Swedbank executive: too soon for champagne01.11.2010, 09:55
Robert Kitt, head of corporate banking division of Swedbank in Estonia, belives that that instead of preaching about the need to develop knowledge-based industries, Estonia should focus on balancing its economic structure.
The following is abstracts from his speech held at the Swedish Business Awards in Estonia 2010 ceremony.
At least officially, the economic crisis in Estonia is over, as indicated by the 3% year-on-year growth in the second quarter. However, double-digit growth of macroeconomic indicators shows that we are not having an overall solid economic growth, but one that is fragile and vulnerable.
I would like to urge all economic sectors to engage in broad-based discussion about Estonia's economic development. In the last twenty years Estonia's economy has gone through a major transition. Development has been extremely fragile and there have been many traps. Climbing to the top of the development ladder has proven that rapid, albeit vulnerable growth, has been worth it. But now we have reached a step where we could break a leg if we slip and fall. Therefore, the only meaningful solution today is balanced development.
Let me provide some examples. When in 2002 borrowing and depositing was largely equal in Estonia, by the end of 2008 loans constituted 175% of deposits. This imbalance created bubbles. By now this ratio has fallen notably and stands at about 145%. Banks are in excellent shape and the total picture hints at stability.
Also the government debt burden is very small and the government has liquid reserves in its disposal. The balance is becoming more stable and we have a buffer to protect us by the end of next year.
Estonia's second-quarter economy expanded mainly on growing industrial output. I disagree that this was based on by cheap labour force or low-cost subcontracting. I have spoken with many businessmen and visited many plants and farms. In my opinion, Estonian producers have adapted to the new situation. I also think that the government's public sector spending cuts helped the private sector to adjust. The plants were downsizing and becoming more efficient, but at the same time they were actively looking for new markets. While before the crisis Estonia exported 20% of its output, this figure today is much higher.
Our competitive edge is not quantity - we actually produce quite ordinary items for all parts of the value chains of different economic sectors. Our main advantage is flexibility. We are in the same time zone with Europe, we have the same business standards and we fill the orders quickly. Therefore, it is not surprising that the chronic current-account deficit has gone. The current account has been positive in every single quarter since the beginning of last year.
Looking back we can say that the sectors that focused on domestic demand were growing too fast. Return to reality has wiped out excessive demand, leaving behind high unemployment. Although it is no longer growing, it is dangerously high since our workforce out of 1.3 million people is about 690,000. Of them, 128,000 have no jobs. We cannot talk about stability before we have brought unemployment down to below 10%.
Yes, we have gone through rapid economic growth, we are members in OECD, EU and NATO and, very soon, also the Eurozone. I hope that further development will be more stable. We must have balanced structure in our economy as well. It is too risky to focus too much on high-tech or nanotechnology industries. I would therefore like to calm down the calls to move towards knowledge-based economy and, instead, urge you to move more towards integrated broad-based economy. Also knowledge-based economy needs basic skills on how to operate, let's say, a bakery.