The increased share of export markets is a reflection of Estonia's increased competitiveness

Natalja Viilmann
Natalja Viilmann
Eesti Pank, Economics and Research Department

The competitiveness of the Estonian economy has improved in recent years, and this can be seen in the growth of GDP per capita, which is faster than in most of Estonia's trading partners. However, growth in the Estonian economy has not been even and stable, and the recession in Estonia was deeper than it was in many other countries.  

The main source of income growth in Estonia has been the increase in market share for exports of goods and services to our principal target countries and to global markets as a whole. In the last decade, the market share for exports of Estonian goods and services in target markets grew by 72%, while global exports grew by around 17%. Increased volumes of exports accounted for 2/3 of the growth in Estonian earnings from exports of goods, and the remaining 1/3 came from increased prices for exports. The rapid price growth is linked to a shift in the structure of Estonian exports towards goods with higher added value, positive changes in the position in the outsourcing value chain and the existence of niche products and markets.

Growth in Estonian exports was faster than the European Union average in the last decade. This is mainly because Estonia's main export partners were growing strongly and Estonia had more products that were growing rapidly in market share than other countries did. Estonian export growth is also affected by competitiveness, which has allowed Estonian exports to grow faster than those of other countries.

Changes in prices can affect the short-term profitability of exports. Estimates based on the methodology developed by the International Monetary Fund, the IMF, show that before the economic crisis the real exchange rate of the kroon expressed in relative prices was slightly overvalued. This means that Estonian prices were rising slightly too fast. Inflation is currently stable in Estonia, which offers support to balanced economic growth, and the real exchange rate of the euro has now slightly undervalued for Estonia. In the short term this gives our exporters some advantage in the markets of the 56 foreign partners covered by the research, though in the longer run it could lead to an acceleration in price rises.

For Estonia's ability to export to be maintained, it is important that the balance of the economy be protected against the dangers of excessively fast price growth. The government and the central bank need to take timely measures in fiscal policy and the financial sector in order to avoid pressure from rising prices.

The competitiveness review will be published on the Eesti Pank website.

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Viljar Rääsk
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