ESTONIA IN TRANSITION Muslimin ( ) Haensri Jemy (

Located on the Baltic Sea, and offering a gateway to Russia Where is Estonia?

Estonian History Soviet Era (prior to 1989) Poorest citizens in Europe (did not improve after WW II) Economic decisions centralized in Moscow. No R&D, no Sales & Marketing functions Perestroika ( ) Few manufacturing industries privatized However, sold only to ethnic Russians Transition to Independence (1991) Political turmoil and uncertainty Visible demonstrations against Russia’s military Free country in 1991

 Lack of constitution, democratic institutions, and a legal system;  Obsolete and bad infrastructures;  Below-western-standard banking sector;  Economy crisis:  high inflation  declining GDP,  export halted,  domestic demand feel,  companies went bankrupt,  unemployed skilled & unskilled people Estonia as a free country in 1991

How has Estonia substantially improved its competitiveness, and performed so well compared to most other transition countries? How was Estonia able to advance so rapidly? Question 1

Post-Independence Political & Economy Decisions Open for trades and investments Memberships of WTO and later the EU Council of the Baltic Sea States (CBSS) in 1992 No exchange controls or restrictions on foreign investment Transformations Communist-led planned economy to western market economy Pegged currency to German Mark (1992) and the Euro (2002) Structural Reformations Privatization of state-owned firms (incl. utilities) Building modern infrastructures. Simple tax system

Post-Independence Political & Economy Decisions (cont’d) Business Environment 100% literacy rate in Estonia A state system offering good education for all in year education system. Education The Estonia Information Technology College was established in Tallinn in September 1999 Technology Modernized infrastructure. Privatized utilities. Infrastructure

Post-Independence Political & Economy Decisions (cont’d) Business Environment (con t ’d) Banks played the dominant role in Estonia’s financial markets Financial Markets Strong Exports. Tax-free/customs-free zone Trade Foreign MNC significant contributed to exports Foreign Direct Investment develop a number of emerging clusters Economy

Post-Independence Political & Economy Decisions (cont’d) Clusters Develop emerging clusters, typically built around the country’s traditional industrial sectors. Integrate with some of the stronger clusters in the Nordic region, such as: Food processing. Logistics. Forest products. Textiles and apparel. Automotive components. Telecommunications.

Compare Estonia’s success with that of Chile. What are the similarities? What are the differences? Question 2

Estonia vs Chile Similarities Economy crisis due to political turmoil Free-trade market and bilateral trade agreement Conduct structural reforms, liberalization in domestic market, and sharp reduction in trade barriers

Estonia vs Chile (cont’d) Differences Estonia No significant energy and mineral reserves Chile Mineral-rich world’s largest copper reserve Second largest lithium reserves Medium income country

Estonia vs Chile (cont’d) Differences (cont’d) Estonia Has a long history in IT and telecommunication Chile Agriculture Has a long success history in wine making industry

Estonia vs Chile (cont’d) Differences (cont’d) Estonia After the civil demonstration against Russia’s military, the civil society governs Estonia. No military approach. Chile The military government to stabilize the political situation (Pinochet declared a state of emergency that gave government draconian powers).

What are the issues facing Estonia in 2002? Question 3 The country was sometimes used as a test market for new technologies by companies such as Erickson and Nokia. The IT and telco clusters grow faster among the Baltic Countries.

What recommendations would you make to Estonia’s leaders? Question 4

Recommendations to Estonian Leaders Balancing development between bank & other financial institution. Defending competitive advance or high technology in all sectors. Vasten the export area to get more powerful trade. Increasing FDI to create jobs.