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Economy of Estonia

Economy - overview: Estonia, as a new member of the WTO, is steadily moving toward a modern market economy with increasing ties to the West, including the pegging of its currency to the euro. A major goal is accession to the EU, possibly by 2004. 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.

Economy - in further detail:
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, centralized 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. Trade focused on the local market and the West, particularly Germany and the United Kingdom. Only 3% of all commerce was with the U.S.S.R

The U.S.S.R.'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 U.S.S.R.'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.

Since reestablishing 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.

The privatization 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.

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, privatized 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 privatization 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. 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%. Estonia joined the World Trade Organization in 1999 and continues its European Union (EU) accession talks. In negotiations with the EU, Estonia has closed 27 out of 31 chapters. It hopes to join the EU during the next round of enlargement tentatively set for 2004.

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 and EFTA countries and also with Latvia, Lithuania, Ukraine, Slovakia, Poland, Hungary, Turkey, the Faro Islands, Slovenia, and the Czech Republic.

Estonia's business attitude toward the United States is positive, and business relations between the U.S. and Estonia are increasing significantly. The primary competition for American companies in the Estonian marketplace are European suppliers, especially Finnish and Swedish companies.

Total U.S. exports to Estonia in 2000 were $121 million, forming 2.4% of total Estonian imports. In 2000 the principal imports from the United States were meat and edible meat offal, poultry, boilers and other electrical machinery and transmission/recording apparatus for radio/TV. Estonia's future membership in the EU is not expected to have major bilateral trade implications for the United States. However, this membership will be disadvantageous for certain U.S. imports. For example, since January 2000 Estonia has imposed import tariffs on certain agricultural products from third countries, including the United States, in accordance with EU rules and regulations.

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 just South of Finland and across the Baltic Sea from Sweden--the European Union's newest members. To the East are the huge potential markets of northwest Russia. Having been a member of former Soviet Union, Estonians know how to do business in Russia and in other former Soviet countries. Estonia's modern transportation and communication links provide a safe and reliable bridge for trade with former Soviet Union and Nordic countries. According to the RIPE Network Coordination Centre (at ), Estonia has the highest Internet connected hosts/population ratio in central and eastern Europe and also is ahead of most of the EU countries. Latest surveys indicate that 39% of the Estonian population regard themselves as Internet users. Twenty-five percent of the Estonian population conducts its everyday banking via Internet.

GDP: purchasing power parity - $15.2 billion (2002 est.)

GDP - real growth rate: 4.4% (2002 est.)

GDP - per capita: purchasing power parity - $10,900 (2002 est.)

GDP - composition by sector:
agriculture: 5.8%
industry: 28.6%
services: 65.6% (2001)

Population below poverty line: 6.3% (1994 est.)

Household income or consumption by percentage share:
lowest 10%: 3%
highest 10%: 29.8% (1998)

Inflation rate (consumer prices): 3.7% (2002)

Labor force: 608,600 (2001 est.)

Labor force - by occupation: industry 20%, agriculture and forestry 11%, services 69% (1999 est.)

Unemployment rate: 12.4% (2001)

revenues: $1.89 billion
expenditures: $1.89 billion

Industries: engineering, electronics, wood and wood products, textile, information technology, telecommunications

Industrial production growth rate: 5% (2000 est.)

Electricity - production: 7.937 billion kWh (2001)

Electricity - production by source:
fossil fuel: 99.8%
hydro: 0.1%
nuclear: 0%
other: 0.2% (1998)

Electricity - consumption: 6.191 billion kWh (2001)

Electricity - exports: 1.19 billion kWh (2001)

Electricity - imports: 0 kWh (2001)

Agriculture - products: potatoes, fruits, vegetables; livestock and dairy products; fish

Exports: $3.4 billion f.o.b. (2002)

Exports - commodities: machinery and equipment 33%, wood and paper 15%, textiles 14%, food products 8%, furniture 7%, metals, chemical products (2001)

Exports - partners: Finland 33.8%, Sweden 14%, Latvia 6.9%, Germany 6.9%, UK 4.2 (2001)

Imports: $4.4 billion f.o.b. (2002)

Imports - commodities: machinery and equipment 33.5%, chemical products 11.6%, textiles 10.3%, foodstuffs 9.4%, transportation equipment 8.9% (2001)

Imports - partners: Finland 18%, Germany 11%, Sweden 9%, China 9%, Russia 8% (2001)

Debt - external: $3.3 billion (2001 est.)

Economic aid - recipient: $108 million (2000)

Currency: 1 Estonian kroon (EEK) = 100 senti

Exchange rates: krooni per US dollar - 12.9659(dec. 2003), 16.6118 (2002), 17.5641 (2001), 16.9686 (2000), 14.6776 (1999), 14.0747 (1998)
EUR 1 = EEK 15.6646.

Fiscal year: calendar year

See also : Estonia