Estonia has the most competitive tax system in the world. At least, that’s what the Tax Foundation says. For 7 consecutive years it reserves the first place in its ranking to this country. And the truth is that it is not for less. If there is one country that can serve as a model for others, it is Estonia. The Baltic nation has shown that a strong welfare state is compatible with low taxes and economic growth. And all this starting from a really bad situation. In 1991, Estonia was a new republic that had just separated from the Soviet Union. Its history could have been the same as that of Ukraine or Belarus. But, to the surprise of the whole world, it has become a model of efficiency and prosperity. How have they achieved it? What are the keys to the Estonian public administration? In this video we will tell you about it.
The new administration in Estonia is still planning to pursue an agenda to tighten rules for companies dealing with cryptocurrencies. The Ministry of Finance is looking to strengthen anti-laundering measures within the context of a major money-laundering scandal that involved Danske Bank.
Estonia Revoked Over 1,000 Crypto Firms’ Licenses in 2020
Per a report by ERR News, the Ministry of Finance is not aiming to ride-off from the past administration’s agenda regarding the regulation of crypto assets, such as bitcoin (BTC). The current draft legislation is inherited from Jüri Ratas, the former country’s prime minister and head of the Centre Party.
Although Estonia was considered several years ago as a crypto-friendly hotspot in the region, especially during Taavi Rõivas’ mandate, the situation has changed recently. Before the ministry drafted legislation to make regulations stricter, Estonia issued over 1,300 licenses.
With the Ratas’ legislation, over 1,000 licenses of crypto firms were revoked, representing 70% of Estonia’s digital asset companies. However, the government didn’t enact the new rules to target specifically the crypto industry. In fact, they wanted to target a case of a larger illicit financial flow of over $220 billion laundered.
The existing legislation also seeks to give powers to the Financial Supervisory Authority (Finantsinspektsioon) to oversee the national crypto industry. Previously, the Financial Intelligence Unit (FIU) was the entity responsible for supervising and issuing licenses for the sector.
According to the local media outlet, the existing 381 licensed companies dealing with cryptos should reapply for another license with the Finantsinspektsioon. Citing the advisor at the finance ministry, Erki Peegel, ERR News says the measure doesn’t aim to shut down operators.
However, the advisor warns that the nation could sustain around 50 to 100 crypto firms. The media outlet also adds that the new cabinet does not believe the rules to acquire a license are enough stricter.
For Toomas Hendrik Ilves, a personal interest in technology dovetailed with his political career, first as Estonia’s ambassador to the US, then as foreign minister, and later on as president, from 2006 to 2016. It also became a core tenet of Estonia’s mission to rebuild after decades of war and occupation that had left the country trailing its Nordic neighbours in nearly all aspects of life.
All except IT.
“This was one area where we were all starting on a level playing field,” he recalls.
Like Eisenhower
Talking to Ilves, now 67, one can’t help but be reminded of another president, Dwight Eisenhower, who was born into an 1890s world of horse-drawn buggies and, by the time of his presidency in the 1950s, was soaring above the US in Air Force One. In Ilves’ lifetime, the technological advancements have been no less stunning. Introduced to computers as a curious school kid at the tail-end of the 1960s, he got into programming while an undergrad at Columbia. “After that, I was never intimidated in any way by technology,” he says. He later acquired the first internet browser in 1993. It cost about $30 and came with a box full of floppy disks.
During his tenure as president, Ilves continued to push technology and opened the IKT Demo Centre, later called the e-Estonia Briefing Centre, to showcase the country’s innovations. The Centre celebrated its 12th birthday this January. Following his presidency, Ilves lectured at Stanford University. He is currently a lecturer at the University of Tartu, teaching his classes online from his farm in South Estonia. Yet, no matter where he happens to be, it is no longer of great consequence. “I don’t feel provincial here at all,” he says. “I am connected to the world.”
e-Estonia recently interviewed Ilves to mark its 12th birthday.
