Expansion of Economic Entitlements or Growth of Inequality.

             Economic development refers to economic growth accompanied by improvement in well-being of the citizens in the country. Since every country in the world is unique and different, any kind of generalization can be misleading and dangerous. Therefore, interpretation of development for one country can mean something totally different to another country because we have diverse historical and cultural backgrounds. The first question that would rise in the case of Estonia would be, “What does the economic development mean to Estonia?” Estonia is considered a transitional economy that has grown out of former Soviet Union and has demonstrated remarkable economic growth during the last decade. Economic growth in Estonia has been very fast and has not fallen below 7.1% since 2000; in 2006, the real GDP grew 11.4%[1]. It is not just higher living standards that this country is hoping to achieve through economic growth and convergence with other European Union states, but also a wider variety of political, economic and social freedoms that were prohibited to its citizens during the occupation. Therefore, economic development for its citizens does not represent eradication of poverty like to most of the African countries, but abolition of unfreedom[2]– elimination of constraints and limits in society – and advancement of substantive freedoms. Hence, in the case of Estonia one would like to look for expansion of instrumental freedoms[3] and if they have helped to advance the rights and opportunities of most of its citizens or have these freedoms only developed inequality among its people who were considered generally equal during the era of the Soviet Union.
             In his book “A Preface to Economic Democracy,"[4] Yale professor, Robert Dahl opens his analysis of democracy with consensus that a good society would require political equality, political liberty, and economic liberty. He points out that through history we have been deeply concerned about the conflict between equality and liberty. Classical economists, like Marx and Smith, were also in quest for a society where all the citizens would be able to realize their potential more proficiently; hence, we have been pursuing for substantive freedoms for centuries and have been trying to measure the direct and indirect effects of instrumental freedoms. Unfortunately, there are no exact methods for measuring qualitative indicators of society and therefore we often have to fall back to quantitative measurements, like aggregate economic indicators, for inferring if the society and the well-being of its citizens has been improving or deteriorating. One of the techniques for finding out more about the well-being of Estonian population is to try to compare it with its neighbors and other eastern European countries as well as with some transitional Asian countries through various comparative indicators. For example, Human Development Index (HDI), produced by the United Nations Development Program (UNDP), is one of the most widely used measures for looking differences between the developments of the countries who are represented in the United Nations. It is a composite index of life expectancy at birth, adult literacy combined with level of education, and gross domestic product (GDP) per capita in purchasing power parity (PPP US$). The scholastic views are quite controversial toward HDI. Many researchers support the development indices under assumption that they can produce a more realistic picture of the social welfare of the society. At the same time there are also many critics who consider HDI a composite of arbitrary indicators that does not reflect quality of life as well as GDP does[5].These scholars argue that HDI lacks theoretical basis in defining the scope of its indicators, while GDP correlates highly with many determinants of economic growth, like expectancy of life, mortality, birth rates, health care and many social rights, including education[6].In any case, there is no empirical evidence to truly support the assumption that Human Development Indices that are highly qualitative are less valuable in analysis of the world development than the quantitative data composed from the aggregated variables.

Country	1995	Rank	1998	Rank	2000	Rank	2002	Rank	2004	Rank	2005	Rank
Estonia	0.758	77	0.801	46	0.826	42	0.853	36	0.858	40	0.860	44
Latvia	0.704	92	0.771	63	0.800	53	0.823	50	0.845	45	0.855	45
Lithuania	0.750	79	0.789	52	0.808	49	0.842	41	0.857	41	0.862	43
Russia	0.769	72	0.771	62	0.781	60	0.795	57	0.797	65	0.802	67
Finland	0.942	6	0.917	11	0.930	10	0.935	13	0.947	11	0.952	11
Sweden	0.936	10	0.926	6	0.941	2	0.946	2	0.951	5	0.956	6
Norway	0.943	4	0.934	2	0.942	1	0.956	1	0.965	1	0.968	2
Czech Rep.	0.883	39	0.843	34	0.849	33	0.868	32	0.885	30	0.891	32
Poland	0.851	52	0.814	44	0.833	37	0.850	37	0.862	37	0.870	37
Hungary	0.857	47	0.817	43	0.835	35	0.848	38	0.869	35	0.874	36
Slovenia	0.887	37	0.861	29	0.879	29	0.895	27	0.910	27	0.917	27
Slovakia	0.875	42	0.825	40	0.835	36	0.842	42	0.856	42	0.863	42
Singapore	0.896	28	0.881	24	0.885	25	0.902	25	0.916	25	0.922	25
S. Korea	0.894	30	0.854	31	0.882	27	0.888	9	0.912	26	0.921	26
Hong Kong	0.909	25	0.872	26	0.888	23	0.903	23	0.927	22	0.937	21

   Tabel 1. Human Development Index by UNDP.

