Planning its long-term competitiveness

TALLINN - The Estonian Development Fund (Arengufond) is a public sector venture capital fund and a so-called strategic foresight unit, set up by the Estonian government and managed by a team headed by economist Ott Parna, designed to look far ahead and lay out the country’s vision for the future.

In 2018, Estonia will be marking the centenary of its declaration of independence - its birth as a sovereign country. In the same year, Estonia will also assume the rotating Chair of the European Commission. To prepare for both events, Parna has convened a group of 150 experts and advisors to develop an ‘Estonian Growth Vision’ for 2018.

The first task for the team has been to investigate channels of communication, including social media and more traditional local town hall meetings, in order to engage the population at large and put in place the structures and processes required to harvest opinions and ideas that could be incorporated into the Growth Vision project. Parna is keen for this ‘vision’ to be generated collectively, from the ground up, rather than imposed from above. He says he is looking primarily for new ways of achieving social engagement, rather than trying to improve the old ways. He refers to the 2008 ‘Teeme Ara!’ (‘Let’s do it!’) campaign, which, he considers, is a good example of the process he wants to apply, on a larger scale, to generate the ‘Estonian Growth Vision 2018.’

“The newly-enlarged European Union seeks to re-invent itself in a world context and re-focus its policies of inclusion. One of Estonia’s contributions to the European Community, during its 2018 chairing of the EC, could be a method of engaging Europeans on a large scale to collaborate in the setting of new goals and agendas for its people,” says Parna. “The objective of the Development Fund is to stimulate and support positive changes in the Estonian economy, contributing to modernization of the economy, assuring growth of exports and creation of new jobs requiring high qualifications,” he adds.
According to Parna, the Development Fund supports an increase in awareness of innovation, the emergence of innovative business ideas and growth of entrepreneurship throughout society. An analysis of the opportunities in the services sector forms a part of the Development Fund’s foresight action plan for 2008, being a building block used for constructing Estonia’s growth strategy.

According to Imre Murk, an expert at the Foresight Division, “The manufacturing industry, in its production processes, continues to be a major user of the output of the services sector. Meanwhile, the boundaries between products and services are becoming blurred as industrial companies ‘enrich’ their products and value chains with services. Everywhere services account for an increasingly larger share of employment, value added and GDP. Manufacturing is shifting from developed industrial countries to lower-cost locations; meanwhile, manufacturers in developed industrial countries are focusing on developing services that add value to products and are managing increasingly complex production and supply chains. Traditional industry is thereby losing manufacturing-related jobs to services,” says Murk.

“Looking at the services sector one can see that the most attractive services are those that are knowledge-based and generate high value added, such as telecommunication services, software development, financial intermediation, consultation services, exportable health care and education services, transportation and logistics services, and the creative industry. Hereby the interest is principally focused on innovation, thus raising the export potential,” he points out.

Murk believes that services exports could play a significant role in sustaining economic growth in such a small country as Estonia, with its open economy and limited resources. However, the dynamics of the services sector and opportunities for underpinning the competitiveness of the economy have scarcely been studied. “At the international level, many studies regarding services have been conducted and comparative analyses of policies initiated in order to assess the pertinence and impact thereof on enhancing the productivity and export capacities of the services sector. In more progressive countries, programs have been initiated to sustain service sector innovation. However, in most countries, including Estonia, enterprise policy support measures continue to be mainly targeted at encouraging the development of industrial products and technologies while neglecting the particular features of services sector innovation.”

Murk points out the following objectives, which he considers as the most important, including understanding the characteristics, development dynamics and governing forces of the services sector; mapping the state of play in the Estonian services sector while assessing its future prospects, including highlighting the activities/niches with the best prospects; suggesting a policy framework that policy makers could use for enhancing innovation and export capacities of the niches in the services sector that offer the best prospects.

The Estonian Development Fund’s first foresight exercise into the state of play pertaining to the competitiveness and future prospects of the Estonian economy led to the conclusion that the biggest concern (and a hindrance to everything else) was the structure of the economy, notably that of the manufacturing sector. Fast and long-lasting growth will be attainable again if sectors that provide strong value added, coupled with high corporate productivity, account for the fundamental part of the industry and the economy at large. 

