Estonia began its reform process in 1987 with the development of a
plan for economic autonomy within the Soviet Union. Drawing on examples
from both China and Hungary, the radical proposal called for an end to
central economic control over Estonia, a separate tax system, and the
adoption of a convertible ruble. Until then, it had been said that as
much as 90 percent of the Estonian economy was controlled from Moscow;
very little was left for the Estonians to decide for themselves. The
decline in living standards beginning in the early 1980s and the
"years of stagnation" were viewed as direct consequences of
this overcentralization. With Gorbachev calling for a
"restructuring" (or perestroika ) of the economy, the
Estonian proposal was meant to respond to and test this new call for
change. The idea was popular among Estonians, not least of all because
of the plan's name, Isemajandav Eesti, whose acronym, IME, also means
"miracle" in Estonian.
Despite initial resistance from the old-guard Estonian Communist
Party leadership, IME became official policy soon after the appointment
of native-born Vaino V�ljas as first secretary of the party in June
1988. Teams of economists were put to work mapping out the laws and
decrees that would enable the plan to begin by January 1, 1990. Much of
this work would improve Estonians' knowledge of reform economics by the
time more radical measures proved necessary. In May 1989, the Estonian
Supreme Soviet approved the plan by an overwhelming majority, sending it
on to the Supreme Soviet in Moscow. Kremlin bureaucrats, however, sought
to water down the scheme, injecting contradictory clauses that would
make the plan unworkable. While the final law passed by the Soviet
parliament accorded economic autonomy to Estonia, along with Latvia and
Lithuania, it also stipulated that all reform measures be in accord with
central Soviet laws.
In the following months, as the popular mood in Estonia shifted
toward full independence, it became clear that the IME plan, too, would
get nowhere within the increasingly outdated Soviet system. Still, many
of the details and general impetus of IME proved very useful for
economic reform down the road. In December 1989, the Estonian Supreme
Soviet voted to create a central bank, the Bank of Estonia, for the
republic as part of the plan for an eventual Estonian currency.
Price-reform policies were in full force by October 1990, and an
independent law on foreign trade was adopted. Prime Minister Edgar
Savisaar sought to broaden Estonia's economic contacts with other Soviet
republics, organizing several economic summits in Tallinn with Central
Asian and Caucasian leaders. A new tax system was put in place in
Estonia, replacing the state budget's dependence on enterprise turnover
taxes and phasing in income and sales taxes. In short, economic reform
simply was carried out without regard to the Kremlin.
By August 1991, with Estonia's leap to full independence, the economy
was beginning to feel the pain of both market reform and collapsing ties
to the Soviet Union. Gasoline shortages had been endemic since 1990, and
many enterprises were forced to cut production because of a lack of raw
materials previously imported from other Soviet republics. Lax Soviet
monetary policy also fueled Estonian inflation, undermining reform
efforts as long as the new country remained in the Russian ruble zone.
An unprecedented fuel and food shortage in January 1992 prompted Prime
Minister Savisaar to ask parliament for emergency powers to deal with
the crisis. Deputies in parliament, however, had lost confidence in
Savisaar, and in the ensuing political crisis he was forced to resign.
Savisaar was replaced by his transportation minister, Tiit V�hi.
A temporary fuel loan from Finland helped stabilize the situation,
but the need to hasten the introduction of Estonia's own currency became
apparent. Other economic reforms such as privatization and foreign trade
were also being held up by the country's dependence on the Russian
ruble.
On June 20, 1992, against earlier objections from the International
Monetary Fund (IMF--see Glossary), Estonia introduced its new currency,
the kroon. With only US$120 million in gold reserves and no
internationally backed stabilization fund, Bank of Estonia president
Siim Kallas said the country could wait no longer. At 800 exchange
points across the country, residents were allowed to exchange up to
1,500 rubles at a rate of ten rubles to one kroon. Excess cash was
exchanged at a rate of fifty to one. Bank accounts were converted in
full at ten to one. By the end of the three-day transition period, the
move was declared a success, with only minor glitches reported. For
stability, the kroon was pegged by special agreement to the deutsche
mark (DM) at EKR8 = DM1. This would make the kroon worth about 7.7
United States cents, or EKR13 = US$1. The kroon would be the only Baltic
currency to be officially pegged to any outside value.
Estonia - Economic Developments
Monetary and Fiscal Policy
The new Estonian currency became the foundation for rational
development of the economy. Money began to have clear value; the
currency supply could be controlled from Tallinn, not Moscow; and
long-term investment decisions could be made with greater confidence by
both the state and private enterprise. The president of the central
bank, Siim Kallas, made "hard money" the benchmark of his
policy. In return, the bank saw its reserves grow rapidly, to US$184
million by the end of 1992 and US$365 million by December 1993. The
central bank was independent of the government but subordinate to the
parliament. In addition to its president, the bank was managed by a
board of directors, whose chairman was also appointed by parliament.
