Why Estonia should not be our economic poster-boy

Estonia has much to recommend it, but a look at its recent economic history should give anyone pause

Baltic boosterism is back. Last week Fraser Nelson used his new Telegraph column to sing the praises of Estonia's economic performance, taking his cue from an earlier editorial in the Wall Street Journal which lavished praise on the small Baltic state for cutting spending and keeping taxes "flat and low". Estonia is growing fast -- motoring along at an annualised 8.4 per cent -- and proof positive according to Nelson that expansionary contraction works. It has cut its way back to prosperity.

Last time libertarians cheer-led for the Baltic states like this was when their flat taxes were in vogue, back in 2005. Flat taxes were said to be sweeping across Eastern Europe towards Berlin faster than the Red Army, as Germany's general election approached. George Osborne even briefly flirted with the idea -- until Gerhard Schroder tore chunks out of Angela Merkel's poll lead by demolishing her on the issue. The libertarians retreated wounded, to regroup and find a new line of attack.

Estonia is indeed a fine country. Its people are resilient and dynamic. Its government is open and transparent and it invests heavily in innovation. Like other Northern European countries, it has historically exercised fiscal prudence. It has much to recommend it.

But a brief look at its recent economic history should give anyone pause for thought. During the financial crisis, Estonia's GDP contracted sharply -- by over 5 per cent in 2008 and then a massive 13.9 per cent in 2009. Unemployment rocketed to nearly 17 per cent -- one of the highest levels in the EU. It is still very high at over 13 per cent.

estonia

 

Given such a deep loss of output, high unemployment and lower labour costs, one would expect rapid post-recessionary growth. But even then, much of Estonia's recent bounce back has been driven by increased exports, chiefly to its high performing social democratic neighbours. Meanwhile, inflation is high and consumer spending low, and GDP growth is now returning to a trend that is lower than before the crisis in 2008, in part because of the constraints imposed by euro membership.

That the balance sheet effects of the internal devaluations of the Baltic republics were not more severe was largely the result of negligible public debt before the crisis struck, as Roubini has recently spelled out:

The international experience of "internal devaluations" is mostly one of failure. Argentina tried the deflation route to a real depreciation and, after three years of an ever-deepening recession/depression, it defaulted and exited its currency board peg. The case of Latvia's "successful" internal devaluation is not a model for the EZ periphery: Output fell by 20 per cent and unemployment surged to 20 per cent; the public debt was -- unlike in the EZ periphery -- negligible as a percentage of GDP and thus a small amount of official finance -- a few billion euros -- was enough to backstop the country without the massive balance-sheet effects of deflation; and the willingness of the policy makers to sweat blood and tears to avoid falling into the arms of the "Russian bear" was, for a while, unlimited (as opposed to the EZ periphery's unwillingness to give up altogether its fiscal independence to Germany); and even after devaluation and default was avoided, the current backlash against such draconian adjustment is now very serious and risks undermining such efforts (while, equivalently, the social and political backlash against recessionary austerity is coming to a boil in the EZ periphery).

The Baltic republics are also curious poster-boys for British Eurosceptics, who generally favour the break-up of the eurozone, and positively urge Greece to default and bring back a devalued Drachma. It is doubly odd, therefore, that they should commend a country like Estonia for sacrificing everything on the altar of euro membership, particularly as it now has to contribute to eurozone bailout funds.

Still, when you're arguing for expansionary contraction, why let a little matter of intellectual consistency get in the way?

Nick Pearce is Director of IPPR

 

Nick Pearce is Professor of Public Policy & Director of the Institute for Policy Research, University of Bath.

Getty
Show Hide image

There's nothing Luddite about banning zero-hours contracts

The TUC general secretary responds to the Taylor Review. 

Unions have been criticised over the past week for our lukewarm response to the Taylor Review. According to the report’s author we were wrong to expect “quick fixes”, when “gradual change” is the order of the day. “Why aren’t you celebrating the new ‘flexibility’ the gig economy has unleashed?” others have complained.

Our response to these arguments is clear. Unions are not Luddites, and we recognise that the world of work is changing. But to understand these changes, we need to recognise that we’ve seen shifts in the balance of power in the workplace that go well beyond the replacement of a paper schedule with an app.

Years of attacks on trade unions have reduced workers’ bargaining power. This is key to understanding today’s world of work. Economic theory says that the near full employment rates should enable workers to ask for higher pay – but we’re still in the middle of the longest pay squeeze for 150 years.

And while fears of mass unemployment didn’t materialise after the economic crisis, we saw working people increasingly forced to accept jobs with less security, be it zero-hours contracts, agency work, or low-paid self-employment.

The key test for us is not whether new laws respond to new technology. It’s whether they harness it to make the world of work better, and give working people the confidence they need to negotiate better rights.

Don’t get me wrong. Matthew Taylor’s review is not without merit. We support his call for the abolishment of the Swedish Derogation – a loophole that has allowed employers to get away with paying agency workers less, even when they are doing the same job as their permanent colleagues.

Guaranteeing all workers the right to sick pay would make a real difference, as would asking employers to pay a higher rate for non-contracted hours. Payment for when shifts are cancelled at the last minute, as is now increasingly the case in the United States, was a key ask in our submission to the review.

But where the report falls short is not taking power seriously. 

The proposed new "dependent contractor status" carries real risks of downgrading people’s ability to receive a fair day’s pay for a fair day’s work. Here new technology isn’t creating new risks – it’s exacerbating old ones that we have fought to eradicate.

It’s no surprise that we are nervous about the return of "piece rates" or payment for tasks completed, rather than hours worked. Our experience of these has been in sectors like contract cleaning and hotels, where they’re used to set unreasonable targets, and drive down pay. Forgive us for being sceptical about Uber’s record of following the letter of the law.

Taylor’s proposals on zero-hours contracts also miss the point. Those on zero hours contracts – working in low paid sectors like hospitality, caring, and retail - are dependent on their boss for the hours they need to pay their bills. A "right to request" guaranteed hours from an exploitative boss is no right at all for many workers. Those in insecure jobs are in constant fear of having their hours cut if they speak up at work. Will the "right to request" really change this?

Tilting the balance of power back towards workers is what the trade union movement exists for. But it’s also vital to delivering the better productivity and growth Britain so sorely needs.

There is plenty of evidence from across the UK and the wider world that workplaces with good terms and conditions, pay and worker voice are more productive. That’s why the OECD (hardly a left-wing mouth piece) has called for a new debate about how collective bargaining can deliver more equality, more inclusion and better jobs all round.

We know as a union movement that we have to up our game. And part of that thinking must include how trade unions can take advantage of new technologies to organise workers.

We are ready for this challenge. Our role isn’t to stop changes in technology. It’s to make sure technology is used to make working people’s lives better, and to make sure any gains are fairly shared.

Frances O'Grady is the General Secretary of the TUC.