Economy of Estonia

Economy of Estonia

Tornimäe business area in Tallinn
Currency	Euro (EUR)[1]
Fiscal year	Calendar year
Trade organisations	EU, WTO and OECD
Statistics
GDP	$36.947 billion (PPP, 2015 est.)[2]
GDP rank	98th (nominal) / 113th (PPP)
GDP growth	2.5% (2014 est.)[3]
GDP per capita	$29,543 (PPP, 2016. est)[2]
GDP by sector	agriculture 3.7%, industry 30.2%, services 66.1% (2012 est.)
Inflation (CPI)	3.3% (CPI, 2012 est.)
Population below poverty line	17.5% – income below €299/month (2011)
Gini coefficient	31.3 (2010)
Labour force	675,900 (2012 est.)
Labour force by occupation	agriculture 4.2%, industry 20.2%, services 75.6% (2010)
Unemployment	6.984% (2015 est.)[4]
Average gross salary	€1,163, monthly (Q2 2016)[5]
Average net salary	€871 / $988, monthly (2015)[6][7]
Main industries	engineering, electronics, wood and wood products, textiles; information technology, telecommunications
Ease-of-doing-business rank	16th[8]
External
Exports	€11.6 billion (2015)[9]
Export goods	machinery and electrical equipment 21%, wood and wood products 9%, metals 9%, furniture 7%, vehicles and parts 5%, food products and beverages 4%, textiles 4%, plastics 3%
Main export partners	Sweden 18.5%  Finland 15.8%  Latvia 11.1%  Russia 10.0%  Lithuania 5.5%  Germany 5.0%
Imports	€13.1 billion (2015)
Import goods	machinery and electrical equipment, mineral fuels, chemical products, foodstuffs, plastics, textiles
Main import partners	Finland 15.5%  Germany 11.9%  Sweden 9.1%  Latvia 8.6%  Lithuania 8.0%  Poland 7.8%  Netherlands 5.6%  Russia 4.7%
FDI stock	$16.76 billion (31 December 2012 est.)
Gross external debt	$25.92 billion (31 December 2012 est.)
Public finances
Public debt	9,9% of GDP (2015)[10]
Revenues	$7.915 billion (2012 est.)
Expenses	$8.439 billion (2012 est.)
Economic aid	recipient: $135 million (2004)
Credit rating	AA- (Domestic) AA- (Foreign) AAA (T&C Assessment) (Standard & Poor's)[11]
Foreign reserves	$250.93 million (April 2011)[12]
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars.

Estonia is a member of the European Union and of the eurozone and, according to the IMF, an advanced economy.^[13]

Overview

Before the Second World War, Estonia's economy was based on agriculture, but there was a significant knowledge sector, with the university city of Tartu known for scientific contributions, and a growing industrial sector, similar to that of neighbouring Finland. Products such as butter, milk and cheese were widely known on the western European markets. The main markets were Germany and the United Kingdom, and only 3% of all commerce was with the neighbouring USSR.

The USSR's annexation of Estonia in 1940 and the ensuing Nazi and Soviet destruction during World War II crippled the Estonian economy. Post-war Sovietization of life continued with the integration of Estonia's economy and industry into the USSR's centrally planned structure. Before the war, Estonia and Finland had a relatively similar standard of living. By 1987, capitalist Finland's GDP per capita reached 14,370 USD, while communist Estonia's GDP per capita was around 2,000 USD.^[14]

After Estonia moved away from Communism in the late 1980s and became an independent capitalist economy in 1991, it emerged as a pioneer of the global economy. In 1994, it became one of the first countries in the world to adopt a flat tax, with a uniform rate of 26% regardless of personal income. Between 2005 and 2008, the personal income tax rate was reduced from 26% to 21% in several steps. Estonia received more foreign investment per capita in the second half of the 1990s than any other country in Central and Eastern Europe.^[14]

The country has been quickly catching up with the EU-15; its GDP per capita having grown from 34.8% of the EU-15 average in 1996 to 65% in 2007, similar to that of Central European countries.^[14] It is already rated a high-income country by the World Bank. The GDP (PPP) per capita of the country, a good indicator of wealth, was $23,631 in 2012 according to the World Bank,^[15] between that of Portugal and Lithuania, but below that of long-time EU members such as Greece or Spain. Because of its economic performance after the Soviet breakup, Estonia has been termed one of the Baltic Tigers.

