Effective Estonia
Mart Siimann
Prime Minister of Estonia

Despite a complicated and adverse history, Estonia has generally managed to succeed. For example, one can recall the Hanseatic League period as well as our first period of independence, from 1918-1940. There was also the last occupation period, at which time Estonia was the most prosperous of the Soviet Republics. The decision at the European Union's Luxembourg summit meeting in December 1997, to include Estonia among the countries with whom to start membership negotiations, confirmed that once again.

A country with a working market economy

Seven years ago, when independence was restored, Estonia was thoroughly integrated into the planned, closed-off economy of the Soviet Union. Today, Estonia has become one of the most dynamically developing European free market countries. Recently, the Heritage Foundation/Wall Street Journal's free market index placed Estonia 17th in a list of 156 countries.

Due to its limited domestic market and scarce natural resources, Estonia's success depends largely on its openness to the world. In addition to liberal trade policies, the foundations for Estonia's economic policies are conservative monetary and fiscal policies, privately owned enterprises, and a simple and liberal tax policy that favours economic development. One of the foundation stones of our economic reform is extensive privatisation. Together with the rapid creation of private businesses, it has given Estonia one of the largest private sectors in Central and Eastern Europe. EBRD estimates that last year the private sector contributed to at least 70 per cent of the GDP.

Estonia is already a country with a working market economy that can handle the pressures of competition. The existence of a stable macro economy and a legal framework makes it possible for enterprises to make long-term plans. Strong budget discipline, reduction of subsidies, end to easy credit for businesses, and rapid privatisation have strengthened the market forces for investment and production. The country's political environment is stable, and despite changes in government, the country's foreign policy and economic course have remained constant. Last year both Standard & Poor's and Moody's gave Estonia a credit rating of BBB+ and Baa1, respectively.

Structural changes in the economy

Changes in Estonia's economy occurred under conditions of uncertainty, sudden contraction of the eastern market, rapid changes in prices, and harsh monetary policy. In the reformation of the economic structure, the only practical determinants have been the enterprises' adjustment to the new conditions and their capacity to reorient themselves to the western market. The application of new technologies, contemporary know how, and filling of organisational and leadership positions, attracted foreign capital and investments, helping with the reorientation.

The economic restructuring proceeded quite painfully. GDP dropped 36.8 per cent in 1990-1994, industrial production fell 62.5 per cent and in 1994 reached only 37.5 per cent of the 1990 level. During the same period, agriculture's share fell by 31.5 per cent. Unfortunately, that was the price to be paid in order to create the foundations for a new market economy.

Today, the foundation is largely in place and a phase has been reached whereby most of the economic branches are growing. Already in 1996, economic growth was four per cent, and last year the total domestic production grew by 9.5 per cent.

The following figures characterise Estonia's economic growth in 1997:

  • growth in industrial products sales was 13.1 per cent;
  • volume of goods passing through the harbours grew by 50 per cent;
  • volume of goods on rails grew by 13.4 per cent, of which 33.4 per cent was international hauling and over 19 per cent was internal transport.

The service sector has grown the fastest on the way to market economy, comprising of almost two-thirds of the GDP. Retail and wholesale businesses, transportation, tourism and communications are the most dynamic branches. Both retail and wholesale businesses are developing into large companies and chain operations, whilst specialty enterprises are markedly increasing their share in sales. Tourism has become very important for Estonia. Last year more than 2.5 million tourists visited Estonia.

The volume of sales by producers grew by 13 per cent in 1997. Almost a third of the total production comes from food producers. In light industry, the most important branches are the sewing and textile industry, and footwear manufacturers.

In former years the machine and metal industry was tied to Soviet Union's raw materials and markets, although some plants have retained their ties with CIS countries. Ship repair plants and machine building plants have received foreign orders, some companies are small parts subcontractors for Nordic companies. A fast growing branch is also construction. A 30 per cent annual growth in exports suggests Estonia's strengthening position in world markets.

