Estonia is considered one of the most liberal economies in the world, ranking 13th in the Heritage Foundation's 2009 Economic Freedom Index. Hallmarks of Estonia's market-based economy have included a balanced budget, a flat-rate income tax system (the first in the world), a fully convertible currency pegged to the Euro, a competitive commercial banking sector, and a hospitable environment for foreign investment, including no tax on reinvested corporate profits (tax is not levied unless a distribution is made).
Estonia's liberal economic policies and macroeconomic stability have fostered exceptionally strong growth and better living standards than those of most new EU member states. After enjoying 8% average annual GDP growth since 2000, the economy started to show signs of cooling in 2007 when GDP growth slowed to 6.3%. In the current economic crisis, GDP fell by 3.6% in 2008 and a further 14.1% in 2009. Unemployment is currently 15.5% (4th Quarter 2009). However, after posting quarter-on-quarter growth at the end of 2009, Estonia may have started an economic recovery. Despite these hardships, the Estonian government has kept budget deficits low and appears on track to meet all Maastricht Criteria and adopt the euro in January 2011.
The economy benefits from strong electronics and telecommunications sectors; the country is so wired that it is nicknamed E-stonia. Bars and cafes across the country are typically equipped with wireless connections. Skype, designed by Estonian developers, offers free calls over the Internet to millions of people worldwide. Tourism has also driven Estonia's economic growth, with Tallinn’s beautifully restored old town a major Baltic tourist landmark.
By the late 1990s, Estonia's trade regime was so liberal that adoption of EU and World Trade Organization (WTO) norms actually forced Estonia to impose tariffs in certain sectors, such as agriculture, which had previously been tariff-free. Openness to trade, rapid growth in investment, and an appreciating real exchange rate resulted in large trade deficits from 2000 to 2008.
Estonia is a net-exporter of electricity, using heavily polluting, but locally mined oil shale, to fire its power plants. However, it imports all of its natural gas and most petroleum (roughly 30% of total energy consumption) from Russia. Alternative energy sources such as wood, peat, and biomass make up about 9% of primary energy production, and Estonia is developing wind farms for clean renewable energy. An undersea electricity cable inaugurated in December 2006 allows Estonia to export electricity to Finland. Estonia and Finland plan to begin construction on a second undersea cable in 2011.
Information by U.S. Department of State
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