Ülo Ennuste Economics

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Dual Market-Transition in Estonia 1987-2009: Institutional Mechanism Analysis Approach*



                                                Ülo Ennuste

                 Tallinn University of Technology, ylo.ennuste@mail.ee




                          “institutions are not usually created to be socially efficient, are created to serve the interests of those with bargaining power to create new rules.”        

                                                                                                           North, D. 1990



                “These considerations lead to the second concept of rational social order: an ecological system, designed by no mind …”                                                    Smith                                                                                                                                           , V. 2005





I thank Jose´Fanelli, Gary McMahon, Kalev Kukk, Alari Purju and Rein Taagepera whose helpful advice and comments allowed improving significantly the analyses. Financial support from the Estonian Ministry of Education and Research (Project 0142086s02) and GDN are gratefully acknowledged. The remaining errors are my own.




Extended Abstract                                              


According to the plethora of mainstream transition economic studies, Estonia’s capitalist market institutional reform process offers an example of a rather rapid and successful return from relatively civilized communist to liberal capitalist economy principles and in the second step starting integration into civilized Western capitalist market economy. Also, Estonia’s transformation process includes several specific features that deserve additional attention on the basis of our after-wisdom. Analyses of some of the idiosyncrasies of this process have been still now been neglected and many phenomena are commonly misunderstood (e.g. insufficient coordination in the institutions building/constitutional mechanisms, some faulty informed reforming actors in this mechanisms, foreign political influences, ethnic heterogeneity etc) mainly because the mainstream analyses have also neglected in the analysis the latest evolutionary and institutional economics methodological principles of constructivist and ecological rationality and implementation theoretic methods of effective institutional design in the dynamic transition process under great uncertainties. The main novelty of this paper may be that the analyses of the Estonian institutional transition building systems/mechanisms (constitutional systems) are based on the modern Bayesian implementing mechanisms theory for effective institution building (see e.g. Ennuste 2005).

In this context I will try to tackle the Estonian capitalist market reform process in 1998-2006 as a sequentially dual asymmetric meta-constitutional implementation process aimed at building a civilized institutional society (Marangos 2006 and Davidson 1996): first, transition from socialist to a nominal capitalist market economy and, second, the reforms to adopt main elements of the EU countries’ credible and harmonious capitalist market models and acquis communautaire. The former took place in the secessional downward phase/slope and the latter in the accessional upward phase/slope of the real economy.

And more importantly, in the case of Estonian transition, economics and other social sciences have been mainly and frequently in a subordinate and instrumental role to mask politically motivated ends and ambitions and politically oriented incompetent studies in parallel to many other transition countries. There are by now, from the point of economics, many ill-conceived concepts circulating about economic transition in Estonia as well as in general for many other post-socialist transition countries. I agree that “transformation has been above all a political project in which social science can play an instrumental or ancillary role.” But in the analysis of this political process institutional political economy may still play a major role in case we approach the reform process as a national project with socially desirable solutions and try to understand the evolutionary structure of the constitutional constructivist systems/mechanisms that design, implement and enforce these reforms.

From the ecological approach in our study we exploit amply the “snowball effect” theory to show that the Estonian reform processes can be more deeply understood in the tight context of all Soviet Bloc’s political and economic collapse. In the mechanism theoretic formulations the capitalist market reforms process came about into Estonian elites reforming actors’ circles mainly through external shock of the complete breakdown of the Soviet socialist chamber in the end of 1980s. This process was deeply vindicated into snowball effect of the Central-European capitalist market transition and first of vindicated into sporadic privatization activities. From that time the democratic Estonian constitutional forces started step by step to gather to break from and distance from the Socialist economic system and Russian market and rapidly-gradually started to implement new capitalist market system institutions. These have been implicitly the main political incentive as for dominating elite reforming actors as well for the main masses in concert already many decades, but not realised because for  fear of Kremlins repressions.

This first wave of implementation activities was mainly political process as there was no political-economics theoretical knowledge base available about these processes at the time and much based on informal institutional activities. Although the competence of the constitutional actors and their coordination in the field of principles and methods of reforming design was very limited, their incentives were very homogenous and vindicated in the same way into snow-ball process and that helped to learn collectively from the lessons of Central-European transition and avoid significant failures. All actors were “herding” and rapidly implementing mainly simplified and diverse elements of capitalist market institutions that had been proceeding in the CEECs.

In the second period of 1990s this transformation changed to the process of harmonisation and convergence with the European Union advanced economic institutional system. In this process the political incentives of the reforming actors started to differ: some players turned slightly more to right and others more left. But the inertial forces of the successful beginning of 1990s still had the upper hand and the non-political game of elaboration of contemporary capitalist market system was played as before in concert. The central coordination of the reforming actors had also considerably improved at that time. With some minor difficulties the accession was completed in 2004, but the right to use euro will prolong at least till 2008 mainly due the incompetent sterilisation of inflationary pressures.    



1.    Introduction


Why is it important to revise Estonia’s market reform program studies under “institutional mechanism” approach?


According to the plethora of mainstream transition economic studies, Estonia’s capitalist market reform process offers an example of a rather rapid and successful return from communist to liberal capitalist economy principles and integration into Western markets (Panagiotou, 2001). Also, Estonia’s transformation process includes several specific features that deserve additional attention on the basis of our after-wisdom. Analyses of some of the idiosyncrasies of this process have been still now been neglected and many phenomena are commonly misunderstood (e.g. insufficient knowledgebase, same faulty informed reforming actors, foreign political influences etc) mainly because the mainstream analyses have also neglected in the analysis the latest evolutionary and institutional economics methodological principles of constructivist and ecological rationality (Smith, 2005) and game theoretic methods.

In this context we will try to tackle the Estonian capitalist market reform process in 1998-2009 as a sequentially dual asymmetric meta-constitutional process: first, transition from socialist to a nominal capitalist market economy and, second, the reforms to adopt main elements of the EU countries’ credible and harmonious capitalist market models and acquis communautaire (Lavigne, 1999; Andreff, 2004 and Wagener, 2004). The former took place in the secessional (disintegration) downward phase/slope and the latter in the accessional upward phase/slope of the real economy.

By now it is clear that the market oriented transformation processes are long-term and gradual and to a great extent still going on. This “still” probably depends on the initial conditions (Panagiotou, 2001) and takes nowadays the form of economic systems institutional adaptation and harmonization (Andreff, 2004).

And more importantly, in the case of Estonian transition, economics and other social sciences have been mainly and frequently in a subordinate and instrumental role to mask politically motivated ends and ambitions and politically oriented incompetent studies in parallel to many other transition countries (Pickel, 2002). There are by now, from the point of economics, many ill-conceived concepts circulating about economic transition in Estonia as well as in general for many other post-socialist transition countries (Kornai, 1998). We agree with Pickel that “transformation has been above all a political project in which social science can play an instrumental or ancillary role.” But we think that in the analysis of this political process institutional political economy may still play a major role in case we approach the reform process as a national project with socially desirable solutions (Ennuste and Rajasalu, 2002) and try to understand the evolutionary structure of the constitutional constructivist systems/mechanisms that design, implement and enforce these reforms (Wagener, 2004). From the ecological approach in our study we exploit amply the Brezis and Verdier (2003) snowball effect theory to show that the Estonian reform processes can be more deeply understood in the tight context of all Soviet Bloc’s political and economic collapse.[1]



  Analytical framework and methodology to be used

We take that what actually happened was in result an ecological-political evolutionary process aimed at developing a civilized society (Marangos 2006). But to understand the reform attempts in this process we have rigorously to study the constructivist behaviour of the evolving reforming agents and their coordination mechanism in this process. Therefore we try to base our narrative as much as possible on the normative Bayesian implementation theory (for latest most conveniently interpreted approaches see e.g. d’Aspremont et al., 2004 and Matsushima, 1993). In this approach the implemented reforms will be considered as equilibrium outcomes of coordinated constitutional mechanism process, and in this sense “designed by no mind”. Outcomes that may be properly understood only by analysing the game that was played in the mechanism, game where a small change sometimes may trigger dramatic transitions (Levi, 2005).

     The latter approach is in our narrative implicitly extended to cover the constructivist design of economic general compiled reforming mechanisms/systems (Ennuste 2005). In this mechanism the actors are governmental, political and social groups and economic agents etc as market reform designers, implementors and also coordinators. We postulate strategic behaviour, bounded rationality, incompetence and learning capabilities of the actors. In this approach the initial implementable social choice rule contains as decision variables the alternative complementary reform strategy clusters (Ennuste, 2001 and Wagener, 2004) and endogenous information spaces.

Thus we try to take the area of analysis that Pickel (2002) calls “systemic change by design” and considers as most challenging in the field of transformation theory. The core of our discourse is the comparative study of actually functioning institutional metasystems implementing reforms with the models of socially desirable ones. We may call this theoretical approach the third generation transition theory (Müller and Pickel, 2001 describes the first and second) blended with the New Comparative Economics (Dallago, 2004).

The given model is rich enough to adequately describe complete reforming mechanisms and on the basis of this general mechanism model by comparative studies (including case studies of the core reforms) we may distinguish several types of partial sub-mechanisms. Theoretically, for the implementation of a socially optimal reform process in a general economic situation, an ideal design of reforming system is a necessary condition (complete coordination, rational agents etc.). In the case of special economic situations, incomplete mechanism and limited rationality of actors, it may be possible from the model to deduce and understand the reforming performance of different variations of incomplete reforming systems, especially in the sense of the following questions:

  • Why was this reform attempt at that time necessary?
  • What kind of reform was realized/implemented?
  • How well did the implemented reform perform and what lessons can be learned from it?

And we try also to tackle Fanelli’s (2004) three key research questions:

  • Why were some countries able to undertake reform while others were not?
  • What factors enabled some countries to successfully implement their reform program while the program quickly failed in others?
  • Why were some reforms more successful in delivering expected outcomes than others?

