by Mart Sõrg and Danel Tuusis
Abstract

Twenty years have passed since the beginning of the transition towards the market economy in Estonia. Within few years Estonia has achieved considerable results in stabilizing its economy. Estonia became a model of successful transition. Unfortunately Estonia has not resolved the current account deficit problem for very big trade sub account deficit. Despite the deficit in current account the balance of payments is in surplus – financial reserves of the state are growing.

To balance the current account the economy needs inflow surplus of finances: foreign loans, FDI or other resources. The influential factor of foreign goods’ inflow is the foreign loans (as public as well as private). Foreign loans are good substitutes for FDI also signalling the readiness of companies and public sector to expand and to develop. Our hypothesis is that foreign loans are necessary for transition economies on their later development stage to stabilise balance of payments and guarantee the continuous development of a country. We argue also that effective acquiring of foreign loans needs developed banking structure and stable macroeconomic environment.

In our paper we research this hypothesis. For this we analyse the data of Estonian balance of payments and compare this data with other indicators of economic development to find strong causalities.