The Estonian economy is one of the most successful examples of the development of small economies. During the crisis, the state experienced a moderate decline compared with other former republics of the USSR, and then quickly recovered. Today, Estonia is considered one of the wealthiest, not developing countries.
A brief history of the Estonian economy until the twentieth century
For a long time, the economy of the territories where modern Estonia is located has been based on trade. Important trade routes connecting Russia and Western Europe passed through Tallinn (then the city was called Revel) and Narva. The Narva River provided communication with Novgorod, Moscow and Pskov. In addition, in the Middle Ages, Estonia was a major supplier of crops to the northern countries. The industrialization of certain industries (especially wood processing and mining) began even before Estonia joined the Russian Empire.
The economy of Estonia and Russia has been developing together since the time when the interests of the Russian Empire in the Baltic Sea clashed with the interests of Sweden. The accession to the Russian Empire of the territories of modern Estonia, which formed the Revel and Livonia provinces, as well as the emergence of a new capital (St. Petersburg), reduced the commercial importance of Tallinn and Narva. The agrarian reform of 1849 had a positive impact on the country's economy, after which it was allowed to sell and lease land to peasants. By the end of the 19th century, about 50% of peasants in the northern part of the country and 80% in the south and center of modern Estonia were the owners or tenants of land.
In 1897, more than half of the population (65%) was employed in the agricultural sector, 14% worked in the industrial sector and the same number engaged in trade or in the service sector. The Baltic, Germans and Russians remained the intellectual, economic and political elite of Estonian society, although the proportion of Estonians in the national composition reached 90%.
The first independent steps in the economy
The Estonian economy passed the first test for the possibility of regulation by internal state forces in the 1920s and 1930s. The independence of the state necessitated the search for new markets, reforms (and there were enough problems in the economy at that time), and how natural resources would be used. The new economic policy, initiated by the then Minister of Economy of Estonia, Otto Strandman, was aimed at the development of industry oriented to the domestic market and agriculture aimed at export.
The following factors contributed to the independent development of the state economy:
- favorable territorial location;
- the structure of production established during the Russian Empire;
- developed network of railways uniting the domestic market;
- cash assistance from Soviet Russia in the amount of 15 million rubles in gold equivalent.
However, there were many problems:
- almost all equipment from factories was removed during the First World War;
- the existing economic ties were broken, the country lost its sales market in the east;
- The USA stopped supplying Estonia with food due to the conclusion of the Tartu Peace;
- More than 37 thousand citizens who needed housing and jobs returned to Estonia.
Economy of the Estonian Soviet Socialist Republic
A brief description of the Estonian economy within the USSR begins with the calculation of the damage caused by military operations during the Second World War. During the German occupation, 50% of residential homes and 45% of industrial enterprises were destroyed in the republic. Total damage is estimated at 16 billion rubles in pre-war prices.
After the end of World War II, Estonia was in first place in terms of per capita investment among all Soviet republics. The Estonian economy in those years was represented by:
- Industrial complex. Both mining (oil shale, phosphate rock and peat extraction) and the manufacturing industry developed. The latter's branches included mechanical engineering, metalworking, chemical, textile and food industries.
- Energy. It was in Estonia that the first gas shale plant in the world was built, and subsequently the world's largest shale power plants. The energy complex fully met the needs of the republic and allowed to transfer part of the energy to the north-west of the USSR.
- Agricultural sector. During the years of the USSR, Estonian agriculture specialized in dairy and beef cattle breeding and pig breeding. Fur farming, beekeeping, and poultry farming developed. Technical, fodder and grain crops were grown.
- Transport system. Since the time of the Russian Empire, a developed railway network remained in the republic. In addition, road and sea transport developed.
Restoration of independence and economic reform
During the period of restoration of independence, the Estonian economy is briefly characterized by reforms. The latter can be divided into four groups: liberalization, structural and institutional reforms, the return of nationalized property to its rightful owners, and stabilization. The first stage of the transformation was characterized by the transition to regulation of pricing only for electricity, heating and public housing.