We will implicitly estimate the performance of the reform results in our narrative normative/political model from three aspects:

  • Effect of reforms: comparison with the hypothetical (counterfactual) status quo basis (no reforms had been implemented but a new situation).
  • Effectiveness of reform: relative performance of realized reform is estimated relative to the nationally desirable counterfactual reform results from: 1) ex post “after wise” and 2) retrospective ex ante “before wise” positions.
  • Comparative effectiveness: effect of the reform relative to the reform results in other comparable transition countries.
  • Comparative strength of the implemented institutional structure (Chong and Gradstein, 2004) to lead to more equal distribution of national income and to avoid subversion of the reform results.

In the estimations of all reform effects we will keep in mind that these effects may be diluted first of all in the secession and disintegration depression effects (Gradstein, 2004) of the Soviet Bloc and, last but not least, in the ascending accession and integration effects connected with joining the EU (Sand-Zantman, 2004).




2.   Estonian Institutional Market Reform Process and Revisiting its Idiosyncratic Aspects


This section focuses on Estonia’s idiosyncrasies that may have determined why Estonia’s post-communist transition and the EU accession reforms have taken some other characteristics than in other Baltic States or EECs. It hypothesizes that the most significant idiosyncratic reform factors may have been: small size and geographical location, re-annexation threat and large Russian-speaking Diaspora, and last but not least, the Estonian image as a “shining star” of transition on the one hand, and on the other, as a still very low income country.


2.1. Idiosyncratic Aspects


Small size and geographical location

Interestingly enough, the broad spectre of mainstream political-economic and econometric models of transition do not directly indicate factors of size and geographical location of the country as significant determinants of the transition processes and it seems the Estonian experience is not going strongly to refute their understanding. Although in the Soviet Empire the small size and compactness of the Estonian economy was by Moscow considered as a good laboratory for soviet stile limited economic experiments on the national scale (Brutus and Ennuste, 1965). 

Brezis and Verdier (2003) hypothesize in their snowball effect theory to show that for a communist regime the probability to collapse in a country and open way to market reforms and the principal types of these reforms is a function of effectiveness of the punitive repression sector of the pre-democratic period. In Estonia as a small (population 1.4 million) occupied country in the strategically sensitive geographical location, the Soviet communist repression of the population has been extremely severe considering the relative losses of the population and the economic losses over the last half century (Lauristin and Vihalemm, 1997 and Kukk, 2005). From this we may conclude that the factors of small size and respective small geographical distance from the repressive centre should only have deteriorated the types of initiated reforms and delayed them. 

And importantly, the structures and complexities of effective economic market mechanisms and institutions do not depend significantly on the size of the country. It is easy to see that a small country has less resource in the constitutional bodies to build up its capitalist market system and is therefore trying to escape to simplified solutions that may in the end be more effective in the situation of large transitional uncertainties. In this respect gradualism seems for a small country the only way to build up market mechanisms and the discussions about Big Bang reforms and Shock Therapies are not fully understood in these countries.

On the other hand, in the process of independent reforms, economic diversities and bureaucracy in a small country are as a rule smaller than in a big country and this may make economic reforming simpler by not demanding many exceptional institutional arrangements. The latter is mainly logical because a small country is in general economically less heterogeneous (Alesina, 2003).

By now we have already some statistical evidence that may support the hypotheses of a small country being more transition-flexible. E.g., all transition countries had the transition crises, but it seems that smaller countries, even from the relatively backward starting positions like Baltic countries, had by 1992-1997 or so made a transitional convergence with the Central European transition programs (see e.g. Lavigne, 1999, Table 7.1, 122-125).   

Many schools of transition theory emphasize the role of geographical location in the countries’ transition behaviour. E.g., in the Estonian transitional econometric gravity models, the direct distance between the countries may be a significant explanatory variable (Paas, 2003; Rajasalu, 2003b). Economic analytical studies such as Hansson (1995) stress also that Estonia’s geographical proximity to Finland and Sweden was of pivotal importance in the early transition period and enables rapid re-orientation from the Soviet Union towards western markets.


Diasporas and re-annexation threat

In the analyses of transitional reforms, a significant idiosyncrasy in Estonia, compared with other countries but Latvia, was a significant (ethnic) Russian speaking Diaspora comprising about 1/3 of the total population in 1989, and relatively large Estonian World War II émigré Diasporas in the West.

         Russian speaking Diaspora came to Estonia mainly due to the Soviet occupation in about 15-55 previous years, and not by way of natural economic migration and was certainly not of an optimal size of minority (Rapoport and Weiss, 2003)[2]. This group had different cultural and political value systems than the ethnic Estonians. This fact may have contributed to the rise in inter-ethnic tensions at the beginning of the transition period and may have influenced the reform processes not in the best way.

Ott and Ennuste (1996) showed that the reforms were more troublesome for Russian-speaking minority (according to 1990 population surveys) than for Estonians and they experienced more anxiety for their position and status as the country began to move toward a market system. And as the probit model results of Ott and Ennuste (1996) show, less Russians than Estonians were in favour of moving toward political independence. The role of Non-Estonians as an inertial force in the capitalist market transition may be concluded also from the study made by Kirch (1997).

Given this difficult task of balancing critical ethnic issues, the market reformers in Estonia had additional constraints in their movements ahead so as not to cause overcritical uncertainties and anxieties to the Russian-speaking immigrants coming from a society that had a long history of imperial ambitions, and which was dominated by authoritarian regimes and central planning. Mainly the staff of the Russian speaking military factories organized already in 1988 the so-called International Labour Movement of the Estonian SSR to stand against Estonian independence movements and market reforms.

E.g., in 1990, the Estonian Government was engaged not as much with market reforms as with avoiding violent confrontations and conflicts over reforms with local Russians in the north-eastern part of the country. Confrontations were inspired mainly by Gorbatchev’s negative stand against Baltic reforms (Lauristin and Vihalemm, 1997, 95). The anti-independence Russian deputies in the Estonian Supreme Council and Soviet military industry lobby in Estonia tried to use the ethnic situation to form by all means (possibly Soviet military forces involved) a new autonomous Soviet Russian Northeast Estonian Republic in the north-eastern part of Estonia. This process culminated in an illegal referendum in Narva on July 16-17, 1993, organized by Russian speaking anti-Estonian population groups. This referendum failed mainly on the ground that the Russian military forces located in Estonia stayed neutral and didn’t support with arms their national countrymen.

There have been many other dramatic anti-reform incidents between local Russians and Estonian authorities and “It was a miracle that no violence occurred…” (Lauristin and Vihalemm, 1997, 95) in Estonia unlike Latvia and Lithuania.

It is easy to see that many reforms were passed in a distorted form just to please the local Russians. E.g., any permanent adult resident of Estonia who had worked in Estonia was entitled to receive vouchers for privatization of housing. And since the Russians had in general better communal flats (mainly new urban or former rich Estonian owners’), they were placed in a preferable position (The Law on the privatization of dwellings was adopted in April 1992). The same tendencies could be noticed in the new pension law passed in 1991 (Lauristin and Vihalemm, 1997, 96), etc.

To fully understand the behaviour of different subgroups of this Diaspora, we should not omit the probability of the Russian Federation Security Service’s (FSB, former KGB) involvement in engaging elements of Russian-speaking community for anti-market subversions (Slinko et al., 2003) and towards Western movement and later accession to the European Union away from Russian imperial reach of the independent Republic of Estonia. The well documented history of the subversive international activities of the KGB in the Soviet era (e.g. see Andrew and Mitrokhin, 1999 or recall the evidence of the 2007 “Bronze Soldier” uproar in Tallinn or Georgian events 2008) gives us full justification of the approach. But it is too early in this field to make non-probabilistic documented academic statements as far as the documented evidence of secret services will be available for academic research purposes only tens of years later.  

The final act of regaining independence was played on the night of August 20, 1991 when the Supreme Soviet voted for the “Resolution on Independent Estonia”. It called all countries to recognize Estonia as an independent state. When the Soviet Union collapsed it was in the interest of Russia’s President Yeltsin to announce quickly the independence of the Baltic republics (Vihalemm, 1997, 137). And this was an additional blow to the fall of Gorbatchov (Lauristin and Vihalemm, 1997, 98). But in a few years, from August 1991 until the beginning of 1993, the attitude in Yeltsin’s Russia towards Estonia changed “from second-best friend to enemy number one” (Vihalemm, 1997, 137). The relationships between the two countries have stayed cool since then. E.g., in 1994, in bilateral trade goods imported from Estonia were subjected to double custom tariffs in the Russian Federation (Rajasalu, 2003b) and are hidden more or less still so after 1st of May 2004 in the form of various non-tariff restrictions. 

It was surely also the political situation in Russia that made the Estonian government seek accession to the EU and implement rapid institutional preparatory market and monetary (Fundamentals of Ownership Reform Act, 1991, introduction of Estonian kroon 1992, etc) reforms and harmonize laws to that end and not wait for spontaneous emergences of market institutions after stabilization-cum-liberalization (Lavigne, 2000) and so avoided the missing institutionalization link (Kolodko, 2000) in the early Washington consensus. The political situation in Russia is still not in favour of good economic partnership: take e.g. the notorious remark made in April 2005 by President Putin “The collapse of the Soviet Union was the “biggest geopolitical catastrophe …”.

         Though the Estonian World War II émigré Diasporas in the West were quite small compared with most of the transition countries, they have also played a role in Estonian economic reforms. Already during the pre-independence reforms, i.e. in 1988-1991, the governments of that time invited Estonian economic experts and economists from abroad to advise and approbate economic reform plans. There was the so-called Prime Minister’s economic friends club working in 1990-1992, which contained Estonian émigrés mainly from Sweden, USA and Canada. From the economic theory aspect we should mention first of all Ardo Hansson who was a so-called independent member of the Currency Reform Committee at the time of the currency reform and in 1993-1998 also member of the Board of the Bank of Estonia. The process of reforms was more or less influenced also by professors Toivo Miljan (Wilfried Laurier University, Canada), Toomas Palm (Portland University, USA) and Michael (Mihkel) Truu (University of Pretoria, South-Africa).



