Swedbank: Neighbouring countries’ impact on the Estonian economy is waning

  • SwedbankFinland, Sweden, Latvia, and Russia – Estonian closest neighbours – contribute about one-fifth to Estonian GDP through exports.
  • The share of the four neighbouring countries’ tourists’ expenditure is about 60% of the expenditure of all tourists.
  • Finland and Sweden have had a considerable impact on Estonian economic development through foreign direct investments (FDI) – roughly half of total inward FDI stock has come from these countries (25% from Sweden and 23% from Finland).
  • The share of labour income from Finland, Sweden, Latvia, and Russia contributes about 60% of total labour income derived abroad, while 44% of labour income from abroad comes exclusively from Finland. Estonian residents’ labour income from abroad is around 3% of total compensation of employees paid in Estonia.
  • We expect that the economic impact of Estonia’s closest neighbours will decrease in the next few years.

Estonia, as a small and very open economy, is largely affected by the external environment. Especially, Estonia depends to a great extent on its neighbouring countries – Finland, Sweden, Latvia, and Russia. However, the impact of Russia and Latvia is considerably smaller than that of Finland and Sweden. Although a comprehensive analysis of the impact of neighbouring countries on the Estonian economy should contain a considerably wider range of indicators, we have narrowed our work primarily to the overview of trade, tourists’ expenditure, FDI, income on foreign portfolio assets, and labour income. The impact on the Estonian economy comes mainly from trade, FDI, and tourism. A relatively large number of Estonian residents work abroad, especially in Finland. However, the share of labour income from abroad is quite small compared to total compensation of employees paid in Estonia.

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