The development of the financial sector has been stormy. In 1996 the banks' financial assets experienced a 38 per cent growth in the gross domestic economy, and almost 50 per cent in September 1997.


Investments have played a large role in rapid economic development. In 1992 investment of capital into business and industry amounted to 21 per cent of the gross domestic economy. In 1996 it was already 24.8 per cent of GDP. During a nine month period in 1997, 9.1 billion Estonian crowns worth of stocks in businesses and industry was purchased, which is eight per cent more than the previous year. Considering the investment needs of a growing economy, it is realistic to expect the total share of capital investment in the gross domestic economy to remain at approximately 25 per cent in the years ahead. Under such conditions, it is reasonable to predict an average growth of five to six per cent for several years.

During a nine month period of 1997, foreign investments in Estonia amounted to 3.2 billion crowns. The total volume of direct foreign investment in Estonia is 16.7 billion crowns, or more than 11,000 crowns per capita. That indicator places Estonia in second place after Hungary among the Central and Eastern European countries.

Estonia also stands out among the Central and Eastern European countries as an investor. In just a nine month period in 1997, Estonians invested 1.1 billion crowns, or twice the amount of the previous year, abroad (mainly in the other Baltic states, Ukraine and Russia). Estonia is first among countries in this region in per capita investments abroad. Estonia's largest banks plan expansion into the markets of other Baltic states and Russia, with plans for food production in Latvia (Rakvere Meat Processing Plant) and Ukraine (Tallinn Milk Processing Plant) in the offing. The Tallinn Department Store has opened a branch in Helsinki, Finland. These are some examples of Estonian business interests abroad.

What favours Estonia's successful growth?

Estonia is not richly endowed with natural resources. Among our most important natural resources one can mention the nonrenewable mineral resources:

  • oil shale (3800 million tons known deposits);
  • phosphorous (750 million tons);
  • limestone, dolomite (250 million cubic metres);
  • sand and gravel (150 million cubic metres);
  • lake mud (120 million tons);
  • and sea mud.

Among renewable resources:

  • forest (covers 40.1 per cent of Estonia's territory, 264 million cubic metric stock);
  • grasslands (covers about 24 per cent of Estonia's territory);
  • peat (2400 million tons);
  • water;
  • and farmland.

Considering the size and commercial value of these resources, one can only talk about forestry and industries branching from it as meeting the demands of modern industry. One can suggest that, in the future, forestry related industry will be the most important Estonian industry, using its own resources (and just as important - renewable resources).

Although known deposits of oil shale will last for 250 years at the present rate of exploitation (approximately 15 million tons per year), oil shale energy is quite harmful to the environment and does not comply with the demands of sustained development. For that reason we have to find an alternative to oil shale, in addition to energy conservation.

One can identify four basic factors in Estonia's successful growth:

  • Estonia's geographic position, its geopolitical and transit location, offers the development of economic ties in all directions;
  • a relatively well-developed infrastructure;
  • the population's relatively high level of education, and more significantly, a high motivation for education;
  • Estonia's small size, which allows for flexibility in the face of new challenges.

Estonia has ambitions greater than to be Europe's periphery. In the next few decades very significant shifts in employment patterns will occur in the whole of the European economy. In addition to labour reduction in agricultural and traditional industries, employment reduction will also begin to occur in traditional service industries. Simultaneously, employment will increase in new and information intense businesses that are related to the health and welfare of the individual. The ability to adjust to these changes are influenced by such features as the educational level and motivation of the population, acceptance of newness, and the level of information technology development. These features are considerably better in Estonia than they are in its present GDP standard. It is for that reason that Estonia can consider its greatest national wealth and strategic resource to be its people. It is the application and development of this resource that can make Estonia wealthy.