Although the initial success of the kroon was gratifying, many fiscal
challenges remained that threatened to upset monetary policy in the
future. Among these was a high enterprise tax debt to the state. In
December 1992, this debt, mostly unpaid revenue taxes from large state
firms, amounted to about EKR565 million. A year later, this sum had
fallen to roughly EKR400 million, but the possibility that the state
might need to use its own funds to bail out these ailing firms remained.
Another danger to monetary stability was posed by the possible collapse
of several private banks in Estonia. In November 1992, the Bank of
Estonia ordered the shutdown of three private banks because of
insolvency. One of these was the Tartu Commercial Bank, which in 1988
had become the first private bank to be founded in the Soviet Union. Bad
loans, increased competition, and poor management were expected to force
other bank closures, with which the state would have to deal.
Following the enactment of reform laws during 1989-90, the state
budget in Estonia was broken into three parts: the central government
budget, local government budgets, and nine extrabudgetary funds. In 1993
(the first year for which figures are provided entirely in kroons), the
central state budget ran a surplus of EKR216 million on total revenues
of roughly EKR4.2 billion (US$323 million). This surplus, however, was
immediately spent in a secondary budget drawn up in October. The central
budget included the financing of government operations (ministries,
schools, police, cultural subsidies, and so forth) as well as roughly
EKR500 million in aid to cities and towns. About half of the revenue for
the central budget came from an 18 percent value-added tax (VAT--see
Glossary) on most goods and services. Another 35 percent came from
personal income and business taxes. Social welfare taxes on employer
payrolls went directly into the state's extrabudgetary social welfare
and health insurance funds, which amounted to slightly more than EKR2
billion. In all, general government taxes (including local taxes) in
1991 amounted to about 47.7 percent of GDP. Although successive
governments pledged to reduce the overall tax burden, the transition was
slow. In 1994 the previous three-tiered progressive tax scale was
replaced with an across-the-board income tax rate of 26 percent.
Estonia's central budget in 1995 was expected to total EKR8.8 billion,
exceeding the 1994 budget and its supplements by EKR2.3 billion, mainly
because of additional expenditures on social welfare, the civil service,
the police, and the border guard. It was to be a balanced budget,
nonetheless, for the second consecutive year. Various forms of taxation,
including the income tax, an 18 percent VAT, and a corporate tax were to
provide most of the revenue.
Wages and Prices
After the beginning of economic reform in Estonia, real wages dropped
precipitously. From the fourth quarter of 1989, when the first price
rises began, to the third quarter of 1991, when Estonia became
independent, real wages fell by more than half. Food prices rose an
estimated sevenfold as state subsidies were eliminated and the
population received only partial government compensation for the higher
prices. Fuel prices and apartment rents also increased. Inflation soared
even more after independence as trade with Russia broke down even though
Estonia remained in the ruble zone. In January 1992 alone, the
cost-of-living index rose 88 percent, and in February it rose another 74
percent. The average rate for the year was 1,000 percent according to
some estimates. Nominal monthly wages skyrocketed to keep pace, rising
from 648 rubles in May 1992 to 3,850 rubles by May 1993.
The introduction of the kroon in June 1992 did much to stabilize
wages and inflation. In 1993 increases in the consumer price index
averaged about 3.0 percent per month; in 1994 they averaged 3.5 percent
per month. The average monthly wage settled around EKR500 in August
1992. Thereafter, it began a steady climb, reaching roughly EKR1,200 by
the end of 1993. Yet, according to Arvo Kuddo, an official of the Bank
of Estonia, real wages in mid-1993 still amounted to only 95 percent of
their June 1992 levels and barely 50 percent of their levels from early
1991. In the meantime, wage differentials between the highest- and
lowest-paying jobs grew markedly, from 3.4 times to ten times. According
to the Estonian State Statistics Board, in mid-1993 the top 10 percent
of wage earners received 32.9 percent of all income, while the bottom 10
percent received only 2.1 percent. Residents of Tallinn had the highest
average monthly wage, some 20 percent above the national average.
Personal savings also declined during this period. In December 1992, 41
percent of survey respondents said they had no significant savings at
all. In 1993 some 17 percent said they were behind in paying their
utility bills for lack of money.
Employment
The complexion of the Estonian labor market changed rapidly in the
early 1990s in the wake of property reform and the growth of private
enterprise. In 1990 some 95 percent of the labor force was employed in
state-owned enterprises or on collective farms. Only 4.3 percent worked
in private cooperatives or on private farms. In 1993 a public opinion
survey indicated that less than half of the respondents now received
their main income from a state enterprise. As privatization continued
and the privately owned share of production increased, the share of
state employment was expected to drop even more. Industry (in both the
public and the private sectors) employed about 33 percent of workers in
1990; agriculture, 12 percent; education and cultural activities, 10
percent; construction, 10 percent; and trade and catering, 9 percent.
