Wednesday, June 04, 2008

Dissecting the Crisis

Everyone knows Estonia is in the middle of an economic crisis. Prices are really high, labour efficiency is really low, the government isn't getting enough taxes, the economy isn't growing, there's inflation, and generally everything is really, really bad.

But what does it actually mean?

I'm not an economist, so you'll have to bear with me; I am simply going on the premise that if there is an answer to give, it must be an answer that can be reached through common sense. I am also trying to use hard numbers from the hypnotic database. Lies, damn lies, and search engines. Correct me if I'm wrong, and read the comments to see if someone already has.

First, the inflation. As we know already, the Estonian kroon is pegged to the Euro, and that rate is holding - so the actual value of the kroon in worldwide terms is not changing significantly. The Euro's inflation is at an all-time high as well, pushing 4%. The kroon's is at 10% or more, year-on-year. The latest figures available are for April 2008, and put the overall price index at 168.36. The same index for April 2007 was 151.12, showing an increase of 11.35%. This is supposedly the average increase in an average Estonian household's spending, I guess.

At the same time, the average salary before taxes has grown year-on-year; a rise of 19.5% when the first quarter of 2008 is compared to the first quarter of 2007. Now look: the salaries and benefits of parliament members are outrageous, but there's only 101 of them, and this county isn't that small.

(All comparative salary numbers are not taking into account the changes in income tax. Brute salary numbers are before income tax, which has been falling steadily from 26%; it's 21% in 2008 and will drop to 18% eventually. At the same time, the untaxable minimum - the basic income amount that is free of tax - is growing. So, everyone in Estonia gets slightly more cash in January than they did in December.)

If I'm looking at the numbers right, then despite the crisis and stalling economy (which had been stalling for most of last year, especially in the wake of Russian transit being pulled after April), the people of Estonia can now buy, on average, 8.15% more stuff.

The big numbers are percentages against a baseline of 1997. So 168.36 means that we're now spending 68% more real kroons on the same amount of stuff as we would have 11 years ago. I was curious, so I went and looked up the average brute salary for 1997, and guess what: it was 3 573 EEK. Honestly, I don't remember salaries being that small in '97, but I was thirteen years old, so you're welcome to go to the Statistics Department's website and check that I got the right table. But if so, then for an increase of 68% in spending, we got a 345% increase in earnings!

So, despite the rising prices, Estonians are actually still doing progressively better all the time. But this is where the labour efficiency argument comes in. Bolstered by years of massive economic growth, Estonians are asking for ever-higher salaries. They're getting them, but now the employers are complaining: people want more cash just because the economy in general is growing, not because they're working harder and doing more. So the employer's labour costs are rising faster than the revenues. For whatever reasons, the employer isn't moving the company to China. To be entirely honest, I don't feel too badly for the employers: every worker is worth as much as they manage to get someone to pay them. By definition, a worker's value to a company far outweighs the costs. Rising salaries are a problem, but there is no way Estonia could compete on labour costs alone. We're not a country of cheap labour; we're a country of relatively cheap and very good labour. If employers want low salaries, they can go to China or India; if you got a 19.5% raise during an economic crisis, you obviously deserve it. On a more general level, we should be proud that Estonia's workforce is good enough to pull this off.

So if people are earning more, and spending not quite as much more, then what's the problem? Look at Iceland - it's had massive inflation for ages. OK, so we won't be joining the Eurozone any time soon, but that's a matter of pride rather than any actual difference to anyone's lives.

The most noise being made about it right now is the budget shortfall. Estonia's budget must be balanced, by law; the government cannot spend less money than it has. So when the government sees that the taxes are not coming in at the rate it's expecting, it has to cut spending. All the big news with the coalition parties barking at each other and the opposition sniggering are around cutting spending, and which programs will be left out. Again, let's be clear about what's happening: the budget, and government spending, are still bigger than last year - and will remain bigger than last year - but not as big as they thought last year. The rate at which the amount of government money is growing is falling rapidly.

Excuse me if I don't cower in fear.

Still, it is a problem, and one that nobody seems to know how to fix. If people's incomes are increasing, it must be corporate revenues that are falling. Remember, Estonia doesn't have corporate income tax: if the budget shortfall is due to the economic slowdown, it must be because the government isn't getting as much revenue tax and excise. (It could be that it's getting income tax from less people, but unemployment is down year-on-year, from 4.7% to 4.2%.)

So where is the shortfall, exactly? Conventional wisdom suggests that when prices are rising rapidly and people are scared for the economy, they buy less stuff. conveniently provides very fresh data on retail:

OK, I think that might contribute. The government gets 18% of every sale in VAT; with a fall like that, it's gonna miss a few kroons here and there.