In 2008, Estonia was ranked 12th of 162 countries in the Index of Economic Freedom 2008, the best of any former Soviet republic. The same year, the country was on bottom of Europe by labour market freedom, but the government is drafting improvements.^[16] Estonia is 21st on the Ease of Doing Business Index 2013 by the World Bank Group.

The Government of Estonia decided that the country should adopt the euro as its official currency, and finalized the design of Estonian euro coins in late 2004. The switchover to the euro took place on 1 January 2011,^[17] later than planned, because continued high inflation had prevented the country from fulfilling the entry criteria earlier. Until joining the eurozone, the Estonian kroon had been pegged to the euro at a rate of 15.64664 EEK to one euro; before then, the kroon was pegged to the German mark at approximately 8 EEK to one DEM.

The Financial Crisis of 2008 has had a grave effect on the Estonian economy, primarily as a result of an investment and consumption slump that followed the bursting of the real estate market bubble that had been building up during the preceding years. Estonia had the EU's worst year for unemployment, which rose from 3.9% in May 2008 to 15.6% in May 2009.^[18]

Nevertheless, long-term prospects for the Estonian economy remain among the most promising in Europe. In 2011, the real GDP growth in Estonia was 8.0%, and according to the projections made by the CEPII, by 2025 the GDP per capita could rise to the level of Nordic economies of Sweden, Finland, Denmark, and Norway. According to the same projections, by 2050, Estonia could become the most productive country in the EU, after Luxembourg, and thus join the top five most productive nations in the world.^[19]

Early history

Until the early 13th century, the territory that is now known as Estonia was independent. The economy was largely an agricultural one, but Estonia being a country with a long coastline, there were also many maritime activities. Autonomous development was brought to an end by the Northern Crusades undertaken by the King of Denmark, the German Livonian and the Teutonic military orders. The Estonian world was transformed by military conquest. The war against the invaders lasted from 1208–1227. The last Estonian county to fall was the island of Saaremaa in 1261.

Thereafter, through many centuries until WWI, Estonian agriculture consisted of native peasants working large feudal-type estates held by ethnic German landlords. In the decades prior to independence, centralised Czarist rule had created a rather large industrial sector dominated by the Kreenholm Manufacturing Company, then the world's largest cotton mill.

After declaring independence in 1918, the Estonian War of Independence and the subsequent signing of the Treaty of Tartu in 1920, the new Estonian state inherited a ruined post-war economy and an inflated ruble currency. Despite considerable hardship, dislocation, and unemployment, Estonia spent the first decade of independence entirely transforming its economy. In 1918, The Czarist ruble was replaced by the Estonian mark, which was in circulation until 1927. By 1929, a stable currency, the kroon, had been established. It was issued by the Bank of Estonia, the country's central bank. Compensating the German landowners for their holdings, the government confiscated the estates and divided them into small farms, which subsequently formed the basis of Estonian prosperity. Trade focussed on the local market and the West, particularly Germany and the United Kingdom. Only 3% of all commerce was with the USSR.

The USSR's forcible annexation of Estonia in 1940 and the ensuing Nazi and Soviet destruction during World War II crippled the Estonian economy. Post-war Sovietisation of life continued with the integration of Estonia's economy and industry into the USSR's centrally planned structure. More than 56% of Estonian farms were collectivised in the month of April 1949 alone. Moscow expanded on those Estonian industries which had locally available raw materials, such as oil shale mining and phosphorites.

Modernisation and liberalisation

Maakri has become the Central business district of Tallinn in the 21st century

Since reestablishing independence, Estonia has styled itself as the gateway between East and West and aggressively pursued economic reform and integration with the West. Estonia's market reforms put it among the economic leaders in the former COMECON area. A balanced budget, almost non-existent public debt, flat-rate income tax, free trade regime, fully convertible currency backed by currency board and a strong peg to the euro, competitive commercial banking sector, hospitable environment for foreign investment, innovative e-Services and even mobile-based services are all hallmarks of Estonia's free-market-based economy. Estonia also has made excellent progress in regard to structural adjustment.

