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Estonia Country Brief 2003
Overview
Estonia is an upper middle income country with Gross National Income (GNI) per capita of US$ 4,140. As a relatively small country with a fairly narrow range of natural resources, the country's economic prospects remain heavily dependent on trade and thus on the external environment.
Estonia's aspirations to modernize its economy and join the EU have been the driving force for economic reforms, and the country has successfully implemented a broad agenda of stabilization and structural reform policies. Negotiations for European Union (EU) membership are complete and Estonia will join the EU in 2004.
Estonia’s economic performance continued to show resilience in the face of slowdown in its major EU trading partners in 2002. GDP growth was strong at 6 percent in 2002, only slightly below 6.5 percent in 2001.
The country, however, continues to face persistent unemployment despite a slight decline in 2001 and 2002 to 10.3 percent. Continued high unemployment largely reflects skills mismatch. Workers laid off in traditional sectors have not been able to find jobs in the new services and high-tech sectors, specially in the northeast region. Government measures to address the problem include targeted job training for the young and long-term unemployed, and reform of the education system to provide relevant vocational skills.
Events since transition
Estonia regained its independence in late 1991after half a century of central planning and dependence on trade with the countries of the former Soviet Union and the Baltics (FSUB).
The country began transition with some distinct advantages over the other FSUB states. It had the highest per capita income among the FSUB states, and its infrastructure and education levels were among the highest. In addition, basic institutions were well developed from its days of independence between the two World Wars. Moreover, as one of the key gateways for trade between the FSUB and the West, the country had much closer ties with the West than most other FSUB countries. This contact was facilitated by its traditional links with the Nordic countries, particularly Finland, with which it shares cultural and linguistic roots.
Estonia began the process of price and related economic reform in 1989, earlier than the other FSUB republics, and the pace of reform was stepped up significantly after independence. The government's stabilization strategy that followed price liberalization was highly successful. In June 1992, Estonia introduced the kroon, the first new national currency in the FSUB.
Recent economic performance
GDP growth was strong in 2001 and 2002, despite the slowdown in the country's main trading partners. The currency board has served the country well. Inflation, largely driven by external factors and the increasing domestic demand, has been slow to fall and remained above levels in the Euro area and other Baltics. The average consumer price index (CPI) was 3.6 percent in 2002 (compared to 5.8 percent in 2001). The budget registered a surplus of 1.1 percent of GDP in 2002. On the negative side - the current account deficit has doubled in 2002 reaching 12.3 percent of GDP (compared to 6.0 percent of GDP in 2001) due to growing demand for imports. Net FDI covered only about 20% of the current account deficit in 2002.
World Bank Assistance
Estonia joined the World Bank in June 1992. The Bank’s program has supported projects focused on improving the environment, fostering private sector investment and growth, improving the efficiency of infrastructure services, improving human resources, and enhancing Estonia’s human development services.
Impact on the Ground
 Highways upgraded and road safety improved. Upgraded highways and improved road safety have reduced the growing number of vehicular traffic accidents, and improved access to the two major cities in Estonia as well as in some neighboring countries, thereby facilitating economic activity.
 Health care upgraded. A new management information system in the health sector is improving the targeting of health care services. This has resulted in increased childhood immunization coverage with coverage for tuberculosis at 100 percent, polio - 95 percent, pertussis - 94 percent, tetanus - 95 percent, diptheria - 95 percent, rubella -92 percent, mumps- 92 percent, and measles - 92 percent (1999 data).
 Land market developed. About 68 percent of the country’s land area has now been registered. Land values are rising much more rapidly than inflation, including an average rise in 2001 of 34 percent for agricultural land. Farms are managing to be free of debt, and the more entrepreneurial farmers are acquiring additional land through lease and purchase.
 Financial services improved. An integrated Financial Sector Supervision Agency has been established with assistance from the Bank and conducted several on-site inspections since becoming operational in the beginning of 2002. It has devoted resources for the supervision of the establishment of the second-pillar pension system.
Challenges Ahead
ž Reducing persistent unemployment through education and training to improve skills and to take advantage of technological advances.
ž Strengthening local government administrative capacity and financing to ensure adequate delivery of public services such as education, health and social assistance.
World Bank Lending to Estonia
Total IBRD/IDA Commitments from FY93 to FY03: US$ 150 million
(by fiscal year *,in nearest US$ millions)
 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Total |
| Commitments | 125 | - | - | - | 25 | - | - | - | 150 |
| Disbursements | 44 | 17 | 8 | 13 | 13 | 4 | 5 | 7 | 111 |
Total Commitments by Sector since 1991
(in nearest US$ millions)
Fiscal year from July 1-June 30.
For more information please contact:
In Riga: Toms Baumanis phone: + (371 - 7) 22 - 07 - 44
E-mail: tbaumanis@worldbank.org
September 2003
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