Äripäev CFO: let’s triple all prices

19.06.2012, 13:03

Toomas Truuverk, chief financial officer of Äripäev, writes in his opinion article that while Estonians are and will remain a poor East European nation, we should all allow ourselves a little dream.

“I dream that one day Estonians will be among one of Europe’s five richest nations. I understand that this is as hard to achieve as to change our national modesty, and I also understand that a good dream needs a measurable objective and deadline.

Why not set ourselves a target of reaching the living standards of Finns by 2030?

The easiest measure for standard of living is average wages. At the end of 2010, Finnish average wage was 3,040 euros. By 2030 it is likely to be 3,120 euros, considering average quarterly growth of 0.5 percent.

Estonia’s average wages were 847 euros in the first quarter. This means that in the next 17 years, average wages in Estonia should grow about 7.5 percent a year.

But because Finland is going as fast, it would be safe to set the target for wage growth at 10 percent a year.

This in spite of the recent statement by the central bank that even average wage growth of 7 percent is too fast, that productivity growth is much slower and such a development is not sustainable.

What if all Estonians agree one day to raise all prices three times, including the price of labour?

This is the way Swedes decided 45 years ago to switch from left-hand traffic to right-hand.

It would hardly affect the domestic economy at first. Simply our income and expenditure would be both equally higher.

Of course, the whole international trade in Estonia would be turned upside down. We would suddenly become very competitive towards imported goods, but our export industry would lose any change to compete with others because costs may go up, but buyers abroad would laugh at our demand to pay three times more for the same thing.

So, an economic disaster? But what if we drag it over a period of ten years? Or even 18? Would such an internal price increase be possible? It must be.

Estonian central bank talks about productivity. This is the same as efficiency. In other words, all Estonian people would have to give 3.7 times more output in 8 hours than today.

I am talking about the Estonian people because I think that the option of filling low-cost jobs with immigrants is dangerous. Also we have common statistics for Estonian workers and immigrant workers in Estonia, not separate. And the objective is to increase average wages, but otherwise the current reality will remain unchanged.

I agree with the central bank that the key to better future is productivity.

The problem is that the issue of productivity is not one-dimensional.

First, the output is measured in money. If a hairdresser produces her serves in Tallinn for 20 euros and her colleague does it in Helsinki for 70 euros, which one is more productive?

The answer is that the hairdresser in Helsinki because output is measured in money.

Inflation is our friend, not the enemy as claimed by the Bank of Estonia.

We simply must learn how to turn it into our friend.

Secondly, the amount of production per employee depends on the technology that is being implemented.

If, ten years ago, a regular Estonian sawmill employed twenty people who were expecting their paycheck at the end of every month, the same work is now done by highly automated sawmills that have perhaps a few operators in the control room.

Financial sciences say simply that if you want to speed up the revenue growth in an enterprise, the best way to do it is to increase the investment rate.

Thirdly, the volume of output is directly related to the country’s economic structure.

Let’s imagein that there is a country that is populated only by sewing operators, ie seamstresses, and another country whose population develops communication software for billions of people.

It is clear that the first country would be poor and the second country would be rick.

In simplified terms, when we plan the economy’s structure we need to promote the development of economic sectors that pay higher salaries.

Therefore, we can say that subcontracting is bad and smart work is good.

Fortunately, this dream is almost self-fulfilling since the economies of Estonia and Finland are already converging.

This process started years ago and is speeding up as we speak.

Therefore, when we plan for investments we need to consider whether to include in our calculations a major price increase fofr all goods, including labour.

We need to make investments that are aimed at automation and cut the need for labour and hope that our education system finally starts to prepare graduates who are ready for the future and not for the past or present.