Embed Size (px)
Citation preview
WORKING DRAFT
Estonian Growth Vision 2018
Alternate Futures for the Estonian Economy
April 2010
WORKING DRAFT
2
Contents Introduction .................................................................................................................................................. 3
What is this Report? .................................................................................................................................. 3
Using Scenarios as Part of a Vision Project ............................................................................................... 3
What are Scenarios? ................................................................................................................................. 3
Scenario Framework ..................................................................................................................................... 4
Focal Question .......................................................................................................................................... 4
Relative Certainties ................................................................................................................................... 4
Critical Uncertainties ................................................................................................................................. 4
Scenario Matrix ......................................................................................................................................... 6
Understanding Implications for Estonia ................................................................................................... 7
Scenario Narratives ....................................................................................................................................... 8
‘Hanseatic League II’ ................................................................................................................................. 8
‘Southern Finland’ ................................................................................................................................... 12
‘Back to the 80’s’ ..................................................................................................................................... 16
‘Skype Island’ .......................................................................................................................................... 19
Appendix 1: Scenario Plot Elements Table ................................................................................................. 22
Appendix 2: Key Implications Table ............................................................................................................ 25
Appendix 3: Extended List of Driving Forces ............................................................................................... 28
Appendix 4: Clustered Critical Uncertainties .............................................................................................. 30
WORKING DRAFT
3
Introduction
What is this Report?
This report was produced as part of the Estonia Growth Vision 2018 Project (EGV), which has
been launched by Eesti Arengufond and facilitated by Global Business Network (GBN).
In this report, Arengufond is aiming to help key stakeholders in Estonia begin ―a strategic
conversation‖ about the vision for future Estonian growth. The EGV Project aims to encourage
outside-in thinking, exploring the important dynamics and factors beyond the immediate day-to-
day experience of stakeholders, thinking how Estonia‘s circumstances might evolve, before
using these inputs to create a shared vision for the country.
This report describes four robust, plausible and alternate narratives about the future for
economic development in Estonia, and, indentifies the different set of implications each future
has on economic development in Estonia. These scenarios and implications were developed
with a group of stakeholders from the private, public and NGO sector, during the course of a
workshop hosted by Arengufond in Tallinn on March 18th–19th 2010.
This version of the document is a working draft. A final version will be produced incorporating
feedback from workshop participants.
Using Scenarios as Part of a Vision Project
The scenario workshop was Step 1 of the EGV 2018 project. In Step 2, the vision workshop, the
scenario outputs created in Step 1 will be used as inputs to the vision development exercise.
This exercise aims to use the scenarios as context to create a common vision for Estonia by
identifying the key choices available to Estonian policymakers. The workshop will frame the
common vision for Estonia which can be used as the basis for a wider national vision discussion
in Step 3, the Development Forum in May 2010. Step 4 will involve the communication and
implementation stages of the EGV 2018 project
What are Scenarios?
Scenarios are stories about how the future might unfold for our organizations, our communities
and our world. Scenarios are not predictions. Rather, they are provocative, plausible, and data-
rich accounts of how relevant external forces — such as the future political environment,
scientific and technological developments, social dynamics, and economic conditions — might
interact and evolve, providing our organizations with different challenges and opportunities.
The purpose of scenario thinking is not to identify the most likely future, but a set of alternative,
divergent and plausible futures. They are designed to stretch our thinking about emerging
changes and the opportunities and threats that the future might hold. Scenario planning allows
us to make better decisions, to test assumptions, and provide a framework for recognizing and
adapting to change over time
WORKING DRAFT
4
Scenario Framework
Building scenarios involves identifying a focal question, then highlighting the driving forces
(uncertainties or trends with uncertain implications) that will be important in shaping the future
context for the organization, country, region and world. In this project, driving forces that would
affect the development of the Estonian economy were derived from themes identified in
secondary research, interviews with experts within GBN‘s network, and structured brainstorming
sessions with the GBN team, the EGV core team, and other key stakeholders in the Tallinn
workshop.
Focal Question
The starting point for scenario development is to understand the core issue that the scenario
exercise is looking to address. During the workshop the following focal question was agreed
upon by the participants:
“What makes Estonia globally competitive and locally attractive by 2018?”
This question was used to identify the primary focus of the project, and guided the structure of
the narratives and the scenario implications section of the workshop.
Relative Certainties
The next stage in the scenario development process is to understand those elements within the
driving forces that we can be reasonably certain will shape the world we are describing. In the
context of understanding the future of the world and of Estonia in 2018, we believe that we can
reasonably confident about the direction and broad impact of the following short list of trends
and factors. In geopolitical terms, a global multi-polar system is emerging with the rise of China,
India and others. The United States will still remain the single most powerful country but will be
less dominant. From a demographic perspective, global population growth will continue and will
put pressure on energy, food and water resources beyond the pressures exerted by natural
conditions and environmental trends. European populations will become older and, as pressure
for immigration into Europe continues, they will become more diverse. Though the world will
search for new renewable energy sources, there will still be global interdependency on
traditional hydrocarbon sources of energy. Within Estonia, relative certainties include the
adoption of the euro and the ageing population.
Critical Uncertainties
The scenario framework used in this study has two axes, with each axis representing a ―critical
uncertainty‖ — a driving force that is considered both highly important to the focal issue and
highly uncertain in terms of its future resolution. The critical uncertainties were identified using a
WORKING DRAFT
5
clustering process (Appendix 4), based on broader list of potential uncertainties generated by
the GBN / EGV teams and the workshop participants (See Appendix 3).