The “shining star of the Baltics”: Inherited backwardness versus price for the reforms

As Estonia was the only ex-Soviet Republic to be included in the first group of European Union candidate countries and was characterized by the EU since mid-1997 as a “functioning market economy” (European Commission, 1999), then Estonia became very quickly notorious as a “shining star of the Baltics” (e.g., Panagiotou, 2001). This is, of course, a purely political label-term, but however, in the Estonian transition studies it was and still is almost an imperative to superficially assume that this is really a credible characterization. Although, the mainstream transition studies have indicated that the indicators of Estonia’s transitional leading position among the Baltic countries at least might have been small (e.g. Panagiotou, 2001) and probably within the limits of the statistical error. And most importantly, Estonia could be called in mid-1997 a functioning market economy only in the narrow sense because there was missing, like in other transition countries at that time, the modern welfare system to complement the purely capitalist market mechanisms (Lavigne, 1999, 2000). 

Anyway, in the transitional studies the discussions started that: a) Estonia had under the Soviet occupation a relatively prosperous economy (good economic conditions, e.g. no defence expenditures etc.) and the current transition advances are because of the inheritance from the “prosperous” Soviet era, and b) Estonia’s current economic backhandedness from capitalist countries primarily originates from the price for the change of the Estonian social and political regime, from regaining independence, from “transitional depression” (Kolodko, 2000), that it is the price for freedom to suffer for reforms etc.

Last but not least, many experts from various Western institutions generously advised and approbated Estonian transitional economic reform plans. But unfortunately, not all of Western advises could have been completely understood in Estonia at that time because of primitive understandings of capitalist market institutions by local reforming actors. And, alas, theoretical studies of transition problems were only in the infancy even in Western countries.


No significant synchronic oscillations of the elements of the reform process with the political pendulum

The introduction of some political flexibility by Gorbatchev’s glasnost policies and perestroika in the end of 1980s allowed some opportunities to domestically introduce some sporadic economic reforms mainly under the cover name “experimental reforms”. As in all Estonian main political, economic academic and management elite spheres and masses, there existed a long-time common mainstream belief that market system “will improve allocative efficiency and thus the competitiveness of the industries and standard of living in the households.” (Kolodko, 2000). But these beliefs did not trigger at that time not yet dramatic political and market transition in Estonia because for fear of prosecutions and the political preference falsification (Levy,2005) was still dominant  Thus, the main obstacle and constraint in this major period to market-oriented reforms in Estonia were the Kremlin’s dictatorial directives based on the communist ideology, because Estonia was until August 20, 1991 politically de facto integrated into the political system of the Soviet Union. And the main policy target in the market-oriented reforming and timing of reforms in this period may be formulated as: any small market reforms and as soon as they are politically allowed, then it is politically safe and allowed to follow the behaviour  of the preceding post-socialist countries and fellow countryman without regard to his own information (Levy, 2005, “herding”).

      The condition “allowed” had here the critical meaning: all elites new very well to what repressive atrocities Kremlin could resort against Estonia in the case of overstepping constraints imposed by the communist ideology to implement Russian imperial ambitions. These fears forced the Estonian political reformers first of all to wait for credible regional political signals like falling the Berlin Wall etc to start fundamental transition. And, secondly, having in mind the large international political uncertainties to work together in concert in Estonia, whatever were the different understandings in the reforming methods and details.

The reforming process in the period of 1992-1997 may be adequately modelled by the decentralized and mainly underdeveloped democratic system model where the tens of dominating and opposing political actors were in principle homogenous in their objectives regarding rapid capitalist market-oriented reforms, but had different reform models in their agendas. Mainly the lack of competence and incompletely coordinated reforming were the main policy obstacles and these resulted mainly in the introduction of as many basic (first generation transitional reforms; Fanelli, 2004) capitalist market-oriented reforms as possible and some social reforms. This period may be considered to have ended in 1997 when the European Commission claimed that Estonia was a functioning market economy (Agenda 2000). This may also be fixed as the conditional end of the secessional transition period.

As to the structural problems of reform at the beginning of the secessional transition period, the main political parties in Estonia positioned themselves in their pre-election programs homogenously to Western orientated market reform approaches, privatization etc. The political differences here mainly were connected with different models of privatization as “political” versus “economic” (Kein and Tali, 1995). The first approach placed in the fore the restitution of the ownership as it was before WW II, and economic interests of the Estonian citizens, especially the middle class. The second approach considered market reforms mainly as means to create motivated large owners-entrepreneurs for the efficient capitalist market. In this approach, the former communist nomenclature insiders and foreign capitalists had more opportunities to take part in the capitalist market creation.

When the cabinets of opposing political forces started to interchange, it seems that all main political forces kept more or less the same policy line in the main issues of capitalist market creation. We may hypothesize that the cabinets with opposing ideologies, in order to stay credible, had practically not much choice to change the course of market reforms from the mainstream Eastern European transition course. The credibility effects may have been especially forceful in the sense of the secessional snowball effect in the Eastern European countries. The proof of the latter statement may probably be found in the phenomenon that by the start of the accessional transition period, all these countries had more or less similar capitalist market economic institutional structures, notwithstanding the different initial political structures.

During the accessional transition period (starting vigorously in 1998 or so), a more Western-standard general political party system had formed in Estonian. More or less, a political structure had formed where the main economic policy watershed in the pre-election campaigns goes mainly between dominant opposing forces in the agenda of reforming the government budget size and redistribution. The more socially minded centre and centre-left parties were and still are generally propagating bigger governments with higher general government incomes and with more generous social chapters in the budget. The main right-wing parties, vice versa, generally suggest governmental expenditure cuts, to achieve higher competitiveness of the national economy and first of all, to give the priority for the time being to the liberal economic growth. Although nowadays even they have implemented a more socially minded mantra. But it seems again that having achieved in the ruling coalition position, different political forces had again adjusted their approaches to the mainstream standards of the Eastern European Accession Countries, probably as a consequence of the second (accessional) snowball effect. Of course, before the accession referendum 2003 there were some significant political campaigns against the joining from the populist wings of the influential centre party, but without any real consequences.  The main economic policy target after the joining 2004 for all Estonian dominant political forces has been the adoption of the acquis. And as Andreff (2004) theorizes, fulfilment of this target may take a good lot of time for all new member countries. The Andreff’s statement is perhaps better understood in Estonia starting from 2008, in connection with the reversion to the economic depression, which seems to be deeper than in other Eastern- European countries.

Therefore, we may claim that with great probability the oscillations of the top political pendulum in Estonia had during the transition period no significant direct effect on the process of creating the structure of capitalist market institutional system. And the key normative factor in this process was probably the state of the elements of reforming constitutional system: the political actors had mainly homogenous long-term and fundamental reforming incentives and were in the circumstances of great uncertainties ready to work in concert and compromise in the models of reforms.



2.2. A lexical table-model of the dynamics of characteristics of the Estonian institutional market reform process mechanism


Our concept in this section is that there should be a dynamic Bayesian correspondence equilibrium between the elements of the real market reform process. This real causal empirical correspondence may be ecologically modelled as a dynamic Grangerian regression where the regressors or explanatory variables may be characteristics of the elements of the reforming system (mechanisms, organizations, rules etc.) and the regressands are the reforming results or the implemented economic institutions on the time scale.       

     But this kind of analyses is not giving much for the understanding of many political-economic whys, how etc.  in the reform process. For the last propose we have to micro-model the functioning dynamics of the reforming (constitutional) system (mechanisms and constitutional agents) according to constructivist principles (Smith, 2005). In the simplest way this kind of modelling may be executed in the verbal narrative Table form as below.

For introducing time dimension into the table we composed sub-period columns on the basis of the transition periods given below.

The rows of the table describe the states of the characteristics of the elements of the reform process. We start with the characteristics of the reforming system elements (reforming coordinating centre and reforming agents). Then we describe the elements of determinant environmental variables (e.g. foreign political situation, etc). And then we describe the correspondent reform targets, reform outcomes and effects.

The elements of the table are mainly the keywords of the characteristics of the Estonian real reform process states, but the characterization remarks come from comparisons of these empirical states with imaginary modelling results. The latter belong to the field of ideal socially desirable reform system modelling by the experts with the implementation model described in Introduction.  




The starting year 1987 of the general fundamental market-oriented capitalist reforms for the socialist countries is commonly accepted by the mainstream transition researchers (see e.g. Lavigne, 1999 and Brezis and Verdier, 2003). However, this starting is followed in Estonia by at least two sub-periods, which include transition to a market economy or the old transition (1987-1997) and EU accession or the new transition (1997-2006). Within the market transition period, two different sub-periods can be distinguished – pre-independence period (1987-1991) and independence period (1991-1997). Within the EU accession period, the harmonization period (1997-2003) and post-accession period (2004-2009) can be treated separately. However, the general reform process in not over yet. The harmonization with the EU still continues and the process will be more or less completed when Estonia becomes a member of the EMU and Estonian kroon is replaced by euro or even later.

On the basis of the above-described periodization are formed the sub-periodical columns in Table below.