The remainder of the labor force engaged in a variety of other
activities in the services sector (see table 7, Appendix).
As of December 1, 1993, Estonia's official unemployment rate was
still very low, 1.7 percent, or 14,682 people. This figure represented
the proportion of working-age people officially registered as unemployed
with the government's Employment Board and hence receiving unemployment
benefits. During the second half of 1993, unemployment had in fact
steadily declined from a high of 22,699 in May. In addition, the number
of people on unpaid or partially paid leave declined during the first
half of the year. By contrast, however, more people were reported
working part-time, most often with their full-time workweek having been
reduced to three or four days. These people were not included in the
official figure. The highest official unemployment rates in December
1993 were in the towns of the southeast (V�ru, 5.3 percent; P�lva, 4.8
percent) and the northeast (Narva, 4.4 percent). Tallinn posted the
lowest unemployment rate (0.2 percent), with just 594 registered jobless
people. In 1994 official unemployment peaked at 2.3 percent in April,
then fell steadily to a rate of 1.4 percent in November, the lowest rate
among the Baltic states.
The official unemployment figures, however, did not tell the whole
story. The unemployment rate was based on the working-age population
(about 880,000 people), not the smaller number of active persons in the
population (about 795,000). In addition, the figure did not include
unregistered jobless people. In general, the low level of unemployment
benefits also discouraged many people from even registering as
unemployed. In October 1992, unemployment benefits in Estonia were
reduced from 80 percent to 60 percent of the minimum monthly wage.
Benefits were paid for 180 days with the possibility of a ninety-day
renewal. In 1993 the government allocated EKR90 million for an expected
40,000 unemployed but ended up disbursing only EKR30 million because of
the low number of registered jobless people. Still, in the final quarter
of 1993, the Economist Intelligence Unit estimated that the real level
of unemployment was as high as 10 to 12 percent.
Foreign Trade
An integral part of Estonia's transition to a market economy during
the early 1990s involved reorienting foreign trade to the West and
attracting foreign investment to upgrade the country's industry and
commerce. In 1990 only 5 percent of Estonia's foreign trade was with the
developed West, and of this, only 21 percent represented exports. About
87 percent of Estonia's trade was with the Soviet Union, and of that, 61
percent was with Russia. In 1991 trade with Western and other foreign
countries fell further as available hard currency for imports dried up
and as many producers of Estonian exports had to cut output because of a
lack of raw materials. Although trade with Russia struggled on during
the first half of 1991, trade relations broke down after independence
was attained in August. New agreements were signed in December 1991, but
precise licensing procedures and bilateral trade quotas took several
more months to work out. This delayed shipments of fuel and raw
materials to Estonia, causing a severe economic crisis.
The introduction of the Estonian kroon in June 1992 proved decisive
in stabilizing foreign trade. By the third quarter of 1992, Estonia
experienced strong growth in foreign trade, finishing the year with an
EKR136 million surplus. The total volume of trade amounted to nearly
EKR11 billion, two-thirds of that coming during the second half of 1992.
Moreover, by the end of the year, the very structure of Estonia's
foreign trade had begun to change. European countries accounted for 56
percent of Estonia's trade in 1992. While 28.4 percent of Estonia's
imports continued to be from Russia, 22.6 percent now came from Finland.
In 1993 Finland surpassed Russia as a source of Estonia's imports, 27.9
percent to 17.2 percent. The two countries were roughly equal as a
destination for Estonian goods, both accounting for just above 20
percent in 1992 and 1993 (see table 8, Appendix). Textiles constituted
Estonia's leading trade article in 1992, accounting for 14 percent of
exports. Among imports, Estonia primarily continued to receive mineral
products (27.2 percent) and machinery and equipment (18.3 percent) (see
table 9, Appendix).
In 1993 Estonia ran a trade deficit estimated at US$135 million. The
trade balance deteriorated partly because of the strength of the kroon
and partly because of a growing need for automobiles, agricultural
products, and other essential goods. There was a 131 percent increase in
imports from 1992 to 1993, compared with a 91.8 percent increase in
exports. This imbalance was offset by a strong increase in services,
leaving the country's current account in the black at EKR493 million.
The trade deficit, however, continued to swell, reaching an estimated
US$389 million in 1994.
