Estonia. Source:

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1 ESTONIA * 1. DEVEOPMENT DISPARITIES AND ISSUES A stable macro-economic framework, rapid privatisation and other market economy reforms have led to a generally favourable economic environment in Estonia. Between 1995 and 2001, the average GDP growth rate was 5 percent per annum. GDP per capita has increased over the period from 32 to 42 percent of the EU average. In the future, economic growth is expected to continue, based on rapid export growth and supported by the flow of foreign investment in the country. Direct investments at present are mostly of Swedish and Finnish origin (65 percent), while 3/4 of Estonia s exports and 2/3 of its imports are to and from the EU. The main structural changes in Estonia have been the decrease in the importance of agriculture and heavy industry, and the rapid development of the service sector and a number of new industries. 1 Figure 1: Estonia Source: In the labour market, employment rates have decreased and the number of unemployed has increased. The country s National Development Plan anticipates that the State can contribute to increasing employment by facilitating entrepreneurship, improving vocational education and in-service training, and implementing extensive labour market measures that follow the European employment policy guidelines. 2 1 Ministry of Finance, Estonian National Development Plan for the Implementation of EU Structural Funds Single Programming Document (2003), p.7. 2 Ibid, p.8. 1

2 Ongoing economic policy challenges include: tackling the current account deficit; addressing the structural problems in the labour market; improving conditions for increasing productivity; and developing effective competition in network industries. 3 In terms of regional development, restructuring has resulted in increased disparities between the centre-periphery and eastern and western regions of Estonia. Regions that have been particularly affected by the negative impacts of restructuring are rural peripheries, declining industrial settlements, and small inhabited islands. In some regions, the decline in agriculture, low income and high unemployment are leading to high levels of migration by young people and skilled workers. 4 The population in Northern Tallinn and in towns in Ida-Virumaa (Narva, Kohtla-Järve, Sillamäe) has fallen significantly. Mono-functional industrial regions have also had greater difficulty in restructuring. The main regional development issues for Estonia have been: Estonia increased centre/periphery disparities in economic growth, incomes, unemployment; concentration of economic activities and investments in the capital region; decline in agriculture with a resultant increase in unemployment in rural areas; change in the geo-political situation, which has severed economic ties with the Russian markets (especially in the Eastern border areas) and made possible the use of ports and development of tourism in the western regions and islands; and increased unemployment and other social problems in the settlements of former large industrial military bases, and in the large industrial enterprises in need of economic restructuring. Table 1: Socio-economic indicators in Estonia (NUTS II) Population (000) 2001 GDP Per Capita, PPS 2001 Employment by sector (% of total) 2002 Unemployment Rate (%) EU15=100 EU25=100 Agric. Ind. Services Total Source: Eurostat (unemployment rates) and Third Report on Economic and Social Cohesion, (European Commission, Brussels, 2004). 3 European Commission, Commission Recommendation on the 2004 update of the Broad Guidelines of the Economic Policies of the Member States and the Community (for the period), (European Commission, Brussels, 2004), p Ministry of Internal Affairs, Regional Development Strategy of Estonia (1999). 2

3 2. NATIONAL REGIONAL POLICY OBJECTIVES A core regional policy document for Estonia is the Guidelines of Regional Policy, introduced in The Guidelines outline the objectives, principles and implementation of Estonian regional policy, the general aims of which are to create conditions for the develo p- ment of all the regions of the state and balance socio-economic development. The principle tasks included in the Guidelines are: creating conditions which enable prosperous entrepreneurship in all regions of the country; developing a communications infrastructure for the whole country; promoting a more effective regional restructuring of the rural economy; creating economic growth potential in developing regions; ensuring the availability of primary services (basic education, first aid, communication, etc.) across the territory; and creating a national database for monitoring and guiding regional development, and making this information publicly available. Reflecting development patterns in the country, Estonian regional policy seeks, on the one hand, to provide support for target lagging regions, and, on the other hand, it emphasises the strategic importance of regional and local centres for the development in their hinterlands. In 1999 the Regional Development Strategy of Estonia 5 was approved by the Estonian Government. This document further develops the 1994 guidelines, taking account of important changes in the regional policy context such as increasing regional disparities and the introduction of several new development plans and strategies. The document outlines a set of general principles, which are listed below: innovation - development of a capability to learn, support for innovative ideas and activities; focus on self-initiative - fostering of the emergence and support to local initiatives; sustainability - creation of continuing self-sufficiency and potential for development; integrity of the area - development of an area proceeding from the interdependence of its centre and peripheries; and decentralised concentration - utilisation of economic and settlement concentration processes in strengthening regional centres. The Estonian Regional Development Strategy also recognises the need for a co-ordinated and regionally-balanced approach to sectoral policies, such as development of transport 5 Ministry of Internal Affairs, Regional Development Strategy of Estonia (1999). 3

