 1.0. The proliferation of the railroad and steel followed in the 19th century. The next stage of the industrial revolution relied on electrification and the chemical and pharmaceutical industries, with cars and oil chemistry added in the 20th century.

The next cycle, fifth in line, came in the wake of the explosion of information and communication technologies, which we have witnessed first-hand. The ongoing sixth cycle will be based on healthcare, biological and nanotechnologies, and increasingly environmental technologies and the rapid development of AI and quantum computing. In industry, the much-discussed Industrial Revolution 4.0 stage corresponds. Whereas the span of new technological cycles is becoming shorter, having dropped from 60 years to 25 by today, with processes only set to accelerate.

Running in parallel with the economy, the principle of cyclicity applies in politics. There is an American theory of 80-year cycles in that country's development, which have affected similar developments in the world since the 70s of the 19th century and come to dominate them in the 20th century, owing to America's leading role. The cycle that started with the end of World War Two is now coming to an end.

The cyclicity of Russian politics

The development of our rather mean neighbor to the east has also followed a recurring pattern. As long as things are going well economically, Moscow's confidence and aggression grow alongside its desire to demonstratively shed so-called Western values, go down its own path, which sooner or later leads to a series of wars of conquest.

This inevitably causes life to take a turn for the worse in that vast and theoretically wealthy country, with difficulties and dissatisfaction in all social groups resulting in envy and eventually a change of power. Life starts to improve as things normalize, which manufactures confidence and aggression, and the cycle begins anew...

Unfortunately, we find ourselves witnesses to this evergreen cycle's aggressive phase. As a country bordering Russia, we have no topic more important than keeping our independence and freedom. Without it, reaching other goals wouldn't really be possible, definitely not the constitution's aim of making sure the Estonian language and culture survive in perpetuity. More so if we consider the increasingly prominent opinion in Russia that the Soviet authorities made a mistake in allowing national sentiment to survive and giving local national authorities too much power, which led to them betraying "the center" the first chance they got and demolishing the mighty Soviet empire, which was instigated and helped by the "disgusting West." A mistake that apparently mustn't be made again.

What this spells for us should be fresh enough in our collective memory of the brutal repressions of the Soviet regime, including the 1940 and 1949 mass deportations and the policy of relocating the empire's peoples.

It is to be feared that this cycle phase in Russia will last for some time to come, and we need to be prepared for at least another decade of relevant challenges. For example, of the four scenarios proposed in a collective report by the Estonian Academy of Security Sciences titled "On the effects of possible developments in Russia on Estonia," the first or base scenario prescribes no change in Russia, the fourth treats with Russia becoming an autocratic major power, while the second concentrates on Russia's dissolution in the course of a so-called fourth Smuta. All pose a threat to Estonia as a country neighboring Russia. Only one scenario, which the authors hold to be the least likely, of a new political elite and Russia becoming a democracy would benefit Estonia.

The latter would require a 7D-revolution in Russia, made up of demilitarization, denuclearization, decentralization, democratization, decommunization, destalinization and deputinization. Let us consider for a moment whether anyone would be capable of achieving this in Russia in the near future. Such a 7D-revolution can only be supported from the outside, while recent history suggests it cannot be made to happen for the Russians. And even should this scenario be launched, it would take over two generations to complete.

Whereas even then threats would remain. Threats that the nascent military-strategic defense region, the so-called NATO lake, which finally sports sufficient strategic depth, can help us manage. This puts us together with our good and economically significant Nordic partners also in terms of security policy. Countries that sport, in addition to considerable defensive will, strong and up-to-date in terms of quality defense forces and industries.

What is more, regional NATO defense plans are finally taking truly effective form and deterrence is becoming more than mere words. This will naturally strengthen the integration of regional economies, which is not bad to begin with. Finally, the good track record of the Nordic economies and their significant prowess will lend us some of their attractiveness in the conditions of growing competition.

Political and economic shifts in the world

Hardly anyone doubts that we are seeing a shift of recent political and economic organization in the world. The recently somewhat West-centered model will be replaced with a new one. As usual, the transition is happening through confrontation.

China has emerged as a new economic-political superpower, having replaced Deng Xiaoping's course of adjusting to the world and making the best of it with Xi Jinping's alternative of China adjusting the world to meet its needs. The similarity with the aforementioned Russia cycle is suspiciously striking, isn't it?

To achieve this, Beijing is using Moscow with its ambition and aggression as an icebreaker, all the while leaving Russia in deeper economic dependence on China. Beijing is also working on an alternative to its recently Western-dominated economic-technological platform, which constitutes a new situation to the leading powers in the West.

Several analysts believe there is a need to avoid another historical cyclical model known as the Thucydides Trap where a challenger state looks to displace an existing major power by contrasting economically, militarily and through foreign policy. That is how the intensifying contest between the U.S. as the recent dominating power and China as the challenger is increasingly seen in the world.

There is no way this global confrontation can leave us unaffected here in the northeast corner of Europe, since the EU, as the third center of economic power in the world, will not be able to hold its recent line of maintaining perfectly neutral relationships built solely on economic ties with both superpowers. It is already evident how not just political but also economic considerations are aligning us with democracies that stand in contrast to the "axis of evil" and to some extent third countries under the latter's sway.

As a small peripheral EU state, we will inevitably be affected by the Union's political choices, even if we leave aside security policy aspects to do with our eastern neighbor and its close cooperation with the Southeast Asian challenger superpower.

Whereas we need to keep in mind that the Bretton Woods way of things of the past 80 years is crumbling, while a new wave of the aforementioned technological development cycle, heralding rapid changes, is already underway.

