A 'closer look at Estonia'

Michael Burke: ‘Those who declare with infinite certainty that spending cuts and tax increases cannot work, or that there is no example of an economy cutting its way out of recession should take a closer look at the Baltics.’ So says Dan O’Brien, the Economics Editor of the Irish Times.

When it has been previously pointed out that other European countries, such as Germany and Sweden adopted measures to stimulate the economy, we were told that Ireland is unique. When we pointed that small open economies like Belgium had imposed windfall taxes on banks and energy companies to fund government investment, we were told Ireland is not Belgium. Since tautology cannot be disproved, this seemed to settle matters, at least to our critics’ satisfaction.

But now we are told, Ireland is Estonia, or at least should emulate its ‘success’, which is all that was being asserted in the case of countries which boosted investment to spur recovery. Tom McDonnell’s piece on the Baltic States is very welcome in puncturing this nonsense.

There is just one point worth adding, I think. That is, there is no ‘success’ of the Estonian model via what is euphemistically called internal devaluation, aka severe wage cuts to boost the rate of profit.

Below is a table compiled from the IMF country report that Tom helpfully linked to. It shows 3 things. First is the level of GDP growth. Here the Estonian Finance Ministry has issued an updated forecast for 2012, which is that growth will slow dramatically to 1.7% in 2012. Second is the net contribution from the EU as a proportion of GDP. Third is simply the sum arising from deducting two from one, ie what growth would have been without the EU net contributions. The latter does not include any multiplier effect from the spending of the EU, just its arithmetical total.

Estonia GDP and EU Subventions

Source: calculated from IMF, Estonian Finance Ministry data

Before taking into account EU funds, Estonian GDP is now officially expected to end 2012 still 7.6% below its peak in 2007. The entire EU subvention over the period will be equivalent to 20.6% of GDP. The entire growth over the period, from the low-point is just 11.6%. Without the EU funds the Estonia economy will have contracted over the period by 25.3% (again, taking no account of any multiplier effects arsing from that investment).

As is well-known, the EU is a public body. Insofar as there has been any recovery in Estonia it is entirely a function of state, or supra-state bodies. Equally it is well understood that these subventions come in the form of subsidies to particular sectors, especially agriculture, and in the form of structural and cohesion funds. These investment funds are the larger part of the EU funds provided, equivalent to 16% of GDP over the period. They concentrate on infrastructure, transport and other areas.

The ‘internal devaluation’ model has been a disaster for Estonia. Those who want to rescue profits by reducing wages are searching far and wide to find examples of where this had led to growth. But they are failing. The sole success for Estonia over the period has been investment from state bodies. This is the lesson from the Baltics, and one which does apply to Ireland.

Posted in: Inequality • Europe

Tagged with: Estonia • austerity