Euro is about to come and the Estonian society is worried about what is going to happen then. Dr. Robert Pefferly Jr., Associate Professor of Economics at Estonian Business School (EBS), spoke with Estonian Free Press to express his point of view and his analysis of the current situation.
What is your personal vision about the economical situation in Estonia during the last years?
What we just went through is a totally traditional classic bubble with prices fluctuating around a strange attractor based upon (real) fundamentals.
It is used to take about 20 years to repeat the cycle, now it seems to take approximately from 5-9 years to go through the entire cycle. The information technology revolution (now over 120 years old) seems to be increasing our cycle speeds too.
We are somewhere between the moment when people just cannot handle the situation any more (no jobs, graduates cannot get hired, people protest…) and the beginning of the recovery.
Is it the crisis influencing a lot the economics in Estonia?
Yes. Generally, it is not as bad as most people think and it is not as good as most people believe too. Estonian Economics is Microeconomics. There are only approximately 1.3 million people here so this is not a macro economy. That said, Estonia is influenced more by outside exogenous macroeconomic trends, so the recent food price increases and Chinese wage increases do affect Estonia more than some others.
Can you give us an example about the crisis effects in Estonia?
There are also some strange events that really just do not make sense. Prices have maintained and/or increased because business owners have to maintain profits. This nominal effect is troublesome because I do not see the real growth or increase in quality. This makes no sense. In addition, the level of unemployment and underemployment is scandalous. But it all gets hidden by the registered unemployment game administrators play. Although there has been a world crisis, a lot of Estonia’s economic wounds have been selfinflicted.
What are the most important incomes for the Estonian government?
Taxes. Some of the recent proposed and implemented taxes show the desperation of what is going on.
What is the most important asset of Estonia?
Young people. Unfortunately the Estonian government and business leaders seem intent on driving the best and brightest out of this country. While letting too many not increase their human capital skills. Estonia does not experience a brain drain; it experiences a brain river flowing out. If the Estonian government could grow its way out of the situation, that would be great.
Corruption, incompetence, non-delivery of basic services, and overpaid administrators. The worst offenders are the administrators at the top who are supposed to be “visionaries” – really quite depressing to watch. I really wish some young people would start to do something politically in this country. Where are Estonia’s young leaders?
The Statistics Board said that the Government has spent 4 billions kroons more that the incomes they have. However, the debt has been reduced 2.1 billions. How can that be possible?
I am a statistician and I gave up trying to make sense of the Estonian statistics years ago. Really, I use the statistical data for some analysis, but for the most part, I am just left scratching my head wondering…Of course there are variability issues such that all statistical data is soft and variable, but from my analysis, a lot of the statistics produced by Estonia really appears to be more random noise than signal. I stopped trying to figure it out a few years ago.
The Estonian debt is more than 15 billions kroons, how is that situation going to influence the arrival of the Euro in Estonia?
It will not affect it at all. This decision stopped being about economics late last year. This has been more of a political contest for the past 6-10 months.
Sovereign wealth / debt are going to be one of the main problems in 2010-2025. But that will not affect Estonia in 2011.
Is the deficit going to increase when the Euro arrives?
Hard to say. It will have both beneficial (nominal) effects and detrimental (real) effects.
I have been thinking about what happens to the deficit and I can argue both ways depending upon what assumptions I make.
So what I need to see is which assumptions fail before I can see a clear vision on what the probable path is for the deficit. My gut tells me to be pessimistic, but really, I have no clear vision on this matter. It is like the world cup this year, no clear vision on who to cheer for.
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