Economy

Estonia, a new member of the World Trade Organisation, has a high-income, modern market economy with increasing ties to the West, including the pegging of its currency to the Euro. It acceded to the European Union in 2004. There is a great degree of economic mobility and technological advancement. The state of the economy is greatly influenced by developments in Finland, Sweden and Germany, three major trading partners. The high current account deficit remains a concern, although the economy has high GDP growth (around 10% per annum).

Early History

For centuries until 1920, Estonian agriculture consisted of native peasants working large feudal-type estates held by ethnic German landlords. In the decades prior to independence, centralised Czarist rule had contributed a rather large industrial sector dominated by the world's largest cotton mill, a ruined post-war economy and an inflated ruble currency. In years 1920 to 1930, Estonia entirely transformed its economy, despite considerable hardship, dislocation and unemployment. Compensating the German landowners for their holdings, the government confiscated the estates and divided them into small farms which subsequently formed the basis of Estonian prosperity.

By 1929, a stable currency, the Kroon (or crown), was established. It is issued by the Bank of Estonia, the country's central bank. Trade focused on the local market and the West, particularly Germany and the United Kingdom. Only 3% of all commerce was with the USSR.

The USSR's forcible annexation of Estonia in 1940 and the ensuing Nazi and Soviet destruction during World War II crippled the Estonian economy. Post-war Sovietization of life continued with the integration of Estonia's economy and industry into the USSR's centrally planned structure. More than 56% of Estonian farms were collectivized in the month of April 1949 alone. Moscow expanded on those Estonian industries which had locally available raw materials, such as oil shale mining and phosphorites. As a laboratory for economic experiments, especially in industrial management techniques, Estonia enjoyed more success and greater prosperity than other regions under Soviet rule.

Modernisation and Capitalism

Since re-establishing independence, Estonia has styled itself as the gateway between East and West and aggressively pursued economic reform and integration with the West. Estonia's market reforms put it among the economic leaders in the former COMECON area. A balanced budget, flat-rate income tax, free trade regime, fully convertible currency, competitive commercial banking sector, and hospitable environment for foreign investment are hallmarks of Estonia's free-market-based economy. Estonia also has made excellent progress in regard to structural adjustment.

In June 1992, Estonia replaced the ruble with its own freely convertible currency, the Kroon (EEK). A currency board was created and the new currency was pegged to the German Mark at the rate at 8 EEK for 1 DEM. When Germany introduced the Euro the peg was changed to 15.6466 Kroon for 1 Euro. It is at the moment unclear when Estonia will adopt the Euro, it is likely that the change will not take place before 2010 and might even happen in 2012 or later.

The privatisation of state-owned firms is virtually complete, with only the port and the main power plants remaining in government hands. The constitution requires a balanced budget, and the protection afforded by Estonia's intellectual property laws is on a par of that of Europe's. In early 1992, both liquidity problems and structural weakness stemming from the communist era precipitated a banking crisis. As a result, effective bankruptcy legislation was enacted and privately owned, well-managed banks emerged as market leaders. Today, near-ideal conditions for the banking sector exist. Foreigners are not restricted from buying bank shares or acquiring majority holdings.

Tallinn's fully electronic stock exchange opened in early 1996 and was bought out by Finland's Helsinki Stock Exchange in 2001. It is estimated that the unregistered economy provides almost 12% of annual GDP.

The Economy Today

Estonia is nearly energy independent supplying over 90% of its electricity needs with locally mined oil shale. Alternative energy sources such as wood, peat and biomass make up approximately 9% of primary energy production. Estonia imports needed petroleum products from western Europe and Russia. Oil shale energy, telecommunications, textiles, chemical products, banking, services, food and fishing, timber, shipbuilding, electronics, and transportation are key sectors of the economy. The ice-free port of Muuga, near Tallinn, is a modern facility featuring good transshipment capability, a high-capacity grain elevator, chill/frozen storage, and brand-new oil tanker off-loading capabilities. The railroad, privatised by an international consortium in 2000, serves as a conduit between the West, Russia, and other points to the East.

Estonia still faces challenges. Agricultural privatisation has caused severe problems for farmers needing collateral to be eligible for loans. The income differential between Tallinn and the rest of the country is widening. Standards of living have eroded for the large portion of the population on fixed pensions. The formerly industrial northeast section of Estonia is undergoing a severe economic depression as a result of plant closings.

During recent years the Estonian economy has continued to grow. Estonian GDP grew by 6.4% in the year 2000 and by 5.4% in 2001 and with double speeds after accession to the EU in 2004. Inflation declined modestly to 5.0% in the year 2000 (the estimate for 2001 is 4.8%). The unemployment rate in 2001 was 12.6%, but is now one of the lowest in the European Union (4.2% in July 2006). Estonia joined the World Trade Organisation in 1999 and the European Union (EU) in 2004.

In the first quarter of 2007, the average monthly gross wage in Estonia was 10,322 kroons (€660, US$888).

Foreign Trade

Estonia's liberal foreign trade regime, which contains few tariff or nontariff barriers, is nearly unique in Europe. Estonia also boasts a national currency which is freely convertible at a fixed exchange rate and conservative fiscal and monetary policies. Estonia has free trade regimes with European Union (which it is a member of) and EFTA countries and also with Ukraine.

Estonia, being a small country of 1.4 million people, relies on its greatest natural asset: its location at the crossroads of East and West. Estonia lies across the Baltic Sea just South of Finland and East from Sweden. To the East are the huge potential markets of northwest Russia. Estonia's modern transportation and communication links provide a safe and reliable bridge for trade with former Soviet Union and Nordic countries.

Exports

Estonia exports machinery and equipment (33% of all exports annually), wood and paper (15% of all exports annually), textiles (14% of all exports annually), food products (8% of all exports annually), furniture (7% of all exports annually), and metals and chemical products. Estonia also exports 1.562 billion kilowatt hours of electricity annually.

Estonia's export partners are Finland (26.4%), Sweden (12.9%), Latvia (8.8%), Russia (6.5%), Germany (6.2%), and Lithuania (4.8%).

Imports

Estonia imports machinery and equipment (33.5% of all imports annually), chemical products (11.6% of all imports annually), textiles (10.3% of all imports annually), food products (9.4% of all imports annually), and transportation equipment (8.9% of all imports annually). Estonia imports 200 million kilowatt hours of electricity annually.