Estonia, located in the northeast of Europe at the eastern coast of the Baltic Sea, is one of the youngest independent nations in Europe and one of the smallest in the European Union regarding both population and land surface. In august 2016, it celebrated the 25th anniversary of regaining its independence after the Soviet Union collapsed. During those 25 years, many different developments occurred in Estonia regarding its economy, which have influenced trade, migration and urbanization in different ways. This article focuses on these developments in Estonia during its current 26 years of post-Soviet independence. It is based on my essay for the “Economic Geography: Theory and Application” course, which is part of the Economic Geography master’s program and was coordinated by prof. dr. Philip McCann.
After the collapse of the Soviet Union, the newly formed Estonian government was tasked with rebuilding the country economically, regarding both the internal economy and their international trade relations. During the Soviet era, the Estonian Soviet Socialist Republic (ESSR) functioned as a base for heavy industries. The ‘country’ imported and exported for 90% from and to other Soviet republics, primarily to the Russian Soviet Federative Socialist Republic (RSFSR, commonly known as Soviet Russia). Furthermore, population redistribution policies led to many people moving from the RSFSR to the ESSR. Because industries were primarily based in urban areas, many of these Russians moved to the Estonian cities, thus leading to rapid growth of the urban population. The Estonians themselves didn’t move to the cities on such a degree as the Russians did: about 60% of the Estonians in the ESSR were urbanized, compared to 90% of the Russians. They remained primarily focused on agriculture throughout the Soviet era.
After the collapse of the Soviet Union in 1991, a significant decline of the urban population occurred. This was probably caused by many ethnic Russians who returned to their homeland, although official numbers are unknown due to the relatively open border to Russia during the first years of Estonian independence. External migration, however, is known as a major influence of the decrease in urban population during the 1990s.
The Soviet era had let to Estonia being isolated from the outside world for many decades, which in turn led to a shortage of experience regarding international trade compared to western European countries. The policies accepted by the Estonian government focused on both restoring relations with Russia, while also integrating with western European countries. This double focus is explained by the Estonian goal of becoming a member of the European Union and NATO, while the country recognized that Russia remained an important trading partner because of its location and size. Even today, many exporting Estonian companies still use contacts with their Russian counterparts, which already existed before the collapse of the Soviet Union.
The Estonian independence led, as expected, to new opportunities regarding trade and political relations. The focus on the European common market was evident following signing the first trade and cooperation agreements with the European Union in 1992. Integrating with the European common market, according to the Estonian idea, was planned to increase foreign direct investments (FDI) in the country. This policy was supported by implementing a very open trade regime and fiscal policies favorable for foreign companies. After the establishment of the Euro currency in the early 2000s, the Estonian currency (‘Kroon’) was quickly fixed tightly to the euro, which led to monetary stability – and therefore trust – among national and international economic actors, which in turn led to an increase in FDI within Estonia.
The geographical location of the country turned out to be a significant advantage, with Russia, strong European markets (for example Finland), and other newly opened economies (such as Latvia) all situated close by. This made Estonia an interesting location for companies, since operating in Estonia would mean that many other markets could be accessed very easily. Therefore, the country’s exports increased, primarily to Latvia and Lithuania. Companies from bigger European economies, such as Sweden and Germany, found Estonia a favorable production base because of its relatively low production costs. A number of companies from these countries moved their factories to Estonia, thus further increasing the Estonian exports. In 2016, Sweden was the biggest country for Estonian exports, followed by Finland and Latvia. Germany is another top exporting country, while previously mentioned Russia remains among the top listed countries as well.
Regional differences: Tallinn leading the way
The spatial distribution of FDI has been very concentrated since opening up the Estonian market to the western world. The capital of Tallinn received about 80% of all FDI during the 1990s, while combined with the surrounding areas in Harjumaa county, this percentage comes close to 90%. Most of the remaining 10% of FDI went to the province of Tartumaa, where Estonia’s second biggest city Tartu is situated (which is currently mostly famous for its university). While these two areas became generally dependent on the services sector, most other areas remained primarily industry based or agricultural. Nevertheless, rapid restructuring took place in agricultural areas, which led to a decline in agricultural jobs, therefore letting agricultural areas struggle with poverty and income inequalities. In both the agricultural and industrial sectors, the number of jobs saw a decrease soon after the Estonian independence.
The combination of a growing services sector, combined with a decline in the two other sectors, led to patterns of internal migration. Initially, urban areas lost population relative to rural areas during the 1990s, which was due to the loss of jobs in the city centers because the Soviet industries were closed down after the independence. Unemployment, combined with increasing living costs due to limited housing in the cities due to limited housing, led to people leaving the cities and moving to surro
unding rural areas. This started the development of suburbs surrounding Tallinn and is a significant cause for the city being stretched out over relatively big area. Even today, Estonia’s economic activities are still highly concentrated in Harjumaa county. After joining the European Union in 2004, Estonia received easy access to credit, which in turn led to huge increases in real estate developments in areas surrounding the cities. This also helped increasing the urban population, particularly in the greater Tallinn area.
Becoming a member of the European Union led to access to large markets for goods and services, as well as deep capital markets. The Estonian economy skyrocketed after joining the European Union, mainly due to a huge increase in cross-border activity, which initially led to a gross foreign debt. This isn’t anything special for countries that are catching up, since they need to invest in their economy until their export capacities are sufficiently strong enough. Imports from the common market increased, while imports from Russia declined. Despite the rapid economic development, Estonia appeared vulnerable for external developments following the global financial crisis, which led to a sharp decrease in investments. This decrease was caused by the so-called ‘real-estate bubble’, which was the main cause for Estonia suffering heavily from the global economic crisis, leading to a big shock for the Estonian economic development. However, the country has been recovering strongly after the crisis.
Over the past 26 years, Estonia has transformed from a socialist state to a modern European economy. Having to deal with the legacy left by the Soviet Union during the early 1990s, policies focused on economic integration into the European Union, as well as the favorable geographical location, have set the pace for Estonia’s strong economic development. This led to a number of geographical developments, such as rapidly increasing trade flows with western economies (primarily Finland and Sweden). While initially having to deal with declining urban areas, economic development has been very concentrated within the capital area of Harjumaa, which in turn led to migration flows to this area, causing a steady growth for Tallinn. It is fair to say that Estonia has been developing greatly over the past 2,5 decades, though the developmental gap between the leading areas and other parts of the country may require specific action to make sure these areas won’t fall behind too greatly.
The full reference list of the original essay can be received upon request.
Photos: Jeroen de Regt