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Estonia’s ICT development would require stronger productivity growth

Despite Estonia’s advances in the Information and Communication Technology (ICT) sector, the country still needs a new approach, according to Emerging Europe.

Estonia needs policies that promote digitalisation, innovation and skills among companies, including through increased co-operation between the public and private sector to attract investment in innovation.

The country’s economy was severely affected by the war in Ukraine and the ensuing spike in energy prices, which led the country into recession. Economic activity is now slowly recovering, but Estonia faces the challenge of returning to more sustainable growth, according to the Organisation for Economic Co-operation and Development’s (OECD) latest economic survey for Estonia.

The OECD expects Estonia’s GDP to shrink by 0.4 per cent in 2024, following a 3.1 per cent contraction in 2023. Then, in 2025, GDP will start to grow by 2.6%.

The modest recovery will be driven by higher demand for exports, increased public investment and lower interest rates. Inflation could fall from 9.1 per cent in 2023 to 3.9 per cent in 2024 and 2.1 per cent in 2025, experts predict.

The study by the OECD emphasises the need for a prudent fiscal policy to balance stabilising the economy with reducing the state budget deficit.

Estonia’s expenditure has increased due to higher spending on defence, health care and family benefits. Fiscal consolidation strategies for 2024-2027 will be hampered by the slow economic recovery and weak growth prospects.

Renewed economic convergence with more developed countries would require stronger productivity growth, the researchers noted. The country is expected to once again top Emerging Europe’s IT Competitiveness Index, which will be published later this month. But despite the successes in the ICT sector, a new approach is also needed.

Preventable mortality, especially from cardiovascular disease and cancer, remains high. Mortality rates for older men and people on low incomes are particularly weak, with regional disparities still high. With limited budgets, achieving further improvements in health outcomes in an ageing population is likely to require additional funding.

While the OECD believes that the health system is well designed and provides good incentives for the use and allocation of resources, there is room to improve treatment and prevention and to better prioritise resources.

Due to continued dependence on domestic oil shale and increased emissions in a number of sectors, the Estonian economy remains carbon intensive. Accelerating climate change – by halving greenhouse gas emissions in 2005 by 2030 – will require an ambitious decarbonisation of the entire economy, experts argue.

Estonian Finance Minister Mart Võrklaev stated that the OECD recommendations were “very much in line with what we ourselves know, that the fiscal situation is difficult.”

We need to continue with the austerity measures as well as the tax reforms that we have already undertaken to reduce the budget deficit.


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