Estonia is located along the Baltic Sea in Northern Europe and has a population of 1.3 million people. The economy of Estonia is largely based on services, which account for around 73 percent of the country’s Gross Domestic Product (GDP). The services sector includes banking, finance, IT, tourism, and transport. The manufacturing industry also plays an important role in the economy with machinery and electrical products being some of the main exports.
According to cheeroutdoor, the Estonian government has implemented several economic policies to encourage investment and stimulate growth in the economy. These include a flat tax system with one of the lowest corporate tax rates in Europe at just 20 percent; this has made it attractive for companies to establish operations in Estonia. In addition to this, there are numerous free trade agreements with countries such as Finland, Latvia, Lithuania and Sweden which have helped to boost exports from Estonia. Furthermore, the government has also encouraged foreign direct investment by offering incentives such as tax breaks and grants to investors willing to invest in the country.
In order to improve infrastructure throughout Estonia there have been significant investments made into roads, railways and ports which have facilitated trade with neighbouring countries. To further strengthen its economy the government has implemented measures to attract highly skilled workers from abroad through its e-residency program; this allows foreign entrepreneurs access to all of the benefits available within Estonia’s digital society including access to banking facilities and other services necessary for setting up a business or project in Estonia. This helps foster innovation within the country which can lead to further economic growth.
Economics and business
Abbreviated as EST by abbreviationfinder.org, Estonia has one of the world’s most liberal market economies and in 2011 became the seventeenth member country of the euro zone.
Estonia is today an advanced IT society, where a significant part of all service is performed electronically, regardless of place of residence. Approximately 98 percent of banking transactions take place via the Internet, nine out of ten income declarations are submitted electronically, and in parliamentary and municipal elections voting can be done via the Internet. With their e-identification, Estonians can start their own business over the Internet without paper bureaucracy. Education and health care were adapted early to IT technology. Despite this, Estonia’s productive IT sector is relatively small. Estonia has contributed some of the world’s most successful computer programmers, but its exports of high technology do not match that position.
With the Second World War and the Soviet annexation, the agricultural community in Estonia was replaced by centralized industrial economics centralized from Moscow. Heavy industry, often defense-related, was built up mainly in northeastern Estonia and Tallinn. Production became dependent on immigrant Russian-speaking labor and the supply of raw materials from the interior of the Soviet Union. Only in the consumer and food sectors did the local authorities have any significant influence. A self-managed and self-sustaining business world therefore became one of the first demands of the independence movement that emerged in the 1980s.
Following the liberation from the Soviet Union in 1991, Estonia implemented rapid and radical market reforms. Government subsidies, price controls and barriers to trade were abolished and business was privatized. The ruble was exchanged in 1992 for its own currency (krona) tied to the D-mark. Requirements for the budget balance were fixed, unit tax (now 21 percent) was introduced and reinvested company profits were tax exempt. The market economy so-called shock therapy was followed by a sharp reduction in production and falling GDP, when subsidies from and trade with the former Soviet Union ceased. Severe unemployment followed the closure of large unprofitable industries and the reduction of state bureaucracy. But after that, the effects of the reforms showed higher growth than in other former Soviet republics.
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In 1997, Estonia’s GDP increased by 10 percent. After a fall in the wake of the Russian financial crisis in 1998, strong growth followed again in 2000–07. The growth came from a restructured business sector, dominated by small and medium-sized companies with production that were in demand in the European market.
Government debt was lowest in the EU in 2010 (6.7 per cent of GDP) and the budget had a small surplus, but the trade balance is negative. After a decline in the late 1990s, Estonia’s economy grew strongly in the early 2000s, with a record increase in GDP of over 11 percent in 2006. Budgetary surpluses and reserves were created through a restrained fiscal policy. This alleviated the financial crisis in 2008–09, when the industry declined sharply and unemployment tripled. After 2010, the economy has started to grow again in combination with a tight economic policy that has promoted low government debt, the budget balance and exports.
The renewed industry was largely built up with foreign direct investment, attracted by liberal tax law. The investments came mainly from Sweden and Finland, whose banks dominate the financial and capital markets in Estonia. Business investment has mainly gone to Tallinn, while the countryside has been partially depopulated in the economic transformation. This has created gaps between the city and the countryside. Estonia’s economy also has problems with labor shortages as many esters have applied to other EU countries.
In 2011, the crops were in the order of wheat, barley, potatoes, rapeseed, oats and rye. In addition, legumes and vegetables are grown. Production of potatoes, barley and rye has declined sharply since the Soviet era, while wheat production has increased tenfold and the harvest of rapeseed has increased from one tonne in 1991 to 135,000 tonnes in 2011. About 1/5 of the country’s area is usable land. Agriculture, along with fishing and forestry, employs about 4 percent of the workforce.
