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Estonia - Economy (Notes)

ECONOMY Estonia is considered one of the most liberal economies in the world, ranking 7th in the Heritage Foundation's 2006 Economic Freedom Index (above the United States and just below the U.K.). Hallmarks of Estonia's free, market-based economy include 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. The IMF projected real GDP growth at over 9% in 2006, slightly below its 2005 level. The economy benefits from strong electronics and telecommunications sectors; the country is so wired that it is nicknamed E-stonia. Bars and cafes are universally 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 beautifully restored Tallinn already a 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 have resulted in large trade deficits in recent years. In the first six months of 2006, exports and imports both grew rapidly, with growth reaching 30.8% and 31% year-on-year, respectively. Estonia supplies more than 90% of its electricity needs with locally mined oil shale; however, it imports all of its natural gas and 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. An undersea electricity cable inaugurated in December 2006 will allow Estonia to export electricity to Finland. Notwithstanding these many achievements, the economy of Estonia still faces challenges. The income differential between Tallinn and the rest of the country has widened in recent years as the cost of living differential has narrowed. The formerly industrial northeast section of Estonia suffered from economic depression as a result of plant closings in the early 1990s, although even this region has experienced strong growth in the last two years. The labor force is shrinking due to low birth rates and emigration. This tight labor market and the government's restrictive labor and immigration policies have led to wage pressure and challenges to future competitiveness. Inflation above 3% has forced the government to push back adoption of the Euro from its original target of 2007. The Estonian Finance Ministry predicts that the economy will grow by 8.7% in 2007. This compares with an estimated EU-wide GDP growth rate of 2.1% in 2006 and 2.4% in 2007. The unemployment rate in the second quarter of 2006 was 5.4%, below the EU-wide average of 8.5%. 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 2005 were $138.4 million, forming 1.4% of total Estonian imports. In 2005 the principal imports from the United States were electronics, iron and steel, and machinery. Estonian exports to the United States grew 27% in 2005 to $240 million, making the U.S. Estonia's eighth-largest export market. U.S. imports from Estonia are primarily mineral fuels and oils, wood and wood products, and electronics. 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. Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank's CD-ROM or via the Internet. Please contact STAT-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at the U.S. Department of Commerce's site and at the U.S. Embassy in Tallinn's website at http://estonia.usembassy.gov/commguide.php. They also can be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce, Trade Information Center by phone at 1-800-USA-TRAD(E) or by fax at 1-202-482-4473.