If geopolitics is an important parameter of growth, then certainly not less important, especially when looking into the future, is technology and specifically information technology. Estonia has already started to move along with the global information technology growth, with our potential in this area being good. Due to our small size, it is considerably easier to implement information technology projects that envelop the whole country. In our favour is also a high level of education, as well as the fact that during the transition to another society the old computers and computer systems disappeared, with the rapid growth of the past seven years completely replacing the technology.

Presently, Estonia is 11-12 in Europe in the number of personal computers per 100 residents and 14th in the number of computers connected to the Internet per 10,000 residents, thus being ahead of such European Union countries as Belgium, France, Luxembourg, Spain, Italy and others. The dynamics of Internet users are as follows:

  • 60,000 in 1996;
  • 110,000 in 1997;
  • and on January 1 of this year, there were 190,000 users.

Last year the volume of software sales in Estonia increased by 250 per cent, with a similar growth expected this year. All the major computer companies known worldwide are represented in Estonia and they offer local support services and care. 85 per cent of the computers manufactured in Estonia are by Estonian companies Microlink, Astrodata and Pennu. Microlink is a market leader in Lithuania and its position is also strong in Latvia. In the next few years we also expect growth in computer exports to Eastern European and Scandinavian countries and to Scandinavian countries. In recent years the growth in information technology volume has averaged 150 per cent per year. The growth is expected to stabilise at 60-80 per cent by the year 2000. The growth in information technology may become the trump card in Estonia's economic growth in the next few years, placing Estonia in the ranks of European countries with a modernised labour force and creating an employment pattern suitable for the 21st century.

Estonia's near term economic priorities

A stabilised economy assigns the country the task of working out near and long-term growth strategies thoroughly. The Estonian Future Analysis Institute has worked out Estonia's growth strategies until the year 2010 (see the Home Page at Internet, www.e2010.ee), and the government has adopted a near-term economic growth plan until the year 2002.

In setting macro economic targets, one has to take into account the low per capita GDP figures which reflect the large welfare gap between Estonia and Western Europe and the need to close it as soon as possible. Estonia's short term goal is to raise the standard of living, which is presently about 23 per cent of the European Union's median, to at least one third by the year 2002.

Regarding the present stabilised situation, and the need to raise the standard of living and the deficit in foreign trade, the following are the policy aims for 1998-2002:

  • a stable six per cent annual increase in GDP;
  • reduced inflation, almost to the international annual level of three to four per cent as a signal to the markets;
  • lower inflation to help reduce the current trade deficit to three to four per cent of GDP;
  • a secure investment climate, especially for Foreign Direct Investment (FDI), so that investment remains at the annual level of four per cent of GDP.

The targets are interrelated. To achieve growth in GDP, the investment environment and prices must be attractive to domestic investors, and especially to FDI that brings in new technology. New technology and a skilled labour force increase productivity and reduce inflation. Increased exports will reduce the trade deficit and stabilise the money market which, which in turn attracts investment. Besides competitive prices, inflation can be reduced by a flexible labour market and a flexible labour force, which can help to reduce local pockets of unemployment. Another cornerstone of stability is a strong banking system that limits risk taking. Investment generated by domestic savings rather than borrowing from abroad is clearly to be preferred.

A fiscal policy based on a stable tax system and steadily building a reserve fund will contribute toward stability. The unexpected developments can thus be met.

The Republic of Estonia celebrates her 80th birthday on 24 February. It is only the 29th time that we can do that as a free nation. During the half century of having to live under a foreign power, Estonian people could not make decisions about their own future. Our country has now started to make up for the lost time all the more vigorously. Last year Estonia achieved the greatest economic growth in its history, the Estonian crown is stable, and the national budget is balanced. Freedom of speech and press, a democratic political system, and proliferation of non-governmental organisations exist in Estonia. The decision by the European Union summit meeting to invite Estonia to membership negotiations is a valuable birthday present to all of us, and gives high marks to the achievements in a brief time by the Estonian nation and peoples.

Small, progressive and trustworthy - these are characteristics that describe Estonia today.

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