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We are not mentally or practically prepared for the possible changes that will accompany the change in worldview, Heido Vitsur, economic analyst at LHV Pank, writes.
During a hearing before the Senate Foreign Relations Committee before his confirmation, US Secretary of State-designate Marco Rubio said, among other things, the following: «Out of the triumphalism of the end of the long Cold War emerged a bipartisan consensus, and this consensus was that we had reached the end of history, that all of the nations of the world would now become members of the democratic Western-led community; that a foreign policy that served the national interest could now be replaced by one that served the liberal world order; and that all mankind was now destined to abandon national sovereignty and national identity and would instead become one human family and citizens of the world. This wasn’t just a fantasy. We now know it was a dangerous delusion.»
The above should be taken more seriously than any other statement made there, because it is precisely on this realization that the changes taking place in global and economic politics in the coming years will be based to the greatest extent.
We need to take this statement more seriously than most countries. First, we are not at all ready for such changes, since over the past decades we have not even allowed questions about the possibility of the continuation of the current liberal world order. We are not mentally or practically ready for the possible changes.
Secondly, we must consider that, operating in a liberal world and not considering possible changes, we were doing very well economically until the financial crisis. It seemed that we had chosen a better path of development than most of our fellow sufferers and had acted wisely by letting as many things as possible take their course. This was not just a feeling – it was confirmed not only by the noticeable improvement in our own standard of living, but also by comparative data with other countries.
But now that we are back to where we were at the end of the previous decade in terms of real GDP per capita, somewhere between 2018 and 2020, it is important to understand that our main problem is not the decline in GDP per capita, but the delay in perceiving a number of global trends and domestic socio-economic processes and connections.
In order to do something, we must, like Rubio, start by recognizing that our vision of the world and society and the possible path of development was simplified, even partly erroneous, and that we have therefore made decisions that are not beneficial to us.
Although wisdom is always easier in hindsight, this is no justification for well-intentioned but irrational decisions to remain as they are, even if we have to give up our favorite biases when changing them.
It must be recognized that we have accumulated quite a few of such, or necessary, but unmade decisions over the past thirty-five years, in almost all areas of life.
By now, it has probably become clear to everyone that our perception of the security of supply of energy and the competitiveness of renewable energy was wrong. Electricity is only useful if it can be used when you need it, which is why the obligation to fully satisfy one’s electricity needs with electricity produced from random renewable sources, mainly wind and solar, even before the deadline set by the European Union, is simply adventuristic. Electricity is not a potato that you store in the cellar in the fall and use as needed throughout the winter, and therefore establishing energy security based mainly on random wind and solar energy requires extremely powerful balancing and storage devices and special market conditions for their establishment. Unfortunately, we do not have these devices, and there are also no conditions for private investment to come there.
But while we have reached the right understanding of self-sufficiency when it comes to security of supply, in our energy plans we have still remained in a world that no longer exists. Yet it is clear that Europe, which is losing its positions in the world, cannot afford to pursue an economic policy that is significantly different from the US, either in energy or trade, because then it will weaken its positions even further.
The decision of the US to start using fossil fuels more freely again («drill, baby, drill») and to balance its balance of payments will inevitably affect European economic policy already in the near future. Therefore, when investing in energy, we would benefit not only from a more complete calculation of energy prices, but also from starting to think about Estonia's current account balance of payments and the use of resources under our control when making decisions.
But despite the above, energy-related issues are relatively simple: the necessary knowledge and experience exist in the world, and we only need to add our analytical skills and the will to get something done.
The situation with tax hikes and increased budget expenditure is much more complicated. It must be understood that the problem here lies not so much in taxes and expenditure, but in demography and the efficiency of using public money.
The problem is that despite pushing population issues into the background of the decision-making process, it is still a fact that last year, for the first time, fewer than 10,000 children were born in the Republic of Estonia, about three-quarters of whom were Estonian, as is the case with the proportion of people over 65 in the population growing rapidly.
The number of children born now is over two times lower than it was during the restoration of independence. And even with this small number, we must remember that we still have relatively many women of childbearing age. Of the few women born in the nineties, only the women of seven or eight years from that generation have reached the average age of having their first child (28-29 years). What the average of 1.6 children per woman over the past thirty-five years means to our nation will only be fully apparent in the number of births by the middle of the century. In the same way, we will gradually, and only in the second half of the century, begin to perceive what the fact that only nine and a half thousand children were born last year means to our population and nation.
We must also take into account that since 25 to 30 percent fewer girls have been born over the past 35 years, we cannot count on a natural increase in population even if 2.1 children per woman per year were to be born in the future, because there are too few young women for that and we cannot increase their number later, which is why stabilization of the population at the current level is not possible even if the number of children were to increase to 2.1.
Although we cannot even say today whether the number of children born per woman will return to its previous level of 1.6 children on average in the coming years or remain at last year's 1.3, it is not difficult to calculate that in the first case, 7.7 or 6.2 children will be born to the 4.8 girls born in 2023, or three to four times fewer than 35 years ago.
