Final dates! Join the tutor2u subject teams in London for a day of exam technique and revision at the cinema. Learn more

Study Notes

Estonia's Free-Market Approach to Economic Growth and Development

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 5 Mar 2023

Estonia has adopted a free-market approach to economic growth and development since it regained its independence from the Soviet Union in 1991. The country has implemented a range of market-oriented reforms that have helped to transform its economy and promote growth.

Estonia's Free-Market Approach to Economic Growth and Development

Some of the key economic reforms that Estonia has implemented include:

  1. Privatization: Estonia has privatized many state-owned enterprises and opened up key industries to competition. This has helped to improve efficiency and productivity in these sectors.
  2. Liberalization: Estonia has liberalized its trade policies and reduced barriers to entry in many industries. This has helped to increase competition and promote innovation.
  3. Fiscal discipline: Estonia has implemented strict fiscal policies and maintained a balanced budget. This has helped to stabilize the economy and promote long-term growth.
  4. Flat tax: Estonia has implemented a flat tax system, which has helped to simplify the tax code and reduce administrative costs.

As a result of these reforms, Estonia has become one of the most economically liberal countries in Europe. The country has a highly competitive business environment and has attracted significant foreign investment. According to the Heritage Foundation's 2021 Index of Economic Freedom, Estonia ranks 7th in the world for economic freedom.

Overall, Estonia's free-market approach to economic growth and development has helped to promote growth and prosperity in the country. While there are still challenges to be addressed, such as income inequality and regional disparities, Estonia's economic model has been widely praised as a success story in the post-Soviet region.

Examples of Privatisation in Estonia

Here are some examples of privatization in Estonia:

  1. Banking sector: In the early 1990s, Estonia privatized its state-owned banks, which had been heavily controlled by the Soviet Union. This helped to promote competition in the banking sector and attract foreign investment.
  2. Telecommunications: Estonia privatized its state-owned telecommunications company, Eesti Telekom, in 1995. The company was sold to a consortium of Scandinavian telecommunications companies and later became part of the Telia Company.
  3. Oil shale industry: Estonia's oil shale industry was also privatized in the 1990s. The industry had been heavily controlled by the Soviet Union and was seen as inefficient and environmentally damaging. The privatization of the industry helped to attract foreign investment and promote modernization.
  4. Energy sector: Estonia has also privatized parts of its energy sector, including its electricity production and distribution companies. This has helped to increase efficiency and competition in the sector.
  5. Real estate: Estonia has privatized much of its state-owned real estate, including apartments and commercial properties. This has helped to attract investment and promote the development of the real estate market.

Overall, Estonia's privatization measures have been a key part of the country's transition to a market-oriented economy. While there have been criticisms of some privatization measures, particularly in relation to income inequality and regional disparities, privatization has helped to promote competition and attract foreign investment to Estonia.

Estonia's Flat Tax System

Estonia has had a flat tax system since 1994, which has helped to simplify its tax code and reduce administrative costs. Under the system, all personal and corporate income is taxed at a flat rate of 20%. Here are some key numbers related to Estonia's flat tax system:

  • Personal income tax: The personal income tax rate in Estonia is a flat 20%. This applies to all income, regardless of the amount.
  • Corporate income tax: The corporate income tax rate in Estonia is also 20%. This applies to all profits earned by companies operating in Estonia.
  • Social security contributions: In addition to income tax, employees in Estonia are required to pay social security contributions. The total contribution rate is 33% of gross salary, of which 20% is paid by the employer and 13% by the employee.
  • Tax revenue: According to the OECD, Estonia's tax revenue as a percentage of GDP was 32.1% in 2020. This is lower than the OECD average of 33.8%.
  • Tax compliance: Estonia's flat tax system has been credited with promoting tax compliance. According to the World Bank, Estonia has one of the lowest tax evasion rates in the world, at around 5%.

Overall, Estonia's flat tax system has been a key part of its economic success story. The system has helped to simplify the tax code, reduce administrative costs, and promote tax compliance. However, there have also been criticisms of the system, particularly in relation to its impact on income inequality and social welfare.

Income inequality in Estonia

Estonia has one of the highest levels of income inequality among OECD countries. According to the latest data available from the OECD, the Gini coefficient, a commonly used measure of income inequality, was 0.338 in Estonia in 2020. This is significantly higher than the OECD average of 0.316.

The income gap between the top and bottom earners in Estonia is also relatively large. According to a report by Statistics Estonia, the top 20% of earners in Estonia earned 5.3 times more than the bottom 20% of earners in 2020.

It is worth noting, however, that income inequality in Estonia has decreased somewhat in recent years. According to the OECD, the Gini coefficient in Estonia has fallen from 0.358 in 2015 to 0.338 in 2020. This may be due in part to Estonia's strong economic growth in recent years, as well as to measures aimed at reducing income inequality, such as increases in the minimum wage and social benefits.

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.