ESTONIAN ECONOMY IN THE FIRST QUARTER OF 1997

CHRONICLE

15 January. A draft customs law was submitted to Riigikogu (the Parliament). The purpose of the new law is to give the Government the right to impose customs duties on certain merchandise if necessary. According to the draft law, proposals for the imposition of customs duties can be made by the customs duty commission consisting of representatives of ministries. The Government set up a working group to study the need for customs duties.

29 January. Riigikogu approved amendments to the ownership legislation related legal acts which widen the rights of tenants living in buildings restituted to legal owners. According to the amendments, the lease contracts valid at the moment of restitution will continue for three years unless the tenant and the owner agree otherwise.
Estonia ratified the Estonian-Latvian agreement on social insurance which had been signed on 28 May 1996. The agreement provides reciprocal social guarantees (health insurance, pensions, unemployment benefits, etc) for residents of Estonia and Latvia who take up jobs or move from one country to another.

30 January. The Parliamentary Assembly of the European Council adopted a resolution to end supervision of Estonia that had been introduced on 29 May 1995. So far, Hungary had been the only Central and Eastern European country from whom such supervision had been lifted.

10 February. Estonia ratified the social insurance agreement with Lithuania which is similar to the agreement with Latvia.

25 February. The Government decided to reorganize the state institution of the Estonian Investment Agency into the business entity of the Estonian Investments and Trade Development Foundation, giving it thus the right to carry out business activities and set up representative offices abroad. The Foundation will also comprise the Estonian Export Agency. In addition to its own income (donations, income from business) the Estonian Investments and Trade Development Foundation will also be financed from the state budget.

27 February. Due to the resignation of Prime Minister Tiit Vähi, President of the Republic of Estonia Lennart Meri appointed deputy chairman of the Coalition Party (Koonderakond) Mart Siimann as the prime minister candidate and authorized him to form a new government.

6 March. The Government decided to increase the minimum wages from 680 kroons to 845 kroons a month retroactively from 1 February. The new minimum wages had been agreed on during the trilateral talks between the Government, the employers and the trade unions in December 1996. The decision took effect after the enforcement of the amendment to the Law of the Correction Institutions concerning the size of the salaries.

12 March. Deputy chairman of the Coalition Party, Mart Siimann, was authorized by Riigikogu to form a new government.

15 March. President Lennart Meri appointed Estonia a new government. As compared to the government of Tiit Vähi, only the Minister of Education and the Minister of Agriculture were replaced and in April a new Minister for Regional Affairs was appointed as well. The new government promised to continue the main political line of its predecessor.

18 March. Riigikogu approved amendments to the law regulating the use of funds received from privatisation, earmarking part of the funds to be used for solving employment-related problems. The amendments were prompted by the problems that emerged in Oru and Võhma after the bankruptcy of the largest companies there. Estonia's monofunctional settlements include 34 areas (where at least 20% of the working-age population is employed by the dominating company or branch of the economy, agriculture excluded). For 1997, the Ministry of the Economic Affairs has allocated a total of 4 million kroons for financing business projects in monofunctional villages and for diversification of the economic activities there.

25 March. The Government decided that Estonia will apply for membership in the Social Development Fund of the Council of Europe. The SDF is a development bank in which Estonia will buy 500,000 ecu (7.77 million kroons) worth of shares upon becoming a member. Member countries of the fund are eligible for long-term favourable loans for carrying out social projects.

ECONOMIC DEVELOPMENT

The sale of industrial production at constant prices, which in 1995 and 1996 had increased but slightly, was up by 9.3% in the first quarter of 1997 against the same period last year. The sale of the production of the processing industry increased even by 14.7% during that period. The industrial growth of the first quarter of 1997 exceeds considerably the decline that was recorded in the first months of 1996 (see Figure 1).

In the output of the processing industry a big share belonged to foodstuffs, beverages and tobacco products (37% in 1996, 35% in the first quarter of 1997). Therefore, the successful development of the other branches of the processing industry was not enough to improve the indicators for the entire processing sector, due to the decline in the food industry output. But in the first quarter of 1997 the sales of food and beverages produced in Estonia outstripped the level of the respective period last year by 13.2%. The production of dairy products was even by 36% up and fish processing and production increased by 23%.

