Estonian dreams of growth

We may sometimes joke about Estonians and their big ambitions but I have to shake my head in disbelief over this story – and for three reasons, see at the end.

According to official news from the Estonian government, Estonian Prime Minister, Taavi Rõivas, declared at a conference in Tartu on 31 October that Estonian GDP should increase by 25% by 2018.

That sounds very good – the only problem is that it is not going to happen so it is empty words and of no use – hot air, wishful thinking.

2018 is only 3 years and two months away. Currently the Estonian economy is growing at 2.4% on an annual basis (2nd quarter 2014, according to Eurostat). Use that rate as an estimate for the whole of 2014 and the economy will have to grow on average 6.8% for each of the years 2015, 2016 and 2017 to reach the PM’s target – or should we call it dream? It would have to look like Figure 1 below.

Figure 1: Estonian growth rates since 2004. 2015 – 2017 are projections to meet the PM’s target

Source: Eurostat and own calculations

One might object that the Estonian economy has done this before but it was due to the credit bubble (growth rates up until 2007-08) and a low base effect (2011).

Estonia is a very open economy, relying heavily on exports. To achieve such high growth rates of close to 7% and for several years would require very strong demand from trading partners in order to increase exports (together with strong domestic demand, of course). But everywhere around Estonia economies are slowing down – in Finland, Latvia, Russia, Germany etc. Add to that Russian sanctions that in and by themselves have a negative impact on Estonian growth and the task gets even more complicated. Estonia as an island of high growth in a sea of standstill? No way!

A second way to see the futility of the PM’s proposal is to look at GDP per capita. Figure 2 gives the ranking for 2013, the most recent we have with Estonia at 72% of the EU average.

Figure 2: GDP per capita at PPS, 2013, EU28 = 100

Source: Eurostat

If Estonia really would grow 25% over the next three years with the rest of the EU growing at a more modest – but realistic/slightly optimistic – 2% per year, then by 2018 the ranking would look like this:

Figure 3: GDP per capita, 2018 given the above assumptions of total growth in 3 years for Estonia of 25% and 2% annual growth in the remaining countries.

Source: Eurostat and own calculations

So, by 2018 Estonia will have overtaken Lithuania, Portugal, Greece, Slovakia, the Czech Republic and Slovenia and will be on par with Cyprus and Malta? No….

What I don’t get is at least three things: a) Why do politicians say things like this when it is so easy to confirm by simple analysis that it just won’t hold? b) Why don’t their advisors ensure that unrealistic claims like these do not appear? And, c), why do the news report such claims without reflecting on the validity of such claims? Where is the critical but informed journalism that should ask questions about this instead of just holding a microphone and reporting what is being said?

This case does not speak well about politics but it does not speak well about the news providers either.

Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga