Estonia Leads Baltic States Into New Era

In this two-page report, the Monitor looks at the progress of economic reforms after a year of Baltic independence

LIKE the other capitals of the three former Baltic republics of the Soviet Union, Tallinn has always been relatively prosperous and Western in appearance. But the changes here in Estonia since the breakup of the Soviet Union have far outstripped even those of fellow Baltic states, and certainly those brought by reforms in Russia. In many ways, Estonia can claim to be the first truly post-Soviet economy.

A visitor from Moscow to this lovely medieval Baltic capital experiences future-shock from the first moment of his journey. A Tupolev-154, the workhorse of the vast Aeroflot fleet, has been repainted with the clean blue and white colors of Air Estonia.

The plane's interior is glistening, years of accumulated dirt scraped off, the carpets pristine and tacked securely down.

The welcoming stewardesses wheel a drinks trolley down the aisle, followed by a well-presented in-flight snack. It is a startling experience for the traveler accustomed to the filthy cabins and surly crews for which the Soviet state airline was notorious.

The gap widens on the ground. Neon signs illuminate downtown streets, brightening the winter gloom. The shelves of the main department store, bare as recently as last April, are filled with attractively displayed Western consumer goods. The narrow cobblestone pathways of the old city offer charming boutiques and coffee shops.

The most dramatic evidence of Estonia's new status is the crisp, new Estonian kroon notes that have circulated since last June. Not only is this the first former Soviet republic to issue its own currency, but the kroon is still the only fully convertible currency, pegged in value to the German mark and freely exchangeable for any Western monies.

The dual economy of full dollar stores and empty ruble shops that is so visible these days in Moscow has disappeared here. All goods, from Westinghouse refrigerators to milk, are sold for kroons. At a small kiosk inside the department store, typical of ones found all over town, a man plunks down $940 and gets kroons back, no questions asked and no forms filled out. A purchase of dollars with kroons is equally easy. Trade pattern shifts

Both Estonian officials and Western economic advisors here express some surprise at the rapid success of the new currency. The most notable sign has been the growth of Estonia's foreign-exchange reserves, which have almost quadrupled from about $50 million in June to $195 million at the beginning of December.

Exports doubled by August, as an export drive took hold. Trade patterns have already shifted, with Finland replacing Russia as Estonia's No. 1 trading partner and dependence on trade with the former Soviet republics going from more than 90 percent to about a third of total trade.

"Today's success has been larger than we expected," admits Estonian Central Bank spokesman Kauto Pollisinski. "We succeeded in making the Estonian kroon legal tender in only three to four days. The growth of central bank reserves was very fast. Monetary reform and a stable kroon have forced our economy to turn to Western markets."

The establishment of a hard currency has forced a variety of changes, including compelling all enterprises - private or state-owned - to live within their means, on the basis of real costs and incomes. This is due to the strict control, set by law, over the amount of new money that can be issued. The money supply is managed by a currency board with the requirement that any new money be backed by an influx of foreign-exchange reserves.

"It imposes a tremendous discipline," comments a Western economic adviser. "Under the former system, an enterprise could finance its operating deficits by going to the banking system or the government to make up the difference. Under this system, the central bank has no way of pumping money into the system without foreign exchange from abroad. It has taken some time to sink in. Enterprises keep asking for money but they aren't getting it."

Estonia is the first former Soviet state to actually let enterprises go under. This was demonstrated dramatically in December when the government closed down a large bank, the Tartu Commercial Bank, and forced the merger of two others. All three had been found to be in de facto bankruptcy, a condition that most experts believe could apply to most Russian commercial banks as well.

"The government wanted to shed some blood to show that there are risks involved in doing business," the Western expert says. "The prime minister [Mart Laar] told me - `this is going to be a lesson in the behavior of the market economy.' " Living standards fall

But critics say this tough-minded devotion to the market has come at tremendous cost. Production levels fell almost 40 percent after the currency change as enterprises lost both markets and sources of raw materials in the former Soviet Union. Estonians have seen their living standards plummet, in part due to the decision to keep the kroon's value low to promote exports. Despite the positive impact of recent monetary controls, inflation remains very high.

Many factories are operating only by giving workers unpaid leave and not paying bills. Official unemployment is about 14,000 or around 2 percent, but officials admit that understates reality. They predict the number of unemployed will hit 100,000 in 1993.

The government has recommended wage increases of 20 to 30 percent at state-run enterprises and institutions but even that will not stop a further decline in real incomes, officials admit. Pension levels and the minimum wage are being held to 260 kroons a month (about $22) to keep the budget under control.

"Of course it is very difficult," says the central bank's Pollisinski, "but I haven't met a person who lives on the minimum wage. Pensioners are being helped by their families. There is no other way today."

Estonian officials are hopeful that if they can get through this winter, including an energy shortage that followed the end of the supply of cheap energy from the former Soviet Union, the worst will be behind them. Ties with the West

Much of Estonia's relative success is due to its close links to the West and especially Finland. The Finns not only are a short boat ride away across the Baltic, close enough for Finnish TV broadcasts to be easily viewed, but they also share a common linguistic and ethnic heritage with Estonians.

"Whole generations of Estonians were brought up in front of Finnish television screens," says foreign minister Trivimi Velliste. "You could watch the ads and you see an image of everyday life in the West."

This accounts in large part for what the Western adviser sees as the difference between Estonia and its former Soviet neighbors. "The ability to adopt new thinking, new technology, is ahead of their neighbors to the south," he observes.

Indeed, the Estonian desire to see itself as part of the West is so strong that they balk even at favorable comparisons between their progress and that of Russia or Ukraine.

"People don't want to see themselves in the old context anymore," says Tarmu Tammerk, the editor of the Baltic Independent weekly. "It doesn't mean anything anymore."

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