Foreign Investment and Loans
Foreign investment in Estonia began during 1987-88 with the creation
of several dozen joint ventures under the Soviet Union's early reform
strategy. The number of joint ventures in Estonia grew steadily after
April 1990, when Estonian authorities began registering joint ventures
themselves. By January 1991, 232 joint ventures had been registered in
Estonia; by October 1991, there were 313. Finland led in the number of
joint ventures (159), but Sweden accounted for the most foreign capital
in Estonia (35 percent). In mid-1990 foreign investment also started
coming into Estonia via joint-stock companies--a more flexible form of
ownership for both foreign investors and local capital. Joint-stock
companies soon surpassed joint ventures as the prime attraction for
foreign capital, totaling 803 by October 1991. In fact, many joint
ventures later were converted into joint-stock companies. In September
1991, Estonia passed a new foreign investment law offering tax breaks
(new ventures were granted a two-year tax exemption) and import-export
incentives to foreign investors. This legislation stimulated further
activity. In 1993 foreign investors were also given the right to buy
land, but only through the purchase of privatized state enterprises.
Non-Estonians could not own more than 50 percent of the equity in joint
ventures without government permission.
From the beginning, foreign capital was heavily concentrated in
Tallinn. About 75 percent of the first joint ventures were established
in the capital; in March 1993, it was reported that 87 percent of all
foreign capital invested in Estonia was located in Tallinn and the
surrounding area. Although the government hoped that lower property
taxes and lower wages might eventually entice more foreign capital to
southern Estonia, most investors continued to be drawn to Tallinn for
its higher-quality communications, better-trained personnel, and broader
transportation opportunities.
Among individual countries, Sweden continued to lead all others in
both overall value of investments and as a percentage of total foreign
investment--37.7 percent in 1993 (see table 10, Appendix). Both the
Norwegian company Statoil and the Finnish firm Neste also were heavily
involved in the national economy, building gasoline stations across
Estonia. Tallinn's premier hotel, Hotel Palace, was owned by the
Estonian-Finnish consortium Fin-Est. In 1992 Coca-Cola set up a joint
venture with the Estonian bottling plant AS Tallinna Karastus-joogid to
produce soft drinks for the Estonian and Russian markets. In 1993 a
four-story office building, the Tallinn Business Center, was opened by a
United States development group.
Estonia's transition to a market economy during 1991-93 was eased
considerably by the availability of more than US$285 million in foreign
aid, loans, and credits. Receipt of this financial assistance was
facilitated by the fact that Estonia, unlike many of the other countries
of Eastern Europe, had no prior foreign debt. In addition, by claiming
legal status as a formerly occupied country, Estonia, along with the
other Baltic states, refused to accept liability for the Soviet Union's
foreign debt. Instead, it claimed--and received the rights to--more than
US$100 million worth of Estonian gold deposited in Western banks by the
prewar republic and frozen after 1940.
During 1992-93 Estonia received a total of about US$125 million in
humanitarian aid, including emergency shipments of fuel, grain, and
medical supplies. In August 1992, Estonia signed its first memorandum
with the IMF to secure a US$32 million loan from the IMF and US$30
million from the World Bank (see Glossary). The memorandum obligated the
Estonian government to balance its budget, to limit wage increases, to
privatize state enterprises, and to maintain a strict monetary policy.
Fourteen months later, the IMF released the first US$16 million of its
loan to Estonia, after it was satisfied that the government has
maintained its economic reforms. In early 1992, Estonia also had become
a member of the European Bank for Reconstruction and Development, from
which it would later receive a total of US$46 million in loans for
improving its energy industry. Other foreign loans were received from
Japan, the United States, Sweden, and the European Union (see Glossary),
among others (see table 11, Appendix). In addition, in December 1993 the
European Investment Bank gave Estonia a credit worth 5 million European
currency units (ECUs--see Glossary) for loans to small businesses. The
credit was the first from an ECU200 million fund allocated to Baltic
states through the European Union's Poland/Hungary Aid for Restructuring
of Economies (PHARE) program.
Property Reform
Privatization, or the selling off of state property, represented the
cornerstone of Estonia's efforts at property reform during 1990-93.
Although growth in simple private enterprise during this period
contributed to the country's shift to capitalism, the allocation to
private initiative of state-owned resources ranging from factories to
kiosks was considered a more formidable engine for encouraging economic
recovery. Much of Estonia's economy had been developed in accordance
with central Soviet planning requisites, and it was unclear at first how
viable many of Estonia's machine-building and metallurgical factories
would be in the context of its small national economy. The fate of these
enterprises remained unclear in the mid-1990s. In the meantime, however,
Estonia had launched a successful small- and medium-scale privatization
program, which showed impressive results after only two years. By August
1993, more than half of all registered Estonian enterprises were
privately owned.
As in many other East European countries, property reform in Estonia
was intimately linked to issues of property restitution. In Estonia's
case, this meant the return of, or compensation for, property
nationalized by the Soviet regime in 1940. Estonia's political strategy
for independence, with its stress on the illegality of Soviet rule,
raised corollary questions and debates during 1989-90 about the legality
of the Soviet Union's early nationalization of the economy. The
principle of a political restoration of the prewar republic also
generated pressures to recognize a kind of economic
restoration--recognition of the right of previous property owners to
reclaim their property or at least to receive just compensation. This,
it was argued, was a simple matter of fairness to society. Thus, the
tension between the equally compelling needs for efficient privatization
and for judicious restitution was acute. If one accepted the necessity
of fostering new economic activity, the imperative to privatize was
clear. Yet, in selling off state property, the government was in danger
of wrongfully profiting from the sale of property taken from Estonian
citizens in 1940. Determining which property could be privatized and
which property might have claims on it soon became a legal tangle with
long-term consequences.