I am intrigued by the history of e-Estonia. When people tell the story of Estonia in the Nineties, there is a lot of focus on economic reforms, political turnover. In the middle of this, you actually have the genesis of the e-state, the Tiger Leap project, and so forth. How did this all get started?
I was wrestling with the issue in 1992, ’93, ’94, of what the hell are we going to do? As was everyone else, I should add. In 1938, the last full year before the war, Estonia had a slightly higher GDP per capita than Finland. In 1992, the first full year of independence after occupations and wars, the GDP per capita of Estonia was $2,800, and the GDP per capita of Finland was $23,800, and that is taking the best case for Estonia. There was an eightfold difference in GDP per capita. We were poor. Everyone looked at us merely as the former Soviet Union, not a country with its statehood restored. On top of that, we had Zeno’s paradox of Achilles and the Tortoise. Whatever we did, it was not as if the countries that had not experienced Soviet or Communist rule were standing still. I fretted; what are we going to do?
What happened next?
So much of our efforts would have to be devoted to catching up on infrastructure, all the stuff that other countries to our West had been building since the end of World War II. Then, however, a couple of things happened. In 1993, Mosaic – the first web browser – came out. This was 1993, only four years after Tim Berners-Lee had invented the hypertext transfer protocol or HTTP. It was the first commercial browser. You had to buy it in a store with a whole bunch of floppies. It cost about $29.95 or so. I bought it, uploaded it, and realized this is one area where we are all starting on a level playing field. It’s not like the autobahn or interstate, which were built in the 1950s. We were no worse nor no better than anyone else. I thought it was interesting and we should think about it. The question was how to do this. Here my own experience added the other part of the idea. I had been a geek since high school. Along with 11 other kids, I was in a one-off experiment in my high school, where a teacher doing her Ph.D. in math education at Columbia University wanted to see if you could teach kids to program. She rented a teletype and a telephone modem, which connected us to a mainframe about 30 to 40 miles away. She rented time on it and taught the 11 of us how to program in Basic.
When was this?
1969-70. I thought that was cool. Later, when I was at Columbia as an undergraduate, I worked in a psychology lab doing experiments. I saw an ad on a 3×5 card on the bulletin board at Schermerhorn Hall. It was a job programming computers for 15 hours a week. It was for the first professor to get a computer. The computer was a PDP-8 made by DEC, and the ‘8’ came from its memory, which was eight kilobytes, which would be an empty email today. Because it was sold with such little memory, the programming had to be in assembler language. Unlike higher-level programs, it was just numbers and letters. I did that. I thought that was cool too. But after that, I was never intimidated in any way by technology. Those two came together in 1993. Estonia was very poor, in terrible shape, and we were thinking about where we would go.
Were you the ambassador to the US at that point?
I was the ambassador, but I mean, that is what I was worried about. I thought if you wanted to turn a country into a tech country — which is something we would have to do, if we were going to compete at all — we were going to have to get the young people involved early because older people weren’t going to understand what it was about. So I came up with this idea that we should with a small amount of money put computers in all schools in Estonia, but do it with a matching program so local governments who pay for schools would have skin in the game, because you know if you just give people computers nobody is ever going to use them. There was an all-night discussion with Jaak Aaviksoo, then minister of education, who has a Ph.D. in astrophysics. So he got it. That led to the Tiger Leap project [in 1996], which was something that really caught on, and people like [Estonian IT entrepreneur] Linnar Viik really caught onto it and started pushing and promoting this thing, and it just took off. There were others who had other ideas about this. But that was my kicking-off point. In my last two years of being president, I made a point of visiting startups. And I kept asking people, ‘How did you get started in all this? What led you to this?’ and I would say about 80 percent of the time, the founder, probably in his or her late twenties or early thirties, would say, ‘I was a kid in your program.’ That kind of worked out. I don’t know how much I had to do with all of it. But I pushed digitisation when I was a foreign minister, and I pushed it when I was president. I pushed it at every opportunity.