At the global and regional level, the uncertainties considered included the nature of the new
world order, regional stability and cooperation, the future of Russia and the nature of the global
economic order. At the Estonian level, they included the availability of human resources and
talent, availability of human capital, adoption of new technology and innovation, alignment of
education with the economy and society, nature of economic recovery, relationship with Russia,
integration with, and access to global markets.
During the workshop, participants were required to narrow down this broad range of variables to
the two ‗critical uncertainties‘, using criteria of ‗highly uncertain‘ and ‗highly important‘. The
resulting two critical uncertainties, ―The Nature of Estonian Economic Growth” and ―The Degree
of Baltic Rim Regional Cooperation”, were then combined in a matrix to define a set of four
scenarios for the future of Estonia that are divergent, challenging, internally consistent and
plausible.
WORKING DRAFT
6
Scenario Matrix
The scenario matrix below displays the four scenarios for the future of Estonian growth. Each
axis represents a spectrum of possibilities. Taken together, they help capture the range of
uncertainty that Estonia faces and describe four plausible, divergent scenarios or stories about
the future of Estonian growth over the next eight years.
WORKING DRAFT
7
Understanding Implications for Estonia
One of the key functions of this report is to enable Estonia to begin a rich strategic conversation
to inform the creation of a vision for its future. As the scenario workshop discussions unfolded,
a common set of questions relating to the future of Estonia‘s growth emerged, which
participants considered in each scenario:
External
What is the basis for competition in the regional / global economy?
What is the role of the European economic and monetary union?
Where is the locus of geopolitical power in this world?
Are there any major conflicts or alliances in the political environment?
What is the role of Russia?
What is the role and status of the Scandinavian region?
What is the role and status of the Baltic States?
Internal
What is the economic development model in this scenario? Where does growth come
from?
What role do policy makers play in Estonia?
Where and how are intellectual capital resources found?
What is the demographic composition of the population? How does society evolve?
What is the role of technology and innovation?
WORKING DRAFT
8
Scenario Narratives
The following narratives outline four different possible visions for the evolution of the world and
of Estonia‘s economy to 2018. After each narrative we outline the timeline, deep causes, and
implications for Estonia in terms of new economic models, new sectors and new players.
‘Hanseatic League II’
In a benign global economic environment, regionalisation increases as Europe wanes and
China and India become increasingly important global players. Russia stabilises and prospers,
and opens to the West. As high-tech, export-led companies thrive, Estonia becomes a prime
investment destination and an open, lively, cosmopolitan nation full of skilled individuals
competing for high value-add jobs.
This is a world characterised by increasing regionalization and rising political and economic
polarisation. China, and to a certain extent India and Russia, become important global players
to complement and compete with the US. Substantial regionalization of the world marketplace
leaves a smaller role for globally focused multi-laterals, as typified by the World Trade
Organization‘s significant mandate reduction in 2017.
Europe’s global influence continues to wane as its internal north-south polarization
continues culminating in one of the PIIGS countries exiting the Euro zone in 2012. The 2010
debt-burden crisis experience makes Germany, Europe‘s largest economy, refocus its energies
from building a robust European Union to forging a strong alliance with the dynamic economies
of its Baltic Sea neighbours to the North and to the East, similar to itself in fiscal discipline.
Meanwhile, aging populations in Europe, in particular in the Baltic rim region, continue to place
significant pressure on maintaining sustainable public finances. Governments in the region
actively rethink their immigration policies to increase the admittance of highly skilled and
semi-skilled workers.
Russia stabilises and prospers under a strong but enlightened dictatorship. However, a rising
China, and the resulting political and territorial tensions on its Asian borders, forces Russia to
seek new friends and trade partners in the West. In 2015, Russia starts preparations for an
application for EU membership. Simultaneously, the political leadership takes active steps by
encouraging immigration from the ex-CIS states as population decline continues to be a major
cause of concern for Moscow.
Technology is the one major exception in this world of regionalization. Led by a globally
connected millennial generation, web-based technologies, breakthroughs in renewables and
other disruptive innovations spread quickly across the world. However, in this new world
order, technology developments occur as much in Asia as they do in Europe and North America.
As expected, Estonia joins the Euro zone in 2011, and elections that year result in a
continuation of existing economic policies. By 2015 educational reform, and the resulting
emergence of regionally competitive universities driven by cutting edge learning technology,
WORKING DRAFT
9
is attracting 5,000 students a year from Russia and other Baltic Rim countries as demobilization
of the Soviet educational system encourages citizens to study abroad.
Oil prices rise to $150 a barrel, driving development of alternative and nuclear energy
projects in Estonia. By 2014, Estonia emerges as a global leader in the niche oil shale energy
technology arena. Partnerships emerge between educational institutions and private enterprises
in R&D, both in Estonia and in partnership with other Baltic Rim countries: Tallinn witnesses the
arrival of a General Electric cleantech development centre, and a Sony Ericsson robotics centre
in Tartu is founded with strong links to other Sony development centres in the region. The
European Union locates its ICT Agency in Estonia in 2014, and driven by these new growth
opportunities, venture capital and private equity investments soar, capitalising on wealth
generation opportunities, cross border innovation, booming regional technology clusters,
and a highly skilled workforce.
A new economic model emerges from these developments and high-value export-led
enterprises, guided by strong leadership and consistent goal-oriented policies. Oil shale
technology, cyber security, genome technology and the service sector all drive growth,
accompanied by high value-added transportation, nuclear power, language services and
software. New domestic companies and high quality educational institutions surface, benefitting
both Estonia and its neighbours. Investors in these sectors, as well as their talented employees,
are immensely rewarded. Those who fail to retain their competitive edge through skill or
language acquisition - enterprises and individuals alike - as well as nationalists and populists,
are left behind.