Despite some individual warnings as to the cost and rationality of
such a move, in December 1990 the Estonian Supreme Soviet adopted a
resolution voiding the Soviet government's 1940 nationalization of
property and recognizing the continuity of all prewar property rights.
In addition, it set a deadline of December 27, 1991, for the submission
of claims to local government authorities for the return of property or
compensation. The authorities thereafter would decide upon the validity
of these claims. In June 1991, the parliament passed a second law laying
out the basic principles of property reform. Among this law's three
explicit objectives was one calling for the "redress of injustice
committed by the violation of property rights" under Soviet rule.
More than 200,000 property restitution claims were submitted, and much
work in municipal archives to verify the claims lay ahead.
Although opposed to restitution, the government of Prime Minister
Edgar Savisaar (1990-92) relented, with the stipulation that for any
prewar property radically altered during the Soviet era, such as
reconstructed factories, only compensation would be offered. In
addition, persons currently in houses and apartments subject to
restitution claims got assurance that they would not be summarily
evicted by the previous owners. With these ground rules, in June 1990
the Supreme Soviet passed the Law on Property, legalizing various forms
of property, including individually owned property. The government moved
to create the State Property Board (Riigivaraamet) in August to
supervise the privatization of at least small businesses and services,
which would help to stimulate the economy. These enterprises mostly had
been created during the Soviet era and thus were free from potential
restitution claims. In early 1991, the board began selling off an
estimated 3,000 such enterprises, among them small booths and shops,
service outlets, and catering facilities. Initially, preference was
given to employee buyouts, but public auctions later became the method
of choice in order to speed up the process. By September 1992, out of a
total of 855 enterprises approved for sale, 558 had been sold. Service
enterprises proved easiest to sell, although retail establishments were
not far behind.
Experimentation with large-scale privatization began in mid-1991. Two
machine-building factories, as well as the Tallinn taxi depot, were
chosen as the first properties to be sold. Preference again was given to
employee buyouts, which in the case of large-scale enterprises, however,
proved to be unwieldy because several competing groups emerged. The
experimental enterprises soon became mired in controversy, and the
policy of relying solely on local capital was abandoned. After the
adoption of the new currency in mid-1992, privatization was
reinvigorated.
In a change of procedure, the government set up the Estonian
Privatization Enterprise (Eesti Erastamisettev�te--EERE) to begin
dealing with the direct sale of large-scale enterprises to foreign and
domestic investors. The EERE was modeled after the successful German
agency Treuhandanstalt, with which the EERE signed a cooperation
agreement. In November 1992, the EERE offered its first thirty-eight
enterprises for sale through widespread advertising in local and Western
newspapers. Yet, scarcely ten days later, the newly elected prime
minister, Mart Laar, halted the process. He claimed that several
restitution claims were outstanding vis-�-vis the advertised properties
and charged that the EERE had too much power. Although the controversy
took some time to resolve, the EERE's program was back on track by 1993.
In May it offered another fifty-four enterprises for sale; in November
forty enterprises were put on the block. In each case, sealed bids were
accepted by the EERE from foreign and local investors until a certain
date. Thereafter, the EERE attempted to negotiate a sale with the
highest bidder based on development plans for the new enterprise as well
as promises to retain a certain number of employees. The early sale
offers by the EERE attracted widespread interest. In April 1993, the
Estonian parliament sweetened the incentive to bid by allowing foreign
investors to buy the land underneath any privatized property, rather
than rent. About half of the enterprises put up in the first two rounds
found buyers. Often, however, enterprises were broken up, with only
parts being sold off. Many initial sales secured guarantees of
employment for up to 60 percent of the acquired enterprise's employees.
In the summer of 1993, Estonia merged its two privatization firms,
the State Property Board and the EERE, to create the Estonian
Privatization Agency (Eesti Erastamisagentuur--EEA). The privatization
of small enterprises was coming to a close, and the process needed to be
consolidated. During 1991-92 the government sold 676 properties for a
total of EKR64.3 million. By October 1993, another 236 small enterprises
had been sold for a total of EKR169 million. Roughly 40 percent of these
were in Tallinn. A total of EKR117.8 million had been garnered from the
sale of the first thirty large-scale enterprises. According to an EEA
official, these deals had secured some EKR52 million in investment and
provided guarantees for 4,900 jobs.