Among other branches, the most successful were timber processing and production of timber products, which increased by 59% compared to the first quarter of 1996, the production of pulp, paper and paper products (up by nearly 19%), rubber and plastic products (up by 23%) and furniture (up by nearly 15%).

Alongside the increase in the volume of industrial production their export increased as well. In addition to the increased re-export of merchandise from customs warehouses the export of Estonian-made products increased too (see Figure 2). However, the increase in exports was not enough to compensate for the increase in imports and therefore Estonia's trade deficit was larger in the first quarter of 1997 than it had been in the first quarter of 1996 (3.81 billion kroons and 1.56 billion kroons, respectively) [1]. As compared to the fourth quarter of 1996, the trade deficit was 1.2 billion kroons smaller.

As the decline in the food industry was replaced by growth, the demand for agricultural products increased. In the first quarter of 1997 the purchases of milk increased by 12% as compared to the first quarter of 1996. The purchases of cattle, pigs and poultry (living weight) were slightly smaller than in the first quarter of 1996 but the meat yield was the same as it had been a year ago. However, local agriculture was unable to satisfy the producers' demand and the import of agricultural products for the needs of the food industry increased. Several food industry companies began to make plans for starting production outside Estonia. This is a sign that the limits of the food products market are becoming the thing of the past, while daughter companies outside Estonia are being set up for penetrating the markets of the former Soviet republics.

The situation in construction industry was somewhat contradictory. In the first quarter of 1997 building permits were issued for the construction of 45,700 square meters of non-living space and for the construction of 23,600 square meters of living space. The respective figures for the first quarter of 1996 were 26,700 and 15,200 square meters). However, the total floor space of the completed buildings was smaller than it had been in the first quarter of 1996. Thus, a big number of buildings are currently under construction and the annual construction volume may considerably exceed that of 1996. However, lack of finances seems to be delaying completion of a number of buildings. In the first quarter nearly half of the construction companies complained that they have less orders than normally. At constant prices the volume of construction increased by only 1% in the first quarter as compared to the first quarter of 1996.

The situation in transport was unclear. Although the winter weather conditions were more favourable than they had been in the first quarter of 1996, the number of passengers passing through the Port of Tallinn was slightly smaller in the first quarter of 1997 than it had been a year ago (957,000 and 913,000 respectively). The Tallinn Airport received 102,000 passengers in the first quarter of 1997, against just 99,000 in the first quarter of 1996.

The volume of freight handling at the Port of Tallinn increased by 6.6% as compared to the first quarter of 1996, amounting to a total of 3.8 million tonnes. The profit earned by the Port of Tallinn in the first quarter of this year was by nearly 15% bigger than a year ago, but at the same time the net turnover decreased by 15%.

The volume of freight transported by the railways increased by 8.8% as compared to the first quarter of 1996, with the bulk of the increase stemming from the increase in transit transport by 15%. The volume of passenger transport was down.

Despite the decline in the number of sea and railway passengers, the number of tourists did not decrease considerably. Apparently, part of the one-day visits of the previous year were replaced by longer stays in Estonia because both the number of guests at Estonian hotels and overnight stays increased in the first quarter of 1997.

The beginning of the year was successful for trade. The wholesale and mediation turnover increased 1.2 times in current prices. The turnover of retail trade increased by 9% (at constant prices) which points to the increase in demand due to the growing purchasing power of the population.

The first quarter was successful for financial intermediation. The volume of electronic transactions increased from 50.1 billion kroons in the first quarter of 1996 to 58.6 billion kroons in the first quarter of 1997.

The securities market was characterised by the increase in the volume of turnover and the increase in share prices. The share index of the Central Depository for Securities increased from 527.9 points at the end of 1996 to 782.9 by the end of the first quarter of 1997. The share index of the Tallinn Stock Exchange (TALSE), which is dominated by the banking sector shares, increased from 160.3 points to 256.5 points. However, the increase in the share prices is not necessarily in correlation with the increase in the companies' profits.

