Estonia's Market Reforms Advance
But securing supplies to get through next winter will strain the newly independent economy
THIS tiny Baltic nation has seized the market-reform spotlight by becoming the first former Soviet republic to dump the ruble in favor of its own national currency.
Last month's introduction of the kroon, as the new monetary unit is called, in principle expanded the purchasing possibilities of Estonia's 1.6 million inhabitants. Because it is convertible, the kroon gives everyone access to Western imports - goods that could only be purchased with dollars and other "hard" currencies when Estonia was part of the ruble zone.
But although consumer goods - from Panasonic electronics and Barbie dolls to Levi's jeans and auto parts - are now seemingly at the fingertips of every Estonian, many say the items are still beyond their reach.
"Sure, there are lots of goods in stores now, and we have new money. But it means very little to me. There's no way I can afford any of these things," says factory worker Oleg Semyonov as he stands in Tallinn's main department store. "So far there's been a lot of talk about reform, but very little has actually changed."
Estonian Prime Minister Tiit Vahi admits the move to a market economy to date has been slow. Until recently, reforms featured mostly cosmetic changes, such as the proliferation of imported items on store shelves, while not much was done to reverse the drastic economic decline that has hit all 15 former Soviet republics.
But Mr. Vahi explains the situation this way: It was relatively easy for Estonia, along with its Baltic neighbors Lithuania and Latvia, to regain independence 11 months ago, during the breakup of the Soviet Union. But breaking out of the Soviet planned economic system, after 50 years of close integration, proved a much more complicated task.
Now the prime minister says the "time has come for an acceleration." The introduction of the kroon, Mr. Vahi asserts, frees Estonia to pursue ambitious reforms designed to stabilize the nation's economy by the end of 1993. A long-awaited privatization program, expected to win parliamentary approval shortly, is the next big step, he says.
"Ownership will be open to our own people and to foreigners," Vahi told the Monitor in an interview. "The main thing is that it is done fairly."
Under the government plan, property worth less than 500,000 kroons (about $41,666 at current exchange rates) can be immediately privatized. The privatization of large industry will be put off until autumn, according to Anders Bergmann, vice minister of economics. The government has enlisted the help of the Treuhand Anstalt, the German agency overseeing the privatization of former East German enterprises, to help work out a scheme for Estonia. "Privatizing Estonia's 260 largest companies is now a question
of how fast we can build Treuhand in Estonia," Mr. Bergmann says.
Unfortunately for Estonians, living conditions are expected to get worse before the situation stabilizes. During the industrial transformation, production is projected to drop as much as 50 percent, while unemployment is expected to soar, Bergmann says. Meanwhile, income taxes have been raised, with the highest rate set at 50 percent.
"It has to be this way," Bergmann says. "Maybe next year tax rates can be lowered, but today there is a big problem with the budget and the money is needed. It will speed our move to the market, but socially it is hard to accept."
Coping with the social upheaval will be just one of the government's problems as reforms unfold. The ultimate success of the move to a market economy largely depends on factors that are unknown at this point, government officials say.
Firstly, the kroon needs to maintain its value to give other reforms a chance. It is too soon to tell, but initial signs have been encouraging, says Kaupo Pollisinski, a central bank spokesman. So far, the kroon appears to have slowed inflation in Estonia. In the ruble zone inflation is estimated at about 1,000 percent for 1992.
Preliminary results have spurred both Latvia and Lithuania to plan the introduction of their own national currencies. Latvia says it will switch to the Latvian ruble starting July 20, while Lithuania may introduce its litas as early as August.
Estonian Central Bank officials warn against being too optimistic, however. Many financial experts don't expect the kroon to be tested until winter, when Estonia will have to spend precious hard currency on heating supplies. Mr. Pollisinski says Estonia has a $120 million stabilization fund backing the kroon, which is pegged to the German mark. But the reserves are sufficient to support the currency only through the end of the year, he added.
If Estonia is to make it through the winter with its reform program intact, government officials estimate that up to $40 million in foreign credits will be needed, mostly for oil and grain purchases. So far, however, the government has not secured the loans. Negotiations continue with international financial organizations, including the World Bank.
In the past, Estonia received its energy supplies from Russia. But trade relations between them have crumbled, in part because of the collapse of both nations' economies. Tension has risen in connection with the Baltic states' demand for a quick withdrawal of the estimated 130,000 Russian troops still stationed on their territory, also contributing to a decline in trade.
A partial restoration of economic links with Russia would greatly enhance Estonia's reforms, officials in Tallinn say, but the prospects for an improvement soon appear dim.
Some political observers say reforms need a visionary leader if they are to succeed. Such a leader is lacking currently, says Michael Tarm, editor of City Paper, an English-language weekly in Tallinn. Elections are scheduled for Sept. 20, but currently there are no dynamic personalities in Estonian politics ready to fill the power void, Mr. Tarm adds.
Vahi has been regarded as a caretaker since he became prime minister in January. He says his government's chief task is to solve the problems presented by the coming winter, adding he would prefer "another person to do the difficult job" of continuing reforms. But he indicated he would remain on the job if needed.
"There's no identifiable leader for the future and this is a big problem for Estonia," Tarm says.