Lexical matrix of the Estonian 1997-2009 capitalist market-oriented institutional reform mechanism elements: characteristics, dynamics and correspondence

Types of the  realized market reform mechanismCharacteristics of the elements, states, results and effects.               1987-92                 1992-7           1997-2004           2004-9  
 Coordinating centre (government, parliament etc, characteristics and functions). Incomplete hierarchical dictating-repressive system with generally nationally undesirable reforming objectives, some informal institutions without sufficient competence. Incompletely decentralized system with insufficient agenda setting, mainly incompetent but with generally socially desirable reforming targets: ad hoc market reforms to implement nominal liberal capitalist market system.   Under-coordinatedbargaining system with compromising (coalition and social) reforming objectives. Insufficient truth-telling mechanisms.  Hierarchical bi-coordination by the EU and Government of Estonia andbi-agenda-setting.Bargaining with compromising (domestic and Union) targets. Insufficient learning.
Reform designing actors (government, ministries, parliament, coalition, opposition, political parties, lobby groups, central bank, international institutions etc) types and characteristics.   Single compact commanding/constraining government with repressive administrative methods and sporadic spontaneous dissident agents with limited agenda setting possibilities.Local governments’ targets controversial, some ad hoc market oriented reforms for macroeconomic stabilization.Low competence on capitalist market institutions.   Representative liberal and similar agents with almost homogenous and associated political targets. Limited competence of the actors in the field of reforming models, especially in the field of privatization.The actors are mainly representatives of the high income groups and in the field of market reforms acted in concert.  Dissonance of coalition and opposition objectives, heterogeneous agents and generally under-coordinating centre. Countermoves to coalition. Centre’s targets to implement general credible institutional market structure.The Bank of Estonia is unable to influence inflation.  Heterogeneous objectives, coordinated mainly with side payments and by acquis. Under-coordination of truth-telling (new Member States had to take measures to prevent building up speculative stocks of sugar, Estonia had in this reporting incorrectness). 
State of external World.  Unexpected collapse and disintegration of the Soviet Bloc, relaxingly repressive, democratization and capitalist market oriented reforms in Eastern Europe, growing instability(secessional snowball effect, Brezis and Verdier, 2003). Unstable, constant reannexation threats. Stabilizing.The accessional snowball effect is Eastern European Countries is prevalent.  Stable. Requirements of the Stability and Growth Pact.Goals of the Lisbon strategy.
Domestic political state. Relaxing dictator-ship, diminishing repressions against spontaneous market reform agenda setters, growing political and economic instability. Incompletely democratic, turbulent, but”period de grâce”. In the field of market reform constitutional actors were in concert (“herding”, Levy, 2005). Democratic, significant uncertainties, deficient political civic capital, growing political and economic credibility. Almost democratic, stable. Self-interested political and market activities are not sufficiently coordinated with the community values. The partocratic tendencies are deepening.    
Why market reforms.   To alleviate disintegration, economic system crises (e.g. barter), to enhance secession and economic sovereignty, to orient to market system, to follow propagations of Eastern European transition leaders (snowball effect) for secession.  To implement nominal robust elementary capitalist market institutions, to try to go with other transition leaders. To implement credible institutional market structure, harmonize market institutions with the EU, and implement social protection institutions as”New transition” (Lavigne, 2000) for the accession to the EU. Fine-tuning to implement internationally cooperative market structure on the basis of acquis(Andreff, 2004) and to adapt to time consistent adjustments to the changes of the economic environment enforced by the EU authorities
What kind of most significant capitalist market oriented reforms?   Generally rather amorphous and arbitrary ad hoc reforms chosen, no fundamental reforms. Legal restrictions on the formation of joint ventures were abolished, liberalization of trade rules, the Fundamentals of Ownership Act 1991 restored the institution of private ownership. Generally diversified and non-expensive institutions market economy firs-order institutions.Tens of major reforms each year, many of them incomplete (Ennuste, 2001).Generally “Washington consensus” type first generation reforms. The EU started the accession negotiations with Estonia, Pension Funds Act passed, new Income Act deducted reinvestments from business income.Generally “Post-Washington consensus” (Müller and Pickel, 2001) type second generation and complementary reforms.      “New transition” where the Government is not free to build institutions according to specifics of the country (Lavigne, 2000) in the EU. Member of the EMU.Buffer reforms for monetary accession.
How well were the market reforms realized compared to hypothetical socially optimal reforms by expert opinions.  Mainly ineffectively.Mainly amorphous ad hoc reforms for small-scale privatization, especially uncoordinated agricultural reforms (Maide, 1995).  Generally inefficiently, except for monetary reforms: procrastinations of privatization, timing and sequencing failures, insufficient central coordination,  oversimplified  reforms, insufficient social protection etc. Coordination failures, insufficient redistribution.Almost credible institutional complex market structure implemented. Mainly failures of the coordination of truth-telling. E.g. the influential Centre Party started to disseminate distorted signals before the EU accession referendum.Significant lack of local macroeconomic competence.   
How well the reforms were realized and performed compared with other comparable transition countries? Generally well and sporadically being ahead in mainly spontaneous reforms. Generally well, in some reforms being ahead, some procrastination.The incompetence  of the actors is mainly compensated by learning from Treuhand lessons and Central-European transition Generally not worse than in other transition countries.Concert phenomenon of different political forces in agreement of reforming. Economic inequality is not lowering. Generally not worse. No significant accession crises or depression till 2008.In 2005 the GDP growth 9.8% and inflation 4,1%.Alas the right to use euro will prolong to 2009-11.
Relative losers economically.   Mainly Russian speaking immigrants, Communist Party nomenclature, farmers and elderly. Farmers by speedy and fuzzy ownership and privatization  laws, retired persons, large young families, intelligentsia.      


Farmers, retired persons, large young families, intelligentsia. Suboptimal high proportion of low wage international subcontracting work.
Relative winners economically.  Mainly management, entrepreneurs, foreign investors. Management, entrepreneurs, politically active groups, foreign investors, local Russian speaking transit entrepreneurs. Entrepreneurs, economic and political elites, foreign investors.  High stable income inequality, Gini »0.37.



Discussion for understanding Table

As already said, the statements and key words in the Table are based on two sources: 1) the comparative ones come from the deductive comparison with the imaginary hypothetical normative design implementation system (described in Introduction), and 2) the empirical keywords and statements come mainly as aggregated conclusions from Section 3, real world analyses supported by many works analyzing the Estonian transition case. The main objective of the analytic table is to comparatively describe the dynamics and correspondence of the states of Estonian market reform conditions, mechanism characteristics, functioning results and effects in a systematic way. In rows we may follow the chronologies of the reform process elements, in columns we see in each sub-period the conditions, explanatory factors etc., and understand probable correspondences between them and the reforming targets, results and effects.

The first two sub-periods of market reforms in the Table, from 1987 to 1997, clearly form a period that may be classified as the secession transition period. The last two sub-periods, from 1997 to 2006, form the accession transition period. In the first transition period, the reforming systems worked more or less for ad hoc reforms to implement a kind of nominal elementary capitalist market economy institutional system. In the accession period, the mechanisms were more or less aimed at a more general agenda, for the implementation of a credible, harmonious and complex market economy institutional cluster, to achieve rapid accession and adaptation to the EU. We agree hereby with Andreff (2004) “that EU enlargement is not a sufficient yardstick by which the end of transition can be fixed, not even in the CEECs.” We mean the end of the accessional transition.

The lexica of the table come mainly from the implementation theoretic literature and from the market transitology. In the former, the most important keywords are connected with the coordination of the design system, in the latter with the market system characteristics. Correspondence and equilibrium between the lexica in the lower rows with the lexica in the higher rows as an important element for understanding the reform processes in the Estonian case may be easily seen.

Summing up, Table hints that in the old transition main Estonian constitutional actors (parliament, government, political elites, business elites and the elites of masses) who were significant players in the transition game implementing market reforms, that these groups had much consensus over the main transition objectives, the close incentives and expectations with long time horizons. Therefore they mainly behaved as one collective even in the new liberal democratic environment. In this phenomenon indeed the path dependence on the Estonian history may have had significant role as Kyriazis and Zoubolakis (2005) have clamed.  This may be also the reason way spontaneous reforms and legalized reforms despite of many coordination failures, the forces of inertia were not getting the upper hand, especially inertia of the Non-Estonians (Kirch, 1997 and Ott and Ennuste, 1996). The Russian speaking masses in Estonia were mainly not taking the same optimistic expectations. Here we have to agree with Shlapentokh (2005): “Another important factor is the power and readiness of the particular actor to influence the future of society and its institutions, not to mention their own lives. When people believe that it is impossible to change the future, or the fate of their nation, they become either fatalistic, or tend to violate social norms, resulting in crime, corruption and violence.”

As it is easy to see from Table the beginning of the new transition or so was also the explicit start of political manoeuvring and obstruction processes in the field of transition and accession processes. The economic basis for that was relatively growing economic inequality, relative compared to the general economic growth. The opposition to government rapid accession policy on both left and right started to grow. Ordinary people connected the governments’ many unpopular market regulations with the regulations from Brussels and this fear was cultivated and heavily exploited by populist politicians. Many national fundamentalists started to fear the new loss of nation’s sovereignty. To come out of this and win the referendum on accession the governments had to procrastinate with many harmonization and buffer reforms. These procrastinations afterward had many negative effects. E.g., the governments were later incompetent to sterilize inflationary pressures connected with the governments’ income tax policies etc.

In sum Table illustrates in the game theoretic formulations that the capitalist market reforms process came about in Estonia mainly through external shock of the complete breakdown of the soviet socialist chamber in the end of 1980s and this process was vindicated into snowball effect of the Central-European transition. The new Estonian constitutional forces started to gather to break from and distance from the old socialist economic system and rapidly-gradually started to implement new capitalist market system that was the main incentive as the dominating elites as the main masses. In the end of 1990s this transformation changed to the process of convergence with the European Union economic system. In this process the incentives of the reforming actors start to differ notably: some players turn slightly more to right and others more to left. But the inertial forces of the successful beginning of 1990s still have the upper hand and the same game was played as before. The absolute welfare of all groups is increasing in both periods, but in the second period the relative welfare of the masses compared to the elites is decreasing.

Understanding some specific features of Estonia‘s market reform process on the basis of Bayesian implementation theoretic narrative analysis

First, rational flexibility in Estonian reform policy targeting is to be mentioned from the point of view of the Bayesian equilibrium approach. Early and very small (shallow, narrow, mainly sporadic spontaneous un-institutionalized and economy-driven) proposals and steps towards market economy were taken already at the end of the Estonian SSR within the Soviet Union. These were rational for all actors considering the huge political uncertainties and risks as preliminary steps.

A more ambitious and rather radical economic reform program was put on right after the restoration of independent statehood in 1991, which was return of Estonia to democracy and private property economy. These reforms were in the beginning mainly crises driven and performed in the condition of extremely bounded competence, but in concert rationally orientated to copy institution building in the Central-European transition countries. The most significant from these (sine qua non) there the privatization and monetary reforms.

The equilibrium outcome here was diversifying institutional cluster and simplified and non-expensive mechanisms (e.g. flat income  tax).

Later the harmonizing reform process was politically driven and subordinated to the EU accession aspirations that fixed quite a strict framework for further institutional development, although already in the conditions of bigger discrepancies of actors’ incentives and smaller uncertainties and incompetence.