By 1993 three property reform tasks remained. First, a wide variety
of mostly unprofitable state enterprises had yet to be sold off. Second,
the issue of how to provide compensation for prewar property claimants
remained unresolved. Third, the process of housing privatization, in
which the average resident was most interested, had yet to begin. These
three tasks were all addressed in a Law on Privatization passed by the
Riigikogu in June 1993. Throughout 1993 all adult residents had begun
registering themselves and their work histories to qualify for a
specific amount of national capital vouchers (rahvakapitali
obligatsioonid --RKOs) based on their years of active employment
and service to the economy. According to the new Law on Privatization,
residents could use their RKOs toward the purchase of their apartments
based on apartment values set by the government. If a resident lived in
a house or did not wish to buy an apartment, he or she could buy into
investment funds, which were to be the main players in the sale of
remaining state property. In addition, individuals could invest in
pension funds backed by the government. Finally, prewar property
claimants who were due compensation for their losses were issued
compensation securities, which they could use in any of the new
investment modes. According to Liia H�nni, a former government
minister, in 1992 the state still held about EKR36 billion worth of
property, of which EKR7 billion worth was housing stock. An estimated
EKR15 to EKR25 billion worth of RKOs would be issued, along with EKR12
to EKR15 billion in property compensation.
Estonia - Economic Sectors
Industry
The Estonian industrial sector suffered more than other sectors
during the country's transition to a market economy. Most of Estonia's
heavy industry had been developed and managed by central planners in
Moscow with imported labor from Russia. In 1990 only sixty-one of 265
industrial enterprises were under direct Estonian control. Forty
enterprises, which accounted for 12 percent of Estonia's industrial
production, were controlled directly from Moscow. Because many of these
were defense related, even Estonian authorities had limited access to
them. After independence was regained in 1991, Estonia acquired all of
the industrial enterprises on its territory and faced the challenge of
finding them a place in a market economy.
In 1990 industry accounted for about 40 percent of GDP (42.5 percent
in 1992) and 33 percent of employment. Within the sector, food
processing was the largest subsector, accounting for 30.4 percent of
production in 1992 (up from 24.5 percent in 1990). It was followed by
light industry at 17.9 percent (down from 26.3 percent in 1990) (see
table 12, Appendix).
Industrial production began to fall drastically as supplies of raw
materials from the Soviet Union dwindled. The World Bank reported that
in the first nine months of 1991, industrial activity decreased by 10
percent over the previous year's corresponding period. According to the
Estonian State Statistics Board, during 1992 total production fell
another 39 percent from 1991. In 1993, as enterprises began slowly
buying raw materials on the world market, production in some areas began
to increase. Although overall output was still down in 1993, it
increased by an estimated 7 percent in 1994. Estonia's best hope lay
with its lighter industries: food processing, textiles, furniture,
paper, and glass. Many of these relied on domestic raw materials and
hence were able to continue producing during the transition. Estonia's
metallurgical and chemical industries showed the greatest decline, and
their future was in doubt without new technology and markets.
Agriculture
Like the rest of the economy, Estonian agriculture has been in great
flux since the degeneration of the collective and state farm systems. In
1991 roughly 12 percent of the labor force was employed in agriculture,
producing 15.4 percent of Estonia's GDP. Estonia has some 1.3 million
hectares of agricultural land, nearly 1 million hectares of which are
arable. During the Soviet era, arable land decreased by nearly 405,000
hectares, much becoming forest. Collectivization in the late 1940s and
1950s brought great hardship to Estonian agriculture, which during the
first independence period had been the mainstay of Estonian society.
Still, Estonian agriculture remained more productive than the Soviet
average. In 1990 there were 221 collective and 117 state farms with an
average of 350 to 400 workers each. The average livestock herd per farm
included 1,900 cattle and 2,500 pigs. Estonia was a net exporter of meat
and milk to the other republics. Agriculture also served as the basis
for the republic's strong food-processing industry (see table 13,
Appendix). For its meat production, however, Estonia relied heavily on
feed grain from Russia. When the republic sought to cut back on meat
exports in the late 1980s, Russia retaliated by slowing the provision of
feed grain, which cut Estonian production even further. Increases in
fuel prices and a general fuel crisis in early 1992 also hit
agricultural production very hard. Although the total area of field
crops grew in the early 1990s, total production and average yields fell
markedly (see table 14, Appendix).
Reform of Estonia's agricultural system began in December 1989 with
adoption of the Law on Private Farming. The law allowed individuals to
take up to fifty hectares of land for private planting and for growing
crops. The land was heritable but could not be bought or sold. The goal
of the reform was to stimulate production and return the spirit of
private farming to a countryside worn down by decades of central
planning. Six months after implementation, nearly 2,000 farms were set
up, with several thousand waiting for approval. A year later, more than
3,500 private farms were operating. Starting in October 1991, farmers
were allowed to own their land. This boosted the number of farms to
7,200 by early 1992. As of the first half of 1993, a total of 8,781
farms had been created, covering approximately 225,000 hectares, or a
quarter of Estonia's arable land.
