E-Stonia, The Baltic Tiger

Sandi's picture
Submitted by Sandi on Sun, 2007-02-11 00:14

New Europe's Boomtown
By John Tierney
The New York Times

Tallinn, Estonia

Philippe Benoit du Rey is not one of those gloomy Frenchmen who frets about the threat to Gallic civilization from McDonald’s and Microsoft. He thinks international competition is good for his countrymen. He’s confident France will flourish in a global economy — eventually.

But for now, he has left the Loire Valley for Tallinn, the capital of Estonia and the economic model for New Europe. It’s a boomtown with a beautifully preserved medieval quarter along with new skyscrapers, gleaming malls and sprawling housing developments: Prague meets Houston, except that Houston’s economy is cool by comparison.

Economists call Estonia the Baltic Tiger, the sequel to the Celtic Tiger as Europe’s success story, and its policies are more radical than Ireland’s. On this year’s State of World Liberty Index, a ranking of countries by their economic and political freedom, Estonia is in first place, just ahead of Ireland and seven places ahead of the U.S. (North Korea comes in last at 159th.)

It transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated. He was 32 years old and had read just one book on economics: “Free to Choose,” by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.

Laar was politically naïve enough to put the theories into practice. Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs. He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba). He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

These reforms were barely approved by the legislature amid warnings of disaster: huge budget deficits, legions of factory workers and farmers who would lose out to foreign competition. But today the chief concerns are what to do with the budget surplus and how to deal with a labor shortage.

Wages have soared thanks to jobs created by foreign companies like Elcoteq of Finland, which bought a failing electronics factory and now employs more than 3,000 people making phones for Nokia and Ericsson. Foreign investors worked with local software engineers to create Skype, the Internet telephone service, and the country has become so Web-savvy that it’s known as E-stonia.

“The spirit is so different here,” Benoit du Rey says. “If you come to the government here and want to start a company, they’ll tell you, ‘Good, do it right now.’ Then you can work free without being bothered by stupid things. Here I talk to my accountant once a month. In France, for every seven or eight workers, you need one full-time worker just to fill out the forms for taxes and other rules.”

It took him less than two weeks last year to start his company, Aruzza. Now he has employees from five countries working on deals like importing Spanish ham, exporting Estonian sofas to France and finding programmers in Tallinn to write software for a California company.

He is not a free-market purist — he likes the health care and social services provided by countries like France. But to pay for their safety nets, he figures they need to cut regulations and taxes so they can have robust economies like Estonia’s, which grew about 10 percent last year.

The growth over the past decade has produced so much unanticipated revenue that the tax rate is being gradually reduced to 20 percent. Laar’s political rivals still complain that his flat tax unfairly helps the rich, but as he notes, the level of income inequality in Estonia actually declined during the past decade.

“People think a progressive tax system is fairer,” Laar says. “But in the real world rich people find a way to avoid high taxes. With a flat tax, they stop worrying about sheltering their income or working in the gray economy. There is less corruption because it’s easier to pay the tax.”

Since Laar started the revolution, the flat tax has been adopted by its Baltic neighbors and a half-dozen other countries, including Russia, Ukraine and Romania. Such radical reform is still taboo in Western European countries like France, but they can’t seal their borders against this threat. If they don’t go to Estonia for a lesson in economics, their enterprising citizens will make the trip on their own.

+++++

It was an enormous pleasure to read this article. Firstly to actually see Estonia blossom and to see the positive results of free enterprise.

My partner and I visted Tallin about 4 years ago and instantly fell in love with the vibrancy of place. One thing in particular that we noticed, was the positivity, exuding from the people and their buildings. There were stark reminders of the Russian occupation, with the ugly Russian style of apartment blocks. However, these blocks were painted with beautiful murals, gardens were planted and lovely walkways built. The city was a delightful blend of beautiful medieval architecture and new.

People we spoke to were very proud of their city and equally as proud to be Estonian.

As for the term E-Stonia, the locals had mentioned the governments commitment to getting every citizen on line, to the extent that old folks homes were given computers and introduced to cyber space.

They weren't in the business to catch up the current generation, they were hell bent on going forward a couple of generations.


( categories: )

Estonia

Callum McPetrie's picture

Estonia is a very nice nation and very pro-Capitalist. They have a flat tax and small bearaucracy-87% of taxes are done online in 5-20 minutes, and in the Estonian parliament every politician has a computer on the desk to undertake activities online. It saves a helluva lot of money and paperwork!

