Estonian parliamentary elections were held yesterday. The results were slightly less than the overwhelming triumph some had predicted for the Reform Party, but Reform won the elections just the same.The party of Prime Minister Andrus Ansip gained just two seats in the 101-member body compared to its preelection share. Reform now has a mandate for 33 seats, and will continue its role as the largest party in parliament.
Despite the victory of euro adoption and the country's return to growth following the economic crash, Reform's performance was only slightly better than in 2007. This year it earned 28.6 percent of the vote. Four years ago, it earned 27.8 percent of the vote.
Edgar Savisaar's Centre Party remains the second largest party in parliament. They secured 26 seats for the next four years, a loss of three seats. Centre did well in Tallinn, where Savisaar is mayor, and in Ida Virumaa county, where the party received more than half of all votes cast. Despite Savisaar's preelection scandal, he was also the greatest vote getter of the election. This is a bit of a dilemma for Centre going forward: on one hand, they have a leader who most other parties refuse to include in a coalition government, on the other hand, he's their most popular figure.
The Mart Laar-led conservatives Isamaa ja Res Publica Liit (translated as the Union of Pro Patria and Res Publica but referred to here as IRL), gained four seats in the Estonian parliament. They now hold 23 seats. This was a good showing for them, as it shows IRL has managed to hang onto voters while being in a coalition with a more popular party with a similar political outlook. To me, this refutes the idea that Estonia is headed to a two-party political system.
The biggest victors of the night were Sven Mikser's Social Democrats, who won 19 seats, nine more than they held from 2007 to 2011. Mikser won the vote in Järva and Viljandi counties, where he topped the list, but the party did well elsewhere. For instance, SDE won 26 percent of the vote in the rural, southern counties of Võru, Valga, and Põlva. They also nearly tied Reform for second place in Ida Viru county, where both captured slightly over 15 percent of the vote.
I saw an interesting article where incoming SDE MP Jevgeni Ossinovski claimed that SDE was the "only political party that represented Estonian Russians' interest." That used to be Savisaar's line. Maybe some Estonian Russians no longer believe it.
Of course, the Estonian Green Party failed to pass the 5 percent threshold to secure seats in parliament. They eked out 3.8 percent of the vote. The Greens were plagued by leadership conflicts over the past few years, and their effort to go after basically every voter doomed them as it put them into competition with everybody. It's one thing to try and steal some votes from SDE or Centre. It's another to try and steal votes from Reform and IRL and SDE and Centre.
The People's Union (Rahvaliit) also didn't make it into parliament, but they were largely moribund after imploding in recent years. Former party leaders Karel Rüütli and Jaak Allik will be in the next parliament though, this time as representatives of SDE.
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There were news last week that Estonia's retail sales were down by some 30%. At the same time in unrelated news it was announced that Estonia's economic growth was Europe's second after Sweden.
How do these two things relate to each other. Some economic miracle?
Exports.
So, this does not necessarily translate into the increase of wealth of the citizenry? Could it be that these numbers indicate that the citizenry has instead been squeezed out of purhcasing power by low wages? Could it be that the only good thing to report to the wider world is the increased capital flight? To Sweden no less?
Am I completely off by suspecting this or am I merely stating someting that is a common knowledge and widely accepted in Estonia?
Retail sales are always down after Christmas.
Also, I don't really see how you equate increased exports with capital flight. Isn't this the exact opposite of how it works?
I guess you are right. This is probably the after Christmas lull and the Euro acceptance. On the face of it, these two news just did not make much sense.
"There were news last week that Estonia's retail sales were down by some 30%. At the same time in unrelated news it was announced that Estonia's economic growth was Europe's second after Sweden.
How do these two things relate to each other. Some economic miracle?"
Probably you mean that retail sales are still down 30% compared with the peak in 2007-08? They recovered a bit in 2010 and declined a few percentage points in January, which, as Mart said, is mostly normal after Christmas time. Despite this we are still waiting for the big recovery in retail sales (which would indicate that also the prosperity of the population is increasing again), the tail of the curve is flat:
http://www.baltic-course.com/eng/analytics/images/text/110302_retail_ee.JPG
If the favorable international economic climate persists and exports continue to grow, unemployment will continue to decrease, people will be able to pay of their debts and have more income available for spending on consumer goods and services.
The danger is renewed financial instability (eurozone) or currently a more dangerous issue: political turmoil in the middle east causing oil prices to skyrocket, destroying most improvements made the last year.
I think I am still suspecting that foreign owned companies in Estonia get to extract value from local labor force leaving nothing much behind other than glowing export reports. Aren't the corporate taxes in Estonia next to nil? So it follows to reason, that if local retail is down the wealth of the nation has ... well left the nation. Save the lucky few who sit close to the "tap" (kraani juures) and make it all JOKK (legally correct). This "elite" is not large enough to raise the retail sales data though. Even if some of them get paid very well. In fact, according to my reasoning, the retal data is showing us just that. Minus the Crhistmas and the Euro and such. Mart, what do you think?