In May 1993, the Estonian parliament passed a law on property taxes,
which had been a major concern for many farmers before getting into
business. The law mandated a 0.5 percent tax on property values to be
paid to the state and a 0.3 to 0.7 percent share to be paid to local
governments. More than property taxes, the costs of commodities such as
fuel and new equipment were considered most likely to prove burdensome
to many new farmers.
With the introduction of private agriculture, many collective farms
began to disintegrate. Corruption and "spontaneous
privatization" of farm equipment by farm directors grew. A number
of Estonia's more successful farms were reorganized into cooperatives.
Over the long term, the government predicted that 40,000 to 60,000
private farms averaging fifty hectares would be optimal. At the same
time, Estonians were likely to maintain a very high rate of consumption
of home-grown fruits and vegetables. A 1993 survey by the Estonian State
Statistics Board indicated that nearly 80 percent of all potatoes
consumed by Estonians either were privately grown or were received from
friends or relatives. Thirty percent of eggs were received outside the
market as well as 71.5 percent of all juice. Overall, Estonians reported
getting over 20 percent of their food from private production or from
friends or relatives.
Estonia has 1.8 million hectares of forest with approximately 274
million cubic meters of timber. Accounting for about 9 percent of
industrial production in 1992, forest-related industries seem likely to
grow further in the 1990s, thanks to expanding furniture and timber
exports.
The fishing industry, once entirely under Soviet control, also has
the potential to contribute to the country's economy. With 230 ships,
including ninety oceangoing vessels, this profitable industry operated
widely in international waters. A large share of Estonia's food-industry
exports consists of fish and fish products. In 1992 about 131,000 tons
of live fish were caught.
Energy and Natural Resources
Estonia is an exporter of electrical energy, but it is wholly
dependent on the outside market for oil fuels and natural gas. Oil shale
deposits estimated at 5 billion tons in the country's northeast help to
fuel two large thermal power plants near the town of Narva (see fig. 5).
Roughly 23 million tons of oil shale were mined per year up to the early
1990s. In 1990 Estonia produced about 17.2 billion kilowatt-hours of
electricity, of which about 8.5 billion were exported to Russia and
Latvia. By 1992, however, export production of electricity had dropped
by more than one-half because of falling demand in Russia. These
cutbacks in turn forced a slowdown in oil-shale mining, although no
exact figures were available. In many mines, miners were employed only
three or four days per week. The decline in tonnage also increased
relative production costs. In order to start bringing Estonian oil shale
closer to world prices and to cover costs, mining officials called in
1993 for an increase in the state price per ton from EKR36 to EKR50. The
government resisted at first, fearing a corresponding rise in
electricity prices and a new wave of inflation throughout the economy
but eventually allowed oil shale producers to raise the price of their
products to EKR45 per ton.
After independence, Estonia endeavored to sign barter agreements with
Russia to exchange Estonian electricity and food for Russian oil and
gas. Transportation problems in Russia caused this arrangement to break
down in early 1992. The ensuing fuel shortages forced Estonia to venture
onto the open market for the first time. In the interim, Russian oil
prices began to approach the world price, meaning Estonia would find it
just as competitive to begin buying fuel from other countries. In March
1993, two new oil terminals were opened near Tallinn, which will
facilitate imports in the future. Foreign companies, such as Finland's
Neste and Norway's Statoil, also began entering the Estonian gasoline
market, building several modern filling stations in Tallinn and the
surrounding areas. Meanwhile, the Estonian state oil company, Eesti K�tus,
was forced to sell off many of its holdings and drastically scale back
its operations in mid-1993 in order to pay an estimated EKR250 million
in debts and back taxes. The company's market share was expected to drop
from 70 percent to 30 percent.
Dependence on Russia for natural gas continued, with Estonia
consuming about 1.3 billion cubic meters of Russian natural gas in 1990.
Energy was in fact often used as a political weapon during the early
1990s. Estonia's two thermal power plants, for example, were staffed
mostly by Russian workers who, to protest Estonian government policies,
repeatedly threatened to shut down the plants. Although any disruption
in production would also affect neighboring Russia, the possibility of
problems persisted. Russia in turn threatened Estonia with a cutoff of
gas supplies in June 1993 during the crisis surrounding Estonia's Law on
Aliens (see Government and Politics, this ch.). The Russian gas company
Lentransgas once shut down its pipelines to Estonia for a single day,
ostensibly because of Estonia's US$10 million in unpaid bills. Also,
Russian leaders often threatened economic sanctions for what they called
discrimination against Estonia's Russian minority.
