Economy of Estonia

Estonia is a member of the European Union and a developed market economy.

Before the Second World War Estonia's economy was based on agriculture, but there was a significant knowledge sector (with Tartu known for scientific contributions) and growing industrial sector, similar to Finland. Products such as butter, milk and cheese were widely known on the western European markets. Main markets were Germany and United Kingdom, and only 3% of all commerce was with the neighbouring 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. Estonia and Finland had about the same GDP per capita before Estonia became a socialist economy. By 1987, the capitalist Finland's GDP per capita was 14,370 USD and the socialist Estonia's GDP per capita was around 2,000 USD.

After Estonia moved away from socialism in the late 1980s and became an independent capitalist economy in 1991, Estonia emerged as a pioneer in global economy. In 1994, Estonia became one of the first countries in the world to adopt a flat tax, with a uniform rate of 26% regardless of personal income. In January 2005 the personal income tax rate was reduced to 24%. A subsequent reduction to 23% followed in January 2006. The income tax rate will be decreased by 1% annually to reach 18% by January 2010. Estonia received more foreign invest­ment per capita in the second half of the 1990s than any other country in Central and Eastern Europe. [http://www.heritage.org/Research/WorldwideFreedom/bg2060.cfm The Estonian Economic Miracle] , by Mart Laar. August 7, 2007.] Estonia has been fast catching up with the EU-15, having grown GDP per capita from 34.8% of the EU-15 average in 1996 to 65% in 2007, similar to Central Europe. Estonia is already rated increasehigh income country by the World Bank. The Estonian economic miracle has been termed a Baltic Tiger.

Estonia is ranked 12th of 162 countries in the Index of Economic Freedom 2008, the best of any ex-communist country. Estonia is on bottom of Europe by labour market freedom, but the government is drafting improvements. [ [http://www.balticbusinessnews.com/Default2.aspx?ref=topread&ArticleID=60cb40ba-e355-4d36-88ee-1ba221201681 Estonia on bottom of Europe by labour market freedom] , Baltic Business News. May 20th 2008.] Estonia is 17th on the Ease of Doing Business Index 2007 by World Bank Group. The Government of Estonia finalized the design of Estonia's euro coins in late 2004, and is now intending to adopt the euro as the country's currency between 2011 and 2013, later than planned due to continued high inflation. The Estonian kroon is pegged to the Euro at rate 1 EUR = 15.64664 EEK.

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, 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. 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 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 and by the end of Soviet times in 1990 was only slightly behind Russia in quality of life according to Human Development Index estimates.

Modernization and liberalization

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, almost non-existent public debt, flat-rate income tax, free trade regime, fully convertible currency backed by currency board and a strong peg to the euro, competitive commercial banking sector, hospitable environment for foreign investment, innovative e-Services and even mobile-based services are all 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. Estonia was set to adopt the Euro in 2008 but due to high inflation rates the date was set on January 2010.

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.

The economy today

Estonian economy is one of the fastest growing in the world with growth rates even exceeding 10% annually. Despite some concerns both in and outside of the country, the Estonian economy and its currency remain highly resilient and solvent.

Estonia has recently overcome many of its past challenges. Problems with exporting to Russia in 1990s caused severe problems, especially for farmers. Since the accession to the EU the living standards in rural areas have increased greatly. The formerly industrial northeast section of Estonia is undergoing severe restructuring. It is hoped that the low cost of labor will attract foreign investors to their regions. Since 2001, when unemployment was 12.6%, it has now fallen to 4.2% in July 2006 [ [http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2006/PGE_CAT_PREREL_YEAR_2006_MONTH_09/3-01092006-EN-BP.PDF Eurostat Unemployment Report] , July 2006] ) and is thus one of the lowest in EU.

During recent years the Estonian economy has continued to grow with admirable rates. Estonian GDP grew by 6.4% in the year 2000 and with double speeds after accession to the EU in 2004. The GDP grew by 7.9% in 2007 alone. Increases in labor costs, rise of taxation on tobacco, alcohol, electricity, fuel, and gas, and also external pressures (growing prices of oil and food on the global market) are expected to raise inflation just above the 10% mark in the first months of 2009.