Continued collaboration with Russia, Scandinavia and Germany offers a large market for
Estonian businesses. Although Estonia does not directly benefit from fast growing emerging
markets, regional economic cooperation allows Baltic Rim countries to benefit from the
consumption boom in Asia, Latin America and Africa. However, an important consequence of
this growing prosperity is income inequality, which widens considerably. A growing group of
disenfranchised citizens drive social unrest, which becomes increasingly xenophobic.
Nevertheless, by 2018, Tallinn and Tartu are open, lively, cosmopolitan cities full of skilled
individuals competing for high value-add jobs. Effective immigration policies result in the
broad acceptance of Russian migrants, typified by Estonia‘s support for visa-free travel for
Russians within the EU. Benefiting substantially from the region‘s political stability, close
economic cooperation and talent mobility, Estonia carves its niche in the Baltic rim.
WORKING DRAFT
10
Timeline of Key Events
Deep Causes of Hanseatic League II’s Emergence
Enlightened Russian dictatorship
Regionalization of the world economy
North-south polarization of Europe
Russian cooperation with the West
Implications for Hanseatic League II
Winners Losers
Service sector
New sectors, e.g. in ICT, energy,
technology
Innovative Estonian companies
Higher education institutions
R&D institutions
Talented, skilled individuals
Companies with limited innovation / R&D
capacity
Individuals with outdated skills
Populist leaders
Nationalist leaders
Models of Economic Development (non-exclusive)
Model 1: High Value-Add Export-Driven
High value export-led economic
development
Oil shale, genome, cyber tech
Software
High value-added transit services
Greater state leadership
Model 2: Regional Service-Driven
Focus on the elderly
Healthcare services
Tourism
Retirement / care homes
Entertainment
WORKING DRAFT
11
Emerging New Sectors Less Important Sectors
Nuclear power generation
Virtual services
Language services
Educational services
Low-value added assembly and other
labour-intensive sectors
New Players
EU institutions
EU IT agency
Multinational corporations
VCs / PEs
Radical right wing groups
WORKING DRAFT
12
‘Southern Finland’
In a global slow-growth environment, regional blocs arise in Europe as a result of fractured
economic integration. Scandinavian capital continues to dominate the Estonian economy, and
the economic model remains static, competing on labour cost alone in low-value added parts of
value chains. Estonia muddles through in an increasingly integrated Baltic Rim region.
This is a world which experiences increasing global cooperation, driven by slow but stable
economic growth. China, Russian and the USA realise the need for mutual cooperation,
leading to an increased collaboration across economic, political and even defence fields. Multi-
lateral agencies and institutions such as the UN, World Bank, IMF and WTO continue to be
important.
Despite a change in social attitudes towards a ‗greener‘ economy, the reality of large fiscal
deficits created during the recession years makes it difficult for developed countries to make
substantial investments in environmentally friendly technologies, although Scandinavia retains a
competitive edge. However, social pressures result in these countries agreeing and
implementing market friendly carbon control measures such as cap-and-trade.
The European Union continues to be strong politically, but less so economically. The
PIIGS crisis in 2010 forces a rethink among the member nations of the importance of Euro and
the European Central Bank. While committed to unrestricted movement of people and goods,
the large EU members such as Germany, France and the UK recognise the limitations of
intertwined economic policies. As a consequence, informal and sometimes formal regional
blocs arise within the EU and sometimes between EU countries and other nations.
The Baltic Rim, comprised of the Scandinavian countries, Baltic states, Germany, Poland and
Russia becomes an important regional alliance. The region becomes largely self-sufficient as
Russia provides the natural resources, Germany and Scandinavia the technology and high-tech
capital goods, and the Baltic states and Poland the labour-intensive manufacturing and services.
Estonia joins the euro in 2011, followed by Latvia, Lithuania and Poland. The 2011 elections see
a continuation of existing economic policies, and EU structural funds continue flow in,
despite an economically weak euro zone. This increasingly strong regional relationship provides
stability, but limited access to capital in Estonia as the domestic banking sector continues to
be dominated by the Swedish banks. Poor economic performance reduces capital availability for
the entire region, but the impact is exacerbated Estonia where the government is unable to
direct investment to entrepreneurs and new sectors, despite the launch in 2015 of a new
national investment and innovation fund, supported by Finland‘s SITRA.
Sluggish EU and Baltic Rim growth results in limited innovation and clear roles for the member
nations in the value chain, despite some investment in clean-tech and wellbeing sectors. Like
Western Europe, structural changes result in a decade of slow growth in Scandinavia, and
the region turns to increased integration and outsourced manufacturing to low-cost
neighbours as a mitigation strategy. As a consequence, Estonia competes with other Baltic
WORKING DRAFT
13
states, its economy grows slowly, and by 2018 productivity levels remain at 70% of the EU
average.
The economic development model for Estonia remains static; Estonian companies attempt to
remain competitive based on lower labour costs, mainly playing in low-value added parts
of value chains, focusing on export and simple service driven sectors such as food processing,
agriculture, assembly lines, and call-centres. This economic model, underpinned by an
educational focus on vocational training to drive low-cost competitiveness, alienates talented
entrepreneurs and innovators who are unable to attract capital. As Helsinki University
incorporates former Estonian state universities and reduces their research intensity, the ‗Brain
Drain’ also continues, with an estimated 5,000 skilled and educated workers leaving Estonia
each year, relieving unemployment burdens in the short term but exacerbating the longer term
demographic crisis.
