Estonia - Overview of economy

Until World War II, Estonia was poor and mostly agricultural. Its industrial economy was shaped during the Soviet period (1940-91) with the nationalization of industry and the collectivization of agricultural land into large state-run farms. Soviet central planning stressed the development of heavy industries. Prior to restoring its independence from the Soviet Union in 1991, Estonia was

the most prosperous Soviet republic. Its policy since independence has focused on building up relations with the Nordic countries, particularly Finland and Sweden, Western Europe, and its Baltic neighbors, while weakening ties with the rest of the former Soviet countries.

Estonia's economic record is among the strongest in Eastern Europe. Although its gross domestic product per capita was only US$3,951 in 1998, its total gross domestic product grew by over 4 percent in 2000, and expectations for 2001 were for a strong 5-6 percent growth. The Estonian monetary and banking system, which suffered after independence, stabilized with the introduction of a currency board . The central bank holds foreign currency reserves to cover all circulation and reserves in krooni. It cannot refinance commercial banks unless there is extreme need, and the government's freedom to take on debt is restricted, as recommended by the International Monetary Fund (IMF). The Estonian kroon was pegged to the German mark at a fixed exchange rate of 8:1. Despite the limitations of the currency board, stable finances and economic reforms have created a predominantly free market European-style economy.

Many state-owned assets were privatized after independence, and the sale of public companies was still underway in the energy, telecommunications, and transportation sectors in 2000. High levels of foreign direct investment have supported the privatization program. Foreign investors in Estonia have been most active in communications, financial services, manufacturing, transportation, and real estate. They have acquired control of local assets relatively cheaply, while increasing the value of domestic companies through capital expenditures. Approximately 60 percent of foreign investments in Estonia are from Finland and Sweden, followed by the United States, Denmark, Norway, Liechtenstein, and the United Kingdom.

In 1998 Estonia began negotiations with the European Union for accession by the end of 2002. It is among the front-runners for membership, with a functioning market economy and the ability to cope with competitive pressure in the single European market. Estonia's foreign debt is estimated at a manageable US$270 million. Estonia also receives economic aid from the European Union (US$137.3 million in 1995).