4 and communication infrastructures, and the location of medical, social, educational, research, sports and cultural institutions. 3. INSTITUTIONAL ARRANGEMENTS 3.1 Territorial Administrative Structures The territory of the Republic of Estonia is counted as one NUTS 2 region. Estonia is divided into five NUTS 3 regions. These have exclusively EU statistical and administrative purposes. Table 2: Territorial Administrative Structures in Estonia Unit Type Designation Number of Units Regions with EU statistical and administrative purposes Counties (Regional state government units) Nuts III 5 Nuts IV 15 Town municipalities Nuts V 39 Rural Municipalities Nuts V 202 There is a one-tier local government system. 241 municipalities (39 towns and 202 rural municipalities) act within 15 counties (regional state government units). County governors are appointed by the Cabinet/Government for five years. Along with the county governments (i.e. sectoral administrative departments), they are responsible for the local level implementation of a range of central government policies, including regional policies and development programmes. 3.2 Institutional Structure for Regional Policy National Level The Minister for Regional Affairs within the Ministry of Internal Affairs coordinates regional policy in Estonia. The Ministry for Internal Affairs is responsible for the monitoring and analysis of regional development, and the design and implementation of regional policy, in co-operation with other ministries. Other Ministries with an involvement in regional policy are the Ministry of the Economy, the Ministry of Agriculture, and the Ministry of the Environment. A Council for Regional Policy and Municipalities has been formed and takes a role in advising the President of Estonia. However, the precise role and influence of the Council are not clearly defined. Until 2001, the Estonian Regional Development Agency (ERDA) acted as a fund manager for the majority of the instruments of national regional policy. The Agency board, chaired by the Minister for Regional Affairs, included representatives from the Ministry of Internal Affairs, Ministry of Economic Affairs, National Parliament and Local Authorities. It was re- 4

5 sponsible for financial and technical preparations for the use of state funds, and the development and co-ordination of activities carried out through a national business support system. Two subsidiaries of the ERDA were established in North Eastern and Southern Estonia. On 18 July 2001, the Agency was merged with Enterprise Estonia (EAS) and now forms a part of this wider organisation. The mission of Enterprise Estonia is to support Estonian enterprises by applying approved and effective public measures. 6 The activities of Enterprise Estonia are based on co-operation between the Estonian Trade Promotion Agency, Estonian Technology Agency, Estonian Tourist Board, Estonian Regional Development Agency, Estonian Investment Agency, EAS Ida-Viru Agency and EAS South-Estonian Agency. Regional Level In Estonia s Regional Development Strategy (1999), regional policy is defined as targeted activities of national authorities for the improvement of preconditions for development in regions and for the direction of the regional development in a state. 7 The main role of the regional administrative level (counties) in relation to regional policy is defined as implementation of national regional programmes and policies through development activities in counties. Counties are also responsible for producing development plans which then form a basis for the central government preparation of regional development programmes. Development activities in the counties are organised by the county governor through the county government. The county government organises the design and implementation of the activities in co-operation with ministries, local governments in the county, local representatives of employers and employees, local representatives of the non-governmental sector and other interested partners. However, counties have few dedicated resources for promoting local development activities. For example, capital for developing facilities such as office sites for enterprises, industrial parks etc is in short supply. 8 Enterprise Estonia, the national development agency, also operates at county level, through its regional offices. These offices provide several business support and consultancy services, to both private and public actors. They play an important role in the implementation of regional development strategies, providing information and assistance on the applications for funding from both national and EU development programmes NATIONAL REGIONAL POLICY INSTRUMENTS According to the Strategy for Regional Development, national regional policy consists of three components: decentralising development activities to the regional level in all coun- 6 Detailed information on activities and structure of Enterprise Estonia is available on the agency s website: 7 Ministry of Internal Affairs, Regional Development Strategy of Estonia (1999), p.2. 8 Ministry of Finance, Estonian National Development Plan for the Implementation of EU Structural Funds Single Programming Document (2003), pp Enterprise Estonia website, 5