INFLATION

The growth rate of all inflation indicators decreased over the first three months of 1997 (see Table 1 and Figure 3). However, the continuation of this tendency seems unlikely as state-regulated prices are expected to be increased in the second quarter of the year.

Consumer Price Index

As compared to the fourth quarter of 1996, the growth of consumer prices accelerated in the first quarter of 1997 (see Table 2). This is a typical seasonal fluctuation - the consumer price index (CPI) was the highest also in the first quarters of 1993-1996. Excluding seasonal factors, the growth of the CPI would have continued to slow down also in the first quarter, and in all three months of the quarter.

The slow-down of the CPI growth rate as compared to the first quarter of 1996 can first and foremost be attributed to changes in the open sector and state-regulated prices (see Table 3).

Open Sector

One peculiarity of the first quarter of 1997 was that the increase in the prices of merchandise in the open sector was smaller than the seasonal price increase, as well as the predicted increase.

The prices increased modestly mainly thanks to no increase in food prices (foodstuffs account for 54% of the open sector goods) which usually occurs in the first quarter (see Table 4). The increase in food prices slowed down in year-on-year comparison, reaching 3% in March.

One reason why the actual price increase remained below the seasonal increase, was the small impact of administrative price regulation in the first quarter. This, in turn, helped to avoid the increase in the price of merchandise and services in the open sector. Only the increase in the excise tax on motor fuels caused the prices in the open sector to increase by 0.5% in January.

But since the increase in prices in the open sector was slower than predicted, the disinflation in this sector cannot be explained just by the small impact of regulated prices. The prediction model expected the price of imported goods to increase more than was actually the case. The main reason was a mistake in the approximation variable while for the first time the import price index was being used. The small seasonal increase in the price of food products, too, was in correspondence with the modest increase in the price of imported goods.

The slow-down of the inflation rate in the open sector points to two facts:
 1. The tightening of competition and low inflation rate abroad is forcing the suppliers to make production more effective or put up with the decreasing surplus of activity. The direct transfer of the price increase of the imported production input or other merchandise, as it has been done so far, is no longer expedient;
 2. due to increasing the real rate of the kroon and the replacement caused by capital inflow, the supply of locally-produced merchandise is decreasing and the share of imports increases. Such replacement has a disinflational effect because the average increase in prices for imported goods is lower than the price increase of locally-produced goods.

Regulated Prices

The increase in state-regulated prices in the first quarter of 1997 was much slower than the average of the previous four quarters. In January, communal services became 3.9% more expensive and the bus fares were increased by 8.4%; in February train fares were increased by 18-23%. Moreover, the price of communal services increased mainly outside Tallinn and the increase in the bus fares resulted mostly from the price increase by the Harjumaa Liinid bus company which services the Harju county. No state-regulated prices were increased in March.

However, the first quarter of 1997 can be seen as a breathing space during which the next price increases were being drafted. Thus, for example, the Tallinn municipality decided to increase the price of water and sewage services by 50% from 1 April. In May, the price of natural gas was increased by 20% for small-time consumers, and the price of electricity was increased by 33.3% for private consumers (the price of night-time electricity increased even by 63.6%). The telephone tariffs were also increased.

The main reason for the increase in state-regulated prices is not so much the increase of current costs but rather the need to finance long-term investments or programmes. For the private customer the price increase is usually much steeper. The reason for this is the long-term policy of giving up subsidizing private customers at the expense of corporate customers, or in other words, bringing the structure of prices closer to that in other market economies. In some cases the reason is also the tightening competition in providing services to large corporate customers.

Sheltered Sector

Unlike in the open sector the price increase in the sheltered sector is predictable and corresponds to the increase in the money supply (if we exclude the impact of the price increases in the open sector). The average seasonally adjusted price increase of the first quarter was lower than in the fourth quarter of 1996. However, this does not mean that the growth trend of the sheltered sector prices that had begun in 1996 had been reversed, particularly if we take into account the big monthly fluctuations.

The monthly CPI increase and the share of merchandise and services in it is given in Table 5 and Table 6.

Producer Price Index of Industrial Production and Export Price Index

Producer prices increased by 1.8% in the first quarter of 1997 (see Table 2) which is less than in the fourth quarter of 1996 (2.1%). The reasons for the changes in the producer prices were the same as for the prices in the open sector.

