From State to Market: Thirty Years of Economic Success in Estonia
After thirty years of independence, today Estonia has a very high government integrity, full respect and guarantee of property rights, a fair tax burden and government spending, high trade investment, and considerable financial freedom. Not bad for a country that has been under State Socialism for almost half a century: how was then Estonia able to reborn from that experience?
Low taxes and high investments in people (and their liberty), services, and infrastructures are just few of the main positive policy elements that allowed Estonia to shine nationally and internationally in multiple fields. Economic reform and FDI in the country were crucial, but the country’s history shows what liberalization and people’s empowerment can produce and what happens when people decide their fate, both economically and socially.
Today’s Estonia is one of the leading countries in high-tech; it maintains an efficient bureaucracy, rule of law, and a high degree of economic freedom. Estonia massively invested in the technology sector and made high-quality services fully available to its citizens.
As thirty years ago, the new liberal-oriented government will continue to prompt economic freedom, strategic innovation, bureaucratic simplification, which guarantee Estonia’s health, despite COVID-19 and other global challenges. The 1991 independence, the 1993 economic collapse, and the successful economic raise in the later years shaped Estonia’s identity and fame as a reliable country.
This year, on August 20th, it will be thirty years since Estonia restored its independence. According to Fraser Institute (2020) and it “Economic Freedom of the World: 2020 Annual Report”, Estonia is in the first quartile in terms of economic freedom. A trend confirmed by Heritage (2020) and its “2020 Index of Economic Freedom”, which states that Estonia has very high government integrity, full respect of property rights, a fair tax burden, and government spending, high trade investment, and considerable financial freedom.
These elements suggest that with moderate inflation, an inflow of $1.3 billion and just 5.5% of unemployment (ibid.), the Estonian economy is in a very good shape. Surely, the country is equipped to compete with the challenges of the future, both regionally and globally.
Today, Estonia is a healthy country from many points of view. Its government and institutions are solid and private capital can find its place in the Baltic nation, where foreign direct investment – FDI – is generally welcomed with relatively easy bureaucratic practices.
However, Heritage (2020) informs, what seems to hold «Estonia back from reaching the topmost ranks of the economically free are high levels of government spending and lingering rigidities in labour regulations that impede growth in productivity».
The COVID-19 pandemic is ravaging European economies and under this profile, the Estonian one is suffering as much. However, recovery will be surely bright for a country that in the Golden Age of globalization was remarkably able to take the best of the economic difficulties and create a modern and cutting-edge economy, benefiting the whole Baltic region, generating the admiration of Eastern neighbours.
Who would have ever said that a small country in the former Soviet bloc would have developed in just a few years an ingenious, efficient and florid economic and social system? How were Estonia’s economy and society just after the fall of Communism in Central-Eastern Europa, between the end of the Eighties and the beginning of the nineties compared with today’s situation, thirty years after the independence from Moscow? How was Estonia able to become a modern and innovative country in the globalized world, and which were its early premises?
Starting with a historical-context section, the paper will be supported by the empirical efficiency provided by data-analysis from Estonian institutions. Data are essential to understand both the economy and the society, especially in the transition from a state-planned to a free market economy.
Today’s Estonia offers a good example of what liberalization and people’s empowerment can look like and what happens when people decide their fate, both economically and socially. The focus will be on the economic indicators, tax system, and financial sector in Estonia, the introduction of the Euro, demography, technology, health, from 1989 until today.
At the end of the paper, an attempt to draw the conclusion and the future perspectives of Estonia – along with current affairs and challenges that the new Estonian government faces, starting from the COVID-19 pandemic – is provided. Estonia is a dynamic country, ambitious, tolerant and open after years of oppression and terror behind the Iron Curtain.
Many changes occurred in Estonia. Today, the country scores 94/100 both in terms of global freedom and Internet freedom, and its democratic score is 85/100, which means it is a consolidated democracy (Freedom House 2020), something that nowadays – with resurgences of populism, authoritarianism, and protectionism – should not be taken from granted.
Estonia suffered under both National Socialism and Communism. Independence from the Soviet Union seemed to be a far mirage for the state on the Baltic Sea for many years. But at the end of the eighties, a new political wind across Europe reached the tiny republic in the North. Popular organizations in the Baltic States were born in the three Baltic states: they wanted to support the new policies of reform within the Soviet Union (Okas Ainso 2018).
