Executive Summary

Strong but stagnating performance
In many respects, Estonia has successfully established a sustainable democracy. Among the 41 countries in the SGI, Estonia ranked seventh for democracy, eighth for policy performance and 11th for governance in 2019. However, Estonia’s policy performance and democracy rankings have stagnated, and in some areas have even declined. Several problems have emerged that may be related to the current composition of the center-right government, which for the first time includes a populist radical-right party.
Generally incremental approach
The government has set a comprehensive program for 2019 – 2023, although most targets remain modest. Yet, in the shadow of this generally incremental approach, some areas and policy issues have gained significant priority (homeland security, and public administration and pension reform), while other areas have been neglected (RDI, e-governance, gender equality and minority rights).
Robust growth,
strong labor market
The country’s economy remains robust, with a high level of employment and annual economic growth above 3%. Despite the high employment rate, labor shortages and high taxes on labor continue to undermine economic development, particularly productivity. The labor market situation has triggered debates about migration policy and the need to regulate the increasing use of migrant workers, particularly Ukrainian workers.
Sustainability concerns
in welfare system
The main elements of Estonia’s welfare system (i.e., the healthcare and pension system), which are based on the Bismarckian principle of social insurance, face substantial financial problems. The pay-as-you-go (PAYG) pension pillar is accumulating debt due to the high population dependency ratio, while Estonia has the weakest performing mandatory pension funds of any OECD country. At the same time, poverty is increasing among the elderly and the pension replacement rate is decreasing. In order to address these problems, the government launched a reform to dismantle the existing mandatory second pillar and transfer part of the social insurance contributions back to the PAYG pillar. Ignoring warnings by the IMF, OECD and Bank of Estonia about harmful long-term effects on wellbeing and immediate effects on capital markets, the reform is expected to be approved by the parliament in early 2020.
Populist forces
posing new risk
Democracy remains constitutionally strong, although some alarming tendencies are manifesting. The freedom and neutrality of print and electronic media has been questioned by several parties, and the dissemination of hate speech and fake news via social media is problematic. The populist coalition partner EKRE has verbally attacked LGBT movements and this confrontation is echoed at street level via protests by both sides. EKRE is also cultivating the notion of “deep state” and questioning the independence of the court system. Yet, no court or constitutional reforms have been proposed so far.
Efficiency prioritized
over quality gains
In governance, little progress has been achieved on policy innovation, quality management and pursuing holistic approaches. The ongoing state reform attempts to improve the coherence of governance by merging executive agencies that have overlapping functions and by strengthening the Prime Minister’s Office. In parallel to administrative mergers, several state agencies will move from the capital to regional locations in order to support regional development. At the moment, efficiency gains are prioritized over increasing the quality of service provision or public access. Regarding the long-term perspective, Estonia is preparing a national strategy, Estonia 2035, which will increase government focus on climate change and the U.N. SDGs. The allocation of EU structural funds in 2021 – 2027 will be aligned with the Estonia 2035 goals.
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