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Extract 3
Estonia (Case Study)…read more

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Key Terms
Economic Growth:
This is an increase in real out or income of an economy over a time
period this is shown as a change in GDP.
The total value of goods produced and services provided in a country
during one year. Estonia's GDP was $21.42bn 2012.
Transition Economies:
This is a countries engaging in the long-run process moving from a
centrally planned economy to a free market.
Market Economy:
An economy that relies on market forces of demand and supply to
allocate goods and resources and to determine price. Note Estonia has
been transitioning since 1991.
Supply Side Policies:
Government policies that aim to increase the level of aggregate supply
within an economy, this is either a quantity or quality improvement.
Note Estonia has a good education system HDI=0.919 but needs to
improve health care.…read more

Slide 3

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Transitioning to a Market Economy
Advantages of Market Economy:
Countries are open to FDI this leads to economic growth
and productivity both domestically and globally.
Efficiency gain as firms can react better to changes in
demand, they will provide a good that the consumer
actually wants and not what they government think they
They have more incentive to earn profits there leading to
more innovative choice within the market (dynamic
efficiency gains).
Disadvantages of Market Economy:
Economic instability, as they are open to FDI (this tend to
lead to more export lead growth). The FDI could leave,
leaving the country in a much worse state. Note
downward multiplier.
Social cost of FDI such as environmental issue. Note high
levels of manufacturing can lead to pollution.…read more

Slide 4

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Supply Side Policies
Estonia's long term goal is to shift there competitive advantage to high knowledge services
and high-value manufacturing industries. Note Estonia face competitive challenge with
low labour costs in the East.
Education & Training:
High web penetration and strong technical standards of technical education.
They have put large amounts of money into education, with compulsory education
till 17 and there is a strong focus on vocational education.
Cut In Direct Tax:
Note that in Estonia they have a flat rate tax of 21%, decreasing the tax would mean
that people have an increase in disposable income, and the MPC would therefore
increase, will create a multiplier effect, encouraging people to work overtime or to
go back to work.
Improve Health Care:
They scored the lower in this than education HDI=762
Improving health would lead to less sick days being taken off as population is more
Cutting Corporate Labour Tax:
Cutting minimum wage will encourage firms to hire more people. Note this can
have a damaging effect, with lower wage rate attracting FDI, it will also deter labour
force how may seek working in other countries where they will be paid more; net
migration rate -3.33 per 1000.
Lowering labour tax on extra workers. Note in sustainable Estonia 21 they will be
taxed more for negative externalities but less for extra workers, this is to balance
out the effects of the tax on i.e. Pollution.…read more

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Supply Side Evaluation
This will definitely reduce an inflation gap.
Less likely to create conflict with other macro-economic
objectives as they will benefit all of them.
Jobs are created as well as sustainable growth through
productivity and competitive gains.
Supply side policies take a long time, both to implement
and in the case of education it can take 18-30 years to see
They are very expensive to implement, more expensive
than changing an interest rate.
Cutting tax may not encourage people to work overtime
as they may have a fixed contract therefore cannot, and
those that have a flexible contract may be happy with
their current living standards so won't work overtime.…read more

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Causes For Negative GDP Growth
Estonia has a lot of foreign owned banks within it
economy (with Swedish banks dominating), in the short
term this gave consumers greater access to credit at a
lower interest rate. Their economic growth was brought
about largely by loans, which during the financial crises
and the collapse of many European banks led to large
personal debt and a decline in demand.
Estonia's growth is very much export lead due to large
levels of FDI, with most of its exports going within the EU
(73% of exports) therefore when the financial crisis of
2008 came about they found themselves suffering from
other member states `shrinking economies'. As demand
fell so did company shares. Note exports in goods and
services slumped by 20% from 2008-2009, this
recovered in 2010.
Business capital investment fell by 40% 2008-2009.…read more

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