Transportation and Telecommunications
Estonia had a total of 30,300 kilometers of public roads (29,200
kilometers hard-surfaced and 1,100 kilometers un-paved) in the early
1990s. These was little traffic congestion, thanks to the relatively low
number of automobiles per person--140 per 1,000 inhabitants. Estonia's
major roads include Highway M11 to St. Petersburg and Highway M12 to
Riga. In 1990 the roads carried 214 million tons of freight, or 85
percent of the total freight for that year. Estonian officials, for
their part, were seeking to increase international truck transport
through the country by encouraging the development of an international
highway project, Via Baltica, from Tallinn to Warsaw (see fig. 6).
Bus transportation was widely developed during the Soviet period,
totaling 4.5 billion passenger-kilometers in 1990. By 1993 the removal
of state subsidies had forced an increase in ticket prices, a decline in
ridership, and a contraction of service. New international routes,
however, were opened to Germany and Denmark.
With a total of 1,126 kilometers of track, railroads in Estonia
carried 30 million tons of freight and 16 million passengers in 1993.
Estonia's main rail lines link Tallinn with Narva and St. Petersburg,
Tartu with the Russian city of Pskov, and P�rnu with Riga. More than
130 kilometers of rail line are electrified.
The country's main airport, located in Tallinn, can serve
medium-sized jets and accommodate up to 2 million passengers per year.
Airports are also located in Tartu and P�rnu at former Russian air
force bases. Domestic air service is provided only to Estonia's islands.
In September 1991, the country inherited a fleet of about fifteen
airplanes from the Soviet airline Aeroflot. It had a fleet of sixteen
aircraft in 1992. A state airline, Estonian Air, was launched in
December. In 1992 it served twelve international
destinations--Amsterdam, Copenhagen, Frankfurt, Helsinki, Kiev, Minsk,
Moscow, Riga, St. Petersburg, Sochi (Russia), <"http://worldfacts.us/Sweden-Stockholm.htm">Stockholm
, and
Vilnius--and carried nearly 175,000 passengers. Service is also provided
by other airlines, including Aeroflot, Drakk Air Lines, Finnair,
Lithuanian Airlines, SAS (Scandinavian Airlines), and Lufthansa.
International shipping was a major source of foreign currency for
Estonia under the Soviet regime. In the early 1990s, the state-owned
Estonian Shipping Company operated a fleet of eighty-two vessels with a
carrying capacity of 500,000 tons. Narva is the main inland port. Five
hundred kilometers of inland waterways are navigable year round.
Estonia's three main commercial ports are all located around Tallinn;
together they handled about 10 million tons of cargo in 1991. The
Tallinn port continued to be a transit point for trade shipments to
Russia, particularly grain. Ferry traffic out of Tallinn grew
exponentially in the early 1990s. In 1992 an estimated 1.3 million
people crossed between Tallinn and Helsinki, while traffic was said to
be still growing at 50 to 60 percent a year. In 1990 overnight ferry
service was started to Stockholm; freight service to Germany followed
later. Disaster struck on September 28, 1994, however, when a ferry
owned by Estline, a Swedish-Estonian joint venture, sank in the Baltic
Sea, killing more than 900 passengers.
Telecommunications required much modernization in Estonia after
independence. Poor-quality telephone connections and outmoded equipment
were among the major problems. The number of international lines was
increased during the early 1990s, and beginning in 1993 new digital
switchboards were being installed to replace old mechanical ones. The
country's first mobile telephone networks were set up in 1990.
Esttelecom, the state telecommunications company, had approx-imately
341,000 subscribers in 1992. However, unmet demand because of a shortage
of lines indicated the existence of another 150,000 potential customers.
Only two-thirds of telephone customers had long-distance access within
Estonia and to the former Soviet Union. To improve service, Esttelecom
was negotiating with Swedtel of Sweden for outside investment and the
creation of a joint telecommunications venture. In 1993 there were
approximately 600,000 television receivers in use, or one television per
2.6 persons. There was one radio per 1.7 persons and one telephone per
3.9 persons.
Tourism was a major area of growth for Estonia in the late 1980s and
even more so after independence. With the expansion of ferry and air
links, Estonia began to receive a growing number of visitors from
Western countries as the number of tourists from the former Soviet Union
dropped off. In 1990 the number of tourists was estimated at 500,000; by
the mid-1990s, that figure was expected to top 1 million. New
accommodations were being built, and several of Tallinn's major hotels
were being privatized. Estonia established visa requirements for
visitors after independence but soon rescinded them for many European
countries, the United States, and Canada. The Baltic states also signed
agreements allowing foreigners to travel with one country's visa in all
three states. Tallinn's medieval old town, although in need of repairs,
is Estonia's main tourist attraction. Many visitors also tour Tartu and
the island of Saaremaa. The greatest number of visitors come from
Finland and Sweden. Net tourism receipts totaled about EKR26 million in
1992.