My inaugural hyperlink...

Jameson's picture

Cato Institute Honours Laar

Jameson's picture

An inspiring post indeed, Sandi!

There's an excellent and endearing 17 minute video of Laar accepting the Milton Friedman Prize for Advancing Liberty:

http://www.cato.org/special/fr...

Here's what the Cato Institute has to say about him:

When Mart Laar began his second term as prime minister of Estonia in 1999, the country was in the midst of a fiscal crisis. The collapse of Russia's economy the year before had left Estonia's stock market reeling, and the government was struggling to fund the benefits promised by Soviet-era social programs.

Laar realized that the only way for Estonia to weather the crisis was to finally leave behind the legacy of its communist past. He announced deep cuts to paternalistic state welfare programs, slashed business taxes, and urged liberalization of international trade. By the end of his term, the government's Bureau of Privatization was dissolved; more than 90 percent of the economy was in private hands. The economy was growing 7 percent annually, and Laar was widely credited as the force behind the creation of the "Baltic Tiger."

Mart Laar believes in economic freedom because he believes in the Estonian people. As a young student of history, Laar braved Soviet arrest by researching Estonian resistance to the World War II occupation. In his first term of office, he negotiated the withdrawal of Russian troops from the country, introduced the highly stable Estonian currency, and implemented a flat tax that has decreased steadily since 1994.

Laar is not an economist, and he says that his boldness came mostly from naiveté. "I had read only one book on economics—Milton Friedman's Free to Choose," he said. "I was so ignorant at the time that I thought that what Friedman wrote about the benefits of privatization, the flat tax and the abolition of all customs rights, was the result of economic reforms that had been put into practice in the West. It seemed common sense to me and, as I thought it had already been done everywhere, I simply introduced it in Estonia, despite warnings from Estonian economists that it could not be done. They said it was as impossible as walking on water. We did it: we just walked on the water because we did not know that it was impossible."

Laar's dedication to progress and economic freedom has allowed the former communist state to develop into one of the most dynamic economies in the world, ranking in the top 10 countries in the Economic Freedom of the World index. At the dedication in 1995 of the F. A. Hayek Auditorium at the Cato Institute, House Majority Leader Dick Armey said of Laar's government, "If Estonia is not a vindication of everything we believe in—from free trade to privatization to sound money to balanced budgets—I am at a loss as to how else one could validate our ideas." Laar has defied common wisdom in Europe to prove that economic freedom works.

In 2006 the Cato Institute awarded Laar the Milton Friedman Prize for Advancing Liberty. Recently Mart Laar also became an economic adviser to Georgian President Mikhail Saakashvili.

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A hero to the Estonians -- and all of us in the so-called free West.

Thanks, Sandi.

Glenn

There's something to be said...

Olivia's picture

for naieve idealists in politics!

It will be interesting to see if Estonia's breast cancer treatment will advance beyond being equal only to New Zealand's. Practically medieval by comparison to the rest of the modern world.

> What is their immigration

PhilipC's picture

> What is their immigration policy? What language do they speak there?
(only sort-of joking)

Melissa, the latest news is that the Atlas Society/TOC is going to relocate from Washington, D.C., to Talinn, Estonia to be where the -real- center of power is and that all op eds and monographs are currently being translated .... as well as all lectures on CD's from past summer conferences are currently being dubbed into Estonian. I am told by David Kelley, Will Thomas and Ed Hudgins that my speaking voice in particular is quite sexy in Estonian...so you may want to pick up a copy before they sell out.

Their immigration policy, however, is very restrictive. You have to have a heartbeat and possess both arms and legs and be able to recite a chapter from "Capitalism and Freedom" from memory. TAS/TOC is negotiating to substitute Galt's speech from "Atlas Shrugged" for all of its members and an entire volume from the Encyclopedia Britannica for all ARI members.

Sandi, this is really

PhilipC's picture

Sandi, this is really inspiring. Thanks for posting some good news - nice to seefor a change. Tierney is a rare bird: both a libertarian columnist at the NYT (probably the only one now that Virginia Postrel is no longer there) and a good writer.

Wonderful!

Melissa Lepley's picture

This is so great! What is their immigration policy? What language do they speak there?

(only sort-of joking)

Melissa

"Shiny. Let's be bad guys."

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