EU membership and enhanced regional cooperation provides a safety net, but as the age
dependency ratio increases, concerns mount over the government‘s ability in the future to pay
increasing pension and healthcare costs. In order to service this model of economic
development, labour related taxes are lowered, reforms within the administration take place,
and vocational schools see further increases in investment. Successful Estonian enterprises,
both old and new, continue to be bought by foreign investors – the largest Estonian exporter,
BLRT is bought by a Swedish private equity player, and Estonian Air is fully taken over.
Estonian capital is crowded out and only internally focused SMEs remain Estonian-owned, as
Scandinavian capital continues to drive key decisions in the economy.
The Baltic continues to been seen by Brussels as a core growth area, and despite the regional
low growth environment the EU maintains a steady flow of structural funds focused on
infrastructure, effectively creating business for Scandinavian companies. As a result
unemployment drops and regional projects focused on greater integration persist, with the
Tallinn-Helsinki rail tunnel link the most relevant for Estonia - a phase two feasibility study
successfully secures funding in 2012, digging starts in January 2014, and the first tunnel test
run is scheduled for 2020.
The political landscape broadly remains the same, enhancing the development of leadership
complacency which in turn leads to a culture of gradualism, resulting in significant lost
opportunities. There are however, improvements in internal cultural integration, in particular
around the engagement of the Russian-Estonian population, which is symbolised by the 2016
election to the cabinet of Estonia‘s first ethnic Russian minister.
As Estonia muddles through internally, the external relationship with Russia improves
slightly, along with internal ethnic integration. Trade slowly increases, mainly in exports of the
mid value products which accounts for the majority of Estonia‘s economic output such as food
and timber. As economic integration slowly increases, with the removal of double customs tariffs
in 2015 a key breakthrough, so do social ties and political links, resulting in a Russia that is a
benign neighbour, if not quite a friend.
WORKING DRAFT
14
Timeline of Key Events
Deep Causes of Southern Finland’s Emergence
Increasing globalization
Overregulated EU
Increase in regional cooperation driven by Scandinavian capital
Depressed entrepreneurial spirit
Implications for Southern Finland
Winners Losers
Companies and investors who
currently hold assets
Scandinavian companies (access to
cheap labour)
Companies serving Baltic rim
market
Constructors of infrastructure
Current political establishment
Low and medium skilled workers
Russian Estonians
Eco-business and green tech
(servicing and assembly)
Basic skills and training providers
R&D and higher education institutions
New entrants
Budding entrepreneurs
Knowledge intensive businesses
High skilled workers
WORKING DRAFT
15
Models of Economic Development (non-exclusive)
Model : Low Value-add Export-Driven
Subcontracting
Service outsourcing
Serving Scandinavia from Estonia
Low labour related taxes to maintain cost competitiveness
Partially reformed administration and education
Emerging New Sectors Less Important Sectors
Tourism (from Baltic rim)
Food processing and agriculture
Services
Transit trade
Machinery
Elderly care (for Finland / Sweden)
Textiles
ICT and other high technology (development)
business
New Players
Basic skills / training providers
Government investment and innovation fund, supported by SITRA
Companies serving the whole Baltic rim (regional companies)
WORKING DRAFT
16
‘Back to the 80’s’
As economic growth in the developed world stutters and developed world swells, a new order
emerges globally and also in Europe. Caught in the fissures between large powers, Estonia
finds it difficult to carve a place for itself in this challenging environment. The country reverts to a
cost- and resource-based economic model in order to survive. A new resolve to rebuild the
nation arises as the character of the nation is severely tested in these demanding times.
This is a world in which the shockwaves of the global financial crisis continue to ripple
across the global economic landscape through 2016. The economic recovery in 2010-11 turns
out to be short-lived as many developed countries experience a double-dip recession as
consumer spending doesn‘t increase enough to offset the reducing stimulus spending. On the
other hand, economic growth – driven by increased domestic consumption - continues in China,
India and some of the other major emerging markets, resulting in a gradual shift in global
power, and increasing tensions between nations. Recognising these opportunities,
multinational companies move much of their new investments towards emerging markets. As
the developed countries see a fall in real standard of living, unemployment and social
unrest increase. Populist governments come to power in many countries, driving
protectionist and short-sighted policies getting these countries into a vicious circle from which
they find it increasingly difficult to get out. The environmental campaigns in the West take a
back-seat as the developed world remains pre-occupied with a return to growth.
The 2010 PIGS crisis marks the beginning of at least a five year period of economic and
political turmoil in the European Union, during which the nature of the political and economic
union is severely tested. The European project continues, but looks very different relative to the
optimistic, unified future many thought was a certainty in 2005. The last entrants to the EU
remain in the political union, but financial crises in Lithuania and Latvia ensure that euro
adoption doesn‘t bring the hoped for economic benefits like inward investments. A tense
regional environment follows, as economic and political crises lead to populist governments, an
increase in Russian protectionism, and a reduction in social cohesion. As a consequence
of the crisis, integration of the Nordic countries also slows and then reverses, as countries
adopt increasingly protectionist policies. Bilateral agreements are the norm, as survival
instincts take hold.
Vladimir Putin is re-elected as President in Russia, ushering in a new political era in which
Russia exerts much more control over its neighbours, and Russian influence over Estonian
politics increases. Russia seeks to take advantage of a challenging world and assume its lost
superpower status. However, an aging and declining population, reduced gas prices due to
abundance of shale gas supplies, and a geo-political conflict with a strong China over its Asian
borders, makes it difficult for Russia to achieve its ambition. Recognising this reality, Russia
looks west to Europe to stamp its dominance. Closing gas pipelines in the winter and
increasing naval and oil-drilling conflicts in the Arctic become the norm.