Many deluded themselves and have thought that economical planification was emendable. Since tangible economic results were late to manifest, a series of single mass demonstrations led also 300’000 Estonians (over one-fifth of the population) in Tallinn chanting national songs. Ordinary people decided to take each other’s hands in the spirit of “togetherness” and unity. It was then that the artist Heinz Valk coined the term “Singing Revolution” (Laar-Kelam 2017). A new era was born – and the then Mart Laar’s Pro Patria Union positively helped towards this change.
On August 23rd, 1989, around two million people from the three Baltic countries stood on the Vilnius-Tallinn road holding hands. The unprecedented living chain measured nearly six hundred kilometers (Webel-Jørgen 2012). In the Soviet world, things were already changing under the rule of Mikhail Gorbachev, who tried to reform Soviet Communism through Perestroika and Glasnost, which bolstered the Soviet leader’s innovative governance (Okas Ainso 2018), but this did not prevent the 1989 political change across Central-Eastern Europe. On November 9th, the Berlin Wall fell.
On August 19th, 1991 a military coup d’état attempt against Gorbachev offered an opportunity for the Baltic states to restore the independence (Laar-Kelam 2017) they had lost after the infamous 1939 Molotov-von Ribbentrop Pact. Revolutionary ferments were already present in Estonia for several months and pacific manifestations brought eventually Estonia to gain independence, on August 20th, 1991.
Joining the Western world, Estonia soon entered the UN (1991) and the Council of Europe (1993), then the WTO (1999), the European Union, NATO (2004), and the OECD (2010). Meanwhile, Russia watched all this with awe and annoyance, but also preoccupation, especially because of the North Atlantic Treaty’s expansion in former Soviet-regions. Global – and Western-sponsored – institutionalism pervaded Estonia, which instead of closing into nationalism, showed its patriotism to the world and open up itself.
A new independent and free nation was born and institutionalized itself in less than two decades. Today Estonia is a stable multiparty democracy which liberated itself from the totalitarian burden which lasted three generations. Since 1989, Estonia grew immensely: almost extinguished – and the premises of a total political and economic collapse were present from the late eighties to the mid-nineties – successfully reborn – today Estonia is one of the leading countries in high-tech, efficient bureaucracy, rule of law and high economic freedom.
Economic Revolution and Liberalization
How did the Estonian economic situation look like in the late eighties? Very dire. How it evolved until today? Simply put, with the free market. With the openness resulted from the 1991 events, the dependence on the former Soviet market has been dramatically reduced (Agenda 2000); Estonian trade has been progressively oriented to Western and global markets. Soon – and today, the situation has not changed – Finland replaced Russia as the main trade partner (ibid.).
In terms of commerce today, according to OEC (2019), in 2019 Estonian exports are in the field of broadcasting ($969 Million), petroleum ($842M), oil ($667M), cars ($628M), exporting mostly to Finland ($2.29 billion), Sweden ($1.56B), Latvia ($1.42B), Russia ($1.4B), and the US ($1.13B).
On the other hand, in terms of imports, Estonia gets cars, ($1.48B), petroleum ($1.37B), oil ($556M), and broadcasting equipment ($425M), mostly from Russia ($2.5B), Germany ($1.94B), Finland ($1.79B), Lithuania ($1.5B), and Latvia ($1.46B) (ibid.).
With liberalization, the country not only opened up its trade potential, but also actively strengthened the political, economic, social, and cultural ties with the EU (Agenda 2000). The Union prompted economic liberalization and an open market: the inclusion of the Baltic region in general within the common market has been beneficial for both Brussels and Tallinn. Free enterprise and economic freedom have meant that, combined with a series of necessary structural reforms and redesign of the state, Estonia could not only grow economically but also achieved excellent employment results.
Progressively, poor infrastructures and services eroded and corrupted by the “Socialism with a human face” were replaced by the entering of FDI and the commitment of many Estonians to work for themselves and not for Moscow or the Party. Empty shops were soon filled with globalized goods and Estonia’s export took off in an unprecedented way.
However, today’s Estonia is also a result of painful economic moments of recovery. When the country opened up, a huge economic crisis started: «in just two years (1992-1993) industrial production declined by more than 30%, real wages plummeted by 45% […] prices rose by more than 10.000%» (Laar-Kelam 2017, 50).
