UNIVERSIDAD DE MONTERREY

International Competitiveness

Case Estonia: From Transition to EU Membership (Chile: The Latin American Tiger?)

David Fernando Charles Elizondo 58617

Diana Laura Sanmiguel Galindo 168552

Carlos Alberto Zamora García 197639

Francisco Federico Peraza Pérez 526377

Professors

Dr. Carlos Enrique Atoche Kong

Dr. Francisco Javier Azcúnaga Guerra

“We hereby affirm that we have done this work with academic integrity and with strict

observance of honor code of UDEM”

 Estonia: From Transition to EU Membership

BACKGROUND

Estonia and Chile are countries that have several common points on their history, since

through the years, have established several important changes in their institutions. Both

countries have developed economic systems which have allowed them to advance in several

areas. We will analyze each one of them, and we will explore, which conditions allowed each

country’s advance. We will also explore the main differences among both nations.

Both countries had become a showcase of economic reforms, establishing modern

government and open market economy. These two countries are quite different, however there

are some common points in their leadership’s decisions and actions which, after some lapse of

time, have different effects in their countries.

CASE QUESTIONS

1.- What was the competitive position of Estonia when it regained independence in 1991?

What were its assets and liabilities?

Estonia gained its independence after Soviet Union’s collapse in 1991, in a pacific way.

Independence was preceded by a confusing period of uncertainty, since first elections were held

until September 1992 and country had not a formal constitution, neither institutions. After World
War II, country was devastated and occupied by USSR. As a Soviet Republic, all land, real

estate and industrial and agricultural assets were nationalized. At the end of Soviet occupation,

infrastructure (such as roads, telecommunications and railways) were in bad condition.

Among country’s assets we can mention the oil-shale resources at north eastern. During

soviet occupation, oil was used to fuel electricity generation and chemical industry. Other

important asset, which was emphasized by the soviets, was people’s basic education. Estonian

literacy rate was 100%.

Among liabilities, infrastructure was in disrepair and, as we already mentioned, country

lacked of formal democratic institutions. The oil-shale extraction had caused damage to land, air

and water. After 1991 independence, country rapidly fell into crisis. GDP, inflation and

industrial activity, among another economic metrics, got worse.

After a long time of soviet occupancy, country was virtually isolated from rest of world.

During late 1980s, with Perestroika and Glasnost reforms, there were some few steps to enter

private capital to some industries. First joint venture with foreign investors were set in 1987.

However, the most of trade interchange of Estonia was limited to Russia and other soviet

republics, as well as with COMECON members.

2.- Analyze the national diamond over time. What allowed Estonia to upgrade

competitiveness faster than many other transition countries?

See Figure 1 – Porter Diamond

 Foreign employees
Firm strategy,  High literacy rate
structure and  Education growing
rivalry

Factor conditions Demand conditions

 Logistic infrastructure  Export of telecom

 Communications equipment
 Administrative infrastructure Supporting and  Internet service
 Capital marekts related industries
 Innovation and clusters
 Growth of financial markets
 Employment in food industry
 Textile companies
 Oil

3.- Why was Estonia able to achieve such rapid progress?

We cannot ignore the fact that when 1992 elections took place, a new generation of

politicians took over government, and most of soviet-era officials laid-off. New officials, leaded

by Maart Laar, who was appointed as Prime Minister, were oriented towards the West and free-

market policies believers.

Several western market economy oriented dispositions were put to practice, such as:

a) Monetary policy. New Estonian currency, Kroon (EEK) was pledged to German

Deutschemark in 1992, by a currency board, and later in 2002, EEK was tied to Euro.

EEK was full convertible to other currency on capital transactions.

b) Structural reform. Land and private properties nationalized by soviet state, were

returned to former owners. Soviet-era agricultural cooperatives were dissolved. A

process of privatization started in 1991 in small scale. In 1993, the effort of privatize

all state business entities took place. Restrictions to foreign capitals were repealed,

and equal rights to foreign and local investors were granted. A very important matter

related to these two policies, is that they were issued and formalized in Estonian law

framework. Return of private property was established in the Principles of

Ownership Reform Act and the Land Reform Act. Privatization of state business was

leaded by the Estonian Privatization Agency

c) Estonia also opened to free market. Soviet-era trade restrictions, such as import-

export quotas, and import tariffs, were repealed. In 1996, Tallin Stock Exchange start

operations, and Estonia became a member of WTO in 1999. To reinforce free market

policies, country also opened to people’s traffic, from EU and Baltic region.

d) New tax system. In 1994, Estonia simplified its tax system, by establishing a flat tax

rate of 26% (for individuals and corporations), a VAT of 18%, and 30% of social

security tax over wages, payable by employer. In addition, reinvested profits were

tax-free.
4.- Compare Estonia’s success with that of Chile. What are the similarities? What are the

differences? Which country faced greater challenges.