Estonia‘s economic position remains precarious, as Euro adoption doesn’t bring about the
anticipated benefits. High unemployment levels and very few business opportunities persist,
WORKING DRAFT
17
triggering an emigration of some of the best talent. As a result, social spending needs
increase while revenues fall, further straining public finances. In order to survive in this
challenging world, Estonia reorients its economic policy. To manage its capital resources
efficiently in this demanding environment, Estonia exits or reduces investments in sectors
which require significant capital, such as telecom, infrastructure and financial services, and
increases its investments in a labour-cost or local resource-based small scale production, timber
and oil shale. Taxpayers feel the heavy weight of the country‘s lack of economic development,
and prolonged social stress leads to the election of a populist and nationalist government in pre-
maturely called parliamentary elections of 2013.
Russian-Estonian tensions rise not only in the region, but within Estonia, giving rise to defined
cultural identities and a widening ethnic divide, reinforced by an erosion of trust and faith in
the state. Ethnic riots break out from an incident at an employment centre in 2013.
By 2016, Estonia‘s capacity for long term investment is reduced significantly due to the
complex and challenging political and economic environment. As global economic growth
fails to recover and Estonia‘s competitive position remains weak, foreign direct investment
proves difficult to attract, and a downward spiral ensues. The Estonian Government steps in
to buy falling private assets to guarantee base levels of employment and limit social unrest.
Estonia is once again dominated by state owned enterprises, and bureaucracy flourishes,
as increasing control is sought. As the importance of banks and professional services
declines, a cash economy emerges from the shadows as a much valued even if inefficient
alternative to inefficient state owned enterprises. Without economic opportunity, talented,
educated Estonians find refuge in other parts of Europe. The state drops from 16 to 40 on the
economic freedom index, a significant reduction so often noticed in small countries. Belief in
Estonia as an independent state falters, Estonians and the country fight for survival. As the
character of the people and the country is immensely tested in such difficult times, a common
strength and resolve evolves among its citizens and leaders to make Estonia a happier place
again for its people to study, live and work in.
Timeline of Key Events
WORKING DRAFT
18
Deep Causes of Back to the 80’s Emergence
Prolonged recession
EU economic shock and failed leadership
Economic collapse of Estonia‘s neighbours
Social stress results in election of populist government
Implications for Back to the 80’s
Winners Losers
Oil shale, forestry, food processing,
cheap tourism, mining and furniture
sectors (Resource based sectors)
Existing state-owned enterprises
Populist leaders
Estonian taxpayers, investors, and
companies
Technology, Telecommunications, R&D
(Sectors that require large-scale financing)
Capital intensive and service-based
industries
Models of Economic Development (non-exclusive)
Model 1: State-led Inward Driven
State owned enterprise driven by
interventionist government
Decisions made at ministerial level
only, little discussions beyond
populism
Inward focused, nationalised
economy
High taxes
Model 2: Low Value-add Exports only
Low value-added production and low-end
service focus
Local market focus mainly
SME focus
Sub-contracting to Scandinavia / Germany,
but on small scale
Emerging New Sectors Less Important Sectors
More public service delivery
Shadow cash economy increases
Oil shale sector accelerates
Banks and virtual payment services
Professional services
New Players
Blurring of public / private sectors (as per Latvia)
Powerful state-owned enterprises through re-nationalisation of private assets
Shadow economy-focused players
WORKING DRAFT
19
‘Skype Island’
In a recession-free world, tensions between East and West lead to protectionist policies, and in
the wake of unbalanced European growth, Russia and Germany build a strong alliance. Estonia
reinforces partnerships with Sweden and Finland, makes proactive investments in education,
and becomes a hub for innovation and entrepreneurs.
This is a world in which global economic growth returns, and the shadows of the recession
lift. Global trade improves as the developed world continues its dependence on emerging
markets to service its manufacturing and outsourcing needs. As a result, emerging markets, in
particular, China, Brazil and India, benefit immensely while also moving up the value
chain. However, the increasing dichotomy in the degree of growth and competitive pressures
between the East and West leads to regular tensions and protectionist policies. For
example, while they continue to be each other‘s largest trading partners, the USA-China
relationship never extends into a broader political and military alliance.
Reducing the large fiscal deficits run up by USA and other developed countries during the 2008-
09 recession becomes less of an issue in this stable growth environment. Investments in
renewables and other environmentally friendly technologies increase, as the USA
recognizes the need for reducing its dependency on imported oil, whilst also finally accepting
the role of mankind in climate change.
At the same time, the European Union sees the continuation of unbalanced growth seen in
the post-recession period, which extends around the Baltic rim. Governments seek to protect
national industries, and regional cooperation declines and fragments as bi-lateral relationships
develop. Building on a mutual interdependence for energy and high-tech goods, Russia and
Germany build a strong axis. As its economy stalls, Latvia finds itself trapped between the EU
and Russian influences. A stronger Russia challenges the NATO alliance politically as relations
with China warm. The EU weakens as a unified actor in the global marketplace, giving rise to
several new political and economic European alliances, and strengthening other alliances such
as NAFTA and ASEAN.
With the gradual delay of existing relationships with the EU and Scandinavia, Estonia‘s
internally integrated government obtains new, strong allies. Economic partnerships with
Sweden and Finland are reinforced, external investment opportunities are sought, and
Estonia seeks to build political and economic ties with the large economies such as India, Brazil,
and USA.