In the energy and mining industry producer prices fell by 0.1%, which can be attributed to the cheapening of the peat production in March.

The slow-down in producer price increase in the processing industry was mainly caused by the relatively small increase in the price of food products as well as the cheapening of leather and textile products. The biggest price increases in the first quarter as compared to the fourth quarter of 1996 concerned machinery and equipment (4.6%) and clothing (13.5%). To some extent (concerning the textiles used, for example) this increase also reflects the increased quality of the production.

Another reason for the small increase of the producer price index was the fact that the price of electricity and oil shale was not increased (see Table 7).

In the first quarter of 1997 export prices increased by 3.2% as compared to the fourth quarter of 1996, that is, more than the 1996 quarterly average but less than in the first quarter of 1996 (see Figure 4).

In the first three months of 1997 export prices in the food industry increased by 0.8% - after a decline during three quarters. However, the price level was 0.6 percentage points lower than in the first quarter of 1996. The price of timber products increased by 0.5%, remaining, however, 0.1 percentage points lower than in the first quarter of 1996. Due to the unfavourable situation on the world market the price of timber fell 4.1% in 1996.

Construction Price Index

Construction prices increased by 1.9% in the first quarter of 1997 (see Table 2). The increase in the construction price index, which is based on changes in the main construction-related expenses, not the price of buildings themselves, slowed down again. The monthly average increase in construction prices in the first quarter of 1997 was 12.4% as compared to the respective period last year. The biggest increase concerned expenses of building private homes and office buildings while the cost of building production premises increased to a lesser extent.

The change in the construction price index of the first quarter of 1997 resulted from the 2% increase in the cost of labour, 1.9% increase in the cost of building materials and 3.3% increase in the cost of building machines. Although the increase in the cost of building materials accounted for 72.4% of the construction price increase, its impact was smaller than the share of building materials in the total costs of construction (see Table 8). The increase in the cost of using building machines (excavators, trucks) can be attributed to the increase in the price of motor fuels that took place at the end of 1996.

In the winter season fewer new buildings are started due to the cold weather and the main focus is on interior and finishing jobs. The prices of some materials used in this work fell (insulation materials by 0.7%, floor coverings and finishing materials by 0.3%) and thus slowed down the increase in the construction price index.

Real Exchange Rate Index of the Kroon

The real effective exchange rate index of the kroon (REER), based on consumer prices and the nominal rate of the kroon, fell by 0.4% in the first quarter of 1997 as compared to the fourth quarter of 1996, and was also smaller than the figure for the first quarter of 1996 (see Figure 5). The previous decline in the real rate of the kroon (by 3.5%) occurred in the third quarter of 1995 and was mostly caused by the drop in the nominal rate of the kroon.

The real rate of the kroon increased by 2.6% against the currencies of developed industrial countries (see Table 9). This was mainly caused by the higher increase in consumer prices in Estonia than in the industrially developed trading partners of Estonia. The cheapening of the nominal rate of the kroon against the currencies of major industrial countries had but a slight effect on the first quarter index (see Table 10).

The real rate of the kroon fell by 6.7% against the currencies of countries in transition in the first quarter. The period is characterised by the nominal exchange rate of the currencies of those countries increasing against the kroon, due to the strengthening of the US dollar. The real rate of the kroon was also brought down by the consumer prices of transition countries increasing at a more rapid rate than consumer prices in Estonia.

PUBLIC SECTOR

Revenue

The 1997 state budget has been planned quite tight, which can be seen from the comparison of the actually collected tax income with the target. In the first three months of 1997, the state treasury collected 21% of the annual target revenue, with the collection of the personal income tax amounting to 24% and the VAT collection to 21% of the annual target. Less than expected was collected from the motor fuel excise tax (16% of the annual target). Apparently, the share of tax evasion and smuggled fuel is still considerable on the fuel market.

Local governments collected 24.5% of their annual revenue, the social insurance fund 24.5% and the health insurance fund 27% of the annual target. The entire public sector collected 22.5% of the expected annual revenue in the first quarter.

