Estonian-Scandinavian income gap wider than ever

Photo: SCANPIX

Even if related to eurozone our income level has slowly risen over the past decade, the opposite is true as we look to the Nordic countries – with income gap widening.

«Even though Estonia’s economy has, being adjusted to crisis, entered a moderate growth trajectory, a long-term problem persists in the overly slow convergence of incomes,» said the Nordea Eesti head economist Tõnu Palm, presenting the bank’s recent economic outlook. «A sign of danger being Estonia’s negative immigration ratio of 2012 – with 6,600 persons in their employment age leaving the country, amounting to almost 1 per cent of overall work force,» he added.

«Talking about this past decade, it is evident that it included a major crisis, while Estonia suffered a far worse recession than Scandinavia,» is how the SEB economist Ruta Arumäe explained our slower income growth. «But if, from now on, Estonia will manage to grow faster than a couple of per cents a year, then, in the future, the gap would begin to diminish,» said Ms Arumäe, adding that this could well be the case, as Estonia’s growth potential ought to be a bit better that a couple of percent.

Maris Lauri, an analyst specialising in macroeconomic matters, also claims that while at the worst moments of the economic crisis, in 2009, the gap was torn wider, it has indeed been closing up thereafter.

«In purchasing power, Estonia’s GDP per citizen was, in 2009, about 55 per cent of the Finnish and 52 per cent of the Swedish ones; the corresponding figures for 2012 being 60 and 53 per cent, respectively,» explained Ms Lauri. «With the Estonian data, it has to be taken into account that all calculations have been done on the basis of estimated population figures – heavily exaggerated, as evidenced by the Census,» underlined Ms Lauri.

«In all probability, the real 2012 Estonian GDP per citizen, purchasing power wise, amounted to about 62 per cent of the Finnish and 55 of the Swedish figures,» said the economist.

Ms Lauri added that the recent comparisons with Latvia and Lithuania were faulty as well, as the latter had already harmonised their results with Census figures – unlike Estonia. «In my estimation, Estonia’s GDP per citizen, considering purchasing power, would still exceed that of Latvia and Lithuania, should the correct [Estonian] population amount be used,» said Ms Lauri.

So: what to do in order to bring our income level closer to Scandinavia? «The recipe is simple: we must try to do things just as well as the Scandinavians, but a bit cheaper,» said Ruta Arumäe.

«When cheap production is being offered, this is not possible – especially with our decreasing population,» warned Maris Lauri. «Thus, it would be most prudent to start producing products and services with greater added value. Then, productivity and citizens’ wealth levels would rise as well,» she added.

Tõnu Palm also stressed that the slow convergence of income is related to modest growth of added value. Over the past decade, added value per person has only doubled.

To enhance income growth, we would have to target fields of economy with the best proven added value. These, last year, being processing industry, wholesale and retail trade, construction, transportation and warehousing, information and communications.

For instance, in the production of oil products, the decade’s added value increase has amounted to 1,040 per cent; four times in production of computers, electronics and optic devices; 290 per cent in wholesale trade; 270 per cent in metal production.

According to Mr Palm, too many people are tied to domestic market and state functions; approximately 17 per cent of those in employment working in wholesale and retail trade alone. 

«Countries with high standards of living invest into new sectors of the economy,» underlined Mr Palm, adding that in the context of an ageing population, medicine could be an area of great potential.