Second, still the Estonian reform process included several significant non-traditional approaches in the Central- and Eastern-European transition like implementation of currency board framework and vast restitution of properties that were expropriated after the annexation of Estonia by the Soviet Union in 1940 and 1944.

These choices were good for reforming agents securing international credibility of Estonian new economy. The currency board arrangement insisted on the austerity in government spending and on the requirement that the parliament should not approve budgets with planned deficit and helped stabilize the liberalization of foreign trade as well as current account and financial account transactions, for FDI etc.

The vast restitution or compensation of properties expropriated after the annexation made elaboration of privatization laws rather time-consuming and actual privatization started with some delay but, on the other hand, were important to enhance credibility of national economy. However, privatization was still carried out quite fast and was more comprehensive than usually, including privatization of state-owned infrastructure (telecommunications, railways, national flight company, etc.).

Third, there were some specific timing problems and interactions-complementarities between reforms of different generations. For instance, privatization as the first-order reform was sometimes hindered by under-coordination of incentives of different population groups and slow institution building (as second generation reform) as, for instance, real estate registers, land cadastres etc. were to be established first.

Broader transactions with privatization vouchers had to wait for development of securities market. Some small steps on the way of attracting foreign capital taken already before the restitution of political independence were revised in the process of actual privatization, several additional privileges (tax relieves) were given to foreign capital and later, uniform tax schemes were introduced for all enterprises. Thus, many reforms were carried out simultaneously, many adjustments were later made to co-ordinate and link reforms together in the best possible way. Understandably, the reforming process included quite a lot of “learning by doing” and adapting (correction of laws) by the government, parliament, ministries, political parties and informal social groups.

In the process of harmonization the under-coordination of the truth-telling in the reforming game has to be mentioned and because of that some buffer-reforms were performed improperly (e.g. Estonia had by the time of accession to the EU substantial speculative sugar supplies).

Fourth, the economic decline, especially statistical, in Estonia due to the collapse of the Soviet economy was especially drastic and this fact should not be forgotten in the analysis of reforms or even this decline should not be falsely considered as “the social cost of reforms” or price for a faulty institutional transition design game. Especially considering the objective incompleteness of information and externally and heavily bounded rationality brutally inflicted by soviets to the actors of reform process designers and implementors (Salo, 2005).

Severe real GDP collapse demonstrated the great losses of human and real capital during the occupation. In this sense, the Estonian economy, like other Baltic States, had an extremely unfavourable initial position for a deep seemingly “transitional depression”, but that in reality was mainly as inheritance of the colonial economic system. First of all, during fifty years under the very ineffective Soviet economic system, Estonian economy had suffered huge losses in the sense of missed national income per capita in comparison with e.g. such capitalist market economy like Finland (estimates vary around one million kroon per capita; Salo, 2005).[3] Second, in the mid-1980s, many Soviet military factories and huge Soviet occupation army units (according to estimates around 100,000 troops; ibid.) with their technical and economic infrastructures were located in Estonia.[4] All this oriented Estonian economy to the soviet-style low production quality and extensive development-oriented economic structure that had to be profoundly restructured in the transition to market economy. In this sense, the Estonian economy of the mid-1990s is not even correctly comparable to the Estonian economy in the mid-1980s, not to speak with Central-European former socialist countries.[5]


2.3. Strong versus weak reforms: Comparative remarks on impacts of the Estonian capitalist market reforms on redistribution and sustainability of reforms


Recently Chong and Gradstein (2004) proposed weakness criteria for socio-economic institutional reforms. Weakness  can be briefly detected and understood on the basis of the resultant relatively exceptional and increasing by time income inequality of population compared to the other comparable countries. Excessive income inequality and its evolution may have the poor influence to the reform processes as this may subvert and destabilize the reforms in the democracies. One approach of the theoretical framework of this double feedback relationship was proposed  also by Harms and Zink, 2003. Thus, to fully understand the weakness or strength in the aspect of sustainability of Estonian transitional socio-economic institutional reform processes we have to compare with other countries the factual dynamics of income inequalities and the dynamics of inequalities as the results of reforms.


Some income inequality comparisons

Radical political and economic reforms in Estonia coincided in 1992-1993 with falling of the living standard caused mainly as an after-effect by the collapse of the Soviet industrial system (Kornai, 1998) and partly by inefficient allocations caused by political break-up of the Soviet Bloc as a federative political system (Gradstein, 2004). Thus, in the transition in Estonia, like in other transition countries, the income issues played an important role in the economic stabilization reforms and policies (Lavigne, 1999, 114). The main discussion in these days was about the efficiency versus income dilemma, and this was mainly solved in the tenets of neo-liberal political slogans of the ruling nationalist and reformist coalitions in this period: there is no way to redistribute poverty or in other words, first economic growth and then egalitarian economic policies, but already in the second half of 1990s these discussions focused on the problems on income inequalities and transfers, especially in the election campaigns.


With the help of different decile ratios it is possible to more precisely characterize the spread of income across population rather than using only the difference between top and bottom deciles. Compared for instance with the neighbouring country Finland, incomes by decile ratios differ more in Estonia, but contrary to Finland, the differences have diminished in the periods under discussion.

In international comparisons of income distribution inequality on the basis of decile ratios or Gini coefficients it is not possible to characterize the impact of differences in the absolute value of incomes on inequality. For example, in Finland, the disposable income difference between IX and I decile in 2001 was EUR 16.5 thousand (Statistical Yearbook of Finland, 2003), but in Estonia EUR 2.6 thousand in 2002 (Household Living Niveau, 2003), meaning that this difference in Finland was 6.3 times bigger than in Estonia. Therefore it is important in international comparisons of income distribution to take into consideration also the absolute value of disposable income.

         Thus transition to market economy, economic and social reforms in the EU accession period have created conditions in Estonia where the income stratification of the population has not increased; income distribution has been characterized rather by the slight tendency of decreasing inequality in recent years. In these tendencies there may be some influences on the Estonian welfare model being near-by Scandinavian countries’ long-term egalitarian welfare societies (Andersen, 2004), that especially after accession.

       In sum, we may on the basis of this analysis claim that probably the Estonian economic institutional transition process has thus far had enough strength not to fall into vicious circle of excessive income inequality and positive feedback trap of weak socio-economic institutions.



3. Summary Remarks


Dual transition

The Estonian market economy transition has a dual character: first, the secessional post-Soviet transition and, second, the accessional transition to the EU. These two sub-periods have been called also old and new transition (e.g. Lavigne, 1999) or first and second transition (e.g. Andreff, 2004).

In the context of the capitalist market reform process, the secessional transition started institutionally from tabula rasa in many ways. Firstly, the collapsing Soviet Union, literally speaking, had no complete economic institutional system, but foremost only a repressively implemented production command system oriented preferably to military and low-quality primary consumer goods. This system was centrally and dictatorially coordinated by repressions administrated mainly with rationing and by barter. Institutions such as prices, profits, wages, savings, exchange rates and especially money and assets had in this system a very low economic content and were used mainly for accounting purposes only. Official national production statistics were manipulated by the security offices for propaganda reasons, etc. And secondly, there were at the time not yet available any adequate political-economic academic tenets of the transfer processes  from socialist ownership to private, not to speak about normative theories. 

At the end of 1980s and mostly at the beginning of 1990s, the Estonian market economic reforms and policies were mainly pragmatically crises-driven and spontaneous. They were targeted first of all at turning around the drastic decline in the macroeconomic situation in the country caused by the collapse of the Soviet Bloc socialist planning economy (Kornai, 1998, Bönker et al., 2002). And second, they were politically targeted at coming out from the economic institutional chaos caused by the collapse and distance from Soviet imperial ambitions. In other words, in this period status quo or not reforming economic system would have involved high probability of prohibitively drastic macroeconomic disasters.

In these circumstances the general trend of the Estonian economic reforms was politically prevalently chosen under the regional “snowball effect” as Western oriented and directed to basically radically liberal private property-based free market economy and integration into Western markets and economic unions. Understandably, this policy was in this critical situation politically supported by the main interest groups (Lauristin and Vihalemm, 1997). It is important to note that there are many politically driven, theoretically erroneous and empirically unfounded claims circulating like the Estonian macroeconomic decline in this period was the “price” for the Estonian market reforms, for independence etc.

As approximately in 1994-5 Estonian GDP started to grow and this growth was mainly led by foreign investments or indirectly by privatization reforms and other reforms that enhanced the credibility of the economy, we may claim that the effect of the reforms has been with high probability positive. In other words, the growth could not have started without reforms.

Accessional economic transition started mainly as politically orientated adjustment, adaptation of and convergence to the advanced economic institutions of the contemporary Western economic unions. The first benchmark here was the EU accession, but depending on the choice of convergence criteria (Andreff 2004).

What have we learned from the last problem in the case of Estonia from the aspect of institutional building in our study? It seems that after joining the EMU expectedly in 2007 or so, the following reforms may be qualified as more or less taking place synchronously with the general EU reform campaigns and not as specific elements of accessional transition.


On the results of the reform process

There is the question how effective have the realized reform processes and the realized economic institutional structures been; could there have been higher growth rates achievable with implementation in these circumstances of hypothetical different clusters of market institutions (Djankov et al., 2003) or with comparisons of reforms in other post-socialist countries.

The answer to the first question definitely is that the Estonian reform processes could have been more effective, as there has been some fuzziness in the ownership reforms in the countryside and staggering in the privatization process of state firms due to the under-coordination of the interests of stakeholders and due to insufficient complementarities and sequentially under-coordinated privatization offices designs. There may have been also procrastinations in the introduction and implementation of social protection reforms on the basis of incompetence in this field in the reforming system and political rivalry in the preparation of the reforms. Privatization was a significant method for attracting foreign direct investments into Estonian economy in the mid-1990s: privatization-related foreign investments accounted for about one-third of the foreign capital inflow.