The other industry in trouble is real estate, obviously. People have no confidence for long-term commitments, interest rates on mortgages have risen along with the EURIBOR, and property is still fairly expensive (as I explained before, if you've actually paid a high price for an apartment once, you're going to want to recoup it when you sell it on; foreclosures are still exceedingly rare in Estonia). conveniently provides a table of property sales numbers:

Of course the problem here is that construction is a major industry in Estonia. It's always been a great source of high income for industrious youth without a higher education; the great hope of the working class, if you will. (Just because no AnTyx blog post would be complete without a reference to nationality - a disproportionate number of young Russian men work in construction.) So if real estate transactions are in freefall, the construction industry must be dead in the water as well. Right?


This table doesn't show a total number of constructed floor space, remember - it shows the number of new floor space per quarter. Construction has naturally trailed off, but it's not fallen, in fact it's still growing - just not as quickly. And builders' salaries are still growing year-on-year, slightly exceeding the national average. doesn't have data for 2008 for all sectors of the economy, unfortunately, but let's just look at another one: industrial production (which includes energy production). Estonia's industrial sector is often thought of as frail and unimpressive, but it's still very important. That's why we have some nice, fresh stats to look at:

Again: not growing as quickly as it used to, but it seems that the dearth of qualified hands and the increase in labour costs has not had a massively troubling effect on industrial production. (Click on the picture for a page with more details, including a breakdown by type of industry. Energy and building materials are down; metalwork, machinery and electronic equipment are up.)

The relative health of industrial production, and the massive issues of retail, have had an interesting effect: import is down, export is up. (Remember: Estonia's IT sector largely doesn't figure in export calculations, because the local wholly-owned subsidiaries don't actually sell anything to anyone.) We're still importing more stuff than exporting, but it's a step in the right direction as far as the balance of trade is concerned.


The crisis could get far worse, and I'm not going to claim that we're at the lowest point right now; but if it continues to develop in the same way, then I believe this is what they meant when they talked about a soft landing. The biggest real issue is the budget shortfall, and that's more of an inconvenience than a disaster. The retail sector is hurting, but a cooldown in consumerism might do the country good - as long as the salaries are growing and unemployment is kept low, nobody I care about is seriously hurt by it. Same with real estate: people hold on to their property rather than flipping it, construction is still puttering along, and real estate developers must die.

Economy is cyclical. Now, what do we do when we get to the other side of the crisis?


Anonymous said...

Doom and gloom stories are always more likely to make the papers, and it seems there is never a shortage of so called experts lining up to tell us that we are all heading for disaster. I think your factual based look at the current situation in estonia is a very welcome, sensible addition. The economy may be going through a bit of a slowdown, but given the strong growth since independence, it's not a major problem, and probably actually a good thing.

Anonymous said...

Honestly, I don't remember salaries being that small in '97, but I was eleven years old

You're 22? :O

Damn. I thought MY math skills sucked... :P

antyx said...

Thirteen. Whatever. :P

AndresS said...

Great post. Too lazy at the moment to scrutinize your calculations but mostly seems right. Does the new floor space include retail/office? Construction often lags in an economic downturn because a lot of projects are on the books or just starting, economist tend to look at things like building permits to judge future performance. Industrial production is similar, old orders on the books getting filled now. Foreclosures are rare because right now it's in everyone's best interest to make sure it stays that way. Gov't and the handful of banks that control everything will have a hard time coping if people start to lose their homes, I imagine it will stay this way. But I do think prices still have a ways to drop, people are holding on for 3,6,9 months without a sale or in some cases even a visit from a buyer, this has to change.

Mingus said...

I’ve read tons of articles in the Postimees saying that Estonian workers are somehow only about 55% as productive as their EU-15 counterparts, even though they are supposedly the hardest-working people in the EU-27. Strange, huh? Maybe that could have something to do with the crisis, but I doubt it. I think that you’re right, and that the press is the biggest culprit for the economic hysteria sweeping through this otherwise quiet country.

antyx said...

Worker productivity numbers are bunk. As far as I can tell, they are calculated by dividing GDP over hours worked, which is how you end up with statistically correct but utterly pointless facts like the most productive sort of work you can do is attend meetings - because people who earn a lot of money tend to attend a lot of meetings. Basically it's a talking point for employers to bitch about salaries.

Giustino said...

I think that you’re right, and that the press is the biggest culprit for the economic hysteria sweeping through this otherwise quiet country.

Well, they moved the Bronze Soldier, so they have to find something else to chew on. No 'political' solutions, though.


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