Unfortunately, 8,000 is also overly optimistic, because as recent studies show, the expected economic recovery may not help us much in terms of the birth rate. It has become clear that in developed countries, the increase in the level of education does not reduce the number of children as much as it used to, but rather the opposite is now the case. With the current unstable human relations, it is educated women who are able to have and raise the desired number of children. It is women with a lower level of education and less secure backgrounds who are most likely to have trouble fulfilling their wishes to have children, as they have realized that they too often cannot rely on anyone or anything but themselves when raising children. The problem is therefore not so much the level of GDP, but a change in the consciousness of values, where a sense of responsibility has been left with a rather modest spot.
It seems that we have been like farmers who have cultivated their fields according to all the rules of agrotechnology – that is, watered and fertilized – but have forgotten that even in good conditions it is weeds that grow best. Even if they are not sown.
Since influencing people's beliefs and behavior is in any case a long-term and complex undertaking, we have to pay for what we let go in growing a sense of responsibility so far, if we want to survive as a nation, of course, at least initially in money.
From an economic perspective, however, it is completely irresponsible that we have not clearly stated in this demographic situation that people who started working today will no longer be able to receive the pension they need for living from the current financing system, or the first pillar. After all, while our birth rate has remained well below the level necessary to maintain the population for a third of a century, the number of people over 65 has increased from 190,000 to 283,000 in the last 25 years.
In addition to our own demographic situation, we must also take into account that the whole of Europe is in more or less the same situation as us, but we are not a very desirable destination for the qualified foreign workforce due to our living conditions and the language barrier.
However, our situation is not at all hopeless and there are many things we can do quite easily to improve our current relatively poor competitive position. First of all, we should urgently abolish those prohibitions or excessively strict conditions that directly hinder economic development. There are many of them.
One could recently read in Maaleht that Estonia has for some reason excluded «available ground surface», which could also include home turf, from the substrates allowed for chicken farming – straw, peat, sawdust and soil. This example is not a particular economic problem, but it is all the more indicative of the prevailing attitude in our country.
It has also become clear by now that the decision to allow only energy class A buildings to be built from some arbitrarily designated time onwards is not beneficial to the environment, people, or the economy, but rather, on the contrary, leads us to use the world's resources and our own money inefficiently. The obligation to ensure parking in underground parking lots throughout Tallinn also raises doubts.
Unfortunately, alongside such specific and clear-cut regulations, there are also those whose impact and content are difficult to grasp.
For decades, we have been proud of the arrival of our new shopping centers and new retail chains. We already have so much retail space that nowhere in Europe is there as much retail space per person as in Tallinn, even with a significantly higher turnover. At the same time, in addition to enjoying the growth of retail space, we have also dreamed that the increased competition that accompanies the growth of retail space would start to push prices down. Unfortunately, this has not happened.
We have not understood that in our retail trade, competition is not so much about prices as about presence, and that in such competitive conditions, the creation of excessive space is completely natural if it is not prevented in any way. In Copenhagen, for example, the creation of excessive space is prevented by city planners, who ensure that retail space is created in a dispersed manner in the city and based on the fifteen-minute city principle. Of course, a competition is organized for each new retail space with defined parameters, open to all. However, we have created an environment for ourselves where the size of retail space is planned by an excavator, and with it also unnecessary costs and higher prices.
We have not even understood such a simple thing that in addition to the excess of retail space, our additional price increase is also caused by longer store opening hours compared to most European countries. Unfortunately, we have not taken into account that while the trade unions have long done the work of finding optimal working hours there, no store can shorten its opening hours on its own in the current competitive conditions, although everyone knows very well that long opening hours increase costs but have relatively little effect on turnover.
Ultimately, however, such high price levels are not a problem of trade at all, but of our competitiveness and institutional failure.
The same situation as in retail trade is also in our settlement policy. We like to live scattered and we do. Nevertheless, it would be wise to ask ourselves how much such a luxury costs and who actually pays for it, what we lose in our economic competitiveness as a result of the increased costs of building and maintaining infrastructure due to such settlement, and what we will not be able to do because of such a choice. It is also worth thinking about what our descendants may think in less than a hundred years when they realize how much land suitable for growing crops their parents have only recently buried under asphalt and concrete.
But it is even more difficult to see the cost to be borne by consumers and businesses as a result of our desire to mitigate banking risks more than the European average.
Unfortunately, risk assessment is an art that no one fully masters. However, it is possible to calculate what a two to three percentage point higher capital requirement imposed on our banks will cost our businesses and households. This will make loans for businesses more expensive by about 50 basis points and for households by 25 basis points.
In euros, this means an additional thirteenth payment per year for families on their home loans, while for companies it means an additional cost of tens of thousands of euros per year for every million euros of a loan. In addition, a reduction in the money supply and its impact on the economy.
Since this series of half-solved or unresolved problems can continue with many issues awaiting resolution in education and healthcare, it must be acknowledged that the center of gravity of solving all our problems lies in our institutions. And not so much in the number of people, but in what they do. Estonia needs state reform.
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