In the first quarter 2008 GDP grow only 0,1%. The government made a supplementary negative budget, which was passed by Riigikogu. The revenue of the budget was decreased for 2008 by EEK 6.1 billion and the expenditure by EEK 3.2 billion. [ [http://www.fin.ee/?id=80290 Ministry of Finance ] ]

Estonia joined the World Trade Organization in 1999. A sizable current account deficits remains, but started to shrink in the last months of 2008 and is expected to do so in the near future.

In the first quarter of 2007, the average monthly gross wage in Estonia was 10,322 kroons (€660, US$888). [ [http://www.stat.ee/187713 Statistics Estonia] ]

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 serves as a conduit between the West, Russia, and other points to the East.

Some international experts and journalists, who like to view the three Baltic states as a single economic identity, have failed to notice that Estonia has constantly performed better than Latvia and Lithuania. Estonia today is mainly influenced by developments in Germany, Finland and Sweden - the three main trade partners. The government recently increased greatly its spending on innovation. The prime ministers Estonian Reform Party has stated its goal of bringing Estonian GDP per capita into the TOP 5 of EU by 2022. Ireland is sometimes seen as a model for Estonian economic future. However, the GDP of Estonia decreased by 1.4% in the 2nd quarter of 2008.

Sectors

The 20 most valuable companies based on 2007 profit estimates by GILD are: Hansapank, Eesti Energia, SEB Eesti Ühispank, Eesti Telekom, Tallink Grupp, Olympic Entertainment Group, Tallinna Sadam, Tele2 Eesti, Sampo Pank, Tallinna Kaubamaja, Merko Grupp, BLRT Grupp, Elisa, Tallinna Vesi, Transgroup Invest, Eesti Raudtee, Kunda Nordic Tsement, Viru Keemia Grupp, Falck Baltics, and Pro Kapital Grupp. [ [http://www.gildbankers.com/top100/index.html GILD TOP 100 - The most valuable Estonian companies] , GILD, 2007] In terms of 2003 sales, the 20 largest companies included Kesko Food, Stora Enso Timbe, EMT, Elion Ettevõtted, Eesti Põlevkivi, Silberauto, Toyota Baltic, Eesti Statoil, Rakvere Lihakombinaat, Lukoil Eesti, Kreenholmi Valduse, and Eesti Gaas. [ [http://www.balticbusinessnews.com/static/Est_TOP_50.html Largest Estonian companies in terms of 2003 sales] , Baltic Business News] Estonian Institute of Economic Research publishes top company awards in various categories, where Estonian small and medium size companies take many top positions.

Tallinn has emerged as a financial center. According to Invest in Estonia, advantages of Estonian financial sector are low and taxes, unbureaucratic cooperation between companies and authorities, and educated people. The largest banks are Hansabank, SEB, Nordea, and Sampo Bank. Several IPOs have been made recently on the Tallinn Stock Exchange, a member OMX system. Estonia is ranked 21th of 121 countries in the Capital Access Index 2005 by Milken Institute, outperforming Austria and Italy among others. [http://www.investinestonia.com/index.php?option=displaypage&Itemid=157&op=page&SubMenu= A Financial Center in Northern Europe] , Invest in Estonia] The rent levels of new office spaces in Tallinn starts at 15 euros per square meter or 2000 euro sale price, with demand exceeding supply.

Estonian service sector employs over 60% of workforce. Estonia has a strong information technology (IT) sector, partly due to the Tiigrihüpe project undertaken in mid 1990s, and has been mentioned as the most "wired" and advanced country in Europe in the terms of [http://www.valitsus.ee/ e-government] . [ [http://www.wired.com/politics/security/magazine/15-09/ff_estonia Hackers Take Down the Most Wired Country in Europe] , August 2007]

Farming, collectivized until 20 year ago, has become privatized, more efficient, and the farming area has increased recently. [ [http://www.estonica.org/eng/lugu.html?menyy_id=914&kateg=40&alam=94&leht=3 The rural economy in Estonia] ] The share of agriculture in the gross domestic product decreased from 15% to 3.3% during 1991–2000, while employment in agriculture decreased from 15% to 5.2%. [http://www.stat.ee/18533 The biggest share of the gross domestic product of Estonia is continuously created in Harju county] , Statistics Estonia] Mining industry makes 1% of the GDP. Mined commodities include oil shale, peat, and industrial minerals, such as clays, limestone, sand and gravel. [ [http://minerals.usgs.gov/minerals/pubs/country/2001/enlglhmyb01.pdf The mineral industries of Estonia, Latvia and Lithuania.] By Chin S. Kuo] Soviets created badly polluting industry in the early 1950s, concentrated in North East Estonia. Socialist economy and military areas left Estonia highly polluted, and mainly because of oil shale industry in East-Virumaa, sulphur dioxide emissions per person is almost as high as in Czech Republic. The coastal seawater is polluted in certain locations, mainly in East-Estonia. The government is looking for ways to reduce pollution further. [ [http://enrin.grida.no/htmls/estonia/env2001/content/soe/air_2-2.htm State Environment in Estonia: Pollution load ] ] In 2000 the emissions were 80% smaller than in 1980 and the amount of unpurified wastewater discharged to water bodies was one twentieth the level of 1980. [http://www.umsl.edu/services/govdocs/wofact2005/geos/en.html Environment - current issues in Estonia. CIA Factbooken_icon]