             During the last decade Estonia has demonstrated strong positive trend in the HDI (table 1), even though it is still behind the old European states[7] and the eastern European states. Estonia’s HDI index has been mostly influenced by the GDP index that has grown 27.6%. In 1995 Estonia’s GDP per capita in PPP was $4,062 US[8], by 2005 it had reached $15,478 US according to UNDP and by 2007[9] $21,800.
             According to “The Lisbon ScoreCard VIII,” published in February 2008, Estonia is the third wealthiest ex-communist member of the EU. The country has exhibited amazing economic growth during the last 14 years, but unfortunately GDP per capita is not the best indicator for assessing the standard of living or change in economic facilities. It is vulnerable to outliers and bias toward inequality of income in the country. Just because the aggregate statistics in the country are demonstrating positive growth it does not mean that the most of the population is benefiting from the GDP augmentation. Theory of economic growth points out that even though positive aggregate growth has important implications for the welfare of the individuals in any country, it does not mean that income of all citizens has increased. If inequality augmented along with economic growth, it is possible to witness both positive per capita GDP growth and an increasing number of people below minimum living standards[10]. The accelerated processes in the modern-day developing and transitional economies impose enormous strains[11] on those societies, especially on the level of income distribution within the country. One of the arguments for Estonia’s speedy growth could be the convergence theory fueled by knowledge spillover and technological diffusion from its surrounding neighbors and according to which Estonia, as a less developed country, should be converging with other EU members who are more advanced; keeping in mind that its economic parameters will also equalize with other members while it fulfills the requirements of accession. According to several regional studies, countries in the same political union and region have quite similar economic parameters and usually have tendency to converge as shown by Barro and Sala-i-Martin in the case of prefectures in Japan, among the states in the USA and across European regions. Hence one could expect the same behavior from the European accession countries and when the convergence is accompanied by the growing income inequality the lower income class within the country can be hit twice: once at the level of distribution across countries and then at the level of distribution within countries[12]. Therefore, many Estonians could find themselves even worse off than expected. In addition, even when the fast GDP growth is considered as a welcome sign because its high correlation with indicators of the quality of life, it is still not the complete determinant for all facets of development[13], because data sets do not form smooth curves and thus GDP does not explain all the variation in the particular qualitative indicator. Concisely, GDP does not give us sufficient information about the social opportunities in the country and in reality inequality between its citizens could be increasing and that would not be explicit from the aggregate statistics.
             After re-gained independence Estonia’s first major radical reforms were targeted toward foreign direct investment and general business environment in the country. Estonia had exceptionally liberal trade policies after the adoption of unilateral free trade-abolishing tariffs on all imports, including agricultural commodities. Decade ago Estonia’s trade regime was the most liberal among transition countries in the world and comparable with Hong Kong and Singapore[14]. According to American Heritage Foundation report for 2008, even after joining European Union in 2004 and adapting its regulations and policies, Estonia is still the world’s 12^th freest economy and the 5^th among 41 European countries. Its open economy stimulated the growth of GDP which did not come without sacrifice in other areas of life, because favorable climate for capitalism does not mean socially egalitarian opportunities for everybody. The fact that the strong growth in GDP became in the expense of social development and infrastructure projects that were not priority issues for the government policy makers during the last decade is also observable from the table 2. The life expectancy index and the education index have almost stayed static, while GDP index has changed considerably. Hence, most of the Estonians did not directly benefit from the GDP’s growth in those areas. Only in recent years has Estonia realized that the fast economic growth can not be realized in the expense of social development because in the long run they are going to be the main determinants for the economic growth and competitiveness in the world market. At the same time, different tempos in the economic and social development are often observable in transitional and fast developing countries. For example, we can look at Singapore and Hong Kong that have higher GDP indicators than Estonia has, but at the same time their educational indexes are still worse than Estonian index.

