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The purpose of this paper is to analyze socio-economic goals of the administrative-territorial reform in Estonia. An administrative-territorial reform has been a top issue since in Estonia regained its independence but there are virtually no results. In 1995, a law was passed granting the Government the right to take decisions on the country's administrative-territorial division. Both the local authorities and the central government can initiate changes in the administrative-territorial division. By the spring of 2012, there were 226 local governments in Estonia, including 193 rural municipalities and 33 cities. The administrative-territorial organisation of Estonia needs changes. The average population of Estonian rural municipalities is less than 2,500 people and, in spite of mergers, there are still inexpedient units where the centrally located settlement is separated from its hinterland in administrative terms. However, one should be objective when preparing and implementing the administrative-territorial reform. The often expressed opinion that decreasing the number of rural municipalities would result in retrenchment of resources in terms of the number of local officials and administrative costs is misleading.