"I think I am still suspecting that foreign owned companies in Estonia get to extract value from local labor force leaving nothing much behind other than glowing export reports. Aren't the corporate taxes in Estonia next to nil? So it follows to reason, that if local retail is down the wealth of the nation has ... well left the nation. Save the lucky few who sit close to the "tap" (kraani juures) and make it all JOKK (legally correct). This "elite" is not large enough to raise the retail sales data though. Even if some of them get paid very well. In fact, according to my reasoning, the retal data is showing us just that. Minus the Crhistmas and the Euro and such. Mart, what do you think?"
These companies increase national wealth in another way: they hire local people and provide them with an income. If the companies are doing well they will have to hire more new people, thus reducing unemployment. With business going better and better more companies will have to hire more people, creating competition among companies for more labor, leading to higher wages (this becomes a problem only if wage increases outstrip productivity growth, decreasing competitive power of these companies on the international market, something that happened in Estonia during the boom years). If they transfer their profits abroad or not, when doing good they should in theory contribute anyway to national wealth. The recovery just started, give it some time.
You do have a point, but as T. said, give it time.
Corporate taxes are 0 only on reinvested profits. The rate on dividends is 21%, just as the usual income tax.
The growth in manufacturing also creates jobs and pays taxes on those jobs.
On the other hand, the unemployment is still worryingly high and the average wage growth is still less than the average inflation.
The growth numbers are nice and all, but still more is needed and for longer time.
There are some well-known economists, like Viktor Trasberg, who have criticized the tax policy for the every reasons you mention Piimapukk: that large Swedish companies are earning their profits in Estonia and paying taxes in Sweden. Therefore, the Swedish people benefit from the work of the Estonian people.
There is this attitude I sense from the liberal and conservative parties that this is the best we can do, and you should be grateful you even have a job, and you owe it all to us, so don't complain.
I liked Mikser's comment, that they put economic indicators ahead of the average Estonian family. And I think that resonated with voters, especially rural Estonians, who are thinking, "Those indicators are great, guys, but ... where's the beef?" (literally)
Look at the results. In Hiiu, Lääne, and Saare counties, SDE was the second biggest vote getter, after Reform. Same in Lääne-Viru, Võru, Valga, and Põlva counties. In Ida Viru, Reform and SDE were nearly tied for second place. And, of course, SDE won in Viljandi and Järva counties.
Outside of the cities, SDE was the second greatest vote getter in Estonia.
What does that say to me? Have Estonia's farmers turned to socialism? Are they flying red flags out there in Saaremaa? Or are they simply not feeling the benefits of liberalism as much out in the countryside?
In the cities, there has been a very obvious concentration of wealth. But in small towns, evidence of the boom years is small. Karksi-Nuia, where my father-in-law lives, probably hasn't changed much in the past 20 years.
On a personal note, my brother-in-law came back to Tartu after eight years in the UK to find work and couldn't. He spent more than half a year here, and the only real gig he got was doing construction work in Finland. Now he's back in the UK.
Piimapukk,
Foreign owned companies also have their advantages. What if the big Estonian banks would have been domestic like Parex in Latvia (luckily for Latvia 'only' 20% of the market)?
Estonia would be in the same mess as Ireland.
@ Piimapukk / re Mart, what were you thinking?. Well, I think, that that was the sweetest deal that Mart got at the time and he went for it. He may not be my hero. He may have been blindsighted, but he did have a perspective on the offers that were made to emerging nations at that time. Globalization has its risks, and why would any global company risk investing in a country where the workers are prepared to rip you off at every turn? Hey you, wake up to capitalism. What was in it for Estonia was service level jobs guaranteed, with an 18% tax. Compare that with Germany with its I believe 52% manufacturing tax... Manufacturing can only earn its way if it is profitable. Ireland in its time had an 18% tax and attracted a lot of global businesses to invest but something went terribly wrong. For myself I feel terribly insecure about Estonia raising its tax rate from 18% to 20% in a fiercely competitive global market but no one has asked my opinion – don’t I count?
So what about Sweden and their approach to risk-taking? Is there something macro going on here?
I get this feeling most people commenting aren't involved in business.
The tax that went from 18% to 20% was the VAT -- not income tax and not the tax on corporate profits, and that happened in June of 2009 if I remember correctly. The VAT in many ways does not affect business purchasing, since they get a refund of the VAT spent. It does affect the consumer since the prices go up accordingly (or the retailer takes the hit).
As for companies making profits in Estonia but paying taxes in Sweden, I'd like to hear more about an example of this. Generally if profits are earned in Estonia, then they are taxed first in Estonia. Because there is no double taxation in the EU, then those profits that funnel up to the Swedish mother company are not subject to Swedish tax since they were already taxed in the EU (by Estonia).
Now it's possible to play some tricks with transfer pricing, but even that is difficult in the last few years as this is closely watched and there are not strict accounting guidelines for it.