In June 1992, Estonia replaced the ruble with its own freely convertible currency, the kroon (EEK). A currency board was created and the new currency was pegged to the German Mark at the rate of 8 Estonian kroons for 1 Deutsche Mark. When Germany introduced the euro the peg was changed to 15.6466 kroons for 1 euro. Estonia was set to adopt the euro in 2008 but due to high inflation rates the adoption date was delayed to 2011. On 1 January 2011, Estonia adopted the euro and became the 17th eurozone member state.^[17]

The privatisation of state-owned firms is virtually complete, with only the port and the main power plants remaining in government hands. The constitution requires a balanced budget, and the protection afforded by Estonia's intellectual property laws is on a par of that of Europe's. In early 1992 both liquidity problems and structural weakness stemming from the communist era precipitated a banking crisis. As a result, effective bankruptcy legislation was enacted and privately owned, well-managed banks emerged as market leaders. Today, near-ideal conditions for the banking sector exist. Foreigners are not restricted from buying bank shares or acquiring majority holdings.

Tallinn's fully electronic stock exchange opened in early 1996 and was bought out by Finland's Helsinki Stock Exchange in 2001. It is estimated that the unregistered economy provides almost 12% of annual GDP.

The economy today

Real GDP growth in Estonia, 2002-2012.

The Estonian economy was one of the fastest growing in the world until 2006, with growth rates even exceeding 10% annually. Despite some concerns both in and outside of the country, the Estonian economy and its currency remained highly resilient and solvent.

Until recent years, the Estonian economy has continued to grow with admirable rates. Estonian GDP grew by 6.4% in the year 2000 and with double digit speeds after accession to the EU in 2004. The GDP grew by 7.9% in 2007 alone. Increases in labor costs, rise of taxation on tobacco, alcohol, electricity, fuel, and gas, and also external pressures (growing prices of oil and food on the global market) are expected to raise inflation just above the 10% mark in the first months of 2009.

In the first quarter 2008, GDP grew only 0.1%. The government made a supplementary negative budget, which was passed by the Riigikogu. The revenue of the budget was decreased for 2008 by EEK 6.1 billion and the expenditure by EEK 3.2 billion.^[20]

Estonia joined the World Trade Organization in 1999. A sizable current account deficits remains, but started to shrink in the last months of 2008 and is expected to do so in the near future.

In the second quarter of 2013, the average monthly gross wage in Estonia was €976 (15,271 kroons, US$1,328).^[21]

Estonia is nearly energy independent, supplying over 90% of its electricity needs with locally mined oil shale. Alternative energy sources such as wood, peat, and biomass make up approximately 9% of primary energy production. Estonia imports needed petroleum products from western Europe and Russia. Oil shale energy, telecommunications, textiles, chemical products, banking, services, food and fishing, timber, shipbuilding, electronics, and transportation are key sectors of the economy. The ice-free port of Muuga, near Tallinn, is a modern facility featuring good transshipment capability, a high-capacity grain elevator, chill/frozen storage, and brand-new oil tanker off-loading capabilities. The railroad serves as a conduit between the West, Russia, and other points to the East.

After a long period of very high growth of GDP, the GDP of Estonia decreased by a little over 3% on a yearly basis in the 3rd quarter of 2008. In the 4th quarter of 2008 the negative growth was already −9.4%. Some international experts and journalists, who like to view the three Baltic states as a single economic identity, have failed to notice that Estonia has constantly performed better than Lithuania and Latvia on many fundamental indicators. Still, in 2009 Estonia was one of the five worst performing economies in the world in terms of annual GDP growth rate.^[22] The current account deficit and inflation is lower than in Latvia, the GDP per capita is higher than in Latvia and Lithuania, Estonia's public debt is a very low 3.8% of GDP and government reserves are close to 10% of GDP. The difference is exemplified by the fact that in December 2008 Estonia became one of the donor countries to the IMF lead rescue package for Latvia.