In 1993, the economy reached the bottom and contracted by 9.09%; the inflation was at 90% (Kasekamp 2010). The years just after the independence were difficult for Estonia. The transition from a state-oriented economy, to a free-market-oriented one, was troublesome for the country and the region.
Estonia – finally (self-)liberated from foreign domination – was facing a dire economic collapse. Between 1992 and 1994, the industrial production contracted by more than 60% (Agenda 2000), but economic recovery started in the second half of 1993. In 1995, Estonia registered a 4.3% GDP growth (ibid.). Thus, by 1996 recovery was definitively on its way: the economy grew by 4.90% that year, and inflation went down (Kasekamp 2010).
Two aspects were crucial for Estonia to heal its economy in the mid-early nineties. The first one was the remarkable reform of the state-system and the economy. Estonia was courageous enough to launch a set of rapid and radical pro-free market reforms. Many countries are reluctant to adopt liberal reforms today, while Estonia was able to embrace them just few years after Soviet domination.
«The economic philosophy of the first government headed by Mart Laar was inspired by Milton Friedman and Margaret Thatcher and was coined “shock therapy”» (Kasekamp 2010, 181).
Following the neoliberal restructuration and framework, Estonia dismantled the restrictive and state-guided USSR’s economic-trade mercantilist regime, adopting «one of the most liberal trade regimes in the world» (Agenda 2000). A second crucial aspect was the close cooperation with neighbours in the region, primarily the Nordic countries: Latvia, Lithuania, Finland, Sweden, and Denmark (Kasekamp 2010), which eventually promoted a flourishing free-market economy and democracy.
The reforms conducted by the government were based on a liberal economic policy. The successes Estonia experienced in the years ahead were also a direct consequence of those courageous policies. With the free-market framework, liberalization was then the next step.
Indeed, price liberalization started in 1989 and was almost completed in 1992 (Agenda 2000), which is quite considerable if we keep into account that the Communist system infected the Estonian economic fabric for almost half a century. To reconfigure the entire economy might not be easy.
Free enterprises within a non-intervention state economic model became (almost) universally accepted within the country. To the liberalization of different industries (which in Estonia rapidly occurred after 1991), privatization advanced fast, and by the end of 1996, practically all of the large enterprises had been sold, except for transport, telecommunication, and energy sectors (ibid.). This, of course, helped Estonia to become very attractive in terms of FDI, to modernize its production system and general efficiency. FDI in much Estonian business has been satisfactory (see CIA 2021) throughout the years.
Freedom of movement entailed freedom of capital movements: this was tremendous news for the Estonian people, who benefitted from the European common market and the Schengen’s system. Under Communism, in Estonia, the collective ownership was the dominant paradigm. Before independence, the entrepreneur was almost non-existent. After 1991, however, the private sector developed very quickly.
Interestingly, almost all state enterprises have been privatized at that time, to the point that the share of the private sector in GDP was estimated at 70% in mid-1996 (Agenda 2000). Remarkable was also the number of private companies – supported by the functioning market economy – that grew rapidly since the late eighties. In 1995, 10,000 new companies were established (ibid.) and an unprecedented wave of (digital-oriented) start-ups and Small and Medium-sized Enterprises (SMEs) permeated the fast-growing and dynamic Estonian economy.
It is thus no coincidence that today’s Estonian economic performance is overall very positive, especially if compared to the performance of many other countries of the Eurozone. Were the nineties’ needed economic reforms efficient in the long term? With all their limits (and contradictions as well), we can state so. The policies adopted at that time liberated potential and helped to shape Estonia’s today economy.
Since the fall of Communism, Estonia has always been growing. Its GDP per capita was $3.933,9 in 1999, $7.175,0 in 2004, $12.443,7 in 2012, $18.047,8 in 2017 (Statistics Estonia 2019) and $23.404,4 in 2019 (World Population Review 2019). It would seem that the last Euro crisis did not affect the Baltic State much. Even in terms of unemployment, the Estonian situation is satisfying: “just” 5.1% in June 2019 (Statistics Estonia 2019). Due to the Covid-19 pandemic, the rate passed to 7.7% in late 2020 (Trading Economics 2020).
One of the most important challenges that affected Estonia’s system and the economy was the adoption of the Euro in 2011, a further step towards full European integration and inclusion in the Western world. The Estonian government budget has remained in considerable surplus throughout the 2001-2007 period (Estonia’s National Changeover Plan 2010). The 2008 economic recession has put pressure on the State’s finances.
