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Estonia, Economy

Chief sources, German mark, Estonians, EU membership, EBRD

In the 1990s Estonia rapidly transformed its economy from a centrally planned system to a free market—the fourth radical transformation in the 20th century. Estonia was an agrarian country in the early 1900s, with native peasants farming large foreign-owned estates. In the 1920s the newly created Estonian republic reformed land ownership, breaking up the estate holdings and distributing smaller farms to citizens. In the 1940s the Soviet Union forcibly annexed Estonia, and the country suffered much destruction during World War II; both events crippled Estonia’s economy. After the war the Soviet Union fully integrated the region into its economic system. The Soviets forced farmers to join collectives and pushed heavy industrial development, causing extensive environmental degradation. As one of the last republics to be absorbed into the Soviet Union, Estonia had a stronger economy than most and was better prepared for renewed independence five decades later. The USSR used Estonia as an outlet to the West, an interaction that gave its residents the highest per capita income in the Soviet Union, a high level of education, and frequent contact with Western institutions. When Estonians regained independence in 1991 they built quickly on these advantages to institute a free-market economy.

As a country with a small population and limited natural resources, Estonia views trade as a key to economic growth. The country’s leadership positioned it as a gateway between other former Soviet republics (including Russia) and established economies of Western countries. The government adopted business-protection laws, such as those covering bankruptcy, trademarks, and copyrights, to attract foreign investment. The leadership also negotiated trade and investment agreements with Western countries, and the country’s trading system became one of the most barrier-free in the world. To further encourage investment, the government eased the flow of money across Estonia’s borders by tying its currency to the German mark. The government’s program to put businesses and industry in private ownership also moved quickly, with industrial privatization essentially completed by 1995.

Estonia’s gross domestic product (GDP), which measures the value of all goods and services in the country, was $5 billion in 2000. Industry in that year accounted for 27 percent of GDP. Agriculture, forestry, and fishing together produced 6 percent of GDP, and the services sector, which includes trade and financial activities, produced 67 percent. GDP grew by 11 percent in 1997.

In the 1990s the large collective farms that dominated Estonian agriculture during the Soviet era were broken up and placed in private hands. Farm production fell during this period of restructuring, but stabilized in the mid-1990s. The principal agricultural activity is raising animals for meat and milk production. Leading crops are potatoes and grains such as barley, rye, oats, and wheat. With 49 percent of the country’s land area covered by forests, the cutting and processing of timber is a significant economic activity. Agriculture, forestry, and fishing employs 9 percent of the labor force.

Machine building, electronics manufacturing, and electrical engineering dominate Estonia’s industrial sector. The processing of the country’s fish catch and farm products also adds value, and timber is used to make paper and other wood products. Mining is focused on extracting oil shale and peat. The oil shale is processed into gas and chemicals and used to generate electricity, some of which is exported. The industrial sector employs 32 percent of workers.

Estonia experienced a rapid reorientation of its trading relationships after the breakup of the Soviet Union. Trade with Western economies, particularly those in Nordic countries, increased substantially while the flow of goods between Estonia and other former Soviet republics dropped precipitously. In the mid-1990s chief exports were food and animal products, textiles, and timber products. Leading imports were machinery and transportation equipment, mineral products, textiles, and foods. Finland has become Estonia’s principal trading partner, and many Finns travel by boat from Helsinki to shop for bargains in the markets of Tallinn. Other leading buyers of Estonian exports are Russia, Sweden, Germany, and Latvia. Chief sources for imports in addition to Finland are Russia, Germany, and Sweden.

In 1992 Estonia became the first former Soviet republic to issue its own stable currency, the kroon (16.97 kroon equal U.S.$1; 2000 average). In 1992 Estonia became a member of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the European Bank for Reconstruction and Development (EBRD). Estonia became an associate member of the European Union (EU) in mid-1995, and discussions for full EU membership began in 1997.

Article key phrases:

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