What can be done to maintain the digital edge that Estonia enjoys at the moment? If you go to the e-Estonia website, they will say they have built the digital society and can show you how. There is confidence being projected that this can be exported.
It’s still better than almost every country in the world. But the problem is that the architecture and the tech are now 20 years old. What that means is we are in extreme danger of becoming legacy technology. A fundamental problem where the world has moved ahead but not brought into e-governance is the use of open data, which is architecturally, structurally limited by the form of x-Road, because its entire success in terms of security and trust is in terms of a highly distributed system. The problem when you have a highly distributed system is, how do you collect big data? There are solutions, and there are people working on them and I hope they will come up with something good soon.
I recall someone describing Estonians as being self-confident to a fault. Is that ever a danger? Becoming too smug or too self-satisfied with the digital infrastructure?
I would say that is probably true [that Estonians are self-confident] only in respect to the expectation of humility and self-deprecation on the part of other post-communist countries. I don’t find Estonians overly smug. But perhaps more so in reaction to the Orientalist view of Western Europeans toward Eastern Europeans, that they are ost-Untermenschen, they are more corrupt. Even if you look at the Transparency International list and you look at European countries, we are 12 out of 27 EU countries. That means that the majority of European countries, including West European countries, are more corrupt than we are. France, for example.
Every country in the West still thinks that whatever they have is better than anyone else, and I still think the US is the most delusional about this. I lived in the middle of Silicon Valley in Palo Alto for three and a half years. In a 12-mile radius were the headquarters of Tesla, Apple, Google, Facebook, YouTube, and they produce amazing things. When I wanted to go register my kids to go to school there, I had to drive to the school headquarters, bring my electricity bill and passport and then someone sat there for 20 minutes and made a photocopy of my electricity bill and then copied out the details from my passport and my wife’s passport by hand as well as our DS2019 form that said we were there on a scholar’s visa. Yes, they are pretty good when it comes to the private sector, no doubt about it. But this idea that they are the greatest? I would say that Apple is probably the best computer company in the world, but that public services are a disaster.
When you were president, I recall there was an image of you in traditional Estonian dress seated with a laptop by a barn. Is that the modern Estonia idea? Combining traditional life with new technology?
I think it is more than e-governance. I don’t feel provincial here at all. I am connected to the world; my afternoons are often filled because I am on some webinar with the US on the East Coast, or sometimes these things on the West Coast start at ten at night.
Where do you think the development of e-services is heading? What could be next?
I mentioned open data, which will give you a better approach to looking at problems in the country. AI will certainly be incorporated more; I cannot say how much. It really depends on this government, if it can dig itself out from the crap of the past five years. It was nice that the prime minister went around, pulling out a digital ID card and saying, “We are a digital republic” (Sic) … but if you asked him what that meant. “You can do everything with the card.” Well, no. How does it work? One thing that many politicians say and are utterly wrong, which is why we have this serious CP Snow problem here, is that there is data on the card. “All my data on the card!” No. Your data is not on the card. The card is to enable two-factor identification and no data is on there. If you get a match in your device between something you have, the chip, and something you know, which is your code, then the signal goes out, this is a legit connection. That is all the data that is on the card, aside from what is printed on it.
What is the ‘CP Snow problem?’
