The representatives of Estonia's main investors, Sweden and Finland, are not the type of people who attract a lot of attention.These glazed-over northern neighbors are usually polite at all times, even when they vehemently disagree with something. Recently, though, the ambassadors of Estonia's Nordic investment class have begun to speak up. What is their central message? It's time to build a modern Estonia.
The dream of Estonia's Nokia, a wonder product that would lift all boats, is dead and gone say the northerners. Instead, Estonia should invest on building the infrastructure and investment environment to attract small- and medium-sized enterprises(SMEs) from its most reliable partners, Sverige and Suomi.
Two channels of information from this interest group come via the Swedish Chamber of Commerce in Estonia and the Foreign Investor's Council in Estonia.
Depending on the year, Swedish foreign direct investments usually make up around a half of all FDIs in this country. SCCE puts out a quarterly magazine called In Focus. In the latest In Focus, SCCE Chairman Anders Hedman pops the question, "Is it right to criticize Estonia?"
"I think it is very painful indeed for many Swedish-Estonians when their friends in Sweden read about the bad Estonian economy and the possible devaluation of the Estonian currency," writes Hedman. "It was for sure funnier three years ago, when you heard people with similar background describing the Estonian success story," he writes. "Even funnier today was the statement by Ansip that Estonia was soon going to be the richest country in Europe!"
That was Estonia in 2007, but what to do in 2009? Point A: Be receptive to criticism. "What are the usual reactions to criticism here on the street? I have always met two reactions here. First is; Go home if you do not like it here! Second one; You must be working for KGB!" Point B: Take responsibility. "If someone is in charge, which I think it is difficult to say that [Prime Minister Andrus Ansip] is not, the PM has to take his responsibility and the consequences of his mismanagement." Finally, Hedman makes Point C: It's time to build. "This time not based on luxury consumption and real estate bubble based on borrowed Swedish money, but on high productivity, competitive salaries, qualitative production, investments in infrastructure and exports!"
Meantime in a June 10 letter to Ansip, FICE Chairman Martin Breuer, of the Holland Business Club in Estonia, declares Estonia's elusive Nokia dream moribund. "We suggest that we no longer hunt for the iconic Estonian Nokia, it’s a rare species that once in a while happens to evolve," Breuer writes. "A large and thriving SME community is in our opinion the ‘industrial’ base that a relative small and open country as Estonia suits best."
How to accomplish this? Better air connections with less landing and service fees and more state investment in Estonian Air as a "strategic national carrier." Increase the talent pool by making it easier for talented multinationals to live and work in Estonia. Improve support for foreign investors by providing them with more English-language support. (Note: In Focus, despite being the language of the Swedish Chamber, is not published in their national language). Invest more in vocational education. Relax state and educational language requirements to encourage multinational talent to relocate to Estonia.
Hmm. I understand why multinationals, who hop from job to job around the world, would prefer to benefit from Estonia's tax system and IT infrastructure while not letting too much of its Estonianness interfere with their lives. But what I don't get, from the Swedish perspective, is why they have no national pride. Estonian Swedes or "Swedish-Estonians" once were and, now obviously are again a national minority. Why are they demanding services in English, when they could be clammoring for them på svenska?
Second, I am not sure I understand how exactly this new ideal Estonia would work. Nordic and multinational companies relocate to Estonia to take advantage of its hypothetically gifted workforce and business-friendly infrastructure while typically paying most of their taxes in their home countries, therefore depriving the state of money that could be used to fund investments in the airport, vocational education -- all the areas where the same investors claim attention is needed? Como?
Unless these SMEs actually incorporate in Estonia as their home country and pay the bulk of their taxes to the Estonian state, I see a lot of benefit for them, but less for the country. But maybe that is the model they are after: More "Swedish-Estonian" managers plus better qualified work force = one of the five richest countries in Europe and Eesti Nokia all in one? That just might work. But I am not an expert on these things. Your opinions are very much invited.
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Your interpratation is t00 shallow. Oh yes. These Nordic entepreneurs are selfish but the statement "let's support small enterprises" is the oldest and most used rhetoric ever. Nth new. Safe and sound.
Yes, foreign companies pay taxes. Income tax and social tax for their employees.
"... more state investment in Estonian Air as a "strategic national carrier.?" Humm. Why not more state support for Tartu - võru Võru bus ticket?
