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Economist: Estonia may never catch up with Finland

Economist Kaspar Oja.
Economist Kaspar Oja. Source: (ERR)

Estonia could reach a level equivalent to 85 percent of the actual living standard of Finland in 15-20 years, Kaspar Oja, economist at the Bank of Estonia, said. How long this takes depends on the forecast method and source, though Oja holds that Estonia may never completely be on par with its northern neighbor.

If Estonia's economic growth per person from now on was 3 percent a year, and the Finnish economy went on growing at the same tempo as it showed over the past 20 years, which is 1.7 percent a year, then Estonia would reach Finland's standard of living in approximately 30 years, Oja wrote in the central bank's blog.

He added that a 3-percent growth as an average for a longer period is an optimistic assumption, as Estonia's economic growth will probably decelerate again in the future.

Wages in Estonia currently amount to approximately 40 percent of wages in Finland. At the same time, the level of prices in Estonia is also lower, 60 percent of those in Finland. "Thanks to lower prices, the actual living standard is not so far behind Finland as you would expect from looking at the wages alone," Oja said.

He said that according to forecasts made by international organizations, Estonia's living standard would not reach that of Finland in a while. The forecasts estimate that a fairly fast convergence of income levels will continue over the next 20 years. Forecasts suggest that in the next 15-20 years, Estonia should reach a level equivalent to approximately 85 percent of the living standard of Finland, though Oja said he considered it unlikely that Estonia would ever be able to match the Finnish standard of living entirely.

By extending the recent economic forecasts of the Bank of Estonia and the Bank of Finland with the long-term preconditions of the forecast of the European Commission, Estonia's GDP per person should reach approximately 80 percent of the Finnish by 2025, and approximately 87 percent by 2035.

"From then on, the convergence of income will decelerate partly due to Estonia's unfavorable population situation, but partly also due to the technical characteristics of these forecasts—the GDP growth rates of countries harmonize over time," Oja said.

Productivity growth would harmonize with the European Union's average in the distant future. As long as productivity in Estonia remained below the EU average, productivity in Estonia would increase faster than the EU average due to taking over technology, and living standards would converge in the distant future. The higher the living standard, the slower the economic growth would be, Oja argued.

The long-term forecast of the Organization for Economic Co-operation and Development (OECD) takes into account Estonian institutions' development, openness, and capacity for updates, and this was probably why the organization was more optimistic than the long-term forecast of the European Commission.

According to that forecast, the convergence of the living standard of Estonia and Finland would continue for a long time, and towards 2050 Estonia's living standard should then reach approximately 90 percent of Finland's, which meant that the difference in actual living standards is similar to that between Latvia and Estonia at present, Oja said.

"In the comparison of long-term forecasts, the question plays a great part which scenario economic growth will be based on in the next few years. For example, if the OECD's preconditions for long-term economic growth were to be adapted to IMF's forecast, Estonia should catch up with Finland by 2060 in terms of living standards. That would not happen if OECD's own short-term forecast is used. However, it definitely can’t be forgotten that forecasts made for ten, twenty or fifty years cannot be that accurate," he added.

Editor: Dario Cavegn

Source: BNS

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