However, the access to the Euro has been beneficial for Estonia and boosted «business confidence, investor confidence, and also the well-being and confidence of the Estonian people», according to the Ministry of Foreign Affairs (2016).
The Euro has supported Estonian economic stability, facilitating free trade relations with EU member states; inflation is under control: 3.4% in 2018, 2.2% in 2019 (CIA 2021).
The characteristics of Estonia’s fiscal policy are the same for many years. Much attention has always been given to the transparency of the simple tax system, far away from the complicated, unproductive Soviet-style bureaucracy. «Estonia has a sustainable and socially and regionally balanced tax system which consists of national taxes and local taxes» (Rahandumsministeerium 2019), with close attention to anti-money laundering policies.
From January 2018, the corporate income tax rate lowered from 20% to 14%, even if for foreign entities the rate is still 20%. In terms of labour taxes, social taxes are 20% of social security plus 13% for health insurance. In 2020, Estonia was the first competitive country in the International Tax Competitiveness Index Rankings (Tax foundation 2020). The Baltic country has also one of the world’s records in terms of country’s tax returns: 94% of which are made online since 2012 (World Economic Forum 2019).
Social Revolution and Current Affairs
At the societal level, since 1989 the revolution touched many areas. Technology in particular was a distinctive element that shaped the direction taken by Estonian society. It is this field that made Estonia famous in the whole world. Liberalization of the sectors, particularly, the broadcasting field, has been positive within society.
Particularly, the Estonian economy has always benefited from electronics and telecommunications sectors and trade ties with Finland, Sweden, and Germany, but the so-called new technologies have essentially been made available by the cohesion funds from Brussels. Estonia benefited immensely from the participation in the EU. Concerning the export of electronic products – which Estonia is famous today for – the country, was able to export other high-quality goods to the West (Agenda 2000).
In terms of techno-solutions, Estonia has always been finding an innovative and technological solution to approach complex problems. The boost in technology and innovation started in 2004. The so-called e-government system – which made Estonia one of the pioneers in Europe in the field – helped to rank Estonia as the first country in terms of digital development in the EU (Barclays 2018).
Almost 90% of the Estonian citizens – 1.1 million people – are Internet users (CIA 2021); the country has one of the best Internet connections (Worksup 2021).
Furthermore, since 2000, many new technologies were progressively introduced in the “tech nation”. From the e-tax board (2000) to the e-school and digital signature (2002), the ID bus ticket and e-land registry (2003), the e-voting system (2005), the e-police (2007), the e-health system (2008), the e-prescription (2010), the e-residency (2014), the healthcare 4.0 (2018). Something unique in the world today. And these are symptoms not of an “entrepreneurial state”, but a state that trusts and elevates its citizens.
Together with technology, the health sector is equally important and has undergone many relevant innovations over the years. Keeping aside the disruptive effects of Covid-19, many Estonian demographic groups, e.g. people under 19, pregnant women, people with a child under three, unemployed people, get free healthcare. Most of the health data generated in the healthcare system by doctors and hospitals in Estonia is totally digitalized.
E-Estonia represents the flagship of the Estonian social system: complete opposite of some European bureaucratic welfarist system. E-Estonia tells a «success story that grew out of the partnership between a forward-thinking government, a pro-active ICT sector, and a switched-on, tech-savvy population. Thanks to this success, Estonians […] enjoy a wide range of e-solutions that those living elsewhere can only dream about» (Ministry of Foreign Affairs 2019)
Estonia hugely invested in tech and made high-quality services fully available to its citizens. The popular digital prescription is a centralized, paperless system for issuing and handling medical prescriptions (estonia.ee 2019), very common in the country. Working in healthcare has never been as important as it is today.
Another related topic is demography, a crucial chapter that threatens European democracies: Westerners are getting older. And Estonians make no exception. However, if one looks at the positive side of it, life expectancy increased for both sexes in the last thirty years. It was 69.98 for men and 80.06 for women in 2009; 73.86 and 82.72 in 2018 respectively (Statistics Estonia 2019). Estonians live more and most of the time better: opening the (economic) system back in 1991 was not a bad idea after all.
