Estonia in Transition

Abstract

This paper will assess institutional change and performance for the Estonian economy during the transition period, with a focus on the monetary aspects. Estonia was the first of the former Soviet republics to issue its own fully convertible currency backed by a currency board. The issuing of the new currency occurred in the context of a transition, and the Estonian experience is characteristic of the shock therapy approach. Culture and history also affect the path of transition. An understanding of the Estonian experience can shed light on why economic transition has been less successful in Russia and other countries of the former Soviet Union. The process of transition from a planned socialist economy to a capitalist market economy involves the privatization of state-owned enterprises and land. Prices, freed of administrative constraint, move to equilibrium market levels. The introduction of markets provides the basis for resource allocation and drastically changes the role of government. Government production of goods and services is reduced in favor of laying the ground rules for the evolution of a market system. Banking and financial market reforms require a revamping of the monetary system [Koslowski 1992, 673-705]. Once shock therapy is implemented, economic theory predicts a pattern where the level of Gross Domestic Product (GDP) and personal income falls, measured unemployment rises, and measurable inflation accelerates. Prices adjust to pressures from domestic and world markets, and downsizing by state-owned enterprises or