Estonia has around 600,000 employees. Estonian productivity is growing fast, and consequently wages are rising fast, with around 8% rise in private consumption in 2005. According to Estonian Institute of Economic Research, the largest contributors to GDP growth in 2005 were processing industry, financial intermediation, retailing and wholesale trade, transport and communications. [http://www.eas.ee/?id=3116 Top Estonian Enterprises 2006] , Estonian Institute of Economic Research] Estonia has a shortage of skilled labor and, since skill shortages are experienced everywhere in Europe, the government has increased working visa quota for non-EEA citizens, although still criticized for being inadequate to address skill shortage challenges.

Infrastructure

Railway transport dominates the cargo sector, comprising 70% of all carried goods, domestic and international. Road transport is the one that prevails in the passenger sector, accounting for over 90% of all transported passengers. 5 major cargo ports offer easy navigational access, deep waters, and good ice conditions. There are 12 airports and 1 heliport in Estonia. Tallinn International Airport is the largest airport in Estonia, with 1,73 million passengers and 22,764 tons of cargo (annual cargo growth 119,7%) in 2007. International flight companies such as SAS, Finnair, Lufthansa, EasyJet, and Estonian Air provide direct flights to 27 destinations. [ [http://www.investinestonia.com/index.php?option=displaypage&Itemid=111&op=page&SubMenu= TRANSPORTATION] , Invest in Estonia]

Approximately 7.5% of the country’s workforce is employed in transportation and it makes over 10% of GDP. Estonia is getting much business from traffic between Europe and Russia, especially oil cargo through Estonia ports. Transit trade's share of GDP is disputed, but many agree that Russia's increased hostility is decreasing the share. [ [http://www.tse.fi/FI/yksikot/erillislaitokset/pei/Documents/bre2008/expert_article172_12008.pdf Transit trade trough Estonia: problems and developments By Alari Purju] ] [ [http://www.balticbusinessnews.com/Default2.aspx?ArticleID=43ce440f-713d-4469-ae85-5e9d12ddb2e1 Estonian businessman: Estonian transit will struggle another 10 years] , Baltic Business News]

Instead of coal, companies are encouraged to burn oil shale, with stations mainly in Narva making around 75% of the country's energy. Other energy sources are natural gas imported from Russia, wood, motor fuels, and fuel oils. [ [http://www.windenergy-in-the-bsr.net/countries_detail_3.html Countries: Estonia - Wind energy in the Baltic Sea Region ] ] Wind power in Estonia amounts to 58.1 megawatts, whilst roughly 399 megawatts worth of projects are currently being developed. Estonian energy liberalization is lagging far behind the Nordic energy market. During the accession negotiations with the EU, Estonia agreed that at least 35% of the market are opened before 2009 and all of non-household market, which totals around 77% of consumption, before 2013. Estonia is concerned that Russia could use energy markets to bully it. [http://www.evi.ee/lib/Security.pdf] Estonia is considerings to grant permits for nuclear power companies and Estonian government is already involved in a Baltic nuclear station. [ [http://news.bbc.co.uk/2/hi/europe/4757304.stm BBC NEWS | Europe | Baltic states agree nuclear plant ] ]

Internet connections are available throughout most of the country and Estonia has a high Internet penetration.

Trade

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. [http://www.cia.gov/library/publications/the-world-factbook/geos/en.html CIA World Factbook: Estonia] ] Estonia also exports 1.562 billion kilowatt hours of electricity annually. 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.

Natural resources

ee also

*Economy of Europe
*Estonia
*Baltic Tiger

Notes