Published: March 2019
Estonia built its economy up from scratch, leapfrogging more advanced nations by taking a risk on the latest technologies, deploying innovative public services, and becoming a model state of the EU. But with an aging population and a heavy dependency on exports is the Estonia model sustainable?
After gaining independence from the Soviet Union in 1991, Estonia, a small state of 1.3 million people on the Baltic Sea, was left a dysfunctional, decimated backwater. The country’s per capita GDP was around $2,000, its industrial sector that was in ruins, real wages were halved, inflation was rampant, and food was so scarce that it had to be rationed.
However, this sorry state of affairs didn’t last long: within less than a generation the country transformed itself into one of the world’s most technologically advanced and economically dynamic countries; a place that the World Bank now describes as a high-income free market economy – the quintessential rags to riches story played out on a national stage. But how did the Estonian miracle happen?
THE TRANSITION
After 50 years of occupation, Estonia was suddenly given an opportunity that countries rarely receive: the chance to start over again. They had the choice of carrying on with a system similar to what they had endured under the Soviets or start building an entirely new country from the ground up – a proverbial blank slate upon which they could pick and choose the social and economic models they wanted to emulate and tailor fit to their unique social and geographic contexts.
“The Estonians have a saying, ‘Nothing good comes from the east,’ and maybe they’re talking about the weather but probably they’re talking about something else,” jokes James Maclaren, a global security analyst who taught at a NATO college in Estonia from 2011-2015. “So, they were determined to make rapid progress, to make themselves a Western country.”
In its first post-Soviet elections, the people showed their resolve to youth and a new way, voting in a 32-year old, Mart Laar, as prime minister. Like Latvia and Lithuania, Estonia subsequently jumped headlong into the West, employing an experimental “shock therapy” strategy that instantly created a free market economy and deeper ties with the U.S., Western Europe, and the nearby Scandinavian states. The country issued its own fully convertible currency (the first post-Soviet state to do so), public companies and land were abruptly privatized, and the people were cut off from dependency on the state. It was time for the country to sink or swim.
“We chose to open the economy and we privatized almost all the public companies,” explains Karel Lember, an economic analyst at Estonia’s Ministry of Economic Affairs and Communications. “We had neighbors like Sweden and Finland who bought many Estonian companies [and] brought in a lot of know-how and technology transfer.”
THE RISING TIDE
Estonia became a member of the EU and NATO in 2004, the Schengen Area in 2007, and the eurozone in 2011, fulling integrating itself within the socio-economic and security institutions of the West. At the time of independence the country was completely economically dependent on Russia, with 92 percent the its trade going eastward. Today, this number has dropped to 6.1 percent, with the bulk of trade going in the other direction: Scandinavia, Central Europe, and the United States. The economic results of this pivot have been phenomenal, the small market sitting at the edge of the EU has in such a short time risen to become one of the world’s most vibrant economies, ranking 17th on the Index of Economic Freedom, 30th on the United Nations’ Human Development Index, and 16th on the World Banks’ Ease of Doing Business list. Estonia’s GDP has now topped $25.92 billion ($31,800 per capita) with an unemployment rate of just 4.4 percent – the lowest it’s been in over 20 years.
The other Baltic states, Latvia and Lithuania, which Estonia is often compared with, followed similar paths of development post-independence and obtained similarly positive results. Latvia, Estonia’s neighbor to the south, ranks 19th on the World Bank’s Ease of Doing Business List and has a per capita GDP of $25,063, while Lithuania ranks 14th and has a per capita GDP of $29,524.
LEAPFROGGING THE WORLD
When it came to technology, the “blank slate” that modern Estonia was built upon ended up being one of the country’s biggest advantages. Rather than being hamstrung by legacy technologies, like more established countries around the world, they could jump ahead to the technological cutting edge, leapfrogging many of these more established countries along the way. Estonians found no use for things like checkbooks and landline telephones, skipping straight to bank cards and cellphones.
“I think what struck me, coming from the U.K., was the determination to embrace all modern things,” Maclaren explains. “I was expecting it to be the same as Poland and Hungary, and in fact the pace of change was incredible, probably outpacing anywhere in Western Europe.”