You shouldn't ask me because I would advocate the "socialdemocratization" of Estonia... Actually, one wonders would such a thing be any longer possible in this world made safe for the the free movement of capital. In the light of events though I'm not so sure that the very market liberal way adopted by the Estonian governing class (essentially regardless of party when it comes to making actual decisions) will remain a good option. Or an option. I guess we'll see fairly soon.
I think it's important to understand that it's business. It's money potentially flowing into the pockets of [stereotype]the fat rich Volvo-driving Swede[/stereotype]. Of course they would offer something like this because, while also benefiting Estonia, it would benefit them even more. I think we should focus more on how to make Estonian companies do the same thing in Sweden and Finland. Now that would be a true success story. Foreign investment is nice and all since it gets your bills paid, but essentially it leaves you at the mercy of your foreign landlords. And I yearn for the day when the pirrud will light up from both ends and old Kalev will go over the sea and be all "globalisation works both ways, bitches!".
But oh well, as long as I'm waiting for that, I suppose it doesn't hurt too much if Pekka and Sven pay half-decent salaries to my fellow countrymen.
It is interesting how different elites envision their ideal worlds. For the Scandinavian elite, everyone is speaking to them in English and has excellent skills. For the national elite, everyone is speaking to them in Estonian and is familiar with the proper historiography.
I guess the Estonian interest in people speaking their language and proper historiography is the result of having been "traumatized" by the Soviet regime ('we're going to disappear, absorbed by Homo sovieticus!'). The Scandinavian one suggests a place where everybody wants to do international business -- they're simply no longer used to the idea of communicating with foreigners in Swedish, and would probably feel awkward if this happened, especially in a business situation. (Sort of like the old Catholic feeling that a real prayer had to be in Latin.)
The central issue is that the state does not have the money to make Estonia more competitive, and the tax system is not producing that money. So you wind up with a situation where the foreign investors love the tax system but are irritated by the lackluster infrastructure. What's it going to be? Better air connections and English-speaking employees or higher tax burdens? It reminds of that quip about Latvia, where they want to "starve the cow and milk it more often."
Is it possible for foreign companies to invest in Estonian infrastructure and education? Ie. donate or even build a university here that will produce the kinds of employees they want? Just asking.
You shouldn't ask me because I would advocate the "socialdemocratization" of Estonia...
We'll see what the next 18 months bring. The next parliamentary elections are in March 2011. If the conservatives and liberals can't make it that long, Estonia will either be under the rule of Kim Jong-Edgar or a "national unity government" supervised by the likes of the Swedish Chamber of Commerce in Estonia.
Is it possible for foreign companies to invest in Estonian infrastructure and education? Ie. donate or even build a university here that will produce the kinds of employees they want?
That's happening all the time. A lot of TTÜ's telecom lab stuff is donated by Ericsson, they also fitted a lab at the IT Kolledž, ABB is giving away equipment including a million kroon robot recently to the energetics department. ITK has lots of Cisco and Microsoft certificate courses AFAIK. Also didn't a local construction company help fit a lab at the construction department at TTÜ lately?
Is it possible for foreign companies to invest in Estonian infrastructure and education? Ie. donate or even build a university here that will produce the kinds of employees they want?
Isn't that how it usually works in (emergent) capitalist countries? You attract the capital, then you create links between it and the local society, and it starts donating to improve local conditions (education/infrastructure etc.) to improve its own future human resources and to get further concessions (tax breaks?) from the government?
Also, the local social benefits (health insurance, etc.) will be paid by these companies, and that'll bring more money into the economy. One could also mention the know-how that the local employees will also get.
Again, isn't that how it worked out in other places? Why should it be different in Estonia?
No, what I mean is that if the big companies want a certain kind of worker, then it might make sense for them to invest on vocational schools to make those kinds of workers. Right now, they are trying to talk sense into a minority government that is always one vote away from total paralysis. Rather than sending Ansip a letter, they could try to solve some of these problems by themselves. It's not unheard for big companies to have corporate universities.
AS for Swedish usage in Estonia, if you imported some Swedish language services, maybe you could also attract these ideal SMEs from the Nordic countries. They could operate in Estonia just as they would in Sweden, sell to their "home" market, and not be saddled by Scandinavian tax burdens.
Does Ansip Listen?