In this fragmented geopolitical environment, Estonia follows two parallel approaches to
advance its economy through selective investment in innovative sectors. Initially, Estonia
realises the need for international networks, and in a world of increased bilateralism, works to
use bi-lateral relationships to generate foreign capital investments in export-led innovation
based industries. It incentivises talent flow into the country to develop these enterprises.
Under a government-sponsored program, entrepreneurial students are selected to be educated
abroad, strengthening links to international markets and emulating the Singaporean model as
1,000 Chinese and Indian students per year study at the Estonian IT Academy.
WORKING DRAFT
20
Meanwhile, proactive investments in education are made to enable the next generation of
Estonians to participate in the expanding, innovative, and high-value add domestic market. The
Estonian Leadership Academy and an internationally competitive business school together
facilitate the internationalisation of society, develop national change-management skills, and
boost the entrepreneurial DNA of the nation. Emphasis is placed on lifelong learning and
adaptable, forward thinking capabilities. This thoughtful development results in a strong,
visionary leadership focused on strategic management, not national bureaucracy. Educated,
ambitious, and globally competitive young workers are empowered by economic opportunity to
envision their futures within Estonia, further contributing to its sustained growth.
The combination of these two strategies leads to the creation of an innovative environment in
which ICT and other high-value - mostly technology- industries blossom, making Estonia a
target country for talent and start-up alliances. As a result, by 2015 Estonia has given rise to
two global companies - in partnership with Silicon Valley and Thames Valley – which recreate
phenomenal Skype‘s success. Venture capital flows into the country at record levels,
supporting creative and ambitious companies, while long term knowledge creation supports the
growth of large and established enterprises. Aided by astute externally-facing economic policy,
Estonia leapfrogs in order to remain competitive in the global marketplace.
By 2018, the policy of targeted government intervention focused on quick economic recovery
leads to negative social consequences. For 8 years, investments in education and
knowledge-based sectors have been systematically prioritised over funding for social welfare
programs, and as a result many tiers of society are left discontent and disenfranchised. The
drive for entrepreneurship and high-skilled jobs creates structural unemployment, and social
tensions rise as the jobless do not receive the state assistance required to support them and
retrain them with the requisite skills for the rapidly evolving labour market.
Timeline of Key Events
WORKING DRAFT
21
Deep Causes of Skype Island’s Emergence
Stable economic growth
Bi-lateral relationships
Strong Russia / n alliances
Educational reform
Implications for Skype Island
Winners Losers
Current asset holders in Estonia
Visionary leaders
Small, ambitious, creative companies
via VC funds
Professional service companies
High-level educational institutions
Educated, globally competitive youth
Foreign students, scientists,
specialists
Estonian brand
Inflexible and uncreative companies
Non high-level educational institutions
Social benefit dependents
Most low skilled individuals
Models of Economic Development (non-exclusive)
Model: Innovation-led
Innovation based model, mainly focused around ICT
Driven by domestic intellectual capital
Active, targeted government intervention in economic and education policy
Government shift to strategic management from state administration approach
Emerging New Sectors Less Important Sectors
IP-intense industries
Estonian based ICT
Other science and technology
sectors
Exporting policy reform expertise
Low value added enterprises, especially
in manufacturing
New Players
Ministry of Education becomes more important
Foreign investors from new countries (rising world players)
Small scale, international venture capital
Leadership academy
International business school
WORKING DRAFT
22
Appendix 1: Scenario Plot Elements Table
The table below contrasts the four scenarios along a number of the key uncertainties and
outcomes or plot elements.
Hanseatic
League II
Southern
Finland
Back to
the 80’s
Skype
Island
Baltic Rim
Regional
Cooperation
Harmonious, strong
Harmonious, Strong
Fragmented, weak Fragmented, weak
Estonian
Economic
Growth
Robust and broad-based
Weak and narrow-based
Weak and narrow-based
Robust and broad-based
Deep Forces Enlightened Russian dictatorship
Regionalization of the world economy
North-south polarization of Europe
Russian cooperation with the West
Increasing globalization
Overregulated EU
Increase in regional cooperation driven by Scandinavian capital
Depressed entrepreneurial spirit
Prolonged recession
EU economic shock and failed leadership
Economic collapse of Estonia‘s neighbours
Social stress results in election of populist government
Stable economic growth
Bi-lateral relationships
Strong Russia / n alliances
Educational reform
Global and
Regional
Economics
Estonia joins euro zone
Estonia joins expanded and stable euro zone
Increasingly strong regional relationships but limited access to capital
Decade of slow growth for Scandinavia resulting in increased regional integration and low cost outsourcing
Prolonged regional recession, with Estonian entry to euro zone delayed
Estonia sees rise of state owned enterprises and bureaucracy
A cash economy emerges as the importance of banks and professional services declines
High Estonian
Stable global economic growth, but unbalanced growth across the Baltic rim
WORKING DRAFT
23
Hanseatic
League II
Southern
Finland
Back to
the 80’s
Skype
Island
manufacturing unemployment triggers outward migration
Geopolitics Regional, liberal political stability
Russia becomes increasingly pro-Europe
Increasing power of China
