Before the Second World War economy was based on agriculture and a growing industrial sector, similar to that of Finland. Butter, milk and cheese were widely known on western European markets. Main markets were Germany and the United Kingdom and only 3% of all commerce was with the USSR.

USSR's annexation of Estonia and the ensuing Nazi and Soviet destruction crippled the Estonian economy. Post-war Sovietization of life continued with the integration of Estonia's economy and industry into the USSR. Before the war Estonia and Finland had a similar standard of living. By 1987, capitalist Finland's GDP per capita was 14 370 USD while communist Estonia's GDP per capita was 2 000 USD.

After Estonia moved from Communism in the late and became an independent capitalist economy in 1991, it became a pioneer of the global economy. In 1994 it became one of the first countries to adopt a flat tax with a uniform rate of 26% regardless of income. From 2005 and 2008 the personal income tax rate was reduced from to 21%. Estonia received more foreign investment in the second half of the 90s than any other country in Eastern Europe. The country has been quickly catching up. It is already rated a high-income country according to the World Bank. GDP per capita of the country was $23 631 in 2012 according to the World Bank. Because of its economic performance Estonia has been termed one of the Baltic Tigers.

Banking system
Bank of Estonia is an independent central bank. Estonia is part of the Euro zone and the core tasks of the Bank are to help to define the monetary policy of the European Community and to implement the monetary policy of the Central Bank. Eesti Pank is holding and managing Estonian foreign exchange reserves as well as overall financial stability and maintaining well-functioning payment systems. The Bank of Estonia is responsible for the circulation of cash in Estonia.

Developments in the banking sector have been rapid and welcoming foreign capital. Banking sector has gone through restructuring as a result of privatisation and bankruptcy following a relatively stable period in the 2000s. Banking sector is dominated by two commercial banks, Swedbank and SEB. These banks control approximately 62% of the financial market. In Estonia there are no state-owned commercial banks or other credit institutions.

In the transition to a market economy Estonia took a stance to development of private banking. Episodes of banking crisis at the beginning of 1990s induced stricter regulation to foster financial sector oversight. It lead to the formation of the Financial Supervision Authority carrying out supervision of all Estonian financial institutions.

Financial system is largely bank based and local equity markets play a subdued role. Small size of the economy, monetary environment together with full currency convertibility, free capital movement from early years of transition and low public debt with prudent fiscal policy have all had their influence on financial sector. Since the 1990s when Swedish large banking groups acquired two major Estonian banks, the banking sector is primarily foreign-owned. This has brought a need for cooperation between home and host authorities in the Nordic-Baltic region.