Livestock management is traditionally significant with milk production and dairy as important branches. However, animal husbandry has declined sharply since the peak was reached in the mid-1980s. At the same time, the return per animal has increased, which means that the production loss is smaller than the decrease in the number of animals suggests. The overall market value of agricultural products has also been relatively stable.
Estonia’s natural conditions for agricultural production are not the best. Nevertheless, agriculture supported the economy of the independent wartime republic and accounted for more than half of the country’s exports. During the Soviet era, the small family farms were forced into collective, which lowered the farmers’ motivation. Nevertheless, Estonian agriculture was considered successful and in the 1970s and 1980s, the then Soviet Republic was given special responsibility for milk and meat production for the rest of the Soviet Union. From there, Estonia imported cheap feed and fuel in return. However, compared to western neighboring countries, Estonia’s agriculture has lagged in production levels and productivity throughout the post-war period.
During the 1990s, reforms were carried out to break up the collective and restore small-scale family farming. The first steps were already taken in the late 1980s and were followed by legislation that made privatization possible. by refund. The number of private farms grew rapidly and was around 55,000 at the turn of the millennium. Most had poor or no profitability, despite some state aid being reintroduced in 1999. Many Estonian EU accession in 2004 eliminated many farmers from new hygiene and quality requirements, and partly with Most EU farms closed down support for EU grants. The result has been high unemployment and social problems in rural areas.
In 2007, almost 22,000 private farms remained, of which two-thirds were small family farms. Of the more than 900,000 ha of agricultural land, approximately 470,000 ha were privately owned. The backbone of the agricultural sector consists of reshaped collective and state agriculture, which is now run under state or cooperative management or in corporation form. In the 1990s, the number of jobs in agriculture fell by about half, and between 2001 and 2007, the labor force fell further from about 140,000 to about 73,000 people.
The forest is Estonia’s most important natural resource. About half of Estonia’s surface is covered by forest. Of 2.2 million hectares of forest land, almost 1 million hectares are now privately owned and the rest are state-owned or under privatization. The forests are over half overgrown with pine and spruce. Among the deciduous trees, birch and aspen dominate.
In addition to smaller uses for energy purposes, the timber is mainly used in the sawmill, pulp and paper industries. Forestry also provides the basis for the manufacture of furniture, building materials and prefabricated houses. A significant proportion of production is exported in the form of pulpwood and sawn timber, mainly to the Nordic countries but also to the rest of Europe.
After privatization in the 1990s, extensive harvesting took place. It decreased between 2001 and 2006 but has since increased again. In 2010, approximately 8 million cubic meters were felled. Environmental organizations have warned against over-utilization of certain parts of the forest stock.
In Estonia, fishing is practiced on a fairly small scale. In 2009, approximately 97,000 tonnes were caught, which is almost half of Sweden’s catch that year. Sharp herring and herring are the species that are by far the largest quantity. Shrimp, perch, cod, pike, bream and Norwegian fish are also fished. About 75 percent of Estonia’s fishery production is exported. Most of the fishing takes place in the Baltic Sea. Lake fishing is of limited commercial interest.
In the coastal regions, fishing has long been an important nutrient catch, as a main source of income or as a complement to agriculture. During the Soviet period, the activities were mainly organized in fishing cooperatives, which engaged in fishing both in the Baltic and in the Atlantic. At the same time, local fishing (including house-based fishing) was made more difficult by political and military reasons for boat ownership and by limited access to large parts of the coastal areas.
Raw material resources and energy supply
Estonia is relatively poor in resources but has the world’s largest recoverable oil shale deposits (around Kohtla-Järve). In addition, there is phosphorite (Rakvere, Maardu) for the production of e.g. fertilizer. The uranium was mined in Sillamäe until 1989, when the health and environmental effects forced a closure. Limestone, dolomite and clay have come to play a crucial role as raw material for the building materials industry. However, imports often have to be made to secure the need. The most important raw material production in terms of volume consists of crushing gravel and natural gravel.
Despite reduced production, the oil shale resources in northeastern Estonia account for two-thirds of the country’s energy needs through the operation of thermal power plants and the extraction of natural gas, oil and gasoline. The oil shale generates almost the entire need for electricity and surplus, which is exported to Finland, Latvia and Lithuania. In 2006, Estlink, a power cable between Estonia and Finland, was inaugurated, and in 2014 it was followed by Estlink 2, which runs under the Gulf of Finland. In addition to oil shale, the domestic energy sources are mainly peat, wood and surplus products from the forest industry.
Several wind farms are in operation. Oil and natural gas are imported from the Russian Federation. The management of oil shale has caused significant environmental damage, and the thermal power plants in Narva are being renovated to meet EU environmental requirements.