Germany‘s aligns with the Baltics
PIIGS economy kicked out of euro zone
Decline of multilaterals (e.g. WTO)
Political landscape remains broadly the same leading to complacency
Economic integration makes Russia a benign neighbour
Crises give rise to populist governments
Regional integration slows and then reverses
Protectionist and bilateral trade policies adopted
Russia; exerts more control over Estonian politics
Fragmented geopolitical environment
Bi-lateral relationships, with strong Russian-German axis
Russia challenges NATO
EU recedes as a strong unified actor
Breakdown of Estonia‘s integrated relationship with EU and Scandinavia
Intellectual
Capital
Estonian educational reform
Soviet educational demobilization
Influx of talented, high skilled labour
Estonian productivity remains below the EU average due to moderate growth
Vocational training supports low-value add enterprise
Talented entrepreneurs alienated
Talents, educated Estonians emigrate for economic opportunity
Low skilled labour utilised in small scale production economy
Foreign capital investments attract talent
Entrepreneurial students elected to be educated abroad
Estonian Leadership Academy and business school established
Society and
Demographics
Influx of students from Russia
Tallinn is an open, cosmopolitan city
Undertones of
Estonian Diaspora (5,000 workers / year)
Age dependency ratio rises; pension and healthcare
Social spending increases, further straining public finances
Reduction in social cohesion; Widening ethnic
Targeted government intervention and investments in education and knowledge-based sectors
WORKING DRAFT
24
Hanseatic
League II
Southern
Finland
Back to
the 80’s
Skype
Island
social unrest due to income inequality and xenophobia
Russia granted visa free travel
costs rise
Improvements in Estonian cultural integration; first ethnic Russian minister elected
divide
Belief in Estonia as an independent state falters as citizens and the country fight for their survival
Many tiers of society disenfranchised
Technology and
Innovation
Estonia is a global leader in oil technology
Development of alternative and nuclear energy projects
Private / academic partnerships in R&D
EU locates IT headquarters in Tallinn
Venture capital and private equity highly active
Sluggish EU growth leads to anaemic levels of innovation
Estonian investments pulled from finance heavy enterprises; innovation ceases
Economy based on small scale production
High value add, innovation based market, with strong ICT emphasis
Venture capital supports creative, ambitious companies
Start-up alliances result in creation of two global companies
Estonia leapfrogs to remain competitive
WORKING DRAFT
25
Appendix 2: Key Implications Table
The table below contrasts the four scenarios along a number of the key implications categories.
Hanseatic
League II
Southern
Finland
Back to
the 80’s
Skype
Island
Baltic Rim
Regional
Cooperation
Harmonious, strong
Harmonious, Strong
Fragmented, weak Fragmented, weak
Estonian
Economic
Growth
Robust Weak Weak Robust
Winners Service sector
New sectors, e.g. in ICT, energy, technology
ICT, energy, technology sectors
Innovative Estonian companies
Higher education institutions
R&D institutions
Talent, skilled individuals
Companies and investors who currently hold assets
Scandinavian companies (access to cheap labour)
Companies linked to Baltic market
Constructors of infrastructure
Current political establishment
Low and medium skilled workers
Russian Estonians Eco-business and
green tech (servicing and assembly)
Basic skills and training providers
Oil shale, forestry, food processing, cheap tourism, mining and furniture (resource based sectors)
Existing state-owned enterprises
Populist leaders
Current asset holders in Estonia
Visionary leaders
Small, ambitious, creative companies via VC funds
High-level educational institutions
Educated, globally competitive youth
Foreign students, scientists, specialists
Estonian brand
Losers Companies with limited innovation / R&D capacity
Individuals with outdated skills
Populist leaders
Nationalist leaders
R&D and higher education institutions
New entrants
Budding entrepreneurs
Knowledge intensive businesses
High skilled
Estonian taxpayers, investors and companies
Technology, Tele-communications, R&D (sectors that require financing)
Capital intensive and service-based
Inflexible and uncreative companies
Non high-level educational institutions
Social benefit dependents
Most low skilled individuals
WORKING DRAFT
26
Hanseatic
League II
Southern
Finland
Back to
the 80’s
Skype
Island
workers industries
Model of
Economic
Development
Model 1: High Value-
add Export-driven
High value export-led economic development
Oil shale, genome and cyber technologies
Software
High value-added transit services
Model 2: Regional
service-driven
Focus on the elderly
Healthcare services
Tourism
Retirement / care homes
Entertainment
Model: Low value-
add export-driven
Subcontracting
Service outsourcing
Serving Scandinavia from Estonia
Lower labour related taxes maintain cost competitiveness
Partially reformed administration and education
Model 1: State-led
inward driven
State owned enterprise driven by interventionist government
Decisions made at ministerial level only, little discussions beyond populism
Inward focused, nationalised economy
Model 2: Low value-
add export-driven
Low value-add production and low-end service focus
Local market focus mainly
Sub-contracting to Scandinavia / Germany, but on small scale
Model: Innovation-led
Innovation based model, focused around ICT
Active, targeted government intervention in economic and educational policy
Government shift to strategic management from state administration approach
Emerging New
Sectors
Nuclear power generation
Virtual services
Foreign language services
Educational services
Tourism (from Baltic rim)
Food processing and agriculture
Services
Transit trade
Machinery
Elderly care (for Finland / Sweden)
More public service delivery
Shadow cash economy increases
Oil shale sector accelerates
IP-intense industries
Estonian based ICT