6 ties; enforcing the regional dimension of sectoral policies; and implementing regional development programmes. Before EU enlargement, state support for local initiatives was designed to influence economic and social development. Working with and through local organisations, the national government supported regional policy measures which prioritised human resource develo p- ment, business activities and infrastructure. The bulk of resources for regional development were allocated to clearly defined regions. Three major programmes targeted the following regions: Ida-Viru county, for the restructuring of industrial areas; the agricultural counties of Southern Estonia; and the island counties. The Regional Development Strategy states that determination of target regions should proceed from the emerging regional development pattern in Estonia that is generally characteristic of the market economy and where the following underdeveloped regions can be identified: regions dependant upon agriculture, industrial regions undergoing economic restructuring, and isolated regions. Mutual dependence of centres and hinterlands should be taken into account, as well as the leading role of centres. 10 Target areas were generally designated on the basis of two key indicators: average income and unemployment rates. Developing region status was given where there were or were expected to be socio-economic problems of high unemployment, out-migration and a lower than average standard of living. 11 Following EU accession, resources for national regional policy interventions have been reduced. Priority is now given to co-financing EU Structural Funds programmes. Only one of the previous seven regional development programmes was retained. The retained rural areas programme, in the past, proved particula rly cost-effective. 10 Ministry of Internal Affairs, Regional Development Strategy of Estonia (1999), p.4 11 K. Kilvits, Estonia in Bachtler J, Downes R and Gorzelak G, Transition, Cohesion and Regional Policy in Central and Eastern Europe, (Ashgate Publishers, Aldershot, 2000). 6

7 Figure 2: Regional State Aid Map for the period Source: DG Competition website 5. EU PROGRAMMES 5.1 Objectives For the period , the European Commission has agreed co-financing of 371 million for Structural Funds. The Cohesion Fund makes an additional 309 million available for Estonia s Single Programming Document sets out four main objectives: Increasing and exploiting Estonia s labour force potential in a more effective way; Increasing competitiveness of enterprises and employment; Balanced and sustainable economic and social development of rural areas; and Establishing infrastructures that support sustainable and balanced economic development. Related, the four programme priorities matching the areas are: Human Resource Development; Competitiveness of Enterprises; Agriculture, Fisheries and Rural Development; Infrastructure and Local Development. 12 RAPID Press Release, Commission agrees on the strategy to implement structural funds in Estonia for , IP/03/1774 of 18 December 2003, Brussels. 7

8 These four priorities are supported by a fifth priority Technica l Assistance. 5.2 Implementation Table 3: Structural Funds Programme Operational Programmes Community Contribution Human Resource Development Competitiveness of Enterprises Agriculture, Fisheries and Rural Develo pment Infrastructure and Local Development 76.1 million 73.2 million 69.3 million million The Managing Authority and Paying Authority for the SPD is the Ministry of Finance. 5.3 Geographic Focus The Estonian SPD does not seem to have a specific geographic focus, although it treats regional development as a horizontal objective. 13 There are no spatial allocations of funding; project applications are accepted from anywhere in the country and can be approved as long as they fulfil the SPD requirements. 6. REFERENCES European Commission, Commission Recommendation on the 2004 update of the Broad Guidelines of the Economic Policies of the Member States and the Community (for the period) (European Commission, Brussels, 2004). European Commission, Regular Report from the Commission on Estonia s Progress Toward Accession, 8 November 2000 (European Commission, Brussels, 2000). Ministry of the Environment, English summary of National Spatial Plan ESTONIA 2010, Available at: Ministry of Finance, Estonian National Development Plan for the Implementation of EU Structural Funds - Single Programming Document (2003). Available at: Ministry of Internal Affairs, Department of Local Government and Regional Development, Guidelines for regional policy (1994). Ministry of Internal Affairs, Regional Development Strategy of Estonia (1999). Available at: 13 Ministry of Finance, Estonian National Development Plan for the Implementation of EU Structural Funds Single Programming Document (2003), p.11. 8

9 Ministry of Internal Affairs, Strategy of the local government administrative reform (2001). Available at: Ministry of Internal Affairs, The Structure and Operation of Local and Regional Democracy in Estonia. Situation in 1999 (2002). Available at: P. Aru, Overview of the Estonian Regional Development Strategy speech to International conference EU Accession and Regional Development June Ministry of Internal Affairs, Department of Local Government and Regional Development, Regional Policy in Estonia, Tallinn. K. Kilvits, Estonia in Bachtler J, Downes R and Gorzelak G, Transition, Cohesion and Regional Pol-icy in Central and Eastern Europe, (Ashgate Publishers, Aldershot, 2000). * This paper has been prepared by Nina Celina Quiogue with Chiara Polverari, based on EPRC desk research and fieldwork. 9