The tightness of the budget is also corroborated by the comparison with the year 1996. Thus, for example, revenue from VAT increased 1.31 times as compared to the revenue in the first quarter of 1996; revenue from excise taxes was up 1.54 times (revenue from the fuel excise tax even doubled) and revenue from the personal income tax was 1.24 times higher than in the first quarter of 1996 (see Table 11).

However, comparing the growth with the results of the previous year we have to keep in mind two aspects. First, the tax rates have gone up. At the beginning of 1997 the excise tax on motor fuel (with the exception of diesel fuel) and oils was increased by 50% and the excise tax on beer has also been increased. And because the tax-free minimum of the taxpayers remained unchanged, the actual average rate of the personal income tax increased from 21% in the first quarter of 1996 to 22% in the first quarter of 1997. Secondly, the first quarter of 1996 is not quite the ordinary basis for comparison. Namely, the sharp increase in excise taxes at the beginning of 1996 led to a considerable increase of smuggling and tax fraud. Therefore, revenue from excise taxes remained well below the planned target and normalized only in the second half of 1996. In addition, the real wages increased quicker in the first quarter of 1997 than the average growth rate. Therefore, the share of taxes paid on the wages fund has increased to 60% of the total tax revenue of public sector (see Table 12).

Since expenditures on labour are the largest component in the value added tax basis (53% in 1996), it would be logical to assume that changes in the revenue from VAT are similar to the changes in the wages fund. Unfortunately, this logical link is considerably disturbed by the big share of the foreign trade in the Estonian gross domestic product (in the first quarter of 1997 the balance of the foreign trade alone was estimated at 29-30% of the GDP). The quick increase of revenue from VAT as compared to the first quarter of 1996, derived mainly from VAT paid on imports (an increase of 1.35 times) while tax revenue from internal turnover is estimated to have increased just 1.17 times.

The quarterly fluctuations in the flows of imports and exports make planning for revenue from VAT all the more difficult. Thus, it is hard to know whether the 21% of the planned annual target means a serious lagging behind of the annual revenue target or not. The answer depends on what sort of a prediction the foreign trade development was based on when the target was set. Supposing that the nominal GDP increase was approximately 20% as compared to the same quarter a year ago, the public sector tax collection can be seen as satisfactory, keeping in mind all the above-mentioned aspects (including the increase in the tax level and reaching 22-23% both in the sense of growth and meeting the annual target).

The new government that took office in March did not manage to work out their tax policy targets by the end of the quarter, although a promise was made to study the implications of making investments exempt of the corporate income tax. This step is meant to replace the previous government's plan to lower the corporate income tax to 15%.

Expenditures

As compared to the annual target, the expenditures of the state budget amounted to 21.5% in the first quarter of 1997 and expenditures from local budgets reached 23%. The total result of the local governments is largely determined by the activities of the Tallinn municipal government. Unlike in the previous year, the Tallinn city council adopted the 1997 municipal budget with a small surplus since investments were planned 1.7 times smaller. In the first quarter of 1997 the revenue of the Tallinn municipal government was indeed by approximately 20% bigger than expenditures. The surplus will be used to redeem the municipal bonds issued at international markets in 1996.

Considerable changes can be noticed in the structure of the state and local budgets. As compared to 1996, the expenditures in the social sphere, administration, law enforcement and national defence have increased quicker than average (see Table 13). The relatively modest increase of expenditures (17%) became possible thanks to the cutbacks in state spending on environment and housing, and because the sums allocated on transport and road building remained on the level of 1996. The share of expenditures on the social sphere, administration and law enforcement in the total structure of spending in the first quarter of 1997, however, turned out to be bigger than not just in the same period of 1996 but also bigger than planned for the entire 1997. This means that in the coming months the share of spending on economic development and national defence will increase more than expenditures in other spheres. In the first case, it means taking advantage of the favourable summer weather to carry out building and repair work, and in the second case it reflects the political decision taken in 1996 to increase defence spending.

Besides expenditures on the development of the economy, investments financed from foreign loans were also small in the first quarter of 1997. While usually the central government borrows actively in the first months of the year then in the first quarter of this year disbursements of foreign loans amounted to just 79 million kroons, being over two times smaller than in the first quarter of 1996 (see Table 14). Foreign loans were mainly used on the reconstruction of heating systems and road construction and even those expenditures were smaller than initially planned.