When analyzing the cases of both countries, it can be easy to identify several points in

common. Among these, we can mention the following:

Both countries faced, at a recent point in their history, economic and political crises,

although not in same order. Chile’s economic crisis came with the measures taken during

Salvador Allende’s presidency, prior to the military coupe-de-etat. Estonian economic crisis

came after a political crisis caused by the Soviet Union dissolution.

Both countries geographical location allowed them to establish free-trade alliances. Chile

with South American countries and Estonia with Eastern Europe and Scandinavian countries.

These alliances allowed them to increase their exports, as well as their geographical situation

which was favorable to maritime traffic.

Both countries took similar paths to reconstruct their economies. Both opened to free

trade, deregulate their institutions and make private property of production means, land and

business the center of economic policy. It is not coincidence that both countries achieve similar

results. Economic growth, exchange rate stability and low inflation rate.

Among differences we can identify that Chile do lever up its growth on primary

industries, such as agriculture and specially fishing. Estonia has not the extent of coastlines that
Chile has. Those coastlines empowered Chilean fishing industry, in particular, salmon fishing,

which is the second largest Chilean export. In addition, Chile has leveraged its growth in mining

industry. Cooper is Chile’s largest export. In contrast, Estonia has leveraged its growth on

technology and manufacturing industries, as well as telecommunications. Estonia has not the

land extension, coastlines and conditions favorable to agriculture or fishing.

As we established before, countries faced their modernization process at different points

of their history, and in different conditions. Chile’s path to west economic policies was

conducted, and executed by Pinochet’s military regime, and the arrival to democracy came after

this process. Estonian process, took place only after the country was liberated from Soviet

oppression. Unlike Chile, which process was leaded by an autocratic regime, Estonian process

was leaded by a democratic elected government, which gave the opportunity to perform these

changes to a new generation of politicians.

In our opinion, Estonia faced the greater challenges, since its transformation did not come

from unilateral dispositions. Estonian transformation had to be agreed among different political

actors. It is important to mention that, prior to Pinochet and Allende’s era, Chile had maintained

an “institutional tradition”, which Estonia did not have, due to soviet occupation.

5.- What are Estonia’s competitiveness issues in 2007? What recommendations would you

make to Estonia’s leaders?

Estonia is an emerging economy, which has been growing above other transition

economies. By 2007, economy has grown at the same pace since 2000. This growth has become
unsustainable. Credit, fueled by Nordic banks started to slow, and housing prices reached their

peak. GDP growth slowed below 10% line, which had been sustained during the mentioned

period (2000-2007).

Estonian economy was hit by global crisis in 2008, which worsened its local situation.

Suddenly, country faced the declining of international refinancing which has fueled its growth,

and exports also declined, which led to a drop of GDP and consequent job losses (especially in

construction)

Actions took by Estonian government appeared to be proper ones. They did not resort to

public expense to stabilize economic situation, but took the opposite route. They cut public

expense, and did not devaluate Kroon.

Recommendations should be to exploit country’s competitive advantages.

Administrative, information and technological infrastructure is good, which can enable the

continuance of opening markets. Business environment in Estonia is also favorable, especially

on corruption index, which is virtually absent (unlike post-soviet countries). This is an important

competitive advantage that country has to exploit.

Estonia’s clusters can be a leverage, such as the logistics cluster for all Baltic area, or IT

cluster, which has evolved from telecommunications. Cluster of wood products and furniture

also is important, since appear that foreign companies are outsourcing furniture manufacturing to

Estonia and other Baltic countries.

 CONCLUSION

Chile and Estonia have had similar approaches to transform each country’s economy, and

results appear to be similar also. We explored that it was a matter of economic policies, no

matter the differences among the countries. As countries, both –Estonia and Chile– cannot be

more different than they are. They differ in territorial extent, natural resources, composition of

population, culture. They also share differences on how the reforms have been implemented.

While Chile arrived to western capitalist economy leaded by a military regime, Estonia took that

path through a democratic-elected government, leaded by civilians from a young and different

politician’s generation.

Notwithstanding the foregoing, both nations implemented very similar economic and

politic measures. Open markets policy, free-trade approach, and private property of goods and

services, appeared to be the engines of both countries growth. Both countries face different

challenges. As Estonia’s main challenges remain low rate of productivity growth, and a

shrinking in labor force, due to demographical reasons. Chile’s main concern appears on how to

deal with two main trade blocks in America: NAFTA and Mercosur. Currently, Chile is not a

member of any, and intends to become a bridge between both blocks.

 REFERENCES

Harvard Business School. “Estonia: From Transition to EU Membership”. August 29,

2013. Porter, Michael; Ketels, Christian & Solvell, Orjan

Harvard Business School. “Chile: The Latin American Tiger?”. March 21, 1999.

Laar, M. (2007). The Estonian economic miracle. Backgrounder, 2060, 1-12.