Estonia is well on the road to economic recovery after its economy bottomed out from post Soviet shocks in the second quarter of 1993. First quarter 1994 data indicate that GNP growth may be as high as six percent on an annualized basis. Estonia's currency, the Kroon, remains stable and fixed to the German Mark at an six to one exchange rate; no devaluations or revaluations are anticipated. Trade continued to expand in 1994, although Estonia fell into a deficit position with imports outpacing exports by approximately 10 percent.

Inflation remained higher than expected, but began to taper off as the year progressed; inflation for 1994 is anticipated to be approximately 40 percent. Estonia's privatization program made commendable progress in 1994, with approximately 50 percent of larger state enterprises now in private hands. Small and medium scale privatization is virtually complete. Housing privatization is just beginning and is moving relatively slowly. Estonia also made some headway in introducing vouchers into its privatization scheme and in creating mutual funds markets for voucher holders. The Government continued to report a balanced budget and due to higher than expected accruals of tax revenues, two supplementary budgets have been adopted. This permitted some modest increases to state pensions and salaries. 2. Exchange Rate Policies

Estonia introduced its own currency, the Kroon, in June of 1992. The monetary reform gave a major boost to Estonia's sovereignty and economic progress. The Kroon is frequently cited as the most important factor in creating fertile conditions for economic restructuring and recovery. Estonia's hard currency reserves have close to quadrupled since the introduction of the Kroon, although the money supply has contracted to a modest extent during the latter half of 1994.

Estonia eliminated the last of its capital controls in 1994; there are no restrictions in opening foreign bank accounts either in Estonia or abroad. There are no restrictions in exchanging Kroons for hard currency and repatriating funds from Estonia. The exchange rate policy of Estonia is anticipated to remain unchanged. There are no perceived pressures on the Kroon for a reevaluation (or devaluation). Current policies should continue to exert downward pressure on inflation which is expected to be significantly lower in 1995.

3. Structural Policies

Pricing Policies: In January of 1992, the prices of 90 percent of goods became free, and the Government of Estonia has liberalized even further since then. The only prices still controlled directly by the Government are electricity, precious stones and metals and energy inputs such as oil shale. Some goods and services (telecommunications, passenger transport) are subject to price regulation.

Tax Policies: Most elements of a modern tax system-such as corporate income tax, personal income tax, and value-added tax (VAT) are now in place. Property taxes were introduced in 1993. New tax laws became effective as of January 1, 1994, which established a 26 percent across the board tax for both personal and corporate income. Tax holidays for foreign investors were phased out as they were viewed as distorting and discriminating against local enterprises; companies already receiving tax holidays were grandfathered, however. An 18 percent VAT is levied on most goods and services. VAT is collected on imports as they enter Estonia; the importer gets VAT reimbursed when the goods are sold in Estonia or reexported. The general trend with Estonian tax legislation has been to decrease taxes associated with production of goods and increase taxes associated with consumption.

Regulatory Policy: Estonia's import and export regime is amongst the most liberal in the world. Import duties exist for fur and goods made of fur (16 percent), cars, bicycles, launches, yachts (10 percent). The only export duties are levied on rapeseed oil (100 percent), values of culture (e.g. cars from before 1950)(100 percent), and metals (ferrous and nonferrous waste and scrap) (5 to 25 percent). There are some fields of economic activity, which are subject to licensing, such as the trading of metals and precious metals, trading of alcohol and tobacco products. Any legal entity registered in Estonia can apply for an operational license.

4. Debt Management Policies

With respect to external debts, Estonia has signed loan agreements with foreign lenders of which 12 have entered into force. The total commitments of foreign loans as of November 1, 1994 was 251.65 million dollars. An additional 75.16 million dollars is in the form of government credit guarantees.

On the basis of current projections, the ratio of total external public debt to GDP is envisaged to increase to a peak of about 18.5 percent in 1995-1996 before declining to some 12 percent in the year 2000. Debt service as a proportion of exports to non-FSU countries is projected to remain in the range of about 5 to 8 percent during the period 1995 to 1999 before rising to just over 10 percent in the year 2000.

5. Significant Barriers to U.S. Exports

Import Licenses: With the elimination of import licenses on all products except alcohol, tobacco, pharmaceuticals and weapons, Estonia is a very receptive market to U.S. exports. Estonia has no major domestic impediments to imports, but minor impediments involving infrastructure deficiencies and financial institutions exist. Infrastructure Deficiencies: While the Estonian telephone system has improved considerably since the formation of a joint venture with Finland and Sweden, telephone service is still uneven; telephone service in areas outside the capital is greatly inferior. This has been a major factor for the minimal amount of foreign investment that has gone to regions further from the capital, and since foreign investment is a major spur to trade, trade performance in these same regions has suffered.

Financial Institutions: Performance of Estonian banks is uneven, but several larger banks are offering services roughly comparable to western banks. Trade financing is difficult to obtain (particularly for new enterprises without a track record) and high interest rates present some obstacles. Some banks have very limited experience with trade financing options, such as letters of credit.

