This report presents a political-economy analysis of the developing free-market economy of the Republic of Estonia since it declared its independence in 1991. After fifty years of Soviet-style central planning, Estonia initiated a program of broad structural reforms in an attempt to enter the global free market economy. In the early-transition period from 1991-1994, reforms focused on implementing a political and legal system compatible with a primarily private-ownership-based market economy--structural reforms which may be viewed as prerequisites for future economic reforms and development. These structural reforms entail the creation of a new legal system, a radical structural change in relevant legal regulation concerning ownership reform (including privatization and other components of ownership reform), fiscal reforms concerning tax and budgetary policies and establishing a new currency, and governmental agencies and institutions such as diplomatic services, and central banking services--all of which involves a radical rearrangement of the institutional structure of Estonian society.
Rather than opting for a gradual program of reform, Estonia has implemented broad and radical changes. While, in the short-term, the initial effects of the program of structural reform resulted in a drop in many key economic and social indicators such as GNP, manufacturing and industrial production, agricultural production, and a decline in employment, pension payments and wages, these reforms underlie the economic boom Estonia has experienced since 1994. This work outlines key aspects of Estonia's radical reform programs concerning privatization, currency, banking, trade, foreign investment, and industrialization which have contributed greatly to Estonia's economic success. The discussion emphasizes their economic and social effects in the short-term period (1991-1994) in contrast to the mid-term period (1994-1997) to evaluate the extent to which reform policies have or have not been successful in transforming Estonia into a free-market economy and fostering economic development. To the extent that Estonia's recent economic success (as evidenced by many key economic indicators) may be associated with its radical reform programs, Estonia's reform program may serve as a useful model of economic development for other post-communist transition economies--especially those formerly incorporated within the Soviet Union.