 Free Market Reforms |
Since then Estonia has been described as an economic miracle. With ideas from young Harvard professor of economy Jeffrey Sachs and local economists, the Estonian government introduced a "treatment" called shock therapy. But it worked well! The economy started to grow at a much higher speed than in the largest former Soviet republics Russia and the Ukraine and even other Baltic Sates, where the state preserved much more of the old communist economic system.
The magic components of the Estonian economic success have been a free market economy with no tariffs on trade, a flat tax rate, privatization, huge foreign direct investments, a currency board system and a stabilized budget. And Estonia is going even further: according to a recently passed law on income tax, the corporate income tax was abolished for companies that re-invest their profits.
"Estonia is coming home to the West; it is coming home to Europe; it is coming home to where it has always belonged," said US Deputy Secretary of State Strobe Talbott during his visit to Estonia at the beginning of this year.
The Estonian success has been an example for other ex-communist states. It has set an example for Bulgaria with its currency board and assisted Ukraine with its monetary reform.
To brake apart from the Soviet economic system,
Estonia changed rubles into its own national currency,
the kroon, in mid-summer 1992. The central bank
introduced a simple and confident system with a
fixed exchange rate, the so-called currency board
system. The Estonian kroon was pegged to the Deutsche
Mark and the main task of the central bank is to
secure this peg. The currency is backed with reserves,
first it was done with the help of the Estonian
state forests, and it is backed by foreign currency
reserves and gold. |
The trust in local currency is secured by very conservative fiscal policy followed by the government. The only exception was last year, when the government faced a real deficit of 4,7% of the GDP. The deficit was financed partly by the resources from the privatization of Estonian Telecom. The deficit amounted to 200 million USD and it was a huge sum of money in Estonian terms.
Last year the government changed after parliamentary elections and the new minister of finance promises that last year's experience will not happen again. "We have promised the IMF to have a deficit of 1,3% of GDP and this is realistic," tells Siim Kallas, the Minister of Finance.
Besides cutting down state expenditures the government promises to stop borrowing money from abroad. There are discussions about the cumulative burden of foreign loans in the state sector that cannot cross 5% of GDP. This is marginal when compared to the 60% of the Maastricht criteria in the EU, but the amount of foreign loans in Estonia as a whole is quite big. This year over 100 million dollars will be borrowed by the government in order to build a highway between two major cities, Tallinn and Tartu. |
