Estonia’s Transition to a Market Economy

By Mark Vickers Estonia’s Historical

Cultural Garden in Cleveland, OH Habitat for

Humanity project

Real GDP growth Rate

-20

-15

-10

-5

0

5

10

15

1989 1993 2003

Estonia

Latvia

Lithuania

Poland

GDP Converted to US Dollars in Billions

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

1989 1993 2003

Estonia

Latvia

GDP after Transition

Worldbank.org Worldbank.org

Population

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

1989 1995 2004

Estonia

Finland

Poland

•It is hard to even compare Estonia and the other Baltic states to other European countries due to its relatively small size

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

1989 1993 2003

Estonia

Latvia

Lithuania

Lithuania’s population is at 3.5 million Poland’s population is at35 million

Geography Distinguishing

characteristics Northern Europe Separated from

Finland by the Gulf of Finland

Solid trading partner Separated from

Sweden by the Baltic Sea

Bordered by Latvia and Russia

Fluctuations in Rule after first Declaration of Independence

Bolshevik Revolution in 1917 First Independence in 1918

Establishment of Riigikogu Saeima-Latvia

Similar to Estonia’s parliament, but with more corruption

Seimas-Lithuania Democratic rep., but

dominated by Catholic Church

Treaty between Russia and Estonia in 1920

World War 2 Estonia needed to choose

side Nonagression pact of 1939 Hitler-Stalin pact of 1939

Break up of Baltics

Soviet Era Estonia and Latvia accused of

conspiracy 1941 German attack on USSR USSR recaptures Estonia Stalin’s death in 1953

Forced communes until Nikita Krushchev in 1953, who brought soviet republics

Emergence of Estonian Communist Party

“Thaw Period” in late 1960s Lasted until early 1980s

Arts and literature flourished as well as economy

Estonia before independence and

Transition Brezhnev-1964-1982

Brought planning in early 1980s

Russification in mid 1980s Communism and planning Proof that planning worked Soviet collapse

Stagnation Hitler-Stalin pact declared illegal

in 1989 Communism abolished Free elections held

Russia's Impact on inflation in Estonia

0

200

400

600

800

1000

1993 1994 1995 1996

Inflation , consumerprices (annual %) inEstonia

Inflation, consumerprices (annual %) inRussia

http://devdata.worldbank.org.proxy.lib.ohio-state.edu/dataonline/

Independence and Transition

Independence declared on Aug. 20 1991 from Soviet Union Parliamentary

Republic of 1918 reestablished

Major economic problems after gradual dropping of planning

Cost of living index Real wages Fuel Prices and Rent Inflation (graph next pg.)

Percent change by year of Real Wages

-50

-40

-30

-20

-10

0

10

20

30

40

1990 1991 1992 1993 1994

Estonia

Latvia

Lithuania

“The Baltic States after Independence”

Inflation of Food and Consumer Prices

0

200

400

600

800

1000

1200

1400

1600

1800

1992 1993 1994 1995 1996

Inflation, food prices(annual %) inEstoniaInflation, food prices(annual %) Russia

Inflation, consumerprices (annual %) inRussiaInflation, consumerprices (annual %) inEstonia

http://devdata.worldbank.org.proxy.lib.ohio-state.edu/dataonline/

Adjusting to Markets-Stabilization

Reestablishment of the Parliamentary Republic in the Riigikogu Introduction of the Kroon in 1992

Imports With increased purchasing power of kroon, interest

of imports increased. Foreign markets become interested in investment Relative Balance of trade came in 1999

Bank of Estonia established Foreign trade balanced

“Buy Estonian” Campaign Good relations established with Finland

Privatization Gradual Small and medium scale

privatization 95% of population was employed

by state owned enterprises in 1989 Submission of property claims

through registration Law of Property ratified in 1990 by

Prime Minister Edgar Savisaar Compensation or redistribution of

property The Riigivaraamet created as

property board to decide how to privitize small businesses

Intro of the Kroon in 1992 spurred sales through auctions

Gradual Large Scale Privatization in 1992

Offered to domestic and foreign buyers

Foreign investors would bid on enterprises through auctions

Bidder a combination of a high bid and a solid development plan would receive the enterprise

Estonian Privatization Agency set standards for foreign investors

Certain amount of employees needed to be hired at all times

Problems with Privatization

Problems How to sell unprofitable

firms Housing privatization Paying for promised

compensation to owners of property during Soviet era

Solution Law of Privatization

passed by The Riigivaraamet

Voucher system put in place

Citizens received vouchers based on work history

Citizens could use vouchers to invest in investment funds or pension funds backed by the govt.

Vouchers also given out as compensation

Response to Supply and Demand

Consumption of goods Fixed exchange rate of

the kroon allowed for foreign markets to sell products in Estonia

Domestic and foreign purchase of goods increased

67% increase from 1995 to 2000

Technology increases 57% of population had

mobile phones in 2001

Changes in consumption structure of Estonia in 1995-2000.

Year 1995 2000

Share of groceries in purchases

45% 35%

Number of cars (thousands)

380 464

Number of travels abroad (thousands)

101 359

www.estonica.org

European Union

Negotiations began in Brussels in 1998 EU rules, the Aquis established in Estonia

through The Draft Accession Treaty on April 8, 2002.

Official date of accession of Estonia to the EU was on May 4, 2004

My question as well as yours?? When will Estonia be able to convert its

currency to the Euro? Bringing down inflation rate from around 4.1%

to EU average of about 1.5% Stabilize budget deficit without printing more

money Bringing down consumer prices Cutting government spending and cutting budgets

Your questions???

References

European Enlargement Information Campaign. March 2004.

http://www.european-movement.org/enlargement/focus_on_estonia.php

Europa Online. Estonia’s Experience in Accession Negotiations with the EU. 11 February 2005. www.europa.org

Geography of Estonia. 2006 About.com Inc. The New York Times Company

http://geography.about.com/library/cia/blcestonia.htm

Gerner, Kristian and Stefan Hedlund, 1993. “The Baltic States and the End of the Soviet Empire.”

Norgaard, Ole. 1996. The Baltic States After Transition. Cheltenham, UK. Brookfield,

US. British Library of Congress

O’Connor, Kevin. 2003. The Greenwood Histories of The Modern Nations. “The Histories of The Baltic States.” Library of Congress. Westport, Connecticut.

Orro, Peter. Interview. 16 January, 2006.

The World Bank Group. 2004. WDI Online. The Ohio State Libraries http://devdata.worldbank.org.proxy.lib.ohio-state.edu/dataonline/

Transition of Estonia. 1996. www.countrystudies.com

United States. Central Intelligence Agency. The World Factbook, 2005. Washington.

GPO, 2005.