Siim Sikkut, an economist with the Estonian Development Fund, says that with the specific purpose of identifying such sectors and activities, the Estonian Development Fund initiated the foresight project’s “Ways of Restructuring Estonia’s Manufacturing Sector,” which was given the abbreviation - Industry Engines 2018. Within the context of the project, which launched in spring 2008, the sector’s growth possibilities are being weighed on a ten-year perspective while identifying the steps required to make use of these alternatives in the near future. Appropriate policy options that serve to promote business will also be suggested.

“The search for the Industry Engines commenced with the identification of the global trends affecting the manufacturing sector. Subsequently, the current competitive position of Estonia’s industrial sectors, along with their development possibilities, were analyzed. In addition, their potential to benefit from the global trends was assessed. In that stage around 50 interviews were carried out, involving major foreign investors in the country’s manufacturing sector. The interviews are estimated to have covered more than half of the exporters in the Estonian manufacturing sector today,” says Sikkut.
“The core of the Growth Vision is agreeing on the future options for Estonia. With the participation of a few hundred bright people we have discovered the trends and drives shaping the future, outlined four different paths to the future for Estonia’s economy and identified the main decision points – key choices for the vision,” said Parna.

Entrepreneurs, academics and politicians have to revaluate their current activities in order to bring about changes in the Estonian economy. Enterprises have to change their position in the value chain; entrepreneurs have to start businesses in the new growth areas; educators have to create the basis for learning new skills and government has to establish the correct mechanisms to bring forth new behavior. All this cannot happen without a clear vision, uniting the different players, providing direction to our activities and a choice of priorities. We cannot create a successful vision sitting in an ivory tower or writing new documents in a quiet office building. This would only result in something that, regardless of quality, does not “speak” broadly to society, and therefore it would be sentenced at best to gather dust on a shelf. Instead, in order to find the answers to important questions, we should be pursuing a “strategic discussion,” where decision-makers from today and tomorrow participate,” he continues.

According to Parna, so far Estonia has achieved important victories. “We can be proud of the right decisions and accomplishments of the past. Unfortunately, we cannot advance only with the help of the rear-view mirror; we need to look into the future and respond accordingly. The development issues in our economy and society, as well as the challenges presented by the surrounding world, which are changing ever more quickly, demand strategic agility and solutions that are more complex than those we have found so far. That is exactly why we need to throw the gauntlet down before the current paradigm. Borrowing from the succinct words of Albert Einstein: ‘We cannot solve problems by using the same kind of thinking we used when we created them,’” he notes.

The essence, future aims and necessary key goals and aspirations of the Estonian growth vision were first presented to the wider public at the Futures Forum III, organized by the Estonian Development Fund, on May 6, 2010. In the autumn, expert groups started to work on these ideas. They have made a draft on a preliminary vision by working through each key goal in a detailed manner and specifying the extent of the changes each of them require. In addition, the expert groups have suggested the most important measures to produce the desired changes in each case.
It is difficult to predict exactly what is going to happen in the future, though planning involves preparing for several different and alternative futures. This is why the team used scenario planning for the visioning process – to add clarity to the complex issues of the world and to envision the possible fate of the Estonian economy, in the form of credible and realistic stories about the future.

Scenario planning wasn’t a goal in itself, but was an important visioning tool. Regardless of how things will turn out in reality, the scenarios point to decisive moments for achieving a successful future – or if the future is negative, then at least to minimize losses.

“While shaping the growth vision, Estonia’s best experts, thinkers and decision-makers have come up with key goals and aspirations. All of these are underlined by the desire for a more active and energetic country. That means we don’t want to be led by the world, we want to direct our own development,” says one of the experts at the Development Fund.
Christian Ketels, from Harvard Business School, considers that “I think there is an emerging picture of how the world economy is evolving.  The bad news for Estonia is that Europe at large is not very well positioned, partly because of demographic factors, and partly because of other factors. The real growth of the global economy is going to be in Asia, maybe in other parts of the world that are catching up,” he says.

“Luckily for Estonia, within Europe it has been relatively well positioned for the last year or two, because it is still a low-cost manufacturing location, especially after the recent wage-moderation. That explains why Estonia has seen such a tremendous growth in exports. Companies were actually more ready to change suppliers and look for low-cost solutions, and having a low-cost supplier in Estonia is actually a good alternative to going to Asia,” Ketels added.
Most of Estonia’s exports go to neighboring states and regions, but within this region the country has “a good starting position. The question for Estonia is in how to move beyond this, because it does not want to remain a low-cost production location for others. And then there is South-Eastern Europe, Ukraine, Belarus and others breathing down its neck,” warns Ketels.