Estonia: Economy

Estonia is considered one of the most liberal economies in the world, ranking 13th in the Heritage Foundation's 2009 Economic Freedom Index. Hallmarks of Estonia's market-based economy have included a balanced budget, a flat-rate income tax system (the first in the world), a fully convertible currency pegged to the Euro, a competitive commercial banking sector, and a hospitable environment for foreign investment, including no tax on reinvested corporate profits (tax is not levied unless a distribution is made).

Estonia's liberal economic policies and macroeconomic stability have fostered exceptionally strong growth and better living standards than those of most new EU member states. After enjoying 8% average annual GDP growth since 2000, the economy started to show signs of cooling in 2007 when GDP growth slowed to 6.3%. In the current economic crisis, GDP fell by 3.6% in 2008 and a further 14.1% in 2009. Unemployment is currently 15.5% (4th Quarter 2009). However, after posting quarter-on-quarter growth at the end of 2009, Estonia may have started an economic recovery. Despite these hardships, the Estonian government has kept budget deficits low and appears on track to meet all Maastricht Criteria and adopt the euro in January 2011.

The economy benefits from strong electronics and telecommunications sectors; the country is so wired that it is nicknamed E-stonia. Bars and cafes across the country are typically equipped with wireless connections. Skype, designed by Estonian developers, offers free calls over the Internet to millions of people worldwide. Tourism has also driven Estonia's economic growth, with Tallinn’s beautifully restored old town a major Baltic tourist landmark.

By the late 1990s, Estonia's trade regime was so liberal that adoption of EU and World Trade Organization (WTO) norms actually forced Estonia to impose tariffs in certain sectors, such as agriculture, which had previously been tariff-free. Openness to trade, rapid growth in investment, and an appreciating real exchange rate resulted in large trade deficits from 2000 to 2008.

Estonia is a net-exporter of electricity, using heavily polluting, but locally mined oil shale, to fire its power plants. However, it imports all of its natural gas and most petroleum (roughly 30% of total energy consumption) from Russia. Alternative energy sources such as wood, peat, and biomass make up about 9% of primary energy production, and Estonia is developing wind farms for clean renewable energy. An undersea electricity cable inaugurated in December 2006 allows Estonia to export electricity to Finland. Estonia and Finland plan to begin construction on a second undersea cable in 2011.

Foreign Trade
Estonia is part of the European Union, and its trade policy is conducted in Brussels.

Estonia's business attitude toward the United States is positive, and business relations between the two countries are increasing. The primary competition for American companies in the Estonian marketplace is European suppliers, especially Finnish and Swedish companies.

Total U.S. exports to Estonia in 2009 were $138.6 million, forming 1.38% of total Estonian imports. Principal imports from the United States were machinery; photo, medical or surgical instruments; electronic equipment; and aircraft parts. Estonian exports to the United States were around $400 million in 2009 (4.3% of the total exports), making the U.S. Estonia's third--largest export market after the EU and Russia. U.S. imports from Estonia are primarily mineral fuels and oils; electronic machinery; games and sports equipment; and photo, medical or surgical instruments.

Estonia's economy benefits from its location at the crossroads of East and West. Estonia lies just south of Finland and across the Baltic Sea from Sweden, both EU members. To the east are the huge potential markets of northwest Russia. Estonia's modern transportation and communication links provide a safe and reliable bridge for trade with former Soviet Union and Nordic countries. Many observers also see a potential role for Estonia as a future link in the supply chain from the Far East into the EU.

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