In the beginning of the reforms, the design and implementation actors had homogenous political objectives and in this situation the under-coordination by the government and insufficient competence of actors was not crucial and the equilibrium outcome-reforms were still sound. But by the development of democracy in the middle of nineties, the strategic behaviour of the opposition and the relative losers became unconstructive for the institutional restructuring. We may claim this was partly due to the lack of truth-telling coordination by the government. The last phenomenon was most disturbing in the case of preparation of reforms for accession (Ennuste and Rajasalu, 2002a,b) and in the beginning of being a member country (speculative sugar supplies, high inflation in 2006-6 preventing Estonia to join without delay the euro-area, e.g.).


On the efficiency of the reforms

Econometric analysis by Rajasalu (2003a) with available international data on the impacts of economic institutional developments (as a results of reform processes) in transition countries on the macroeconomic income indicators suggested that these developments may have had a more important impact on the growth by passing just a certain transition threshold from one institutional system to another. But in the harmonization in the second half of nineties, the institutional structures of the transitional accession countries became too similar to the EU economic policy-making institutional principles (Tabellini, 2003) to make econometric distinctions of the efficiencies of the institutional arrangement in different harmonizing countries possible.

        It is important to note that for understanding the efficiency of reform processes of the economic institutional structure in the case of Estonian transition it is not enough to follow the economic growth rates and achieved GDP quantities. Economic institutional structures should first of all contribute to resistance of adverse shocks and enhance credibility of the economy and sustainable development, including institutional developments. So, the efficiency criteria should combine the growth and stability indicators and their sustainability, including reforms. In this respect, Estonian macroeconomic stability indicators have been relatively stable in the accession period. But here again we face the question how much credit for that should be given to the efficiency of the current simple Estonian economic institutional structure and how much to the specific Estonian idiosyncratic phenomena like one of the first EU members in spe among the accession countries etc. Estonia’s average GDP growth in 1998-2003 was 5.2% and inflation 4.3% per annum.

         It is still important to understand that the big volumes of economic reform flows could not have been the cause of  “transitional economic depression”, as first of all, these reforms were enforced or crises driven to avoid deeper macroeconomic declines. And second, the politically taken radical orientation of the reforms to the West enhanced the credibility of the country and expectations of foreign investors that may have probably instantly compensated for not very significant current costs of building the new economic institutional structure.

On the basis of analyses we may claim that probably the Estonian economic institutional transition process has thus far not been weak and not fallen into some kind of vicious circle (Chong and Gradstein, 2004) of excessive inequality and positive feedback trap of weak institutions. We hope that this conclusion was made not too soon.


On some primary determinants of the transformation

The most significant Estonian idiosyncratic reform conditional factors may have been: re-annexation threat, large Russian-speaking Diaspora, small size and geographical location and political homogeneity domestically.

Many Estonian reform selections and their performances may be explained by idiosyncratic conditions in the country. But as the reform processes are complex, the influences and significance of idiosyncratic factors upon reform programs and their results have also a heterogeneous complex nature. Consequently, the particular idiosyncratic factors have had in different reform programs and their stages different influences and these influences may be discovered and explained only in special reform event studies.

         We have to note that by far not all influences of Estonian idiosyncratic reform factors may be explained by more or less credible evidences or documents for the time being, especially the role of anti-independence and reform activities of foreign security services etc.


On failures and lessons

Although positive in general, Estonia’s reform experiences are not to be understood and approved without further critical understanding and analysis. It is possible now in our “after-wisdom” to analyze many implemented reforms in their interdependence, to evaluate sequencing of reforms, to compare initial goals and gained results, to evaluate economic and social costs of the reforms, to identify relative gainers and losers and revisit the problem of Estonia’s reforming identity as a previous “shining star” (Panagiotou, 2001) in the field of transition.

       The empirical analysis leads to the following conclusions. First, the implementation analysis of the changing Estonian economic reforming mechanisms in 1987-2006 has demonstrated many implementation inefficiencies and failures in these structures. There has been chronically incomplete under-coordination with constantly distorted information of the reforming agents and their irrational behaviours and oversimplified understanding of the workings of the advanced capitalist market mechanisms. The deficiency of lack of truth-telling fault correction side payments is still significantly disturbing, especially in the field of integration processes with the EU.

         Agricultural and land reforms were carried out by local governments, not by the regulation of central government, which made these reforms extremely under-coordinated and strongly smack of nepotism/nomenclature. On the scale „successful – unsuccessful reforms” the reforms in agriculture should be regarded as less successful. Agriculture is an example of how deliberately gradual and seemingly humane reforms ultimately turned most painful (Maide, 1995). In real life, just agricultural reform turned most clearly out to happen through shock, where the compensating or „therapy” component was reduced to the inertia of agricultural production process and picturesque way of life (the decline of money income was compensated here by indispensable “self-supplying”).

With these failures in the Estonian economic reforming system the first step should be to establish coordination mechanisms for more stimulating side payments and limiting constraints to enhance truth-telling and learning as the best strategy for the reforming agents.

Secondly, an intelligent reform strategy is required to eliminate the politically minded manipulations and to give more room to the strengthening of the position of reforming agents in the field of designing more efficient social protection institutions in the realm of budgetary policies. The sustainable economic growth must not be used as an excuse for inaction in this field.

Thirdly, particular attention should be devoted to transforming the Estonian economic reforming system and social environment into proper conditions of a new EU member state to encourage adoption of all new effective reforming resources that open up with the accession and not to stay in the defensive entrenchment positions of nationalistically minded populist politicians. Unfortunately in 2006 failed to fulfil the Maastricht inflation criterion and to apply for joining the euro-area, and in these new conditions, it seems, that Bank of Estonian is unable to sterilize inflationary pressures.


On the political economy of analytical transition implementation models

We have in several sections testified to the rationality of applying a mechanism analytic narrative approach in institutional transitology on the basis of models and methods of modern institutional design implementation. By working out our method we started from imaginary normative socially desirable ex ante dynamic institutional design model (e.g. Ennuste, 2001 and Wagener, 2004). The model was relaxed and decomposed into coordinated implementation game of the centre (implementor) and designing agents. The rules of this game describe the socially desirable mechanisms of reform design and enforcement process that will give as equilibrium outcome socially desirable institutional reforms (institutional clusters). The comparative study of the chronology of the actually realized constitutional mechanisms with the socially ideal mechanisms gives the main clue to understand the process and types of reforms implemented in the real transition process and the lessons to be learned.

E.g., this type of method is the only one known to describe coordination rules for truth telling side payments (Matsushima, 1993). And as our analysis claims, the absence of truth-telling side payments besides of faulty nonlearning actors are contemporarily the most significant faults of the Estonian economic institutional design mechanisms.



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Kein, A. and Tali, V. 1995. The Process of Ownership Reform and Privatization. In: Transforming the Estonian Economy. Edited by O. Lugus and G. Hachey. Tallinn, 140-168.

Kelly, K. 1985. Capitalism, Socialism, Barbarism: Marxist Conceptions of the Soviet Union. – Review of Radical Political Economics, 17, 4, 51-71.

Kirch, A. 1997. The Integration of Non-Estonians Into Estonian Society: History, Problems and Trends. Estonian Academy Publishers, Tallinn.

Kolodko, G. 2000. Transition to a Market and Entrepreneurship: the Systemic Factors and Policy Options. – Communist and Postcommunist Studies, 33, 271-293.

Kornai, J. 1980. Economics of Shortage. Amsterdam.

Kornai, J. 1998. What the Change of System From Socialism to Capitalism Does and Does Not Mean. – Journal of Economic Perspective. 14, 1, 27-42.

Kukk, K. 1997. The Baltic States: Estonia, Latvia, and Lithuania. In: Going Global. Cambridge – London, 243-272.

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Kukk, K. 2005. Economic Damage. In: Salo, V. (ed.) 2005. The White Book: Losses Inflected on the Estonian Nation by the Occupation Regimes 1940-1991, Estonian Encyclopedia Publishers, 141-174.

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Lainela, S. and Sutela, P. 1994. The Baltic Economies in Transition. Helsinki. Bank of Finland.

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Concise Chronologies in the Period 1987-2006: The Transformation of the Estonian Economic Institutions and Domestic and Foreign Environment


Economic  Institutions

Prime Explanatory Phenomena






   1987 The foreign investment system under the planned state economy was nonexistent. The capital market institutions were nonexistent. The monetary system had neither functional nor structural credibility. Directly centralized economic decision mechanism. Substantial informal barter and shadow market institutions. September, idea about Estonia’s economic autonomy (self-accounting Estonia) was put on and several groups were organized to elaborate it. Private capital ownership illegal. Foreign investments from capitalist countries illegal. Spontaneous national elite groups movements against Moscow’scolonial rule and in the field of economy to achieve national control over Estonia’s economy (Taagepera 1993). Urgent need for foreign currency and capital.Private and foreign capitalalmost nonexistent. Constant shortages. Quality of goods is very low. Heavy shortages of goods  Idea about autonomy stemmed from resistance to construction of environmentally hazardous and economically unviable phosphorite mine and to inflow of non-Estonian population. Huge income inequality between nomenclatura and masses. Negative attitudes against foreign capital in the USSR government began to change.January, Degree of the Council of Ministers of the USSR allowed thecapitalist and developed countriesto take part in funding jointventures, the soviet-side ownership at least51%.

USSR branch ministries didn’t consider local interest in their plans.


Political repressions diminishing in the USSR.


In Poland  delocalized  Solidarity is gathering wider popular support.