Since Estonia’s independence in 1991, the industrial sector has undergone a dramatic transformation in the transition from central planning to market economy. When the textile factory Krenholm went bankrupt in 2010, a point was set for large-scale Soviet-inherited production. Krenholm in Narva was one of the largest textile industries in Tsar Russia and the Soviet Union. Today, Estonia’s industry is dominated by small and medium-sized companies, often with Finnish, Swedish or other foreign ownership interests. These mainly produce food, wood products, furniture, metal products, machines, electrical products, electronics and IT technology.
Industrial production increased by about 10 percent a year between 2000 and 2007, but in the wake of the global financial crisis, industry declined by 5 percent in 2008 and close to 25 percent in 2009. Subsequently, the trend turned upwards. The industry recovered lost land in 2010 and has subsequently grown further.
Estonia has a relatively weak industrial historical tradition. It was only during the Soviet period that large-scale industrial expansion took place. The significance of the legacy from that time has now diminished. Not only size distribution but also production orientation has changed, while the industry’s share of total employment has been relatively constant. However, the number of jobs in the sector has decreased.
Since the interwar period, the forest industry has retained its importance as one of the country’s most important industries and production value has increased significantly, while a restructuring has taken place. Many production units have been closed down, while others, and especially sawmills created by foreign investment, have been established. A similar development can be seen in the food industry, where foreign (especially Nordic) interests have actively contributed to changing the forms and direction of production. In both cases, manufacturing for export is also an important element, although production mainly finds local sales. Unlike the forest industry, food producers have not only been recognized by reduced production volumes, but have also increasingly switched to importing raw materials, at the expense of domestic suppliers.
During the Soviet era, the engineering industry was often defense-related and was forced to adapt to a new role as a subcontractor in the export markets. Industries such as electronics and telecom have gained importance, including as subcontractors to Nokia and Ericsson. The timber, glass, plastic and metal products industries have long defended their positions, mainly thanks to low wages as an international means of competition. But after Estonia’s EU accession in 2004, labor costs have increased more than productivity, which has resulted in, for example, furniture manufacturing and the textile industry moving to new low-wage countries. One problem for the industry’s continued competitiveness is that Estonia’s earlier investment in low-wage production has partly hampered the development of knowledge-intensive industry.
The manufacturing industry has mainly been located in Tallinn, where overheating has led to labor shortages and high costs. This has led to the relocation of production to cities such as Tartu, Pärnu and Narva. The Narva area in the northeast, which was previously dominated by large-scale industry, has thus gone through closures and high unemployment to the development of small-scale modern production of, among other things, electronics and leather goods.
Three-quarters of Estonia’s foreign trade takes place with other EU countries. The most important trading partners are Sweden and Finland.
Exports mainly comprise engineering industrial products and electrical equipment, forest products and processed wood products (mainly Sweden and Finland), transport equipment, chemical products and food.
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Estonia’s imports are dominated by machinery and equipment. Fossil fuels, metals and metal products as well as food are other important import goods.
The country also plays an important role as transit country for the Russian Federation’s foreign trade. Large volumes of minerals and, above all, fossil fuels are shipped annually via Estonia’s ports.
Until 1991 trade with other Soviet republics accounted for 95 percent of Estonia’s exports and 85 percent of imports. It was primarily the agricultural sector and the heavy industry that were affected. Today, less than a tenth of Estonia’s foreign trade with the Russian Federation takes place, and trade with, for example, Latvia is larger.
It was with the restored independence that foreign trade came to play a significant role in Estonia’s economy. With stable currency, low production costs and favorable productivity growth, domestic companies have increasingly established themselves in foreign markets on their own or with the help of foreign investors.
At the same time, the very liberal trade policy has opened the country for external imports. Liberalization has contributed to the industry being exposed to competition, the heavy industry has given way to a lighter export industry and the supply of goods has increased. Estonia’s trade policy was so liberal in the early 1990s that, prior to the 2004 EU accession, certain fees were forced to reintroduce to comply with EU rules.
Note: the capital city of Estonia is Tallinn with a population of 394,000 (estimate 2009). Other major cities include Tartu with a population of 102 300, Narva with a population of 66 000, Kohtla-Järve with a population of 44 700, Pärnu with a population of 43 400 (estimate 2009).
Not least neighboring companies, in some cases with export subsidies in the back, have made significant breakthroughs in the Estonian market. The majority of the trade with Sweden and Finland is generated through the Swedish and Finnish-owned companies operating in Estonia.
Estonia’s domestic market is small, which makes the economy dependent on significant foreign trade. Overall, Estonia has a deficit in trade with the outside world.