Investment Barriers: According to the law on foreign investment, foreign investors have the same rights and obligations as domestic individuals or companies. However, in some sectors (mining, power engineering, telecommunications, gas and water supply, transport, telecommunications, banking) foreign investors require a license. All property brought into Estonia by foreign investors as an initial capital investment is exempt from customs duties, but is subject to VAT. A foreign investor has the right to repatriate profits after paying income tax on proceeds which it has received after the liquidation of the enterprise.

6. Export Subsidies Policies

The Government provides no subsidies to Estonian exports.

7. Protection of U.S. Intellectual Property

The Estonian Government has passed several important pieces of legislation designed to bring its intellectual property regime up to modern standards. As of February 5, 1994, Estonia is a member of the World Intellectual Property Organization (WIPO).

Patents: Estonia has taken several significant steps to improve patent regulation. The patent law, which has been in force since May 23, 1994, regulates the legal protection of patentable inventions in the Republic of Estonia. At the same time, the Utility Model Law came into force. On August 24, 1994, Estonia became a party to the Paris Industrial Property Convention and the 1970 Washington Patent Cooperation Treaty. The number of objects exempt from protection has not been determined. Trademarks: Counterfeiting is not a significant problem at this time. The Trademark Law, passed in Parliament on October 12, 1992, stipulates what is protected by law and sets out judicial proceedings: There have been 15,258 applications for trademark registration since 1992, about 60 percent of them are from foreign companies, including 3,032 U.S. companies. Up to the present, about 7,200 applications have received certificates proving trademark registration; this number includes 61 companies from the United States. The fee for a trademark registration is approximately $250.00

Copyrights: The Copyright Law became effective on December 12, 1992. This law provides for protection of software, cable television publications, records, video

broadcast, satellite signals, etc. The Copyright Law applies to works "which require protection in the Republic of Estonia by virtue of international treaties to which the Republic of Estonia is a party." On October 26, 1994, Estonia acceded to the Berne Convention for the Protection of Literary and Artistic Works.

8. Worker Rights

a. The Right of Association.-The Constitution guarantees the right to form and join freely a union or employee association. The Central Organization of Estonian Trade Unions (EAKL) came into being as a wholly voluntary and purely Estonian organization in 1990 to replace the Estonian branch of the official Soviet Labor Confederation, the all-Union Central Council of Trade Unions (AUCCTU). Workers were given a choice as to whether or not they wanted to join the EAKL. While in 1990 the AUCCTU claimed to represent 800,000 members in Estonia, in 1992 the AUCCTU claimed to represent 800,000 members in Estonia, in 1992 the EAKL claimed to represent about 500,000 members, organized in 30 unions. In 1993 EAKL's membership dropped to some 330,000 organized in 27 unions and in 1994 dropped further to about 200,000 organized into 25 unions. The EAKL explains the drop in membership by the breakup of large government-owned enterprises and privatization. EAKL officials estimate that some 40 percent of an approximately 600,000 strong workforce is organized.

The right to strike is legal and unions are independent of the Government and political parties. There were no strikes in 1994. There are constitutional and statutory prohibitions against retribution against strikers. Unions may join federations freely and affiliate internationally. The International Labor Organization has not cited the Government for failure to observe pertinent ILO conventions and standards.

b. The Right to Organize and Bargain Collectively.-While Estonian workers now have the legally acquired right to bargain collectively, collective bargaining is still in its infancy. The Government remains by far the biggest employer. According to EAKL leaders, few collective bargaining agreements have been concluded between the management and workers of a specific enterprise. The EAKL has, however, concluded framework agreements with producer associations. The EAKL was also involved with developing Estonia's new labor code covering employment contracts, vacations and occupational safety. The Labor Code prohibits anti-union discrimination, and employees have the right to go to court to enforce their rights. In 1993, a collective bargaining law, a collective dispute resolution law, and a shop steward law were adopted. EAKL officials reported that the courts re-instated a union official who alleged dismissal because of union activity.

No Export Processing Zones have been established.

c. Prohibition of Forced or Compulsory Labor.-Forced or compulsory labor is prohibited by the Constitution and is not known to occur. It is effectively enforced by the Labor Inspections Office.

d. Minimum Age for Employment of Children.-According to the Labor Law, the statutory minimum age for employment is 16. Minors aged 13 through 15 may work with written permission of a parent or guardian and the local labor inspector, if working is not dangerous to the minor's health, considered immoral, or interferes with studies, and provided that the type of work is included on a list the Government has prepared. State authorities effectively enforce Minimum Age Laws through inspections.

e. Acceptable Conditions of Work.-The Government, after consultations with the EAKL and the Central Producers Union, sets the minimum wage and reviews it monthly. In September, the minimum wage was raised from 300 to 450 Kroons per month (36 U.S. dollars]. The minimum wage is not sufficient to provide a worker and family a decent standard of living. About three percent of the work force receive the minimum wage. The average wage is about four times the minimum.

The standard workweek was reduced from 41 to 40 hours in 1993. There is a mandatory 24-hour rest period in the workweek.