The turning point in the quantity of oil production in the USSR. Economic stagnation in the USSR. In Hungary spontaneous privatization had started.  
   1988 May 16, the Degree of the Council of Ministers of the Estonian SSR to abolish main restrictions on the formation of joint ventures with capitalist countries. In October the spontaneous mass movement the for independence  Popular Front held its founding Congress. November 16, Declaration of the Sovereignty of the Estonian SSR by the Supreme Council of the Estonian SSR. Inadequate political science knowledge. Enterprises with participation of foreign capital (joint ventures) were set up. Inadequate local knowledge of capitalist market mechanisms and intuitions.  Some Western Kremlinologists are in the favour the survival of  the Soviet Empire   


Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 1989 November 17, the Law on Enterprises adopted by the Supreme Council of the Estonian SSR. December 11, the Decree of the Council of Ministers of the Estonian SSR to abolish most restrictions on the formation of joint ventures November 12, Resolution by the Supreme Council of the Estonian SSR declared Resolution of 22 July 1940 on Estonia joining the USSR to be null and void.A parallel legislative body “Estonian Congress” (the shadow parliament of the citizens of the Republic of Estonia) was elected. Share of Estonians in the population about 61%. GDP at PPS per capita compared to EU-15 in the range one fifth – one third. Spontaneous small private entrepreneurship starting.  The breach of the Berlin Wall. Interethnic and military tension accompanies the build-up of the Estonian independence. Tens of thousands of Russian-speaking high paid military factory workers are organized to oppose independence. November, the USSR Supreme Soviet adopted a law granting economic autonomy to Baltic republics concerning ownership.
 1990 February 24, Estonian Congress was elected (an alternative  of the parliament) October, Department of  State Property was founded for carrying out mainly small privatization but also other programs of ownership reform. The Law on Privatization of State-Owned Service, Trade and Catering Establishments, December 13. Rapid implementation of the market mechanisms, liberalization of prices and trade contacts. Liberal foreign trade and capital movement.



On March 30, the Parliament passed the resolution that the annexation did not suspend the de jure existence of the Republic of Estonia. Change in regime creates anxiety in Estonian multi-ethnic society. More Estonians than Russians are in favour of market-oriented economic reform.Estonian sabotage against rouble.  Private entrepreneurship starting. About one thousand family operated farms started but the ownership right was not clear, land was the state property.About one-third of the dwellings in private ownership.The total economic loss during 50 years of annexation not less than $ 100 B (author’s estimate). Mainly caused by ineffective economic system and loss of human capital.  High interethnic and military tension accompanies the build-up of the Estonian independence. More Russian speaking high paid military factory workers are organized to oppose independence. The interest of foreign capital in investment in Estonia increases. In Central Europe the substantial privatization started. In Germany the Treuhandanstalt for large-scale privatization transaction established.  


Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 1991 In March Estonian Bank started independently quoting the Soviet rouble proceeding from the black market exchange rates. The Law on the Fundamentals of Ownership, June 13. Principal issues, private ownership institution restored. Sanctioned private ownership of land. The enactment of the privatization vouchers. The Law on Foreign Investment, September 10, guarantees ownership rights, repatriation of profits and liberal capital movement rules. The Law on Tax Allowances to Enterprises with Foreign Capital, September 10. The income taxes of the foreign investors are reduced.


October, the Land Reform Act was passed.


December, the first investment fund (EBIF) established. The spontaneous formation of securities market started.

All trade barriers and tariffs have been abolished.

On March 3, an unbinding referendum on the question of independence. Nearly all ethnic Estonians supported independence as well as about 1/3 of the non-Estonians. On August 20, Estonia regained independence. Institutional subversions of the Soviet Union economic regulations. Institutional vacuum in many public fields. A priority for direct restitution and the use of vouchers, other models of selling were also permitted. No priorities for the insiders. Municipalization of some state assets. The Land Reform Act, October 17. Restitution, directly or by replacement and compensation. Selling for vouchers and money. Selling to foreigners with the permission of the Government.The reorganization of state-owned enterprises started in 1991, leasing formation of share companies. High military tension accompanies the build-up of the Estonian independence. Kremlin sends in huge additional forces for rapid military operations.   Large-scale privatization in Germany. 
Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 1992 The Government Decree, April 6, endorses a list of activities with foreign capital where the license is required (telecommunication, ports, railways, energy and mining). On June 20, the introduction of the Estonian kroon (EEK) pegged to the Deutschmark (DEM1=EEK8) and implementation of the currency board arrangement.June 28, the new Constitution, the institutionalization of private ownership. The Government Decree, July 13, endorses the rules for privatizing and leasing property to foreigners.In September, the Estonian Privatization Enterprise was set up for organizing large-scale privatization (in stile of  Treuhandanstalt).


More than 35,000 registered organizations.

On June 28, the new Constitution was adopted. The property rights of all persons shall be inviolable (Art.32). September 20, the democratic parliamentary elections. The coalition had no clear policy on privatization methods any more. Tens of political parties with different privatization proposals. Minister without portfolio for coordination of ownership reform was named. The Agricultural Reform Act, March 11.The Law on the Privatization of Flats, April 16.The intensive sale of small-scale privatization units.At the end of the year, the large-scale privatization program started.During 3 years, GDP decreased more than 35%, caused mostly by the collapse of the former Soviet market.Collapse of the provision of many public goods.The first international tender for privatization of large enterprises announced on November 17.

Disruptive changes of the foreign trade towards the West.

 During August and September  almost  all member states of the United Nations recognized Estonia, by September 17 Estonia gained membership. The total collapse of the former Soviet market where Estonia had more than 90% of its foreign trade. Mass privatization in Czechoslovakia and Poland.


Year Economic  Institutions

Prime Explanatory Phenomena




Political Socio-Economic Political Economic
  1993 The Law on Securities Market, June 2.The Property Law, June 9. The Law on State Budget, June 16. In one year the revenues and expenditures should be balanced. The Law on Security Markets adopted on July 2.The Estonian Privatization Enterprise, and the Department of State Property were reorganized into Estonian Privatization Agency.


The Law on Income Tax, December 8, no further tax allowances for enterprises with foreign capital are to be granted. A flat 26% income tax for both enterprises and individuals was established, 33% payroll tax.

In the 1992 elections, the Pro Patria party won on the basis of campaigning for restitution of ownership. Now this party appears to have modified its position. The land reform problems are discussed but no laws are adopted or amended in the Parliament. May 6, a new Law on Privatization of Flats.The Law of June 17 declares a priority for the use of money in selling state assets. 

The Estonian Government has signed agreements about mutual protection of investments with many countries.


May 13, Estonia became a full member of the Council of Europe.

March 6, the Land Tax Act. Competition has emerged. Prospects for economic growth. In August, the Compensation Fund was established. 50% of privatization proceedings are transferred to this fund. The bonds of the Compensation Fund are sold only for vouchers.

The core investor principle is implemented in large-scale privatization. Privatization for money, ignoring the vouchers. Open competition. Payment in instalments for the residents.

Politically conflicting situation with Russia, mainly on the basis of the Estonian Law on Aliens from July 8. Conflicting situation with Russia makes the size of the market for Estonian firms smaller.
Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
  1994 From January 1, the flat 26% income tax for legal and physical persons (also in the case of dividends and capital gains, in principle double taxation avoided). The Government Decree No 291, August 12. Regulation of activities of the investment funds. About 10 investment funds active with total net value of portfolio about EEK 100M. The Government Decree on the Establishment of the Estonian Central Register of Securities. More than twenty commercial banks have been authorized to carry out foreign transactions. By August, more than 0.2 million restitution applications were submitted. The procedure for selling land to legal persons and foreigners is not entirely regulated.  Government makes still final decisions regarding land sales. Privatization of land is tangled. The Government makes still final decisions regarding land sales. Privatization of land is tangled. GDP at PPS per capita compared to EU-15 is about 30%. The Bank of Estonia is unable to influence inflation.  Estonian Russian treaty about the withdrawal of the Russian troupes. InAugust the Russian army was out. July 1, Russia placed double custom tariffs on Estonian agricultural produce and foodstuffs.
Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 1995 January 1, Investment Fund Act became effective (adopted on August 12, 1994).February 15, the Commercial Code. Many forms of business organizations enacted and regulated. The minimum capital requirements for the private limited company EEK 40,000 and public (stock) limited company EEK 400,000. Publicly offered shares of privatization traded at the securities market, emergence of secondary market. November 22, the Amendments to the Law on Income Tax, prevents double taxation for investment funds. 

Over 83 000 registered enterprises, of these 23858 active.

March, the parliamentary elections, directions in privatization exactly the same. In April, the new Parliament voted down the bill to stop privatization. The post of the minister without portfolio for the coordination of ownership reform was dissolved. The minister without portfolio for the coordination of the affairs with the EU is nominated.The ruling governmental coalition is heterogeneous and therefore increasing meta-economic risks.PM Vähi steps down, October. From January 1, the reduced tax rate 10% for physical persons on interests.Difference between the lending rate and deposit rate about 10 points that is about two times more than in Finland. This is the indication of still large country-risks of Estonia compared to Finland.On the account of foreigners 1/5 of the securities.By the end of the year, the small-scale privatization was almost completed. Estonian Hansapank’s (commercial bank) shares listed in the Helsinki Stock Exchange. June 12, the Association Agreement with the EU signed. December, the Parliamentary elections in Russia. November 24, Estonia  applied for the EU membership.  White Paper. Preparation of the Associated Countries of Central and Eastern Europe for Integration into the Internal Market of the Union (presented by the Commission) COM(95) 163 final. January 1, free trade agreement with the EU came into force. International cross-border equity flows into emerging markets are rapidly declining.
Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 1996 By the beginning of the year, there are in the preparation: Law on Exchanges, Law on Investment Funds, Amendments to the Law on Securities Market, Law on Public Offering of Shares, Law on Depositories, Law on Promissory Notes, etc. May 31, the Tallinn Stock Exchange started its operations. More than 60 000 registered enterprises, of these 24609 active. More than 2/3 of enterprises’ assets are privately owned. The presidential elections this year are increasing meta-economic risks. The new ruling coalition is also heterogeneous. Discussions in the Parliament about the introduction of the trade tariffs. January, the Bank of Estonia launches the TALIBOR and TALIBID rates (Tallinn interbank offered rate and bid rate).By the end of the year, large enterprises have been almost completely privatized.Estonia is regarded as a functioning market economy and the first period of transition (marketisation and privatization) is regarded as almost completed. The presidential election in Russia (before elections the incumbent presidents may be more inclined to start small wars). The elected Russian President is waiting for heart surgery (this is increasing political uncertainties). Prospects of the growth of the Russian economy. Russia’s economic country-risk rating about 90%. The expectation that the cross-border equity flows into emerging markets jump up again. 
 1997 April 15, the Deposit Guarantee Fund Act passed.The Law of Trade tariffs for agricultural and food products adopted but not implemented.December, the Council of the EU decides to start the accession negotiations with Estonia at the beginning of 1998. The adoption of the acquis was included among political priorities.PM Tiit Vähi from the Coalition Party steps down, 25th February.The new PM is Mart Siimann, Coalition Party, opposed by the National conservative parties. The problems of the Estonian economic competitiveness in the EU market are widely discussed.August, warnings that the Estonian economy is in danger of overheating, based on the expectations of the GDP increase over 10% for 1997.Consecutive Tallinn stock market crashes, October. Highest market capitalization value was on August 29 almost EEK 27 B and TALSE index 493 points. Agenda 2000 – Commission Opinion on Estonia’s Application for Membership of the European Union, 15th July.Estonia rejects Russian security guarantees as not necessary in the continued westward orientation, October. Asian crisis, withdrawal of capital from emerging markets.


Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 998 March 11, the Competition act passed.March, the Commission of the EU institutionalizes the accession negotiations with Estonia.June 10, the Pension Funds Act passed.May and July, Ühispank and Tallinna Bank merger, and also two leading banks Hansapank and Eesti Hoiupank merger. December 31, Bank of Estonia fixed exchange rate EUR 1= EEK 15.6466 that was equivalent of fixed rate DEM 1= EEK 8 Political manoeuvrings of pre-election year. Foreign Minister Ilves joins the Farmers Party.October, United Opposition in showdown over the budget draft could sink government.December 8, Riigikogu liberalized the citizenship law. Agricultural producers whoexported to Russia have beenhardest hit by Russian crisis.September, Swedbank increases its stake in Hansabank to20%. July, EU presidency transfers from UK to Austria and is not hurting Estonian EU bid. Russian economic crisis. August 31, the value of the rouble dropped 30%.Latvia joins WTO.Food exports to Russia fell dramatically.
 1999 January 1, the central banks of the EU countries began quoting the Estonian kroon.27 January, Riigikogu passed the Anti-corruption Act.9 February, Riigikogu passed the revised Credit Institutions Act  in line with the corresponding EU legislation.  The Moderates, Pro Patria Union and the Reform Party had 53 of the 101 seats in Parliament in the March 7 elections and formed the coalition government. The parliament with 53 votes nominated on March 22 Mart Laar for the post of PM.Constant obstructions in the parliament at the procedures of the revision of the budget.   February 9, the sale of EestiTelecom shares by the Stateconcluded, the State sharedropped to 27%.Market capitalization value ofthe Tallinn Stock Exchangeabout  EEK 18 B on February

16, TELECOM about EEK 9


According to the Statistical

Office, Estonia’s GDP takes a

5.8% plunge for the first


Recession in economic


January, EU presidency transfers to Germany and this may hurt the speed of the Eastern enlargement of EU.February, Russian MPs influence Finland and Sweden to exclude Estonia from EU membership negotiations.  The current account deficit remains high.Estonian tariffs and tariff related measures need to be improved. Exports to Russia and Russian transit traffic fell.
Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 2000 New Income Tax Act enters into force on 1 January. Passed on 15 December, from business income reinvestments are deducted.June 14, Riigikogu passed Trade Unions Act.Employers Union agrees to Trade Union proposal to increase monthly minimum wage from 1,400 to 1,600 kroons. Modernization of the public administration has been limited.Functioning of the judiciary needs to be reinforced.Difficulties with enforcement of industrial and intellectual property rights, pension and public administration laws. Average monthly gross wages Q1: 4,501 kroons.Gini index Q1 is equal to 0.38, this is relatively high.Q2 Temporary depression withdrawing.In the area of regional economic policy, progress has been limited. Share of Estonians in the population about 68%. On November 8, the EU Commission stated in its Enlargement Strategy Paper together with candidate countries’ individual progress reports: “Estonia … should be able to cope with competitive pressures … within the Union in the near term …”. The current account deficit remains high.Estonian tariffs and tariff related measures need to be improved. Exports to Russia and Russian transit traffic fell.   
 2001 The government fixed first time average size of personalized 2001 social tax for annual recalculation of the first pillar pensions. May 9, Riigikogu passed Financial Inspection Act that concentrated supervisory activities of banks, insurance companies and securities markets. June13, Adoption of Unemployment Insurance Act that instituted the Unemployment Insurance Fund. September 26, Riigikogu passed the Contractual and Non-contractual Relations Act that replaced many former separate legal acts.




September, Arnold Rüütel was elected  President of Estonia. September, Draft of the Funded Pensions Act to introduce second (pre-funded) pillar of the pension system. November 1, Estonian Privatization Agency was closed, remaining few privatizations transferred to Ministry of Finance. Abnormally high income inequality compared to European standards. Suboptimal supply of public goods.   April, Estonian Government adopted basic principles for preparation for and implementation of the European Structural Funds and Cohesion Fund Support, action plan for implementation of support in 2001-2001.
Year Economic  Institutions

Prime Explanatory Phenomena



Political Socio-Economic Political Economic
 2002 March, Government ceased the sale of Estonian power plants to NRG as it wasn’t able to make instalments in time. Power Plants remained in state ownership.  January, Prime Minster Mart Laar resigned, new government was formed by Siim Kallas.   Economic growth strong but driven mainly by domestic demand, export growth weak, current account deficit.  November, NATO invited Estonia to start accession negotiations. European Union concluded accession negotiations with Estonia and other candidate countries. 
 2003  September 14 referendum approved the accession to the European Union.  March, parliamentary election, right-wing government. Low industrial innovation and high international subcontracting. Infl. 1.3%.    
 2004  April the Speculative Stocks Act passed. May 1 the accession to the European Union. Fine tuning and harmonization of the market institutions.  Share of Estonians in the population about 68%.   Extractive behaviour of  political and economic elites.GDP at PPS per capita compared to EU-15 is about 40%.Large current-account deficit.   April 1 accession to NATO. Before the enlargement of May 2004, as with previous enlargements, new Member States had to take buffer reforms to prevent operators building up speculative stocks of sugar. 
 2005 May 18  Russia and Estonia sign the border treaty. Russia started to procrastinate with ratification. April, new centre-right coalition and Cabinet.”transition from socialism to capitalism is very difficult.”   (Gorbachev: Sunday Times, June 5, 2005) -the phenomena of partocratic populism are deepening.  Estonia had irregularities in preventing building up speculative stocks of sugar in the EU.Economic inequality of population relatively high. “The collapse of the Soviet Union was the biggest geopolitical catastrophe …”, President Putin.   
   20062009  Expectedly accession to the European Monetary Union not earlier 2009-11 or so. Expectedly less radical income tax reforms coming.   


 Current tax policy mainly focused on reduction of income taxes and raising commodity taxes expectedly in reversion in the direction of the Scandinavian model.  High inflation (over Maastricht criterion and   over deposits interest rates).  Economic depression in 2008, and according to The Economist expectedly continuing in 2009. Recession of Estonian international investment position.   Strong support of the EU for Estonia in the Estonian-Russian political bargaining processes.  Better credit conditions for Estonia in the EU and worse export and transit conditions to Russia.






[1]         Brezis and Verdier  (2003) define “snowball effect” as a regional propagation and diffusion mechanism of communist collapse and democratization among Eastern European countries during the years 1989-1991. We are here differentiating two economic snowball effects: first, the secessional from the Soviet economic system to the elementary functioning capitalist market system, and second, the accessional snowball from elementary market system to the EU developed capitalist integrated  economic system.


[2]         For the collection of articles on “the optimal size of minority”, see Rapoport and Weiss (2003). They themselves hypothesize that the idea is central in the economic analysis of inter-group cooperation and conflicts. We assume that we may endogenosize this phenomenon as being pertinent to the economic reform issues. In Estonian context one criterion for the definition of optimal size may be based on the Lazear (1999) finding that with the high concentration of immigrants they refuse to learn local language. It is a common understanding in Estonia that one of the obstacles of the democratization, capitalist market reforming, accession to the EU in Estonia was and will be the problem that bulk of Estonian population is not going to pick up Estonian language and not going to follow Estonian language information channels.

[3]        As a matter of fact, the Soviet Union was literally speaking not a socialist economic system, even in Marxist conception. Probably the most important conceptions already before the transition are those developed by Bahro (1978), Kelly (1985) and Brutus and Ennuste (1965). According to their definition, the Soviet Union was a class society where “A privileged minority maintains a monopoly of administration and management” (Kelly, 1985). Hence the terms “socialist” and “economy” should not be in this context taken literally but only as a kind of convenient label. Or one adequate term may be “centralized command and queue-rationed military economy including black markets” (see also Alexeev and Sabyr, 2004). Consequently, in the context of capitalist market reforms the former Soviet Union countries, post-Soviet countries, had to start from tabula rasa and in this situation, more importantly, had actually no other alternatives than to adopt rapidly simplified neoliberal models.


[4]        Thus, it is scientifically absurd to make today e.g. macro-economic comparisons of Estonian economy prior to the transition and based on the meaningless Soviet rationing economy prices and today meaningless military production. Still, this kind of comparisons for Estonian transition analyses have been and still are massively made with amazing superficiality, even sporadically by respectable international organizations (WB, IMF, OECD, etc.) and prominent mainstream economists, although these may be used credibly only for politically oriented manipulations. E.g., among others, Stern (1997) analyzes real GDP growth rates in Eastern Europe, the Baltics and the CIS in 1989-1995 with great “precision”.


[5]      And, also importantly, in 1995-1997, at least the Baltics were already qualitatively different economic systems: producing civilized production in competitive market economies with equilibrium prices and exchange rates with credible monetary systems etc. Thus we may claim that the secessional transition was completed and a qualitatively new phase of transformation began: accessional transformation to conform capitalist market institutions to the acquis communautaire (Andreff, 2004).


*Ülo Ennuste. 2007. Dual Market-Transition in Estonia 1987-2006: Institutional Mechanism Analysis Approach.  In:  “EUROPE AFTER HISTORICAL ENLARGEMENT”. The Proceedings of 5th Audentes Spring Conference, Apr. 28 2007, Tallinn, 60-126. http://www.ies.ee/iesp/No3/ and Paper for EAEPE 2006 Conference in Istanbul extended.




October 31, 2008 - Posted by | Uncategorized

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