Estonia today is mainly influenced by developments in Finland, Russia, Sweden and Germany – the four main trade partners. The government recently greatly increased its spending on innovation. The prime minister from the Estonian Reform Party has stated its goal of bringing Estonian GDP per capita into the top 5 of the EU by 2022. However, the GDP of Estonia decreased by 1.4% in the 2nd quarter of 2008, over 3% in the 3rd quarter of 2008, and over 9% in the 4th quarter of 2008. The Estonian economy further contracted by 15.1% in the first quarter of 2009.^[23][24] Low domestic and foreign demand have depressed the economy's overall output.^[25] The Estonian economy's 33.7% industrial production drop was the sharpest decrease in industrial production in the entire European Union.^[26]

Since 2009, the Estonian economy has rebounded. The country's unemployment rate has dropped significantly and is now below 10%, and its GDP growth rate in 2011 was above 8% despite having negative population growth.^[27][28]

The impact of the financial crisis of 2008

On July 2009, Estonian VAT was increased from 18% to 20%.^[29] On 9 August 2011, just days after Standard & Poor's downgraded the credit rating of the United States, it raised Estonia's rating from A to AA-. Among the factors S&P cited as contributing to its decision was confidence in Estonia's ability to "sustain strong economic growth."^[30]

For Estonia, the late-2000s recession was comparatively easier to weather, because Estonia's budget has consistently been kept balanced, and this meant that Estonia's public debt relative to the country's GDP has remained one of the lowest in Europe.

Employment participation

Unemployment rate as a percentage of the labor force in Estonia according to Statistics Estonia.

People unemployed in Estonia, according to Statistics Estonia

Estonia has around 600,000 employees, yet the country has a shortage of skilled labor, and since skill shortages are experienced everywhere in Europe, the government has increased working visa quota for non-EEA citizens, although it has nevertheless been criticized for being inadequate for addressing the shortages.

The late-2000s recession in the world, the near-concurrent local property bust with changes in Estonian legislation to increase labour market flexibility (making it easier for companies to lay off workers) saw Estonia's unemployment rate shoot up to 18.8% throughout the duration of the crisis, then stabilise to 13.8% by summer 2011, as the economy recovered on the basis of strong exports. Internal consumption, and therefore imports, plummeted; and cuts were made in public finances.^[31] Some of the reduction in unemployment has been attributed to some Estonians' emigrating for employment to Finland, the UK, Australia, and elsewhere.

After the recession, the unemployment rate went lower, and throughout 2015 and 2016, the rate stayed near the levels that preceded the economic downturn, staying at just above 6%.^[5]

Sectors

The 20 most valuable companies based on 2007 profit estimates by GILD are: Hansapank, Eesti Energia, SEB Eesti Ühispank, Eesti Telekom, Tallink Grupp, Olympic Entertainment Group, Tallinna Sadam, Tele2 Eesti, Sampo Pank, Tallinna Kaubamaja, Merko Grupp, BLRT Grupp, Elisa, Tallinna Vesi, Transgroup Invest, Eesti Raudtee, Kunda Nordic Tsement, Viru Keemia Grupp, Falck Baltics, and Pro Kapital Grupp.^[32] In terms of 2003 sales, the 20 largest companies included Kesko Food, Stora Enso Timbe, EMT, Elion Ettevõtted, Eesti Põlevkivi, Silberauto, Toyota Baltic, Eesti Statoil, Rakvere Lihakombinaat, Lukoil Eesti, Kreenholmi Valduse, and Eesti Gaas.^[33] Estonian Institute of Economic Research publishes top company awards in various categories, where Estonian small and medium size companies take many top positions.^[34]

Tallinn has emerged as a financial center for Estonians and Russian Russians alike. According to Invest in Estonia, advantages of Estonian financial sector are unbureaucratic cooperation between companies and authorities, and relative abundance of educated people although young educated Estonians tend to emigrate to western Europe for greater income. The largest banks are Hansabank, SEB, Nordea, and Sampo Bank. Several IPOs have been made recently on the Tallinn Stock Exchange, a member OMX system. Estonia is ranked 21st of 121 countries in the Capital Access Index 2005 by Milken Institute, outperforming Austria and Italy among others.^[35] The rent levels of new office spaces in Tallinn starts at 15 euros per square meter or 2000 euro sale price, with demand exceeding supply.^[35]

Estonian service sector employs over 60% of workforce. Estonia has a strong information technology (IT) sector, partly due to the Tiigrihüpe project undertaken in mid-1990s, and has been mentioned as the most "wired" and advanced country in Europe in the terms of e-government.^[36]

