Changes in the economic structure

It has been characteristic of Estonian economic reform that no branch of the economy has been preferred; practically the only determining factor in the restructuring has been the ability of an enterprise to adapt itself to economic conditions, especially its ability to orientate itself to the Western market. This situation has been caused by the indeterminacy of the economic situation, the sharply changing price structure, and the rapid contraction of the eastern market.

The most direct consequence of the changed economic environment has been the sharp decline in production in all branches of the economy. Economic changes were very much influenced by prices and the foreign economic shock. The cumulative decline of the GDP during the period 1990–1994 was 36%.

Economic growth began in 1995. The GDP increased 4.6% in 1995 and 4.0% in 1996. The manufacturing output increased 10.3% in 1995 and 2.6% in 1996. During 1997 the growth rate increased. The GDP increased 10.4% in 1997 and 5.0% in 1998. The Russian financial crisis had an effect on industries whose main target for export was Russia (food industry). The GDP declined in 1999 by 0.7%, but started growing again in 2000. Due to important changes in the direction of foreign trade and the economic relationship in general from east to west during the 1990s, the effect of financial crises in Russia had a more moderate influence on the Estonian economy than would have occurred if Estonia had been more closely linked to the Russian market.

The industrial output increased in 1997 by 14.6% and in 1998 by 4.1%. A decline of –3.8% followed in 1999, but growth recovered again in 2000.

Estonia is overcoming the economic crisis with a notably changed economic structure. The shares of trade, transportation and the service sector have increased rapidly. The share of manufacturing was 35.1% and that of agriculture (together with hunting and forestry) 22.0% of the GDP in 1989. In 1996 the share of agriculture was 5.2% and in 1999 3.3%. The share of manufacturing decreased to 14.8% in 1996 and 13.7% in 1999. At the same time, the amount of trade as a percentage of the GDP increased from 7.0% in 1989 to 15.3% in 1996 and to 14.5% in 1999, the share of transportation and communications from 6.9% to 9.7% to 13.2%. The share of financial institutions and insurance captured 4.2% in 1996 and 3.8% in 1999, the real estate, renting and business services 8.6% and 11.0% respectively. The structure of the Estonian GDP has become rather close to that of the GDP of developed countries. As these structural changes are a result of a deep economic decline and foreign trade shock (a rapid change of terms of trade, and a deep decline of trade with Russia), which was most complicated for industrial enterprises, one very important question is what the share of traditional branches like manufacturing and agriculture will be after some revival of these branches.

The structure of the GDP by economic activities at current prices (%)
Economic activity
1989
1994
1996
1999
Agriculture and hunting
22.01 7.2 5.2 3.3
Forestry
1.31.2  1.6
Fishing
0.5 0.4 0.3
Mining and quarrying 1.7 1.61.4 1.1
Manufacturing 35.1  16.6  14.8
13.7
Electricity, gas and water supply 2.0 2.9 3.6 3.2
Construction  9.0 5.6 5.2 4.9
Wholesale and retail trade   7.02 13.5  15.3 14.5
Hotels and restaurants  
1.01.1 1.2
Transport. Storage and communications  6.9 10.19.7 13.2
Real estate, renting and business activities
7.3 8.6 11.0
Financial intermediation, banking and insurance  
2.8 4.2 3.8
Public administration  16.133.9 4.24.5
Education 
5.0 5.0 5.3
Health and social care 
3.1  3.7 3.4
Other personal service activities 
5.1 5.9 5.7
TOTAL 
87.5 89.5 90.7
FISIM (-)   

2.2
1989
TOTAL AT BASIC PRICES 
99.8 87.5 87.3 1.6
NET TAXES
0.2 12.512.7 10.9
TOTAL AT MARKET PRICES  
100100 100 100

Sources: Rajasalu, T. Estonian Economy at the Dawn of Independence. Tallinn: The 
Estonian Academy of Sciences, 1992; Statistical Yearbook of Estonia, Tallinn: Estonian Statistical 
Office, 2000, p. 213

Foreign investment could be one of the solutions to the structural problems cited above. The total amount of foreign direct investments (FDI) in Estonia, which according to the Bank of Estonia was 44.5 billion kroons on 31 December 2000, places Estonia in a satisfactory position among other Eastern European countries. Sweden with 39% and Finland with 31% were the most important countries from which the FDI came. Transport and communication with 23%, financial intermediation with 23% and manufacturing with 23% were the most important branches for the FDI.

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