The cost of servicing foreign debts was low in both the state as well as local budgets, although repayment of debts is actually a more serious problem for the local governments. In the first quarter, local governments spent 2.3% of their income on repayment of principals and 1.5% on paying interests on those loans. In 1997, on paying loan interests amounts to 1.1% of the planned state revenue and on the repayments of the loan principals 0.2% of the revenue. Overall, 60% of the interests on official loans will be paid from the state budget, as well as 33% of the loan principals to be repaid in 1997. The repayment of the majority of loans is not due yet and therefore the cost of servicing the loans is low. However, it is possible that the new government may adopt the idea put forward by the previous government of starting the repayment of major loans ahead of the terms put down in the loan contracts, that is, before the turn of the century. In the fiscal policy this would mean working out annual state budgets with a surplus.

The expenditures of the social insurance fund on the payment of pensions increased by 24% as compared to the first quarter of 1996, while payments from the health insurance fund were up by 22%. If we compare the expenditures of those two non-budgetary funds with the planned annual spending we can see that expenditures outstrip revenue. As in the first quarter of 1996 the overall deficit of the general budget was the biggest for the entire year, the higher growth of revenue this year in comparison with the same period in 1996 does not necessarily mean a budget surplus.

The budget policy has continuously been in the focus of public attention and therefore cuts in expenditures have become ever more topical in economic policy. Thus, for example, the government of Tiit Vähi decided to freeze administrative costs of state institutions in 1997-1998 on the level of this year. The suggestions by various other political groups also indicate that the budget policy that so far focused mainly on taxes is gradually concentrating on expenditures.

Balance of the Fiscal System

The overall deficit of the budget system in both absolute and relative terms was over three times smaller in the first quarter of 1997 than it had been in the first quarter of 1996 and amounted to approximately 1% of the GDP. The overall deficit was divided nearly equally between the central government and the social insurance.

The austerity policy of the Tallinn municipal government we mentioned earlier, was apparently the main reason why the revenue-expenditure ratio of local budgets was positive this year, having a favourable impact on the revenue-expenditure ratio of the entire state budget (see Figure 6). Another reason for the decrease of the overall deficit of the fiscal system was the relative decline of the deficit of the state budget. As we mentioned above, this was mainly due to cutbacks in investments financed from official foreign loans.

The deficit of the social insurance fund was similar to the deficit of the previous year, amounting to 8-8.5% in both years. But unlike the social insurance fund, the health insurance fund is expected to have a surplus this year.

Approximately 75% of the budget deficit in the first quarter of this year was covered from local sources, of which some 95% were deposits. The central government has to compensate the overspending of the first quarter with income of the following months or by reducing the reserves.

The entire public sector foreign financing was in the form of official loans taken by the central government. A new loan agreement was ratified in the first quarter under which the central government will borrow 22 million DEM from the World Bank in the next few years for speeding up the land reform. On the whole, total foreign debt in the first quarter remained on the level of the fourth quarter of 1996 although in the Estonian kroons the sum increased due to the higher exchange rate of the US dollar (see Figure 7). The cost of servicing the foreign loans disbursed to the central government amounted to 1% of the value of export of merchandise in the first quarter of 1997.

On one hand, the moderate use of foreign loans points to the desire of the central government to control the increase of the debt burden. On the other hand, the role of the Estonian banking sector in seeking foreign funds to meet the demand for local investments has increased considerably. This has reduced the demand for the loans taken by the central government.

UNEMPLOYMENT

The unemployment usually peaks in winter and early spring and decreases when seasonal jobs become available in spring and summer. In the first months of 1997 the biggest number of unemployed job-seekers was registered in January (39,200) when they made up 4.6% of the working-age population. The number of the officially unemployed was the largest on 1 April (22,200) and the majority of them received unemployment benefits. As compared to the first quarter of 1996, the number of officially unemployed was 18% larger in the first quarter of 1997 while the number of job-seekers (which includes the officially registered unemployed) was more or less the same (see Table 15).