Farming, collectivized until 20 years ago, has become privatized, more efficient, and the farming area has increased recently.^[37] The share of agriculture in the gross domestic product decreased from 15% to 3.3% during 1991–2000, while employment in agriculture decreased from 15% to 5.2%.^[38]

The mining industry makes up 1% of the GDP. Mined commodities include oil shale, peat, and industrial minerals, such as clays, limestone, sand and gravel.^[39] Soviets created badly polluting industry in the early 1950s, concentrated in the north-east of the country. Socialist economy and military areas left the country highly polluted, and mainly because of oil shale industry in East-Virumaa, sulphur dioxide emissions per person is almost as high as in Czech Republic. The coastal seawater is polluted in certain locations, mainly the east. The government is looking for ways to reduce pollution further.^[40] In 2000, the emissions were 80% smaller than in 1980, and the amount of unpurified wastewater discharged to water bodies was 95% smaller than in 1980.^[41]

Estonian productivity is experiencing rapid growth, and consequently wages are also rising quickly, with a rise in private consumption of about 8% in 2005. According to Estonian Institute of Economic Research, the largest contributors to GDP growth in 2005 were processing industry, financial intermediation, retailing and wholesale trade, transport and communications.^[34]

Largest companies

Infrastructure

Railway transport dominates the cargo sector, comprising 70% of all carried goods, domestic and international. Road transport is the one that prevails in the passenger sector, accounting for over 90% of all transported passengers. 5 major cargo ports offer easy navigational access, deep waters, and good ice conditions. There are 12 airports and 1 heliport in Estonia. Lennart Meri Tallinn Airport is the largest airport in Estonia, with 1,73 million passengers and 22,764 tons of cargo (annual cargo growth 119.7%) in 2007. International flight companies such as SAS, Finnair, Lufthansa, EasyJet, and Nordic Aviation Group provide direct flights to 27 destinations.^[43]

Approximately 7.5% of the country's workforce is employed in transportation and the sector contributes over 10% of GDP. Estonia is getting much business from traffic between Europe and Russia, especially oil cargo through Estonian ports. Transit trade's share of GDP is disputed, but many agree that Russia's increased hostility is decreasing the share.^[44][45]

Instead of coal, electricity is generated by burning oil shale, with largest stations in Narva. Oil shale supplies around 70% of the country's primary energy. Other energy sources are natural gas imported from Russia, wood, motor fuels, and fuel oils.^[46]

Wind power in Estonia amounts to 58.1 megawatts, whilst roughly 399 megawatts worth of projects are currently being developed. Estonian energy liberalization is lagging far behind the Nordic energy market. During the accession negotiations with the EU, Estonia agreed that at least 35% of the market are opened before 2009 and all of non-household market, which totals around 77% of consumption, before 2013. Estonia is concerned that Russia could use energy markets to bully it.^[47] The government is considering granting permits to nuclear power companies and there are plans for a shared nuclear facility with Latvia and Lithuania.^[48]

Estonia has a high Internet penetration, and connections are available throughout most of the country.

Trade

Graphical depiction of Estonia's product exports in HS product classification.

Country	Export	Import
Finland	16%	14%
Sweden	19%	8%
Latvia	10%	9%
Lithuania	6%	9%
Germany	5%	11%
Russia	7%	6%
Netherlands	3%	6%

Estonia exports machinery and equipment (33% of all exports annually), wood and paper (15% of all exports annually), textiles (14% of all exports annually), food products (8% of all exports annually), furniture (7% of all exports annually), and metals and chemical products.^[49] Estonia also exports 1.562 million megawatt hours of electricity annually.^[49] Estonia imports machinery and equipment (33.5% of all imports annually), chemical products (11.6% of all imports annually), textiles (10.3'% of all imports annually), food products (9.4% of all imports annually), and transportation equipment (8.9% of all imports annually).^[49] Estonia imports 200 thousand megawatt hours of electricity annually.^[49]

Natural resources

See also

• Economy of Europe
• Estonia
• Baltic Tiger

External links

• Trade Profile (Imports/Exports) - Estonia

Notes

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