According to EAKL sources, legal occupational health and safety standards are satisfactory, but they are extremely difficult to achieve in practice. They are supposed to be enforced by the National Labor Inspection Board, the effectiveness of which may improve with experience. In addition, the Labor Unions have occupational health and safety experts who assist workers in bringing employers in compliance with the legal standards.

The overriding concern of workers during the period of transition to a market economy is to hold on to their jobs and receive adequate pay. Workers have the right to remove themselves from dangerous work situations without jeopardy to continued employment.

11994 figures are all estimates based on available monthly data in October 1994, or predictions by the Ministry of Finance.

2GDP at factor cost.

"Real estate, renting and business activities" sectoral division is based on UN SIC-95 classification. *Bank of Finland's base rate.

1. General Policy Framework

The Finnish economy is slowly and unevenly emerging from its 3-year recession, during which GDP has declined by a cumulative 13 percent. An economic recovery led by strong exports has been underway since the first quarter of 1994. GDP looks set to grow at least 5 percent in 1994. The recession has resulted in a significant

shakeout of the Finnish economy, including corporate downsizing, increased competition and cutbacks in government services. Also spurring structural change is membership in the the European Union (EU), scheduled for January 1, 1995.

The economic recovery so far has been largely jobless, with unemployment remaining in the high teens amid stagnant domestic demand. These factors, coupled with low levels of business investment, have resulted in declining government revenues and increases in countercyclical spending, producing large budget deficits. Also contributing is continuing government assistance to the banking sector, particularly to the savings bank system. In 1994, the deficit will be about a third of total spending, the same level as 1993. The deficit is financed by foreign and domestic borrowing through the issuance of bonds; the balance has been roughly evenly divided between the two. The large deficits have brought about rapid increases in overall debt levels. Finnish government debt will increase from 35 percent of GDP at the end of 1992 to an estimated 64 percent at the end of 1994 and debt service will account for some 11 percent of government expenditures. Cuts in government social programs and aid to municipalities are helping to keep the debt from rising still faster. Also contributing are higher income tax rates and increases in indirect taxation. Finland's tax ratio will rise to an estimated 48 percent in 1994, a record.

Despite the high level of foreign debt servicing, Finland is experiencing a sharp improvement in its balance of payments; the current account should move into strong surplus in 1994 after years of deficits. The main contributing factor is a sharp increase in export sales, spurred on by a depreciated finnmark and declining real wages. Finnish international competitiveness has increased by about 30 percent as compared to its long-term average in the past several years. Inflation has so far stayed at a low level as wholesalers and retailers remain reluctant to pass along increased import prices in the face of depressed domestic demand. However, the money supply (M1) is showing rapid growth due to capital inflows, causing concern among some analysts that inflation could take off in early 1995. Domestic credit is tight as banks seek to regain profitability; as inflation fears mount, the Bank of Finland is threatening to raise interest rates further. Banks remain conservative in their lending practices, particularly to new businesses.

Finnish economic policy is based to a large extent on its forthcoming membership in the EU. The requirements of the EU, for example, have resulted in new competition legislation that is helping to reduce the cartelized nature of many Finnish industries. Legislation which took effect at the beginning of 1993 liberalizing foreign investment restrictions has helped spur a sharp increase in foreign portfolio investment and hence has contributed to the internationalization of large Finnish companies. The rise in stock market activity is also due to lower domestic interest rates and a tax law, also new in 1993, which sets a uniform rate of 25 percent on capital income taxation. Foreign direct investment has been slower to materialize, although Finland is hoping to capitalize on its location and expertise to serve as a "gateway" for foreign investors in the former Soviet Union.

In October 1994 Finland's citizens voted in favor of EU membership. Membership will occur in January 1995. EC membership and budgetary constraints have brought about some reform in Finland's highly protected agricultural sector. Finland will convert to the EU agricultural regime in 1995, although in the membership negotiations Finland has strived (with some success) to establish special support mechanisms which provide levels of support higher than the EC average. However, the support mechanisms will not be adequate to prevent major structural changes in the agricultural sector. Over the longer term, some of these changes will include a reduction in the number of farmers and consolidation of surviving farms into larger, more efficient units.

2. Exchange Rate Policy

The finnmark has been floating since the government and central bank broke its fixed link with the European Currency Unit (ecu) in September 1992 in the midst of a currency crisis. Shortly after the float was initiated, the parliament passed new legislation allowing the float to continue indefinitely. It is unlikely that the government will attempt to establish a new currency linkage anytime soon.

The finnmark has declined by about 35 percent in relation to the dollar and over 15 percent in relation to the ecu since the float was initiated, but in recent months the finnmark has again been gaining strength against both of these currencies. Devaluation has strongly boosted Finland's international competitiveness and has dampened demand for imports from all sources, including the United States. Conversely, exports have boomed. The government has not regularly intervened in financial markets to influence the value of the finnmark. The government has encouraged lower interest rates to boost domestic demand, but rates (particularly long term rates) remain high. Many analysts expect that in the medium term the