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Estonian Economic Reform Why did Estoniamove from a planned economy to a market economy?

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Introduction

Estonian Economic Reform Why did Estonia move from a planned economy to a market economy? (5) When Estonia first gained independence after the First World War, it enjoyed great economic success and development during the twenty-year inter-war period. However, the economic gains were negated by fifty years of Soviet occupation following World War II, leading to economic stagnation. The central government of the Soviet Union had destroyed the Soviet Republic's economy as a whole, as the decision of what to produce, how much to produce and for whom to produce was placed solely on the government. Thus inefficient monopolistic state-owned industries employing the entire population regardless of skill level churned out poor quality goods that nobody wanted, while the rationing of basic foodstuffs was part of daily life. With the loss of the profit motive and no hierarchy system where the better were rewarded, both people and companies had little motivation to be efficient or innovative. The Estonian economy was in reality just the sum of the enterprises physically located on one territory. ...read more.

Middle

But political and economic instability in the CIS, coupled with the complete lack of monetary discipline within the ruble zone, offered little international credibility for the nations using the ruble. With the removal of subsidies on a multitude of goods, prices rose to real levels. In 1992 inflation exceeded 1,000 percent. Without the Soviet Union juggernaught providing cheap raw materials and a market for exports, the Estonian economy was left completely exposed. Inefficient state companies were forced to close, aggravating unemployment and dragging down GDP: the cumulative decline of the GDP during the period 1990-1994 was 36%. Foreign investment was desperately needed; enterprise was almost non-existent and capital had to be imported. What are the benefits of its transition? (5) Today, Estonia has a booming economy that is rapidly reaching western standards. Its economic success is based on a liberal economic policy, a currency board system with a stable currency pegged to the Deutschmark/Euro and a balanced budget (The Estonian government solved the problem of rocketing inflation by introducing a new currency, the Kroon, in 1992. ...read more.

Conclusion

The structure of the Estonian GDP has become rather close to that of the GDP of developed countries. These structural changes are a result of the deep economic decline experienced during the difficult years of transition and foreign trade shock (a rapid change of terms of trade, and a deep decline of trade with Russia). These shocks enabled Estonia to develop an export-orientated and well-oiled free market economy, which in turn brought economic growth and an increase of general wages well ahead of inflation. Estonia is now investing heavily in the technology sector, and 40% of its citizens now use the internet. With living standards rising steadily, more and more economists are beginning to call the difficult transition Estonia has endured the 'Estonian Economic Miracle'. Estonian economic indicators 1995-2000 1995 1996 1997 1998 1999 2000 GDP, billion kroons 40.9 52.4 64.0 73.5 76.3 84.4 Real GDP change rate, % 4.6 4.0 10.4 5.0 -0.7 6.4 Industrial output, change % 1.9 2.9 14.6 4.1 3.8 -9.1 Consumer price index, % 29.0 23.1 11.2 8.2 3.3 4.0 Unemployment, % 9.7 10.0 10.5 9.9 12.4 13.4 Average monthly salary, kroons 2697 3310 4027 4389 4799 5279 ...read more.

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