But some would maybe disagree with that, especially Russia, which dominated Estonia for decades, and still today it is a threatening and cumbersome neighbour. Lucky for it, Estonia finds formal refuge in NATO, seen – today as after the Cold War – as a systemic enemy of Moscow. The Kremlin never misses an opportunity to woo the Baltic states in many ways. Occasionally, as in other territories – especially in Eastern Europe –, Moscow launched cyberattacks on the country on the Baltic Sea years ago (CIA 2021).
Relations with Russia are inevitable for Estonia, which among other things has an important Russian presence on its territory, about 25% of the population (ibid.). This can always be taken as an excuse for the Kremlin to somehow intervene to “protect” the ethnic Russians in Estonia and unify them under the Russian flag. Geopolitically and economically, Russia remains a major trading partner for Estonia, but it is also the country over which the Tallinn government has the most border concerns.
The relations with Russia have important political effects in Estonia, and it is a recurrent topic for Tallinn’s government. Which, by the way, recently changed. After the coalition of the Center Party, Isamaa and EKRE collapsed in January 2021, Kaja Kallas – leader of the liberal Reform Party (the Friedrich Naumann Foundation helped to found it in 1994) and winner of the 2019 elections – became Prime Minister (Politico 2021).
A strong advocate of the reform that thirty years ago pulled out her country from the Socialist swamp, Kallas seems to be inclined to carry on with issues such as digitalization, and competitiveness, but also social inclusion, openness, and anti-populism. The liberal-oriented new government’s economic plan – based on the Reform Party’s program (2021) and the necessary compromises to the coalition partner, the Estonian Center Party – will be part of the tradition inaugurated three decades ago: economic freedom, strategic innovation, bureaucratic simplification.
Free market and liberalization benefited Estonia and the generations to come. From a turbulent past, after a peaceful pathway towards freedom, Estonia was able to become one of the most cutting-edge and innovative countries in the world. The independence in 1991, the economic collapse in 1993, and the successful rebirth in the later years shaped Estonia’s identity and fame as a reliable country.
Since the financial crisis was not felt that much in the Baltic countries, Estonia was able to concentrate on setting ambitious goals for its future and the future of its citizens. All this despite the Russian pressures, which has been a constant element of destabilization of the Baltic states in general, and today’s crucial challenges, such as immigration, the rise of populism, the rejection of the open society, the rise of the so-called discontents. And now, also a pandemic.
In the last thirty years – Estonia was officially independent since August 1991 –, the country has given priority to the consolidation of the internal market and the rise of local corporations, coupled with liberalization, privatization, and the rise of the SMEs, as well as digitalization, and increasing export. Furthermore, Estonia has been continuing to be open to FDI and innovation – especially in the tech sector – with considerable attention to the programs related to enterprises, and the inclusion of other social actors to produce good economic outputs.
Indeed, today there are more than 60.000 operating enterprises in Estonia (Ministry of Economic Affairs and Communications 2019). After four decades of inefficient planned economics, today Estonia is the most entrepreneurial country in Europe according to estonia.ee (2019). Openness and innovative ideas’ implementation are the keys to Estonia’s success on the world stage.
Despite the COVID-19 pandemic, according to IMF (2021), Estonia’s projected real GDP growth in 2021 will be 4.5%, which is highly remarkable. GDP is set to fall by 4.7% in 2020 (OECD 2021), but this is better than some would have expected. Estonia is a tiny country but is a strong country.
If it continues to give priority to investment in modernizations, reforms, and liberalizations, while maintaining a non-invasive welfare state, prompting free trade and an enterprise-oriented policy – as well as high-level-services to its citizens – its future will continue to be brilliant, also after the coronavirus pandemic.
Low taxes and high investments in people (and their freedom), services, and infrastructures are a few of the main positive factors that allowed Estonia to shine nationally and internationally. In thirty years, Estonian people unleashed their amazing potential. They have freed themselves from «the inheritance of the totalitarian mentality that somebody else will take responsibility and solve their problems» (Laar-Kelam 2017, 52).
Today, in freedom and liberty, Estonians take responsibility and are motivated to decide their brilliant future.
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Amedeo Gasparini is an intern at the Friedrich Naumann Foundation for Freedom's Project Office for Central Europe and the Baltic States. He is currently finishing his MA degree in International Relations at Charles University in Prague. He is interested in geopolitics, international affairs, history, and journalism. He is also a contributing author in seven media outlets and manages “Blackstar”.