Estonia Under Soviet Type Economy

Frank O'Neill,  May 2000


During Estonia's period of independence (1918-1939) the Estonian economy developed rapidly, and the standard of living rose steadily up until 1940 where the GDP per capita was equal to that of Finland. However on account of the Hitler-Stalin Pact of 1939, Estonia was drawn into the USSR sphere of influence. By mid 1940, the Estonian government was presented with an ultimatum, from the USSR, requiring the appointment of anew communist government. Therefore, a new 130-member Estonian Communist Party was legislated and this new governing body announced the formation of the Estonian Soviet Socialist Republic (SSR). On August 6, 1940, the Estonian SSR was incorporated into the USSR. These actions meant Estonia was no longer able to maintain its successful economic progress, and further, its contacts with western, as well as a few other eastern trade partners, ceased. Pressured by Soviet economic planners, the Estonian economy was centralized: industries, financial institutions and agricultural producers were all nationalized and completely dependent on Moscow.        

The USSR's drastic economic reorganization of the Estonian market economy into a command economy, entirely restructured the fundamental problems of deciding what to produce, and for whom. In the Estonian command economy, government committees of economic planners, production experts, and political officials establish production levels for the goods that were to be produced and designate which factories or facilities were to produce them. The central planning committees would also establish the prices the goods were to be sold at as well as the wages earned by workers who produced them. These series of central decisions determined the quantity, variety, and prices of goods within the centralized Estonian economy.      

 However, the centralized economic system imposed by the USSR was flawed from the start and yielded dire consequences. The command economy created significant distortions of Estonia's infrastructure resulting in unnecessary and overwhelming bureaucracy which caused most of the country's production to be uncompetitive in international markets and caused local surpluses and shortages (Stidelsky, 1995). In reality, both the number of different items to be produced and the  amount of each item to be produced, were set by the Central Planning board limited the actual number of different products, or similar products of the same type, on store shelves. This limited number of choices accounted for the high rate at which popular goods sold out, disappearing from store shelves and inventories: hence creating shortages.

Furthermore, factories failed to meet market demand due to the Central Planning Boards underestimation or miscalculation of the demanded product quantity people want to buy at the Government set price. Clearly the planning procedure was simply too slow to keep up with the changing consumer preferences or the procedure utilized inappropriate or misleading indicators for calculating the product production quotas. Even when the Central Planning Board made changes in production quotas, prices, or both, the shortages were not always resolved. More-over, as the number of people living in Estonia increased, along with the number and sophistication of new products, it became increasingly more difficult for the Central Planning Board to avoid or eliminate both the shortages of the many products consumers demand and the surpluses of many products consumers did not want, or need, to purchase.

With an ever increasing number of products, population, as well as rapidly changing production technologies, the USSR and its satellite republics faced an ever increasing load of decisions and calculations which required careful examination and error free solutions. Moreover, before the release of the finalized prices of goods, over four years of calculations were required. Hence the government established prices were not instantaneously determined but rather tediously worked out in a very time demanding process.

 Immediately following the USSR imposed centralized economy, Estonia entered an economic decline in the 1940s. Though Estonia did maintain the highest standard of living in the former Soviet Union, the repercussions of the economic reformation were harsh. During redistribution of the large land estates, special interests and poor organization stood between the small farmers and much of the untitled land. With the economy under the Moscow's control, society was too controlled by Moscow. Local community organizations were soon dissolved and all Non-Communist presses were eliminated and prohibited.

  During July 1940 - June 1941, a reign of terror swept Estonia: approximately 1,000 people were arrested and disappeared, over 10,000people faced deportation or were sent to prison camps in Siberia. These hardships, both economic and social, help field great enthusiasm for the transition from a totalitarian system, and back to a political democracy during the early 1990s. 


 Christopher, P. (1995) Socialism After Communism: The New Market Socialism,  The Pennsylvania State University Press.

 Kyn, O. (2000) Home page. Apr 2.

 Stidelsky, R. (1995) The Road from Serfdom: The Economic and Political Consequences of the End of Communism, Penguin Press.




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