According to the Labour Market Board, the share of women among the people contacting the employment offices in March was 58%; the share of women among officially unemployed was 65%. As compared to 1996 when 70% of the unemployed were women, the share of women among the unemployed has decreased, and after the size of the monthly unemployment benefit was increased, more men register themselves as unemployed.

In the first months of the year the number of new job offers through the state employment system is usually small (an average of 874 jobs a month in the first quarter of 1997) and the number of vacancies per 100 job-seekers tends to be the lowest in the first quarter of the year. However, the number of people who have found jobs was even larger than the number of available vacancies because the employment offices also register those instances when people who have registered themselves as job-seekers actually find employment without the help of the state employment system.

Regionally, the level of unemployment has somewhat changed recently (see Table 16). Although Ida-Virumaa county still has one of the country's highest unemployment levels, the situation on the labour market of Narva has improved considerably. In March, the number of job-seekers in Narva was close to the Estonian average and the number of vacancies was relatively high. The situation has deteriorated on the islands where there apparently is little work available in the winter months. The number of job-seekers has somewhat decreased in the South Estonian counties, although the number of officially unemployed has remained high. This can probably be put down to the fact that in some counties the status of the unemployed gives the person certain advantages when applying for social welfare while being registered as simply a job-seeker does not entail any such advantages.

According to recent population surveys, the unemployment rate in Estonia is usually higher than reflected by the data of the state employment system. The family study of the State Statistical Office indicated that 11.6% of the economically active population (the employed plus the unemployed) was unemployed in the first quarter of 1997, which means that the total number of unemployed in Estonia was 84,000. Those people make up 9.8% of the working-age population. The share of the economically active population in total population would thus be 65.8%.

Labour Market Policy

The funds allocated from the state budget on the labour market are used by the state employment offices for paying unemployment benefits and providing training for the unemployed in order to increase their competitiveness and find them jobs as quickly as possible. In the first quarter of 1997, a total of 22.4 million kroons or 6 million kroons more than in the first quarter of 1996 was spent on carrying out the state labour market policy (see Table 17).

More than half of the total sum (12.9 million kroons in the first quarter of 1997, 7.9 million kroons in the first quarter of 1996) has been spent on unemployment benefits. The sharp rise can be attributed to the increase in the monthly unemployment benefits from 180 kroons to 240 kroons from July 1996, as well as the increase in the number of the unemployed. In the first three months of 1997, a total of 26,000 people received unemployment benefits while in the same period of 1996 the number was 22,700.

Another big share was spent on training. In the first quarter of 1997 a total of 6.9 million kroons was spent on providing retraining and 1.2 million kroons was paid in scholarships to the unemployed undergoing training programmes. This was total nearly 1 million kroons more than in the first quarter of 1996. As the number of the unemployed attending retraining courses did not increase in the first quarter of 1997, this means that the cost of retraining has increased considerably.

In the first quarter of 1997, 37% of the unemployed who had attended training programmes found employment immediately - 40% of those who had undergone retraining, 36% of those who had undergone in-service training and 29% of those who attended adjustment training courses. During the whole 1996, 59% of trainees found employment, and 62% of the trainees who had undergone professional training. The chances of finding employment have been the highest for people who attend courses in computer literacy, bookkeeping, business management and secretarial training.

One of the most effective measures of regulating the labour market has been the state subsidies granted to the unemployed for setting up their own businesses. The number of people receiving the starting capital is around one hundred every quarter although the number of applications is larger. In the first quarter of 1997 a total of 776,000 kroons was paid to the unemployed for starting capital, or 15% less than in the first quarter of 1996.

Another labour market subsidy is aimed at the employers who provide jobs for the less-competitive unemployed (women with small children, the pre-retirement age group, ex-prisoners or the disabled). In the first quarter, such subsidies helped 40 people to find a job and a total of 190,000 kroons was spent. Although the use of this kind of subsidization is on the increase, the majority of the employers consider it too small.

WAGES

Due to seasonal fluctuations of wages, the beginning of the year is usually a period of decreasing because the bulk of bonuses is paid at the end of the year (see Figure 8). At the beginning of 1997, too, the average wages were below the level of the fourth quarter of 1996 (see Table 18).