Country	Life Expectancy index			Education index			GDP index
	1997	2000	2005	1997	2000	2005	1997	2000	2005
Estonia	0.73	0.76	0.770	0.93	0.95	0.968	0.66	0.77	0.842
Latvia	0.72	0.76	0.784	0.90	0.93	0.961	0.61	0.71	0.821
Lithuania	0.75	0.78	0.792	0.91	0.93	0.965	0.62	0.71	0.831
Russia	0.69	0.68	0.667	0.92	0.92	0.956	0.63	0.74	0.782
Finland	0.86	0.88	0.898	0.99	0.99	0.993	0.89	0.92	0.964
Sweden	0.89	0.91	0.925	0.99	0.99	0.978	0.88	0.92	0.965
Norway	0.89	0.89	0.913	0.98	0.98	0.991	0.92	0.95	1.000
Czech Rep	0.81	0.83	0.849	0.91	0.89	0.936	0.78	0.82	0.889
Poland	0.79	0.81	0.836	0.92	0.94	0.951	0.70	0.75	0.823
Hungary	0.76	0.77	0.799	0.91	0.93	0.958	0.71	0.80	0.866
Slovenia	0.82	0.84	0.874	0.91	0.94	0.974	0.80	0.86	0.902
Slovakia	0.80	0.80	0.821	0.91	0.91	0.921	0.73	0.79	0.846
Singapore	0.87	0.88	0.907	0.85	0.87	0.908	0.94	0.91	0.950
S. Korea	0.79	0.83	0.882	0.95	0.95	0.980	0.82	0.86	0.900
Hong Kong	0.89	0.91	0.949	0.83	0.83	0.885	0.92	0.92	0.977

    Table 2. Constructed from Global Human Development Reports by UNDP.

             Another approach for finding growing inequality in Estonia would be to compare Gini coefficients through time. It is widely used method in the empirical works because its pleasing properties. It is consistent with criteria for inequality measurement: anonymity, population, relative income and Dalton principles; and therefore also consistent with the Lorenz criterion [15]. In 2001 the UNDP started explicitly displaying Gini index in its development reports to show the degree of income inequality in every country. In its reports the value zero represents perfect equality and 100 perfect inequality. It is interesting to observe that in 1999 Estonia had the second highest inequality index among Eastern and Northern Europe states, when its trade policies were most relaxed, and in 2005, after joining the EU, Estonia was the only country in the same group who had lowered its index compared to previous years.
             Considering the fact that about 15 years ago all the post-soviet countries had about the same level of inequality, today, Estonia is doing much worse in giving economic and social opportunities to all of its citizens than other post-soviet central-European countries. Estonia’s inequality index resembles more with developing world than with the developed world. THE PAPER WILL BE CONTINUED.

Häly Laasme

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[1]Calculations are obtained from the data given by Statistics Estonia, www.stat.ee,unless noted otherwise.
[2] “Unfreedom” – Sen, Amartya Kumar. Development as Freedom. New York, 1999: page 8.
[3] “Political freedoms, economic facilities, social opportunities, transparency guarantees, protective security” – Sen, Amartya Kumar. Development as Freedom. New York, 1999: page10.
[4]Dahl, Robert Alan. A Preface To Economic Democracy. Los Angeles: University of California Press, 1985.
[5]Easterlin, Richard A. and Angelescu LauraModern Economic Growth and Quality of Life.IZA DP No. 2755, April 2007.
[6]William Easterly. Life During Growth. World Bank, October 1997.
[7] European states that did not lose their independence after the WWII.
[8] Human Development Report 1998.
[9] CIA.The World Factbook.2008.
[10] Sala-i-Martin, X. and Barro, R. Economic Growth. 2ed. MIT,2004: page 7.
[11] Ray, D.Development Economics. Page 37.
[12] Ray,D. Development Economics. Page 43.
[13] Ray, D. Development Economics. Page 32.
[14] Feldmann, M. Free Trade in the 1990s: Understanding Estonian Exceptionalism.
[15]Ray,R. Development Economics. Page 174-192.