Moscow Times - 12.10.2001

 

The Moscow Times

Estonia: An Economic Success Story

By Marko Mihkelson

Lithuanian television is currently running a program that depicts their neighbors, the Estonians, as arrogant people who like to boast to all and sundry about how clever and successful they are.

The Lithuanians do have a point as there are several grains of truth in the stereotype that Estonians think highly of themselves, but there are also good grounds for such self-assessments.

In the space of 10 years, Estonia -- a country of 1.3 million people and roughly the size of the Netherlands -- has gone from being part of a closed and extremely inefficient economic system to being widely acclaimed as the leading transition economy of the former socialist bloc and, according to some economic rankings, as being one of the most promising economies in the world.

A recent example of this is the index of economic freedom produced jointly by the Heritage Foundation and The Wall Street Journal and published last month, which ranks Estonia as the fourth freest country out of 161 (for comparison, Lithuania occupies 29th place, Latvia 38th, Poland 45th and Russia 131st). The European Bank for Reconstruction and Development also gave the Estonian economy a very positive assessment in its Transition Report published earlier this year. Out of 25 transition countries in Central and Eastern Europe, Estonia was overall frontrunner in economic and political reforms ahead of Slovenia and Hungary, while Latvia and Lithuania occupied 9th and 16th places, respectively.

And last but not least, Estonia is among the most computerized and Internet-friendly countries in the world. With over 35,000 Internet-connected computers, Estonia is among the 15 leading countries by per capita Internet access, ahead of Germany, Britain, France, Italy and others.

This success story, however, did not happen overnight. Indeed, the very first steps were taken in the late 1980s and early 1990s, while the Soviet Union was still in existence. Several factors assisted Estonia in launching itself on the right path, including favorable initial conditions.

One of the key factors in Estonia's development is its proximity to Finland -- one of the better organized and run countries in the world. Estonia's historical closeness to Europe in general and to the Nordic countries particularly helped Estonia's political elite to make the right decisions in the early stages of transition.

General ideas about what constitutes a market economy and the democratic rules of the game spread to Estonia via Finnish television and through other channels. This partially compensated for the isolation brought about by the Iron Curtain, which was for the most part more tightly imposed in Estonia than in Central European countries such as Hungary or Poland.

Geographical proximity and economic ties played an important role in Estonia re-orienting its foreign trade from the socialist bloc to the West, and later facilitated integration with the West and with the European Union in particular.

An important raft of reforms were implemented under the first two post-independence governments of Prime Ministers Tiit Vahi and Mart Laar. Monetary reforms conducted in June 1992 were a major turning point, creating as they did a solid and stable basis for economic growth.

The first legislation regulating privatization, a law on small-scale privatization, was adopted at the end of 1990 while Estonia was still part of the Soviet Union. Comprehensive legislation regulating the whole privatization process was passed in July 1993. These laws set general guidelines for carrying out privatization irrespective of the size of a company. The Privatization Act stipulated that employees of an enterprise do not receive any special privileges or rights in the privatization process, and that all potential purchasers compete on equal terms. This was possibly the most ambitious privatization program of those adopted in the countries of Eastern and Central Europe.

Now more than 75 percent of the nation's GDP is produced by the private sector, while more than 85 percent of formerly state-owned enterprises have been privatized.

Estonia was quick to realize that given the small size of the country and its limited resources, it was absolutely crucial that it adopt liberal economic policies and be open to the world.

Furthermore, a stable currency, stable financial system, low level of taxes and liberal privatization program have helped to encourage foreign direct investment into the country.

The consensus among Estonian investment bankers seems to be that joining the European Union will make Estonia even more attractive for foreign investors. If the Finnish case is anything to go by then this should indeed prove to be the case. After joining the EU, foreign investments into Finland between 1996 and 1998 increased by a factor of 10.

Foreign businessmen accustomed to the bloated bureaucracies of former Soviet countries are often surprised at how easy it is to start a business in Estonia. Within a matter of days (and very rarely longer than a month) one can register a new company and the whole process should cost no more than $600. The ease of registration is such that more than 58,000 enterprises have now been registered, making Estonia one of the most enterprising countries in the world (in terms of the number of enterprises per capita of population).

Estonia has been remarkably fortunate that the gaining of independence in 1991 coincided with the global revolution in information technology. Embracing this revolution has helped Estonia to overcome its forced isolation that lasted for over half a century much faster.

The rapid development and spread of the Internet over the last decade has contributed to making the Estonian economy a lot more dynamic and competitive. For example, Internet banking which was only introduced in the fall of 1997 has already become a commonly used service. At the end of July 2001, the five largest Estonian banks had a total of 375,391 Internet banking clients.

The success of Internet banking has in a sense blazed a trail for bringing a variety of public and private sector services on line. The best example of this is the "E-tax Board." While in 2000 only 11,760 individual tax returns were submitted electronically in Estonia, this year the number has at least tripled. And companies as well as individuals can fill out tax returns via the Internet.

Furthermore, major Estonian companies have clubbed together to accelerate the broadening of Internet access in Estonia. The goal of the project's authors is to make Internet access a public good as of Jan. 1, 2004 (in just the same way that roads are a public good). Thus within about two years, Internet access should be free of charge to all those who wish to have it.

This will provide equal opportunities for Internet use to all inhabitants of Estonia and thus help to break down barriers between rich and poor in the crucial area of information access, as well as further integrating Estonia into the global community.

Marko Mihkelson is director of the Baltic Center for Russian Studies in Tallinn. He contributed this comment to The Moscow Times.