The monetary reform as an important determinant of changes

Although restoration of Estonia’s independence in August 1991 brought with it several changes in the institutional framework of the economy, Estonia still remained in the ruble zone. A major price increase took place in the first months of 1992 because the prices of raw materials were increased in Russia at the beginning of the same year. The prices of fuels and other resources went up several times. As Estonia imported the bulk of its raw materials for industry from Russia, this brought along a forced liberalisation of most prices and a high price jump in Estonia (in 1992 inflation was 1076%).

The monetary reform which introduced the Estonian kroon, conducted in June 1992, was a major turning point in economic reform. As the details of Estonian economic reform have already been extensively discussed in numerous articles, here only some of its more general features are described. The establishment of a currency board and the convertibility of the Estonian kroon were introduced. The exchange rate of the kroon was fixed to the DEM (1 DEM = 8 EEK), with the exchange rates with other currencies calculated according to the DEM. Both private individuals and enterprises can exchange the kroon for foreign currency without restrictions.

The fixed exchange rate of DEM 1=EEK 8, introduced in June 1992, was still the same in June 2001. Estonia had also a relatively high level of inflation after the monetary reform. Estonian economic development under a fixed exchange rate arrangement has resulted in constant appreciation of the price of domestic input. On the other hand, despite increasing costs of production, Estonian enterprises have remained competitive due to increased productivity and the economy has witnessed rapid growth of production and exports.

This growth is first and foremost related to institutional and structural changes. Institutional changes (free trade agreements with other countries, trade relations with new foreign trade partners, improved quality control that made the products acceptable in foreign markets, etc.) ensured access to new markets. Structural changes — the establishment of new companies producing high-quality goods and the adaptation of existing companies —facilitated the marketing of goods and services despite increased domestic production costs.

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