Economy

Economy

Estonia's transition to a free-market economy in the early 1990s reflected the difficulties of building an independent economy from the ruins of one that hitherto had been developed for a single market, that of the Soviet Union. The creation of new economic institutions such as a separate monetary system, new regulatory agencies, and new development strategies had to keep pace with the decline of the old economy and its institutions. Real gross domestic product (GDP--see Glossary) dropped continuously in the early 1990s (see table 6, Appendix). Yet, among the former Soviet republics, in roughly four years of far-reaching market reforms Estonia became a model of economic transformation. The right-of-center government of Mart Laar, which took office in 1992, maintained a promarket stance despite criticism from opposition parties and agricultural interests, which were most vulnerable to foreign competition. After the introduction of the kroon in June 1992, inflation fell rapidly to an average of less than 3 percent per month in 1993. Consumer goods were again in abundant supply. Foreign trade grew, although in 1993 the trade balance began to show deficits. Under a program of privatization, 80 percent of the country's state-owned small businesses were sold off, and three rounds of large-scale privatization with foreign participation resulted in the acquisition of thirty major enterprises. By January 1995, after several more rounds of privatization, only twenty large enterprises had yet to be privatized. Official unemployment dropped to 1.4 percent in November 1994, but real unemployment may have been as high as 10 percent. The squeeze on the economy and the state budget intensified as many large, privatized firms were downsized and the transition neared the decisive stage of open competition.

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