Estonia: a shining example of economic transformation

Business America, August, 1997 by Amy Serrill

Estonia's economic transformation is considered among the most notable in Central and Eastern Europe. Since its independence in 1991, Estonia has made significant and rapid progress in its transition to a market economy. A combination of key policies, including commitment to privatization, adoption of an independent currency, establishment of an extremely open trading regime, and successful attraction of foreign investment, have made Estonia one of the success stories of the region. As a result, Estonia was one of five Central European countries recently invited by the European Union for membership talks.

Today, Estonia continues to experience strong growth after its economy bottomed out from post-Soviet shocks in the second quarter of 1993. Estonia's GDP growth in 1995 was 4.3 percent and in 1996 it was 4 percent. The economy is predicted to grow between 5 and 7 percent. Inflation continues to drop, following the trend of the past two years. In 1996, inflation fell to under 15 percent, and it is predicted to drop to 12 percent in 1997. The Estonian currency, the kroon, is stable and has been pegged to the German mark at the rate of 8 kroons to 1 mark since its introduction in 1992.

U.S. Export Potential. As a small country heavily dependent on foreign trade, Estonia recognizes that it needs a liberal trade regime and has adopted one of the lowest tariff schedules in the world. Currently, most import shipments are subject to nothing more than a 200 EEK (approximately $17) import processing fee. Only the following items are subject to an excise tax: furs (16 percent), alcohol, tobacco, motor vehicles, bicycles, launches, and yachts (10 percent). The value-added tax of 18 percent is charged upon entry. Import licenses are needed only for alcohol, tobacco, pharmaceuticals, and weapons.

Estonia is often overlooked by U.S. companies due to its small market size. However, U.S. firms can find opportunities in Estonia for computers and office equipment, consumer products, sporting goods, foodstuffs, building products, medical equipment, and capital goods. New car sales in Estonia have been booming recently, with June setting a new monthly record high. While European products currently prevail on the Estonian market, U.S. products can be competitive through quality and price.

U.S. exports to Estonia in 1996 totaled $84 million, while U.S. imports from Estonia were $55 million. Major U.S. exports to Estonia include: aircraft, meat, machinery, chemical products, electrical equipment, medical equipment, motor vehicles, yarns, and plastics. Products the United States imports from Estonia include: textiles, organic chemicals, fertilizers, mineral fuel, hydrocarbon, precious metals and ores, wood, machinery, toys, and sporting equipment.

Foreign investment. Estonia has attracted considerable foreign investment for a country of only 1.5 million people. Total direct foreign investment between 1991 and 1996 reached $700 million, giving Estonia one of the highest levels of per capita foreign investment in Central and Eastern Europe, following Hungary and the Czech Republic. Investment flows mostly from Western Europe, the Nordic countries in particular. The United States' share of foreign investment in 1996 was 27.8 percent.

In 1991, a law on foreign investment was passed, guaranteeing equal treatment to foreign investors and ensuring free repatriation of profits. Foreigners are permitted to own land. Investment licenses are required for foreign investors in the following sectors: mining, power, transport, telecommunications, and banking. Corporate taxes are a flat 26 percent.

Privatization. Privatization efforts began in 1992 by selling companies through tenders and auctions to investors. The Estonian Privatization Agency was established in 1993. Several privatization methods have been used, including vouchers which could be traded on a secondary market. The Privatization Agency's primary method has been to privatize through tender sales to a single, effective owner.

Estonia's privatization program continues to progress. By mid- 1996, Estonia had sold 433 state-owned companies for a total of $227 million. The service sector is 70 percent private, while the manufacturing sector is 90 percent private.

The private sector now accounts for 70 percent of Estonia's GDP. Small- and medium-scale privatization is virtually complete and housing privatization is mostly achieved. Estonia's privatization efforts have now switched to large strategic companies. Estonian Air was privatized in 1996, and the state shipping company was privatized in July 1997. Privatization of the gas company is now mostly complete. Within the next two years the telecommunication, energy, and railway utilities, along with the Port of Tallinn, are scheduled to be privatized.

RELATED ARTICLE: ESTONIA AT A GLANCE

Population:         1.48 million

Land area:          45,125 sq km; slightly larger
                    than Vermont and New
                    Hampshire combined

Principal cities:   Tallinn: 443,000 (capital)
                    Tartu: 105,000
                    Narva: 79,000

1996 economic       GDP growth: 4 percent
indicators:         Inflation: 14.8 percent
                    Unemployment: 2 percent
                    Exports: $2 billion
                    Imports: $3 billion

Currency:           Kroon (EEK). Exchange rate is
                    fixed at EEK 8: DM1.
                    Currently about 12 kroons to $1.