IMF Staff Country Reports

Republic of Estonia: Selected Issues

June 21, 2024

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International Monetary Fund. European Dept. "Republic of Estonia: Selected Issues", IMF Staff Country Reports 2024, 178 (2024), accessed November 12, 2024, https://doi.org/10.5089/9798400278334.002

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Summary

This Selected Issues paper explains Estonia’s recent losses of export market shares. Estonia’s export market share has fallen sharply, signalling that exporters have difficulties to keep up with foreign competition. While the immediate cause of this decline can be traced back to an adverse combination of external shocks triggered by the war in Ukraine, signs of faltering export performance surfaced already in the aftermath of the global financial crisis, and thus predate recent shocks. Using a constant share decomposition, this paper shows that, unlike in Latvia and Lithuania, a significant portion of the decline in Estonia’s export share can be attributed to the ‘intensive margin’, i.e., a shrinking share of Estonia’s exports in the main destination markets—a sign of weakening external competitiveness and declining relative productivity. A few high-level policy implications can be drawn. Addressing the erosion of external competitiveness will require structural reforms aimed at enhancing productivity, removing impediment to a structural transformation of the economy toward more technologically intensive and higher value-added products and services, as well as efforts to ensure that real wage growth remains closely aligned with productivity growth. By addressing these underlying challenges, Estonia can restore external competitiveness and ensure continued convergence toward the income levels of EU most advanced economies and Nordic neighbors.

Subject: Capital adequacy requirements, Expenditure, Exports, Financial regulation and supervision, International trade, Production, Productivity, Total factor productivity

Keywords: Baltics, Capital adequacy requirements, Estonia's government spending, Europe, Export market share, Export share decline, Exports, Global, Labor market liberalization, Productivity, Tax revenue-to-GDP ratio, TFP dynamics, Total factor productivity, Within-Sector allocative efficiency

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