The problem we face was described by CP Snow in an essay called “Two Cultures,” which came out in 1959. It was about the problem of the university and I think it has become an acute problem in society now. CP Snow was a literary novelist who coined the term “the corridors of power.” But he was also a physical chemist at the University of Cambridge. In his essay, he writes about the fact that science and the humanities can’t talk. In his club at Cambridge, he would sit with the physicists and chemists and they would discuss quantum mechanics. They would have no interest in the humanities. Then he would go drink with the poets and scholars, and while they were interested in what the scientists were doing, they had no understanding of it. What we have today is the CP Snow problem writ large because back in 1959, you really didn’t interface with technology. Back then, if your telephone was attached to the house, and you left the house, no one knew where you were. The problem is that when you have US Senator Orrin Hatch asking Mark Zuckerberg how he makes his money, the people who do law, and legislation, and regulation do not understand this stuff in the slightest. And of course, the problem with the tech companies is that they don’t care. You know, they say Mark Zuckerberg left Harvard after two years. Well, maybe he should have stuck around and taken an ethics course. It might have come in handy! So we see this divergent world and an enormous amount of power and money on the tech side and either purposive or just passive on the implications of what they do.
What are your thoughts on the e-Estonia Briefing Centre, which you opened in 2009?
I think the Centre is as good as it gets. I think Estonia is wildly well known. Any Japanese person knows about Estonia. I think we do very well. I think that is undoubtedly a reason to be satisfied.
I did have this requirement as president, which was generally followed, for every ambassador who presented his or her credentials to the president. Before they could come to visit me, they had to go to the showroom [one of the Briefing Centre’s former names] first. I would not accept their visit because otherwise, they would not know what I was talking about. It changed the whole tone of the discussion. It was useful for some of the more arrogant developed countries. They would come in, and some of the more arrogant ones couldn’t believe it.
But there was a time when [the then finance minister] wanted to close it. Taavi Kotka and some others came to see me in an emergency meeting. I remember that Kotka pulled out a piece of paper, and I borrowed a pen. I wrote by hand on that torn-out piece of notepaper that I consider to be of vital, fundamental importance to keep this Centre going. Signed it, dated it, and it is now in the Centre on the wall.
Can’t travel but want to hear the e-Estonia story or want to implement e-services in your country or company? Take a look at our services and get in touch – we’ve got you covered!
Digital transformation adviser at the e-estonia briefing centres
Arguably the most important driving factors for digital transformation in the government sector are political support, a sufficient budget, and the technological know-how to make this transformation happen (shhh, we know a few companies that can help with that!).
Let’s say you are the Prime Minister of your country, and you have all of the factors mentioned above at your disposal. Congratulations! You’ve got money, your ministers and population support your digital transformation project, and you’ve got experts who would programme and set up these systems! Now, here’s the catch: How will you delegate and implement your digital dreams? It’s not as straightforward a question as it may seem.
Which step of your digital journey are you on right now?
Let’s start with a simple factor that is often overlooked: Digitalisation in the 1990s was a very different undertaking compared to countries taking their first steps right now. Internet penetration is still an issue in some countries but certainly not as much as 30 years ago. Digital skills, again, have come a long way since then – so yes, educating your population with regards to IT skills will still be necessary, but not to the same extent as was the case pre-2000.
By now, some of your ministries and authorities may have already started implementing siloed IT solutions, creating a fragmented service landscape forcing citizens to create separate user accounts and passwords because there is no unified government authentication method. Effectively, you are already on Digitalisation Avenue – do you walk back to the start and tear up the asphalt to build something new, or will you try to build on the foundations already built, risky as that may be? Those foundations can take different kinds of shapes, for example, small “digitalisation teams” that have quite a bit of authority and a decent budget to test things out… but when we look around the world, we see that these teams are usually regular government workers who were additionally tasked, nay, burdened with thinking up exceptional new services on the side. Do you take their powers away?
How about creating a Ministry of Digitalisation? One massive, well-funded entity that has the right to implement innovative digital services within the respective areas of expertise of all the other ministries? You could do that, but then again, shouldn’t the services be created by those that actually know what their stakeholders want? As an example, are we sure that a software engineer from the Ministry of Digitalisation knows best how to design a service for the Ministry of Agriculture? That’s unlikely.