High inflation rates became a serious problem. In 1991, the figure was 200%, and by 1992 it had risen to 1076%. The savings that were stored in rubles rapidly depreciated. As part of the new economic policy, the once-nationalized property was also returned to the owners. Already by the mid-1990s, the privatization process was almost completely completed. At that time, Estonia became one of the first countries in the world to adopt a flat income tax system.
Jobs and loading of Estonian transport routes were ensured by trade and transit of goods from the Russian Federation. Transit services accounted for 14% of gross domestic product. Most of the Estonian state budget (about 60%) was generated by Russian transit.
Economic growth after Estonia joins the EU
After joining the EU, the Estonian economy developed in a positive way. Significant volumes of foreign investment were attracted to the country. By 2007, Estonia took first place among the former Soviet republics in terms of per capita GDP. At the same time, signs of “overheating” began to appear in the economy: stabilized inflation rates crawled up again, the foreign trade deficit grew by 11%, and the so-called price bubble arose in the housing market. In this regard, the pace of economic growth began to decline.
Recession against the backdrop of the global financial crisis
Negative trends related to the financial crisis also appeared in the Estonian economy. Industrial production fell in 2008, the budget was first adopted with a deficit, and GDP fell by three and a half percent. At the same time, the volume of rail transportation decreased by 43%, inflation increased to 8.3%, domestic demand decreased and imports decreased.
Studies conducted by the working group of the University of Tartu showed that the Estonian economy is developing according to the Greek scenario. The country was dominated by hotel services and trade, as well as small-scale construction, rather than industry, financial intermediation, and high-performance commercial services. The crisis had a profound effect on the Estonian economy, which made us talk about the collapse of the existing development model.
The current structure of the Estonian economy
The Estonian economy is briefly represented by the following sectors:
- Industry (29%). Actively developing chemical, manufacturing, pulp and paper, fuel industry, energy, engineering. A significant share of GDP is construction and real estate.
- Agriculture (3%). The main sectors of the agricultural sector remain meat and dairy cattle breeding, pig breeding. Agriculture is mainly engaged in the cultivation of fodder and industrial crops. Fishing is also developing.
- Service industry (69%). Rapid growth in Estonia is experiencing tourism, especially medical tourism. Recently, the number of offshore IT companies has grown significantly. An important component of the economy is transit through the territory of the state - this determines the role of Estonia in the global economy. For example, transit accounts for 75% of rail traffic.
Regional features of the economy
The Estonian economy is dispersed today by geography. So, in the north-eastern part of the state the manufacturing sector is developed, in this region three quarters of industrial goods are produced. The main industrial centers of the country are Tallinn with its environs, Narva, Maardu, Kohtla-Järve, Kunda. In southern Estonia, agriculture has been more developed, and the western part of the country is characterized by developed fisheries, animal husbandry and tourism are also developed.
Finance, banks and the external debt of the state
The official currency of Estonia is the euro, the transition to European currency from the Estonian kroon was finally completed by the beginning of 2011. The functions of the central bank in the country are performed by the European Central Bank, and the Bank of Estonia is the national supervisor. The functions of the latter are to satisfy the needs of the population in cash, as well as to ensure the reliability and stability of the entire banking system.
There are about ten commercial banks in Estonia. Moreover, more than two thirds of financial assets are regulated by the two largest financial market players - the Swedish banks Swedbank and SEB. Stable economic development of the country allows expanding the scope of bank lending.
Estonia's public external debt remains the lowest among the countries of the European Union, accounting for 10% of gross domestic product as of 2012. In the mid-nineties, the figure was about half of GDP, and by 2010 reached 120% of gross domestic product. More than half of the debt is financial liabilities of credit institutions.
The structure of state foreign trade by industry
The main trading partners of Estonia are the northern neighbors, as well as Russia and the European Union. The main foreign trade groups are mineral fertilizers, fuels and lubricants, manufactured goods, machinery and equipment, and various finished products.
