Estonia's Economic Development : Trends, Practices, and Sources

Abstract

This paper is a case study of an open small economy whose development and growth is based largely on foreign trade and foreign direct investment (FDI). One purpose of the paper is to uncover the causes that have created such a development pattern. Estonia is a former socialist economy, part of the Former Soviet Union (FSU), which introduced comprehensive structural and institutional reforms in the 1990s. The country's transition to a market economy has been enhanced by integration with the European Union (EU), which was very important in evolution of institutions. Other research in this paper concerns the role of external anchors upon economic development; that is, mandates that reflect the values, objectives, and aims of a socioeconomic alliance, and which also frame Estonia's economic policy. One conclusion of the paper is that the EU integration process played an important role in creating and supporting development of a liberal, private sector-based market economy. Implementation of the rules, standards, and norms helped to increase the competitiveness of Estonian companies by improving market access to the EU and other markets. The external anchor concept is related to the international agents. A critical factor for future development and structural changes will be transforming Estonia from a transition economy to an innovation economy. The paper examines the role of the information and communication technology (ICT) sector and Skype in this development. The case of Skype demonstrates the much wider impact of the new telecommunication technology on society. Estonia's development in this field is empirical evidence that location, production, technology, and timing along with external anchors represent a catalyst for change.