Estonia is born again through economic 'miracle' Harsh reformation allows no bailouts

June 20, 1993|By Kathy Lally | Kathy Lally,Staff Writer

TALLINN, Estonia -- Scrappy Estonia, among the first of the 15 former Soviet republics to proclaim independence, has struggled to the forefront once more.

Less than two years after leaving the Soviet Union, Estonia has surmounted bitter political differences to create a new country. With lightning speed, a coalition government has written a constitution, printed its own money, shifted trade from Russia to the West and dramatically transformed the daily lives of its people.

"Just look at me," said Estonia's president, Lennart Meri. "I'm happy. It's been a remarkable achievement."

The radical reforms wrought here hold important lessons, not only for the other countries emerging from Moscow's domination but for giant Russia itself.

Estonia has re-created itself by pursuing a hard and parsimonious financial policy, forcing its business and industry to adapt immediately and completely to a market economy -- or perish.

"We went to a very hard market economy," said Prime Minister Mart Laar.

"If businesses can't survive on their own, they go to bankruptcy. The principle of my government is not to keep giving them money."

So far, results have been what President Clinton's special adviser, Strobe Talbott, calls a "political and economic miracle."

But the hard-won gains are still highly vulnerable, and they have caused deep suffering, particularly among the elderly and young families.

"People have had to really sacrifice," said Mr. Laar. "If you are interested in a better future, you can only spend as much as you earn. And we are not earning very much."

At the heart of Estonia's tentative success has been the issuance of its currency, the kroon. The new money was #F introduced a year ago against the advice of the International Monetary Fund.

"The IMF was pushing for a new ruble zone," said Ardo Hansson, the prime minister's economic adviser.

Estonians, however, wanted to escape any dependency on Russia as soon as possible; they wanted to control their economy. Their currency symbolized sovereignty.

The law establishing the new monetary system was simple and stringent: The Estonian kroon would be pegged to the deutsche mark at 8 kroons to the mark, and the Central Bank could print only as many kroons as it could back up in hard currency.

Sink or swim

This meant that the Central Bank could not bail out the government or industry by printing more money.

The government was forced to operate on a balanced budget, and industry was forced to sink or swim.

The currency was backed up with $120 million in gold returned to Estonia from Sweden and England, along with a $40 million stabilization fund from the IMF -- which was never needed.

From June 20-22 of last year, rubles were exchanged at the rate of 10 rubles for one kroon. It was a harsh measure -- wages dropped by a factor of 10.

"A zero was taken off everything," Mr. Hansson said.

Government was drastically trimmed -- the Cabinet was cut to 11 ministers from 17, and the number of deputy ministers dropped from 35 to 11. Real government wages declined dramatically.

Over the past year, 15 percent of Tallinn residents have lost their jobs -- but most have found new ones in rapidly opening businesses.

"It's been a remarkable performance," said a Western economist. "It's quite clear inflation has come down and the economy has stabilized. The stores are full -- everything is available -- though you can argue that people can't afford to buy anything. But it does mean confidence in the kroon and the future has prompted a lot of economic activity."

While business has surged, the effect on the individual has been almost unbearable. The sales tax was raised from 8 percent to 18 percent. Wages average about $75 a month. And pensioners receive about $25 a month.

Inflation is down

But Estonians remain optimistic. Before the reforms, the inflation rate was 950 percent a year; now it's down to 25 percent to 30 percent a year.

The kroon has remained stable against the deutsche mark. And last year, Estonia had a budget surplus equal to 1.7 percent of its gross domestic product.

The drastic drop in production that came with the fall of the Soviet Union appears to have reached the bottom here, the Western economist said, and there are signs production is beginning to increase.

Much of the boom has come through exports to the West of textiles, furniture and electrical components.

In all of 1991, the value of such exports was $52 million. In the second half of last year, exports jumped to $200 million; that figure is expected to double this year.

Mr. Laar, the energetic prime minister who turned 33 in April, said businesses had been forced to adapt overnight.

"We have no trade barriers," he said. "So our butter manufacturers had to compete against Finland and Sweden. They couldn't keep making butter and margarine full of water. They quickly understood they had to make something people wanted to buy."

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