New centers of economic power are rising. Capitalism is transforming and we no longer believe that the development of market economy will almost automatically result in the dominance of democracy or even liberal democracy. It has turned out that very different forms of government can blossom in the conditions of free market economy. The confrontation of liberal democracy and autocracy is only gearing up.

In short, the good old times will not return because we have entered a new phase of development. This once again, especially for small countries, brings to the forefront the ability to adjust.

But we must also keep in mind that the relative importance of democratic, or free and partially free, countries in the world economy continues to decline. While it was still 80 percent when the Cold War ended, forecasts suggest it will drop to just 40 percent by 2050. Their places will be taken by undemocratic or so-called illiberal countries, the core of which is made up of, in addition to the aforementioned powers, larger and economically more influential developing countries.

This will pose a political and economic challenge to the West as a whole, to Europe and to us inside the latter. More so as the development is coinciding with the end of our own phase of rapid development that followed the restoration of independence, and we need to find new economic momentum irrespective of the confusion accompanying the changes described above.

Estonia's choices

We cannot deny the fact that our lingering economic crisis is happening on the backdrop of the confluence of negative circumstances. Namely our coveted convergence with Europe and the multi-crisis that has hit the world, and especially its Western segment. Estonia is still in the phase of convergence, a classic problem with which is that prices and expenses tend to grow before income can catch up.

That is why inflation is not as quick to let up as it would in a normal economic cycle, even though its current level is by no means unprecedented and falls well short of inflation caused by WWI and WWII, as well as the decade following the 1973 Yom Kippur War.

We need to admit that the multi-crisis, or the pandemic-related recession that followed the start of the cyclical economic crisis, the unprecedented quantitative easing that followed, which gave rise to painful inflation, and the war that further amplified all these negative aspects in Europe coincided with the effects of convergence (and the war) on the five main inputs of the Estonian economy. Because the so-called low hanging fruit stage of economic development had just ended, while the larger-than-believed share of Russian raw materials and market delivered an unexpectedly painful blow in several sectors, such as the timber and metal industries.

Cheap energy is now above-average expensive energy, while cheap money has also run out. The next thing about to run out is relatively cheap qualified labor, which fuels speculations that since we do not have massive unemployment, there aren't enough indicators of a crisis. The reason is labor shortage, which works to hamper economic development in any case.

Other negative contributions have come in the form of the so-called war zone image, which has primarily impacted foreign investments, our primary export markets struggling and finally fickle and unpredictable economic policy. But lack of clarity and weak credibility are demotivating by nature both for investors and consumers.

It is also clear that the logic of economic cycles includes the inevitable end of the latter, while how quickly this will happen and with what results depends, in addition to objective and global circumstances, largely on policies. The latter govern levels of motivation in business and consumption, the quality of education and whether it corresponds to what the economy needs, infrastructure and infrastructure again, its quality and a host of other things.

Consistent and relatively clear economic policy development that has not depended on political constellations has been among the chief factors of Estonia's success and a selling point in the world. I know from personal experience.

However, since we have somewhat exhausted our developmental potential in the recent cycle, we're in for rough seas should we let go of the reins altogether, as suggested by economists. Allow me to point out three possible paths of development in this context.

First, the creation of a so-called glass ceiling in the wake of Europe slowing down and falling behind other centers of economic power, which is illustrated by Peeter Koppel's immortal words, according to which the U.S. is innovating, China imitating and Europe (over)regulating, to which we can add our own questionable policy. As a result, economic growth and growth of prosperity will slow, peripheralization will pick up speed, as will the process of Estonia becoming a city state, the state and administrative reforms will stall, innovation will lose to regulation, energy security is problematic and investment activity remains below par. This will be further acerbated by young talent leaving for greener pastures.

Second, failing to capitalize on the tide – an attitude even more destructive than NIMBY (not in my back yard) called BANANA (build absolutely nothing anywhere near anybody) takes hold, missing all manner of near- friend- and onshoring opportunities etc. The main difference with the glass ceiling scenario is that this would happen despite favorable external conditions.

The third and more positive development would be taking advantage of the rising tide, which would require being at the forefront of modernization, infrastructure development, R&D empowerment, smart education prioritization, new qualified migration policy, more specialized investment environment based on Estonia's specialty and that of its peripheral regions (as the heartland and major attraction centers have a natural advantage) and high quality of energy supply, coupled with competitive prices etc.

All of it is important to ensure competitiveness in international work allocation, which can in turn ensure Estonia's prosperity. Exactly what it would take can be read in a report by University of Tartu economists compiled for the Foresight Center back in 2018.

The state, run by policies and politicians, should do the following in order to retain and boost our competitiveness: keep an eye on changing business environments in nearby countries and possible global market developments/trends, ensure maximally predictable business support measures, construct high-quality infrastructure (foreign links, transport infrastructure, power and communication grids etc.) and put in place a regulative framework, keep regulative operating expenses to a minimum, help develop export-oriented international cooperation, make capital more easily available in all regions, make it possible to sustainably access and add value to local resources etc.

This would help create preconditions for a stable investment environment and tax system, able to maintain competitive industrial input prices (environmental and energy fees, state support etc.) and ensure Estonia's economic well-being in a complicated and changing world.

But the core conclusion based on the altered situation is as follows: there is no way back to business as usual in the changing world, and we must prepare for crises, whether they're military, natural or technogenic. This needs to be achieved in the coeffect of smart and coordinated economic management and persistent actions of individuals at all levels.

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