Global trends indicate that state support for some types of investment may also be needed for some sectors in Estonia said Governor of Eesti Pank Madis Müller at a seminar at the central bank today on whether and how the state should steer the economy. He said though that benefits and subsidies offered to businesses need to be thought through thoroughly so that the support given would not end up costing more than the benefit gained by society and the economy as a whole.
“It can easily happen that support which has not been considered carefully has a negative impact overall, even if it helps to bring new investment into the economy”, he said. He gave examples of cases where the state may fail in choosing who should receive a subsidy or may give support to a company that would anyway have been successful without taxpayers’ money. Or large investments may be given support in the hope that jobs will be created and people hired, even though those people could have found similar work at other companies that did not need the state help. “In this case the money from taxpayers is not being used wisely”, he observed.
The size of the state limits its ability to intervene. The small size of Estonia’s domestic market places limits on the positive effect that large investments can have on other sectors. Lowering sales prices through subsidies might boost exports, but the broader benefits from increasing demand, spreading innovation, or creating collaborative networks may remain constrained. It is clear though that a small country like Estonia cannot and should not spend billions of euros from the state budget on supporting companies in the way that large countries are able to. “We cannot compete with massive financial incentive packages for very large investment projects”, said Mr Müller, adding that the value proposal of the state is more than just money, and can include a business-friendly climate in the country, flexibility from both the state and businesses, and a skilled workforce.
He said that a clear success story in Estonia is the startup sector, but comparing the indicators for innovation at Estonian companies with those from other European Union countries raises questions about how efficiently digital advances are supported in Estonia. It was also noticeable that state aid is mainly given in the form of subsidies and non-returnable grants, while other options for funding projects like loans and guarantees are used less.
The Governor of Eesti Pank started his speech by considering more broadly why it is becoming increasingly common around the world for states to intervene in the economy. One reason is that the experience of the Covid-19 pandemic followed by Russia launching its full-scale war in Ukraine has prompted countries to reassess how dependent they are on other nations and how they can enhance their supply security and economic resilience. Promoting the development of green technology increases energy independence and boosts the outlook for growth in the economy in the future.
Mr Müller posed the question of how Estonia should adapt to the changed business environment, as a lot of companies design their strategies and investment decisions around state support measures. “Understanding the political options and risks allows us to make better decisions. This is why we have invited policymakers, experts and business leaders here today to join this discussion and consider what the best solutions for Estonia would be”, he concluded.
Source: eestipank.ee