Tõnu Palm | Estonian growth companies have formulated an ambitious development vision for Estonia

Tõnu Palm, the head economist of Luminor Eesti

To highlight Estonia's success stories from the corona year, today I’d firstly highlight the billion euros of additional capital raised by start-ups, along with the ambitious development vision of the Estonian Founders' Society[1], according to which at least 30% of Estonia's GDP should come from technology sector exports by 2030. Additionally, Estonian employers have created a "2% club" inviting entrepreneurs to invest at least 2% of their turnover in research and development.

The success of the Estonian economy in coping with the corona crisis has been more than impressive given the large global risks involved in the first year of the crisis, when several economic sectors were essentially locked down due to corona restrictions. Stopping the economy with regulations was a first time experiment.

According to economic growth indicators, Estonia has recovered from the corona crisis among the fastest in the euro area. In the first half of 2021, the volume of the economy already exceeded the pre-crisis level by more than 4 per cent, while annual GDP growth picked up from 4 per cent in the first quarter to 13 per cent in the second quarter. At the same time, the euro area economy will reach pre-crisis levels by the end of this year.

The strong economic recovery arrived earlier than expected, and it’s positive that in the second quarter the rapid growth also became broad-based across economic sectors. While last year the recovery of retail trade, merchandise exports and related industries began with the support of global trade and consumption, the reopening of economies from the corona restrictions in the spring also meant an additional contribution from the services sector and energy sectors.

In the second quarter, large sectors turned to double-digit annual value added growth: the hitherto restrained manufacturing industry (18.9 per cent year-on-year) and the transport and storage sector (35.8 per cent year-on-year). At the same time, probably no sector will be left untouched by digitalisation in the future (the added value of ICT increased by more than 30 percent year-on-year). Virtually all sectors experienced a turnaround, including, for the first time, growth in the accommodation and catering sector during the summer months.

Next year, the Estonian economy will continue to grow at a more moderate pace, given the coolingly high energy and raw material prices, but this will be enough to increase the demand for labor. Importantly, on the positive side, the economy has become more focused towards a more digital and greener economy with the help of EU structural funds. Estonia is investing nearly a billion euros of the recovery and resilience plan funds in health care, green revolution and digitization. Private and public co-financing opens up new development opportunities in the context of the extremely favorable euro (real) interest rates.

In the light of this, the growing ambition of Estonian start-ups to conquer global markets from Africa to India is gratifying. Citizens should no longer be surprised that the added value created by the ICT sector in Estonia is now greater than in the construction sector. For other European economies, overcoming this milestone would undoubtedly be front page news of business newspapers.

Estonia's development is thus moving towards a greener, climate-neutral and smarter circular economy. To achieve a major leap forward, we need more research-intensive production and globally ambitious service companies. Estonian employers have created a "2% club", which includes companies that invest at least 2 percent of their turnover in research and development.

I don’t agree with the statement that Estonia doesn’t have a goal to pursue now after joining the EU and NATO. Many developed countries have considered the forthcoming green transition to be one of the greatest challenges facing humanity overall.

The goal of climate neutrality has thus become a sufficiently ambitious and new positive challenge for Estonia for the next thirty years (Luminor's economic forecast[2], 14 September 2021), which will also potentially help to strengthen international relations between democratic and less democratic countries. Given the global green transition, climate and environmental issues are far from being a challenge for individual countries or industries.

Polluting activities are increasingly limited by the norms established by the businesses themselves, the value of green brands continues to grow in the eyes of investors, and growing environmental awareness with the increase in transparency will help prevent greenwashing in the future. Estonia can offer solutions to meet the challenges of the green transition. Thus, the Estonian 2035 Strategy from Riigikogu sets a good goal to guide future strategic decisions: "The Estonian economy is innovative and science-based, responsible for people and nature".

If Estonia's 2035 strategy sets our long-term goal, the Estonian Founders' Society, which now includes growth companies and start-ups with a global reach, has presented a corresponding and ambitious vision for the development of the Estonian economy[3]: “The prosperity of Estonia’s tomorrow will come from the tenfold growth of the technology sector in the next ten years.” According to this, the export of Estonian technology will grow to one third of the Estonian economy by 2030. This is an ambitious enough goal that can only be accepted.

According to the vision of Estonian technology visionaries, our technology sector will have twenty thousand employees in five years’ time and more than 50,000 in ten years’ time. This will account for just under 10% of all working people in Estonia in 2030. At the same time, if today’s efficiency continues, technology businesses will bring as much as 10 billion euros per year to Estonia in 2030, i.e. 30% of Estonia's gross domestic product. This is the long-dreamed of knowledge-based economy and the export of Estonian brain power to the world.

Alright then, let’s grab life by the horns and expect similar ambition from other economic sectors, because additional cash injection is expected from Europe. The bench of successful Estonian companies is so long that there is no doubt that small and innovative Estonia will continue to be at the top of successful euro area economic tigers. Let's make Estonia bigger with new ideas.

The green transition should not be underestimated as a developmental goal, and the key is to work with other countries to avoid development barriers and bring home the results, using the best available global knowledge on green solutions that are still being developed.


[1] Estonian startup sector vision 2030 — Estonian Founders Society (asutajad.ee)

[2] https://luminor.ee/uudised/luminori-majandusprognoos-majanduse-kiire-kasv-jatkub-ka-jargmisel-aastal

[3] Tehnoloogiasektori visioon 2030 — Asutajate Selts (asutajad.ee)

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