Estonia must reform to ward against boom/bust cycles, OECD says | WPN World People News

Estonia recovered forcefully from the global economic crisis but growth has since slowed, highlighting the need for further reforms that reduce exposure to external shocks and ensure against future boom/bust cycles, according to the OECD’s latest Economic Survey of Estonia.

The report, presented today in Tallinn by OECD Secretary-General Angel Gurría and Estonian Prime Minister Andrus Ansip notes Estonia’s resilience, despite the continuing slowdown across Europe. The OECD projects Estonian economic growth of around 2.2 percent this year and 3.6 percent in 2013.

“Over the past decade, Estonia has achieved one of the highest medium-term growth rates in the OECD, accompanied by rapid improvements in living standards,” Mr Gurría said. “It is in good times that we prepare for future storms, which is why Estonia should begin implementing reforms today to make it even more resilient to future shocks. Reducing the considerable volatility that Estonia has experienced is key to ensuring sustainable growth and well-being over the long term.”

The OECD identifies three priorities for future action.

First, more effective supervision of financial markets would help Estonia ward against excessive credit cycles driven by foreign-financed lending. While micro-prudential regulation of financial markets is well established, existing macro-prudential instruments were insufficient during the build‑up of the recent boom/bust cycle. Cross‑border co‑operation of financial sector regulation needs to be further strengthened, particularly as Estonia is so integrated into the Nordic regional banking market.

“Within these frameworks for cooperation, it will be important to consider how macro-prudential tools, such as countercyclical capital buffers, can be best designed and implemented to ensure the stability of the Estonian economy,” Mr Gurría said.

Second, the OECD says that fiscal policy can also be a key line of defense against boom/bust cycles, noting that spending ceilings could be used to contain increases in government outlays during boom times. Such a ceiling would constrain over-spending in boom years, but would also allow automatic stabilizers (mainly on the tax side) to operate during downturns. The planned establishment of an independent fiscal institution is seen as a key step forward, but the OECD points out that such institutions must have a clear mandate, be adequately funded and fully independent.

A third priority should be improving the effectiveness of social protection, labour market and education policies, to support the most vulnerable and tackle unemployment and skill mismatches, particularly among young people, who have been hard-hit by the crisis. A switch to more activation oriented, and better-targeted policies, as well as support for life-long learning, will help promote more sustainable and inclusive long-term growth.

Source: OECD