This hunger for new technologies transformed the small Baltic state into a global hotbed of innovation, with startups coming up with some of the most disruptive technologies of the early 21st century. Kazaa, the notorious file sharing platform that at one time was the most downloaded program ever, was originally developed in Estonia. From the ashes of Kazaa came Skype, which was invented in a grim Soviet-era complex on the outskirts of Tallinn, sold to eBay for $2.6 billion, and eventually acquired by Microsoft for $8.5 billion. The team that developed Skype splintered off and created an array of other popular applications and companies, such TransferWise, Ambient Sound Investment – a private investment vehicle which put tens of millions into funding dozens of local tech firms – and Starship Technologies – a company that makes delivery robots that could be seen being tested in the streets of Tallinn, Bern, and London.
Largely owing to its small population and willingness to adapt to new technologies, Estonia transformed itself into a live testing ground for innovative digital social systems. All of the country’s social services and government agencies are digitally linked, meaning that information shared between entities, and people can seamlessly move from one to the other from the comfort of their personal electronic devices. The introduction of a national e-signature system made the practices of printing and scanning virtually a thing of the past. Political leaders have been elected by people voting at home from their computers and phones. As far as taxes go, a flat tax system keeps everything simple and people can file their declarations online in minutes. Estonia is also the global leader in e-citizenship, which allows foreign nationals the opportunity to obtain digital citizenship for the purpose of doing business in the EU. Starting a business in the country also couldn’t be easier — all it takes is five to seven minutes and a smartphone. Estonia claims that these integrated digital services allow the country to save 2 percent of its GDP each year – money that would otherwise be paid for unneeded bureaucratic processes.
CHALLENGES AHEAD
While Estonia transformed itself into a very dynamic small economy within a couple of decades, the country is still facing some core challenges that bring its reputation as an economic miracle a little closer down to earth.
Being a small country of a little over a million people, it’s heavily reliant on exports (72.2 percent of GDP), which leaves the country at the mercy of the economies of its major trading partners, namely Finland, Sweden, and Latvia. As Estonia’s top exports are things like broadcasting equipment, refined petroleum, automobile, and prefabricated buildings, a hiccup in the EU could bring a portion of the Estonian dream crumbling down.
Furthermore, a lack of investment for big infrastructure projects is also an issue. While the country’s population centers are fully modern, the hinterlands have been left behind.
“If you get on the train and you want to go to Riga, in Latvia, you’re on a train with wooden benches and you’re sharing it with some woman who’s got a sheep by her,” Maclaren explains. “They have no money to put into things like the rail infrastructure, and if you drive through Estonia you’ve got a long, long way before you see anyone else.”
And while China has been keen to invest in Estonian infrastructure via its Belt and Road initiative, Estonia has so far adopted the EU’s cautious position, although this could change in the near future.
STAYING AHEAD OF THE PACK
Meanwhile, one of the biggest problems in the country that’s known for being led by the young is ironically its rapidly aging population. More than 17.7 percent of the Estonian population is over the age of 65, which has fast become a drain on the country’s resources and presents a question as who is going to care for them – especially as Estonia’s population is expected to significantly decrease in the near future.
All in all, Estonia was successfully able to build its economy and social systems up from scratch, leapfrogging many previously more advanced nations by taking a risk on the latest technologies, shoring up debt, and deploying innovative public services. But how long can the country stay ahead of the pack when the other Baltic countries as well as larger nations through Eastern Europe are now advancing with many of the same strategies?
“It’s very hard, let’s be honest,” Lember admits. “Of course, many countries want to catch us and be ahead of us, but you have to improve your system every year, step by step. If you’re smart, just improve the system every year.” — Wade Shepard
DID YOU KNOW?
45,227 km2
The size of Estonia, making it the fourth smallest country in the EU
1.3 million
The population of Estonia, on a par with the city of Dallas, Texas
14%
The expected decline in population by 2050, to under one million.
$31,800
The per capita GDP.
$8.5 billion
The amount Microsoft paid to acquire Skype, which was originally developed in Tallinn.
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Resource: Delivered
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