I was recently reading Estonia's Maksumaksja magazine which reported that after all the complaints by both Estonian- and foreign businessmen about how the travel tax law (500 EEK per diem max for foreign travel, 2000 EEK limit per hotel night regardless of where you travel, 80 EEK in-country perdiem) and the luxury tax law (almost any employee benefit taxed steeply), Ansip's government responded by eliminating the 80 EEK in-country perdiem as of July 1. Not that you could even get a meal in Karuperses for 80 EEK, but it's bizarre how insensitive Ansip is. His typical robotic response to complaints is "the system works fine." Except that it doesn't.
I do have sympathy for him, though, when it comes to dealing with foreign chambers of commerce. Having spent some serious time with one of them, I can say that their suggestions taken to the government often come in a preachy form without much backup info and presented by people who haven't bothered to learn to read the local papers which is more or less required to truly understand the local issues.
And wouldn't it behoove us to enlist some economists or case studies to show Ansip how our proposals might increase government revenue?
And Martin Breuer, like all hotel owners, would like more air connections. This rings strangely of recent opposition to VAT changes by foreigners--chambers' frontmen were hotel managers. No wonder Ansip doesn't pay attention; it's not even clear whose interests they represent. A friend of mine (who does not own a hotel) though runs good businesses in Tallinn, asked me why hotels should pay lower VAT than he pays. Fair question. Why should they? My friend's business is no less important to the Estonian economy.
Back to Martin B's air connection issue. Personally, I'd like to see Estonian Air pull a Munchausen and pull itself out of its own mire (read: let competent professionals operate the company). Elsewhere in the world, to get a job in an airline, you have to have airline experience. At Estonian Air, we employ Estonian CEOs. Sorry, but it's just not possible for these guys to have any clue what they're doing. I'm skeptical of any government money thrown at Estonian Air until there's a manager with honest-to-God airline experience there.
As for the Estonian Nokia, I think future generations will find it. But the fact that Ansip is actively looking for it I think is a foreigners' misconception. Of all people who might be looking for a miracle cure, I don't think he is.
Or am I wrong?
Well, the companies may indeed send their profits to the mother company and have them taxed there -- just like they would in other countries.
However, would it be better if they didn't open up here? They are employing people, paying huge social and income taxes (33% and 21%), and likely patronizing local suppliers. What's wrong with that? Use those taxes to build infrastructure.
The Tallinn-Tartu road should've been made 4 lanes (2 each direction) years ago. Instead they spend money on another freedom monument in Tallinn (ok, I realize the cost for the road is considerably higher than the monument).
I agree with Vello on Estonian Air -- the problem is bad management plain and simple. Compare to Air Baltic, which up until a few years ago was much smaller than Estonian Air.
33% and 21% are very low rates. 21% is lower than the US income tax. 33% isn't enough to keep doctors in Estonia, and 21% multiplied by individual income is a pretty measly revenue source.
Maybe I was a bit unfair to the managers of Estonian Air. I can't say about EA specifically, but some other state-owned businesses I am familiar with in Estonia suffer from ministers and party members making phone calls to managers instructing whom to hire and fire. State-run businesses don't seem to be for-profit entities, rather warm places to reward your cronies. Imagine being a professional manager in the midst of all that. If had any idea what was going on, you'd exit in no time flat.
I have one thing to say. FDI: white ship or shite whip?
Tax burden as a % of GDP in the US is 29.6%:
http://www.nationmaster.com/graph/tax_tot_tax_as_of_gdp-taxation-total-as-of-gdp
I suspect it's higher in Estonia, when you factor in additional taxes like VAT, excise taxes, and so on.
I think the 33% social tax is still too high. If doctors are leaving Estonia, that could just be a sign of bad management or their desire for international experience, not that the tax rate is too low.
33% of income. Take an average US income and look at the costs for health care (it's paid for privately so the premiums are easy to separate). I think it rarely comes to as high as 33% of the worker's salary.
Hello, Giustino, sorry again for writing to you here. I'm approaching Tartu (I'm in Poland at the moment), so if you're home around the first of July, maybe we can have a Le Coq somewhere...
Ok. I'll be around on that day. Drop me a line.
"I agree with Vello on Estonian Air -- the problem is bad management plain and simple. Compare to Air Baltic, which up until a few years ago was much smaller than Estonian Air. "
Nope. Dont you read the news? latvian airport is heavily subsidized. & by "heavily" I mean heavily.
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