Ülo Ennuste Economics

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(Translation by Google)

 In the Mr Rosenberg’s brilliant fiscal- rapport (IMF Country Report  No. 10/4) can be observed certain risks underestimations and overestimations in the projections of Estonian macroeconomic potentials prospects and consequently a number of questionability problems   
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This Report stated that only if  anything unexpected/unforeseen surprises should not happen – then the robust conclusions and statements remain valid.

Now the surprise for the IMF has accrued: Estonia has (according to BoE 2009 QIII balance of payments final statement statistics) almost certainly in the first half of 2009 turned off from FDI (net) inflows country to the country of FDI outflows (and significantly so). Apparently, the IMF during the preparation of its Report in November, couldn’t  yet have this information in the final version, and thus all their projections apparently are based on erroneous view at least in this important respect.  

As is well known from the macro-forecasts theories, the main kernel or column here is primarily forecast of  the GDP potential, and previous years investments are important regressor in this. If the last projections are wrong, however, e.g. overestimated, the economic potential forecast may be overstated also and thus the exit opportunities out for the crisis can be also overestimated (by the way, in the referral is noted that Estonia’s current authorities generally are overoptimistic and making overestimated policy statements, that may be not of evil, but it is certainly not the panacea for all illnesses in this very deep crisis – indeed: e.g. for the cure of over high unemployment  (already over 15% – especially fatal).

Estonia’s economic potential overestimation cases of predicted effects in the IMF’s forecasts are probably more: certainly is deficiently considered  human and social capital decline in the recession, and large employment  reduction, still growing unemployment and labour force flight etc. Very incomplete and outdated data (2005-7), for example, in the impoverishment of the timeseries, the standard of living (the same trick used by the Estonian official statistics, by the way) and so on. It seems that the Gini index is even unknown to Mr. Rosenberg, like other economic disparities between prediction problems, opportunities for social disorder, ethno-political confrontation as well with big neighbour, as high burden for restoring the economic upturn.

The moral: since for the IMF was Estonian last year change from FDI importer to the exporter apparently unexpected news (now obsolete due to the use of data), then the Reports main conclusions should undoubtedly proved to be erroneous. Several views, particularly as regards macroeconomic claims should be under falsifications, such as: “Estonia has come to function well in crisis,” the current euro exchange rate should stay valid “,” This year’s decline to be only 2% of GDP and growth in only 15-20% of the unemployed “,” 2011-12 in Estonia must have at least 3-5% of GDP growth”(incidentally, also this growth rate in terms of the absolute real quantities compared to the euro area,  is likely to leave Estonia behind  increasingly),” authorities have avoided large-scale full-fledged crisis “and so on.

All this, of course, but does not reduce the number of the report for a rational fiscal policy and institutional proposals, the value of our jurisdictions, the increase of revenue (instead of the fiscal cuts, which are exacerbating the crisis, as is already seen): in the style of European civilization in particular the restoration of profit tax, income taxes should be more progressive (the current two-tier system may also serve for this purpose), high social taxes should partly be transferred to VAT, for example, while households plots taxes should eliminated, parental leave tax reduction and the elimination of specific extra pension rights (known to us still yet even for sovjeti apparatchiks), the imposition on European car taxes and so on. In a word: the whole tax system is unbalanced, incomplete and of low quality.

By the way, Report contains a lot of valuable database of publicly interest not included in the Estonian public knowledge base: (external) debts structures of the private sphere, assessment of the reduction in national payroll in 2009 and so on. This is true, unfortunately, the socio-economic indicators are sparse –  no national income data, but still there is GDP gap.

By the way, in which perspective time Estonia could return to normal FDI importer (in a poor country, mandatory, that it really effective to obtain high-quality products exporter), it seems that the Report between the lines says, as this may heavily dependent on the restoration of a profit tax, at least in some version of rudimentary form.
It would further be noted that while year ago, in Estonia, Mr Rosenberg did not know how to meet that is running the so-called Maastricht criteria for the sustainability/stability of prices (in 2006 Lithuania was left behind the door of the euro area with that criterion), it is not a word in this report. Also find funny in the text to meet some terminology of  the euro sceptics like “rapid transition to the euro” – Heavenly Love – fast/rational transition to euro-zone incompetently was played out by authorities in 2006,  with high inflation politics to conveniently to fulfil easily budget revenue.

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January 11, 2010 - Posted by | Uncategorized

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