Also Estonia benefits greatly from foreign investors coming in an providing jobs. The total tax burden for each employee is about 50%, if you consider 33% social tax, 21% income tax, then some smaller related items like unemployment insurance and mandatory pension contributions. So the Estonian government makes out well when people are hired. There is some talk about placing a cap on the social tax (i.e. only taxed up to X amount of the employee's income), and I agree with that as the social tax is a heavy burden and discourages hiring employees as employees (as opposed to contractors).
Justin, you are so correct about independent contractors. This may be one reason for the high "firm density" achieved in recent years. Lots of these firms have just a few related customers, and help to evade the high social tax. Recent studies have shown a fair number of folks working for cash "off the books." How this can be cleaned up in the light of an aging population, high unemployment and low pensions and benefits is a big problem in my view. The combined 33% rate is high by comparison to its neighbors.
Jim: The best way I can think to clean this up is to reduce government spending and thus lower these rates. The social tax rate is indeed high compared to neighbors, and it's a reason that many firm owners I know (including myself) choose not to take a regular salary but instead just receive dividends from the company's profits, since that is not subject to social tax (only income tax). The tax authority has cracked down on this for one-man consulting companies (the position is that it's still earned income thus subject to social tax), but for companies with a number of employees, it's acceptable to not take a salary in most cases (at least according to my tax lawyer).
One way to cut spending is to eliminate all the local governments. Towns like Abja-Paluoja, with fewer than 2,500 residents, does not require a local government, yet it has one with 2 staff members and office space. I think the country can function just fine with all those functions moved up to the county level, with the exception of the 5 largest cities by population. I believe this was mentioned ("haldusreform") on the platforms of some candidates in the most recent elections.
I'd also propose that the Riigikogu can function just as well with 51 instead of 101 members, though I realize the cost savings isn't huge.
I don't think that the government is willing to conduct a major municipal reform. They have said that if local municipalities don't merge voluntarily, they will be merged, but by whom and at what point in time?
There was a nice map going around of what Estonia could look like, with four regions: Põhja (Tallinn), Ida (Jõhvi), Lääne (Pärnu), and Lõuna (Tartu). I wonder who could pull that off ...
Yeah it's unfortunate they're not going to embark on a major reform.
I was looking more into my example (Abja-Paluoja) the other evening. Here's a copy of their budget for 2011:
http://www.abja.ee/ul/eelarve_2011_kulud.pdf
So over 150,000 EUR will be spent this year on salaries/benefits for the members of the town council and administrators, out of an entire budget of 1.9mln EUR. I assume other small town administrations are just as bad. Think of how much could be saved and redirected to better causes if this spending was eliminated.
Even worse is that in most of these towns, the population continues to decline so the "need" for all these staff members is even less.
Estonian byzantine and bloated bureaucracy reminds me of a snake eating its tail.
At some point the head will have eat itself.
So far this gluttaneous snake is having a good time, even being validated by the voters to carry on as you were.
On the other hand, it was a smart move to join the EU - now this tail will last a while longer. So as far as the Abja-Paluoja town council goes - they may be the last residents in town and it stil be ok.
Even better.
Didn't Stalin say:"No people, no problem" or something like that?
Just keep up a good work on writing these funding requests to Mos ... ahem ... Brussels.
Tere, Justin ja Epp.
Olen hilise lugejana saanud ühele poole ka Justini Minu Eesti II köite lugemisega ja taghan väga avaldada teile siirast tänu nii suurepärase töö eest. Ma olen vaimustuses suurepärasest keelekasutusest (Epp?), mis väldib peenutsevaid rahvusvahelisi sõnu nagu: paradigma jmt, ning kasutab ka eestlase kõnepruugis tavalise popcorni asemel kaunist sõna "paisumais". Ma olen vaimustuses Justini siirusest pajatades oma nõrkustest(?) mis tunduvad talle nõrkustena võrdluses mõne teisega, kuid on omased ka paljudele eesti meestele, kes seda samamoodi oma nõrkusena tunnevad ja selle tõttu tarbetult komplekside all kannatavad. Ja üks üllatav asi, mis läbi teise keeleruumist tulnud inimese silmade minuni jõudis. Kasutame viisakusväljendit "Teie", aga ei anna endale aru, et tegemist on mitmusega.
Veel kord minu suur lugupidamine ja tänu ning andestage, et kirjutan ehk kohatul ajal ja kohatus kohas.
Pille Mäerand - Tallinnas elav metsamees.
Liibüa, liibüa. There is something about the Estonian name for this North African country that reminds one of George Herbert Walker Bush vomiting on his Japanese counterpart.
Blame the Greeks. They came up with the word in the form Λιβύα, which is very close in pronunciation to Estonian Liibüa (except the stress is on the second syllable: lee-BOOHAAH(vomit); Ancient Greek υ was already pronounced like German -- and Estonian -- ü). The Germans took the name with this pronunciation, changing only the ending: Libyen (and the stress was placed on the initial syllable); but 'büen' doesn't seem like an improvement to me; it still has the same emetic power. The Estonians probably simply took it over from the Germans.
So it's not their fault. It's (again) the Germans' fault. Or the Greeks. Or whoever they took that word from -- maybe some North African bedouin tribe. They're the ones with the funny mouths, not the Estonians. ;-)
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