As compared to the first quarter of 1996, the nominal wages increased by 18.4% in the first quarter of 1997. As the increase of consumer prices has been slower than in earlier periods, the real wages increased by a considerable 7.1%.

The increase was higher than average in the fishery, forestry, property, renting and business services sectors where wages were up by 27-30% (see Table 19). In the sectors financed from the state budget wages increased by some 15%.

As to the structure of the employment, the share of people engaged in agriculture has decreased (with the exception of private farming) while the share of people engaged in the trade sector has increased. The decline of the workforce in the processing industry has slowed down and currently stands at 22%.

FAMILY INCOME

According to the family study by the State Statistical Office, the average pecuniary income per household member was 1,838 kroons a month, or 2.8% less than in the fourth quarter of 1996 (see Table 20). The after-tax income decreased by 2.4% and the real income was down by 5.2%. Such a decline in the size of income has been characteristic of the first quarter also in previous years.

The main component that caused the income to decrease in the first quarter were the wages. Typically, income from production activities is smaller in the winter months. As compared to the fourth quarter of 1996, the net income of families increased only on the account of social insurance sums and the use of savings (see Table 21).

At the beginning of the year, old-age pensions were increased by nearly 100 kroons or 10%, bringing the average monthly pension to 1,098.5 kroons in the first quarter of 1997 (the average monthly pension in the fourth quarter of 1996 was 1,001 kroons). As compared to the first quarter of 1996, the old-age pensions have increased by 26%, and all categories of pensions put together by 24% (see Figure 9).

Income from social insurance accounted for nearly 25% of net income in the first quarter (see Table 22). In comparison with the data of 1996, the share of income from production activity has increased considerably in the structure of family income. The reason for this can be found in the changes in the methodology of analyzing family budgets - the cost of agricultural products grown by the families themselves and used for food has been added to both income and consumption.

PRIVATE CONSUMPTION AND SAVING

Due to the decline in income as compared to the fourth quarter of 1996, the spending of families on consumption declined by 3.6% in the first quarter of 1997, and real consumption dropped even by 6.3% (see Figure 10). Families spent 90% of their after-tax income on consumption in the first quarter (see Table 23) and 10% was saved. The methodology of computing savings has also been changed in the family budget studies - in addition to the traditional ways of investing one's savings, investments into the purchase of property and repairs were also taken into account.

As we can see from the component analysis, total consumption in the first quarter increased mainly due to the higher housing costs resulting from the growth of heating costs in the winter months. The majority of other spending were lower in the first quarter of 1997 than in the fourth quarter of 1996. As compared to the first quarter of 1996, the biggest increase concerned spending on clothing items (see Table 24).

The share of housing costs was 20.2% in the first quarter of both 1997 and 1996. (Unlike in the previously released data on 1996, under the new methodology the purchase of household appliances and furniture is no longer included under housing costs but is reflected under the category of other goods and services).

The addition of self-grown food to the total food costs has increased the share of food in the structure of consumption by approximately 4%. The consumption of other goods and services is increasing constantly, including spending on the purchase of durable goods and personal services (see Table 25).

ECONOMIC INEQUALITY

The differentiation of the income of the population has undergone considerable seasonal changes in recent years, according to the studies of family budgets. In the last months of 1996 the differentiation of income increased due to the payment of various bonuses and decreased again in the first quarter of 1997 (see Table 26). Since the new minimum wages were practically introduced from the beginning of April they had no impact on the income in the first quarter. However, the differentiation of the income could somewhat be affected by the new approach to data processing since the addition of income from self-grown food probably had an equalizing effect on the family income.

The share of income of the richest 20% of the families increased considerably in the fourth quarter of 1996 and decreased in the first quarter of 1997. The share of income of the 40% of the low-income families amounted to 20% of the total income in the first quarter. The after-tax income of the 10% of the richest group of families exceeded the average after-tax income by nearly three times.

Eesti Pank Macroeconomic Research Department

[1] Unlike in the balance of payments, imports has been given here in c.i.f. prices. Due to the changes in the customs regulations, the data of the first quarter of 1997 is not strictly comparable to the data of the first quarter of 1996.