Before World War II, the economy was based on agriculture and a growing industrial sector similar to that of Finland. Butter, milk and cheese were well known in Western European markets. The main markets were Germany and the UK, and the USSR accounted for only 3% of total trade.

The annexation of Estonia by the USSR and subsequent destruction by the Nazis and the Soviets crippled the Estonian economy. The Sovietization of life after the war continued with the integration of Estonian 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, while communist Estonia's GDP per capita was $2,000.

After Estonia's late departure from communism and becoming an independent capitalist economy in 1991, it became a pioneer of the world economy. In 1994, it was one of the first countries to introduce a non-income-related flat tax with a uniform tax rate of 26%. From 2005 and 2008 the income tax rate was reduced to 21%. Estonia received more foreign investment in the second half of the 1990s than any other country in Eastern Europe. The country caught up quickly. According to the World Bank, it is already classified as a high-income country. The country's GDP per capita was $23,631 in 2012 according to the World Bank. Due to its economic performance, Estonia is referred to as one of the Baltic Tigers.

Banking system
The 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 shape the monetary policy of the European Community and to implement the monetary policy of the central bank. Eesti Pank holds and manages Estonia's foreign exchange reserves and overall financial stability and maintains well-functioning payment systems. The Bank of Estonia is responsible for cash circulation in Estonia.

Developments in the banking sector have been rapid and inviting to foreign capital. After a relatively stable period in the 2000s, the banking sector was restructured as a result of privatization and bankruptcy. The banking sector is dominated by two commercial banks, Swedbank and SEB. These banks control about 62% of the financial market. There are no state commercial banks or other credit institutions in Estonia.

During the transition to a market economy, Estonia took a position on the development of private banking. Episodes of the banking crisis in the early 1990s led to tighter regulation to encourage oversight of the financial sector. This led to the establishment of the Financial Inspectorate, which exercises supervision over all Estonian financial institutions.

The financial system is largely bank-based and the local stock markets play a minor role. The small size of the economy, the monetary environment together with the full convertibility of currencies, the free movement of capital since the early years of the transition and the low level of public debt with prudent fiscal policies have all had their impact on the financial sector. The banking sector has been mostly foreign-owned since the 1990s when major Swedish banking groups took over two large Estonian banks. This has created a need for cooperation between home and reception authorities in the Nordic-Baltic region.

Investment institutions
Mutual funds offer a range of investment opportunities. A total of four types of investment funds are authorized in the country. Contract investments and mutual funds are the main types of funds used for investments. Most mutual funds are managed by commercial banks. The activities of the pension funds build on the pension reform implemented in 2003.

Contributions to the pension fund are compulsory for young people. Others can join the system, but cannot cancel the contract afterwards. The contribution to compulsory pension insurance is 2% of salary, to which the state adds 4%. Mandatory pension funds have become popular. Voluntary insurance companies offer classic insurance services such as life insurance. There are tax incentives where individuals can contribute up to 15% of their income exempt from income tax.

Venture capital institutions are becoming increasingly accessible. Access to finance from the EBRD and other programs has become easier. The amount of venture capital tied to Estonia is still small compared to developed countries. The capital is usually of foreign origin, although many local banking entities are also involved in investment activity by providing private equity financing.