Top-down vs. bottom-up
Having looked at countries around the world and how they are implementing digital services, I can tell you that there is no fool-proof way to success. Still, there is one finding that stood out to me: Countries that are at the start of their digital journey have a greater chance at success if they digitalise top-down. Why is that? I’d say it’s because if a government creates a clear regulatory framework for data exchange and provides a free, compulsory, and universal digital identity to its citizens, different stakeholders can’t stray away from that common path.
Once the different players are led in the same direction, the useability of the electronic identity will grow exponentially – and quite organically so. The more services are provided by different authorities, the higher will be the usage rate of the electronic ID itself, and the more time and money will be saved in both the public and private sector. With this unified, top-down approach, the government has the chance to create a level playing field and shared rules of the game for service providers, both in the public and private sector, to compete.
Conversely, the opposite appears to be true for countries that are already further down the path of digitalisation: If you already have the key factors such as the electronic ID and data exchange in place, the responsibility of innovation will almost automatically shift more toward the lower strata of government. Budget responsibility may still lie with a higher-level authority in some countries, but the people who know best what service the clients of particular government authority might need in the future…usually are connected to the government authority in question. Put bluntly, the Prime Minister won’t be an expert (and shouldn’t have to be!) in why the latest batch of EU regulations means that a subsidy service protocol in the Ministry of Agriculture has to be adjusted.
So…how did Estonia manage its digital transformation?
What an outstanding question! I’m glad you asked! When we look at the Estonian model of (e-)governance, we see very clearly how it has organically grown over the years, and how competencies and responsibilities have shifted around. Here are some of the key players in the chronological order of when they were created:
E-Estonia Council: Put simply, the e-Estonia Council directs the overall direction and development of Estonia’s digital society. The Council is chaired by the Prime Minister and its membership is very limited: Four Ministers (Economic Affairs, Entrepreneurship, Education, Public Administration), the President of the Estonian Association of IT and Telecommunications, and a handful of seasoned IT experts constitute this organ. It gives opinions on proposals, approves action plans, and ties Estonia’s development into the digital developments around the world. The Council had different names and focuses throughout the decades and was actually created as the Estonian Informatics Council in 1989 when the country was still occupied by the Soviet Union.
SMIT: The IT and Development Centre at the Estonian Ministry of the Interior got started in 2008 and was tasked with the service provision for ICT solutions within the realm of the Ministry of the Interior. As such, SMIT oversees a wide range of services and security systems ranging from the Police and Border Guard Board to the Population Register.
Office of the Government Chief Information Officer: The Government CIO is responsible for setting strategies and policies for the implementation of digital services. Part of the CIO’s Office includes Estonia’s Chief Technology Officer and the National Cyber Security Policy Director. Together, this team has to consider how the nature of digital services could be shaped over the next few years while maintaining Estonia’s prowess in the area of cybersecurity. The position of Government CIO was created in 2013.
There is no universally right or wrong way
What I wanted to show you with these three examples is that also in Estonia, not everything went according to plan. Suppose you take the transition from top-down to bottom-up innovation and responsibility at face-value. In that case, the CIO position should’ve been created before the setup of institutions responsible for just one ministry each, such as SMIT. On the other hand, one could argue that this was the correct order for Estonia because the CIO spends quite a significant part of his time thinking about the future of digital society. So the coordination of current service implementation (as done by SMIT and others) should come before some of the tasks that the CIO focuses on.
Put simply, examples around the world prove that setting top-down ground rules is wise but that there is always wiggle-room for your transition from foundation-building to creating a landscape filled with user-friendly digital services. I hope this small excursion into Estonia’s digital governance architecture proves helpful to you. Now, let’s get back to work! 😊
If you want to stay ahead of the curve in your digitalisation plans, secure your spot at our Digital Discussion on electronic identity on March 10th at 11 AM (+2GMT) where three leading Estonian ICT companies – SK ID, B.Est.Solutions and Proud Engineers present their solutions for building digital identity platforms 👉 https://e-estonia.com/digital-discussions/
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