HF Development
A bold and rapid transition

Juri Sakkeus
Director General, The Estonian Investment Agency

Estonia is the northern most of the three Baltic states, and lies at the heart of the rapidly developing Northern Europe business area, which has a population of approximately 70 million. Estonia is at a vital crossroads for international trade and 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 Northern and Western Russia.

Before being occupied by the Soviet Union in 1940, Estonia enjoyed the same living standards as Finland and Sweden. The country is determined to reach this point once again and has already made impressive progress towards doing so. With independence regained in 1991, Estonia began a bold and rapid transition towards a free-market economy. All of the main political parties strongly committed themselves to realising the benefits of private enterprise and open trade. In so doing they also established some crucial cornerstones for the nation's economic policy: rapid privatisation, a stable currency and balanced state budget, liberal foreign trade, export promotion and the attraction of foreign direct investment.

Estonia quickly recognised that the only appropriate remedy for ineffective corporate governance, loss of markets and lack of managerial incentives was rapid and decisive privatisation. Over the last five years, the private sector has developed and now accounts for 65 per cent of the nation's GDP. Many foreign firms have been instrumental in this process and were attracted to Estonia because of its highly educated and skilled - yet cost-effective - labour and easy access to neighbouring markets. Despite years of Soviet occupation, the country and its people have retained a Western outlook, an entrepreneurial spirit and memories of a market economy which have made the privatisation process all the smoother.

Since the reintroduction of its national currency - the kroon - in 1992, Estonia has followed a firm monetary policy which guarantees a stable economic environment. The kroon is freely convertible and fully backed by reserves of the Bank of Estonia. It is pegged to the German Mark at the fixed rate of eight to one. By law, the state budget must be balanced and the level of foreign loans is strictly limited.

The Estonian financial sector now accounts for 11 per cent of GDP and is the fastest growing area of the economy. There is now a thriving securities market and the Tallinn Stock Exchange, which opened in 1996, is the busiest in the Baltics. The range of financial services and insurance provisions available has grown rapidly, and interest rates have dropped steadily. Foreign banks are welcomed and encouraged to do business in Estonia.

Estonia's foreign policy is based on reintegration as fast as possible into European and Western structures. A number of agreements have successfully reoriented commerce towards Western markets. The Government signed a free trade treaty with the European Union in 1994, an Association Agreement a year later, and has applied for full membership. With its free market policies, Estonia was the first country to gain associate EU membership without a transition period. Free trade agreements with EFTA, the Baltic nations and the Ukraine have been signed, and WTO membership is eagerly sought. Investment Protection Treaties have been signed with 17 countries, including the UK, and Double Taxation Avoidance Treaties are honoured with 11. In addition, the Government aggressively promotes the country's exports. Trade with the West has grown more than fivefold since 1992 as a result of these efforts.

The influx of foreign investment has played a key role in Estonia's economic transition. Many of the laws are based on German and Scandinavian models and conform to EU standards. Immediately after independence, the Law on Foreign Investments was adopted, giving foreign investors equal rights to local businesses. For example, foreign investors have the right to purchase and own land. Profit repatriation is unrestricted, and investments are protected under the law and by bilateral agreements. This legal structure guarantees the security and equal rights of foreign investors, and a low, flat corporate tax rate of 26 per cent facilitates prosperous business partnerships.

These radical reforms - the cornerstones of its economic policy - have placed Estonia among the most Westernised and developed countries in Central and Eastern Europe. Since 1994, the annual growth of GDP - measured conservatively - has been between three and four per cent, and growth during 1996 is estimated to be at the same level. The IMF and other leading international institutions have actually measured the rate at up to six per cent. Inflation has fallen dramatically to an expected 20 per cent in 1996.

Though a small country, thousands of investors have realised that Estonia has a strong economy, is an ideal place to do business, and has much to offer the inward investor. The markets of the EU, Russia and Northern Europe are easily accessible. Estonia is an attractive alternative location within the EU free trade area, but with much lower establishment and operating costs than in EU member states. It has a highly educated and skilled - yet low cost - workforce, self-sufficient supplies of electricity and numerous raw materials, a modern telecommunications network, and convenient international air, rail and sea connections.

More than 8,700 fully or partially foreign-owned companies have realised these attractions and invested in Estonia. The total value of foreign direct investment since 1991 is over US$700 million, placing us second in investment per capita in Central and Eastern Europe. Among these are hundreds of companies with such well-known names as AMP, Coca-Cola, Ruhrgas, Shell, Inpass, Nokia, the Coastal Corporation, Price Waterhouse, AGA, ABB, AIG, McDonald's and many others. In total, Estonia's low risks, low costs and low taxes have attracted companies from almost 100 countries.

Foreign investment has created thousands of new jobs and given Estonia modern technology, know-how and training. The inflow of investment has led to increased productivity, export development and rapid integration into the world economy. Despite this progress, there is still much to be done. There are now better opportunities for foreign investors in Estonia than ever.

For instance, now that privatisation of companies in the manufacturing and service sectors of the economy is nearly complete, the most important focus of the effort is infrastructure. Private infrastructure development is the basis for sustainable economic growth and international competitiveness. There are a number of sectors that still present enormous opportunities to potential investors. Telecommunications, oil-shale mining, energy, ports and railways have been, or are being, privatised and offer investors opportunities to participate in developing this infrastructure.

The electronics, food, and wood processing industries also hold much promise, with many manufacturers in these sectors seeking foreign partners for joint ventures.

In the last five years the world has witnessed a remarkable economic transition in Estonia. Its successful economic reforms have been heralded by the World Bank, the IMF and many others as a shining example to which the rest of Central and Eastern Europe should aspire. Investment from abroad has helped Estonia make this leap and will continue to help it move forward.

To find out more about investment opportunities in Estonia, please contact: The Estonian Investment Agency, Ravala Avenue 6, - 602 B EE 0105 Tallinn, Estonia. Tel: (372) 6410166 Fax: (372) 6410312 E-mail: infoeia.ee

Juri Sakkeus has also been Senior Consultant at the Estonian International Management Consulting Company SIAR-BOSSARD and was Director of Investment Department at the Ministry of Economic Affairs from 1993-4

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