Other sciences and technology sectors
Exporting policy reform expertise
WORKING DRAFT
27
Hanseatic
League II
Southern
Finland
Back to
the 80’s
Skype
Island
Less
Important
Sectors
Low-value added assembly and other labour-intensive sectors
Textiles
ICT and other high technology (development) business
Banks and virtual payment services
Professional services
Low value add enterprises, especially in manufacturing
New Players EU institutions
EU IT agency
Design focused multinational corporations
VCs / PEs
Radical right wing groups
Basic skills / training providers
Government investment and innovation fund, supported by SITRA
Companies serving the whole Baltic rim (regional companies)
Blurring of public / private sectors (as per Latvia)
Powerful state owned enterprises through re-nationalisation of private assets
Shadow economy-focused players
Ministry of Education becomes more important
Foreign investors from new countries (rising world players)
Small scale, international venture capital
Leadership academy
International business school
WORKING DRAFT
28
Appendix 3: Extended List of Driving Forces
Global-Level Forces
Global population growth
Migration patterns
Immigration policies
Aging population and increasing
dependency ratios
Growth of the middle class
Rising Urbanisation
Globalisation of competition for talent
Rise of localisation
New world values
Proliferation of identities
Changing role of work
Changing role of education
Global income polarisation
Changing concept of family
Role of women
Health pandemics
Growing power of millennials
Pace of technological innovation
Increased connectivity
Information overload
Internet Governance
Cyber Security
EU becomes technology hub
Growth of social networking
Development of disruptive bio -/nano- and
cognitive technology
Global economic recovery
Shifts in GDP
Shift east of economic power
Energy demand / commodity prices
Regional energy transportation
Food shocks
‗Free‘ business model growth
Unbundling of value chains
Nature of economic recovery
Allocation of EU budget
PIGS bailout strategy
EU Sovereign Debt variance
Growth of knowledge-based economies /
innovation
Intellectual property geographic shift
Government response to climate change
Water scarcity
Impact of green stimulus spending
Rate of depletion of fossil fuel source
EU emissions strategy
Development and adoption of alternative
energy
Impact of climate change on trade patterns
and growth
Trade and protectionism
Post-western globalization
Role of multilaterals
Reduced role of US and EU
EU / NATO role and expansion
Rise of populism
Religious tension
Corruption — growth and impact
Evolution of public service delivery mode
WORKING DRAFT
29
Internal Forces
Aging population
West-facing cultural direction
Impact of unemployment
Societal polarisation (incl. socioeconomic
and ethnic divide)
Nationalism
Evolution of education system and
alignment with the economy
Extent of post-revolution generational
transition
Immigration policies
Speed of ―Brain Drain‖
External perception of Estonia
Increasing broadband penetration
Increasing mobile internet device
penetration
Access to technological IP
R&D partnerships (with universities)
Impact of Euro arrival
Speed of economic recovery
Sustainability of public finances (incl.
pension / healthcare costs)
Drivers of GDP growth
Economic orientation
Global market knowledge (contacts and
access)
Development of Nordic region
Integration with Nordic region
Estonian access to capital
Use of EU Structural Funds
Impact of austerity measures
Availability of qualified labour
Attitudes to environmental issues
Environmental policies
Availability of domestic natural resources
Infrastructure / access to Estonia
Environmental degradation
Russia — Estonia relations
2011 Election result
Estonian governance
Strength of Estonian leadership
30
Appendix 4: Clustered Critical Uncertainties
Critical Uncertainties
Eclipse of the west ◄ Nature of the new world order
► New wave of
enlightenment
Russia negotiates
entry to EU
◄ Regional stability and cooperation
► Armed conflict
Estonia is a ―talent
hub‖
◄ Availability of human resources / talent
► ―brain-less‖
Estonia
Inflexible and
closed
Estonia does not
attract talent
◄
Human capital availability
► Flexible and open
Estonia attracts
talent
Smart follower ◄ New technology and innovation ► Early adopter
Protectionist and
closed
◄ Global economic order
► Increasingly open
trade
Closed and
controlled
(―besieged
fortress‖)
◄
Future of Russia
► Open and
cooperative
society (in Russia)
Not aligned ◄ Educational alignment with the economy and
society
► Aligned
Domestic led
(replicate of pre-
crisis structure)
◄
Nature of Estonian economic recovery
► Led by export
driven sectors
Closed,
unconstructive
◄ Estonian — Russian relationship
►
Open, constructive
Low, basic
(commoditised)
◄ Estonian integration with global markets
(movement of goods and services)
►
High,
sophisticated
(value added)
Dispersed ◄ Access to global markets
(movement of knowledge)
► Concentrated
31
Arengufond and GBN would like to thank the following participants for their insightful and
enthusiastic participation in the interviews and scenario workshop:
Scenario Workshop Participants:
· Aare Järvan
· Ain Aaviksoo
· Alo Merilo
· Andrew Swart
· Anvar Samost
· Anzori Barkalaja
· Gopi Billa
· Hannes Seeberg
· Hardo Aasmäe
· Hardo Pajula
· Heido Vitsur
· Jaan Puusaag
· Jari Romanainen
· Kadri Kuusk
· Kaur Lass
· Kitty Kubo
· Linnar Viik
· Marek Tiits
· Neeme Raidvere
· Nick Turner
· Ott Pärna
· Priit Põldoja
· Raul Rebane
· Tea Danilov
· Teet Jagomägi
· Tiit Riisalo
· Tom Blathwayt
· Urmas Varblane
· Valdo Kalm
· Whitney Wilson
Interviewees:
· Andres Sutt
· Crawford Beveridge
· Eamonn Kelly
· Erik Terk
· Erkki Raasuke
· Indrek Neivelt
· Jaak Aaviksoo
· Joakim Helenius
· Marju Lauristin
· Mia de Kuijper
· Peter Schwartz
· Raivo Vare
· Sten Tamkivi
· Steven Weber
For more information on the Estonia Growth Vision 2018 Project, please contact Kitty Kubo on
[email protected]. For more information on Scenario Planning or GBN, please contact
Nick Turner on [email protected].
