(D)-Suppressed to avoid disclosing data of individual companies (*)-Under $500,000 Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3 Estonia is on the verge of a profound economic transformation with the goal of moving from a formerly centrally planned economy to a market economy. An initial step in this process was the 1987 reform program of "Self-Managed Estonia" which pushed for greater economic autonomy. In February 1990, the Soviet and Baltic governments agreed to give republics greater control over foreign trade operations, acquisition of foreign credits, and the creation ESTONIA of their own currency reserves. Prices, however, remained regulated and little progress was made in gaining control of the financial and monetary system. In fact, in order to counteract the total collapse of the economy, there were moves towards strengthening the administrative regulation of the economy, such as rationing and a decree that forced enterprises to sell1 80 percent of their output to the state. The Ministry of Material Resources continued to allocate inputs to Estonian enterprises. Most importantly, the inability of Estonia to gain control of key sectors of the economy, such as the banking sector, made it virtually impossible for Estonia to restructure and develop stable trading relations with the West. After declaring its independence in August 1991, the Estonian Government introduced the 3X3X3 program which seeks to prepare Estonia for integration into the world economy. The overall economic objectives of the program are to establish a sovereign national economy and establish entepreneurship based on private capital. The program calls for a number of temporary agreements with the Soviet Union on issues such as currency (temporary printing of rubles until the Estonian currency is introduced), banking, customs, transportation, etc. The program also seeks the fulfillment of existing bilateral economic agreements with the Union republics. Estonia expects to trade with the republics on a ruble basis, at least initially. However, the 3X3X3 program envisions the possibility of having to conduct trade with the Soviet Union in 1992 on the basis of world prices. An equally important aspect of the program is economic relations between Estonia and the West. The program envisions Estonian participation in the EEC, IMF, and World Bank. The Estonian Government also promises to remove restrictions on foreign involvement in the Estonian economy and to introduce favorable customs regulations. The government's agenda also calls for reform of prices, the tax structure, ownership and property rights, monetary/banking institutions, and fiscal policy . 2. Exchange Rate Policies Until Estonia establishes its own currency and the Estonian Bank is able to operate effectively as a central bank, it is very difficult to institute exchange rate policies. Currently, the Estonian Bank establishes an official exchange rate on a weekly basis. For example on October 30, 1991, the Estonian Bank bought $1 for 44.11 rubles and sold $1 for 47.20 rubles. At the same time, there exists a market rate which is usually higher than the official rate. Twice a month, the Estonian Bank holds hard currency auctions where enterprises can apply to sell or purchase any freely convertible currency. Until now there have been 15 auctions and exchange rates have been almost twice as high as those established officially. During the recent auction in ESTONIA October 1990, a record price of 91.20 rubles for $1 was reached. Total transactions have been significant with hard currency sold for almost 100 million rubles. The When Estonia introduces its national currency, the government will have an important policy tool at its disposal through the possibility of adjusting the exchange rate. exchange rate will take on great importance as a way of promoting exports and economizing on the use of foreign exchange for inputs. 3. Structural Policies Patterns of Industrial Ownership: Enterprise reform in Estonia was formalized by adoption of the Enterprise Law in November 1989. This important step allowed a pluralism of ownership forms, including private property. The adoption of a Law on Property in June 1990 further defined property rights. A Law on Leasing was adopted in October 1990. A very important step was adoption by the Supreme Council in December 1990 of a decree declaring illegal the major acts of nationalization and collectivization of the 1940s. While this in principle restored the property rights of former owners and their heirs, the actual return of property will not be automatic, but will involve formal application and proceed according to special laws. This is expected to play an important role in facilitating privatization, but it is estimated that only 10 percent of fixed capital will be subject to claims by former owners. 2) The government envisions three stages of privatization: 1) divestiture of enterprises in trade, services, and catering; widespread privatization of housing and farms, and the experimental privatization of a few large enterprises; privatization of most remaining small and medium-sized enterprises, following a previous settlement of most questions concerning return of and/or compensation for nationalized property, citizenship laws, and residency requirements; and 3) the comprehensive privatization of large enterprises. The privatization process will be managed by the State Property Department. The valuation of enterprises will be its most controversial task. Price Reform: One especially difficult aspect of the overall reform has been price reform and compensation for price increases. While some legislation on prices has been adopted, it does not amount to a fundamental dismantling of the system of centralized price reform. A Law on Prices was adopted ir. December 1989 and was followed by a government decree which established the temporary regulation of prices and tariffs in Estonia. Currently there are four categories of prices: 1) prices established by the government; 2) prices established by the National Pricing Board and the Ministries (included are fuel, alcoholic beverages, tobacco products, coffee, building materials, transportation fees, drugs and medical services); 3) prices negotiated with the Pricing Board (i.e., goods which ESTONIA influence the equilibrium of demand and supply and prices for products of monopoly producers); and 4) prices and tariffs for services established by the free market. The 1989 Law on Prices is considered out of date and creates barriers to the overall development of market prices. One significant factor preventing the establishment of free market prices is the absence of an antimonopoly law. In the absence of more concrete moves to liberalize prices completely, most price increases have been administrative. Compared with a year ago, the cost of living has become 271.8 percent more expensive. The biggest increase, 304.3 percent, was recorded for food prices. Earned income has lagged behind with an increase of only 180 percent. Tax Policies: Estonia is reformulating its tax system. Recently, it adopted a new Corporate Income Tax Law which will be in force as of January 1, 1992. The law calls for the payment of corporate income tax by all enterprises situated in Estonia. The period of taxation is one year and the tax rate is determined on the basis of pre-tax profits. Tax rates are as follows: The tax rate for enterprises registered in Estonia but operating abroad is 10 percent. There are tax holidays of two to five years for foreign investors, depending on the size of foreign investment and degree of foreign participation. The law also introduces a value added tax which is 10 percent. Some goods and services will be exempt from the tax. Foreign Investment: Estonia passed a law on foreign investment in September 1991 which permits the establishment of enterprises with foreign participation with no limitations. All property brought into Estonia by foreign investors as an initial fixed capital investment is exempt from customs duties. A foreign investor has the right to repatriate foreign currency which it has received as profit from an enterprise after paying the income tax or which it has received after liquidation of the enterprise. An enterprise with at least 30 percent foreign investment has the unrestricted right to export and import. All foreign investors require a license; a decision to issue a license must be made in one month. The number of firms with foreign participation currently exceeds 1,000. There are about 300 joint ventures, 350 international joint stock companies, three subsidiaries of |