Transforming an Economy While Building a Nation The Case of Estonia

Most Central and Eastern European countries are struggling with the daunting task of transforming their state-owned, centrally planned economies to a private, market-oriented basis. The newly or again independent states emerging from the collapse of the USSR and Yugoslavia and the dissolution of Czechoslovakia, face an even greater challenge. While also moving from plan to market, they must at the same time restructure their often provincial economies to ones befitting a sovereign state. For a country in the early stages of nation- and state-building, the economics of transformation are changed in two ways. First, it will face some tasks, such as the introduction of a national currency, which are not faced by the 'older' nations. Second, the precise form of steps taken by all reforming CPEs, such as privatization, is often altered by the constraints and needs of nation-building. This paper examines the specific issues faced by the new' states during this period of 'dual economic transformation', using the experience of Estonia as a case study.1 This is done in several stages. First, the main social and political factors which impact on the Estonian transformation are described. This is followed by discussions of the impact of nation-building on fiscal and monetary policy, domestic liberalization, privatization, economic restructuring, and external economic relations. Finally, the paper concludes with a discussion of how the Estonian case can or cannot be generalized to other 'new' states.