Home The Washington Diplomat March 2007

Tiny Estonia Shines as Post-Soviet Economic, Democratic Powerhouse

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When Estonians go to the polls on March 4 to vote in parliamentary elections, they’ll have some serious issues to contend with, such as how to reverse the country’s alarming decline in population and whether to revise Estonia’s flat-tax system without endangering its flourishing economy.

But one thing voters won’t be questioning is the democratic process itself. By all accounts, Estonia—smallest and most prosperous of the 15 former Soviet republics—is also one of the freest countries on Earth.

Washington-based Freedom House gives the Baltic nation a one out of seven—the highest possible score—in both political rights and civil liberties, noting in its Freedom in the World 2005 report that “Estonia’s civil liberties score improved from two to one due to the effective implementation of judicial reforms and greater economic freedom.”

Separately, the Heritage Foundation ranks Estonia seventh out of 155 countries in its 2006 Index of Economic Freedom—even higher than the United States. “Hallmarks of Estonia’s free, market-based economy,” according to the report, “include a balanced budget, a flat-rate income tax system—the first in the world—a fully convertible currency pegged to the euro, a competitive commercial banking sector, and a hospitable environment for foreign investment, including no tax on reinvested corporate profits.”

Jüri Luik, Estonia’s 40-year-old ambassador to the United States, is unabashedly proud of his little country’s achievements in the nearly 16 years since Estonia regained its independence as a sovereign republic.

“Estonia is one of the most successful of all former communist countries. Since 2004, we are a member of both the European Union and NATO, and we’re doing very well economically,” says Luik.

At present, Estonia has a gross domestic product of .3 billion, translating into per-capita income of ,936, or purchasing power parity of ,802, the highest of any of the former Soviet republics. Unemployment stands at only 4.5 percent—even lower than that of the United States.

“When Estonia regained its independence in 1991, we decided it was important to build a sound legal system and a very sound economic policy to give people the chance to develop the country,” Luik told The Washington Diplomat. “The state itself was very poor, and the only way to reform the country was to release the peoples’ creative energy.”

That energy is especially evident in the information-technology sector. Among other things, Estonia is the birthplace of Skype, a technology that allows computer users to make free international phone calls via the Internet. Skype, which was recently acquired by eBay, claims around 100 million users, with 9 million people using the technology at any given time.

“Since we are a small country and cannot afford heavy industry, we try to encourage modern ways of producing revenue, and IT is one of the best ways to do that. We have, for instance, created a number of IT colleges,” Luik explains. “In Tallinn, you can park your car with a mobile phone. You punch a special code in, and you pay the parking company. We are now trying to sell that system to various cities in the United States.”

Yet Estonia has a population of only 1.34 million and a growth rate of 0.64 percent—meaning that for every 10 births, there are 13 deaths. That translates into a fertility rate of barely 1.4 children per woman, far too low to sustain the population.

“Estonia is unfortunately diminishing in population. In most of the former Soviet Union, it’s more because of health reasons—people are simply dying. But in the case of Estonia, people are becoming wealthy,” says Luik. “It’s a big issue, and that’s why one of the election issues is how we can support young families and help them to raise their children.”

Luik has served his country twice as minister of defense and once as minister of foreign affairs. His first diplomatic posting was as head of the Estonian team negotiating the withdrawal of 25,000 Russian troops, the last of whom departed in 1994. Interestingly, his wife Ruth served as Estonia’s ambassador to France at the same time he was ambassador in Brussels.

Luik, who’s been in Washington since September 2003, spoke to The Diplomat at the Estonian Embassy fronting Massachusetts Avenue. The mansion, incidentally, was purchased in 1993 by then-ambassador Toomas Ilves, who is now the country’s president.

Unlike the other former Soviet republics, Estonia and its two Baltic neighbors—Latvia and Lithuania—were sovereign, independent nations before being occupied by Soviet troops during World War II.

“The three Baltic states were occupied by the Soviet Union, but the U.S. never recognized the Soviet occupation. Our diplomats were recognized as Estonian diplomats,” Luik says. “Even though Estonia was de facto occupied, legally it was not destroyed in the eyes of the United States. When we regained our independence in 1991, one of Estonia’s advantages was that since we never disappeared legally, there was a legal basis which formed the fundamentals of our independence.”

He notes that most of the other republics won back their independence simply because the USSR had collapsed. “It was very difficult for them to choose a clear path toward democracy, but in our case, we knew we were part of Europe and we simply had to regain our place in Europe. So basically it was easy for us,” Luik says. “We quickly became a normal Western society with a strong market economy, a democratic system and freedom of the press. We didn’t have to think about what kind of country we’d become.”

Today, Estonia is a multiethnic country with more than 40 groups, although ethnic Estonians comprise about 70 percent of the population. Roughly one-third of the country’s inhabitants reside in Tallinn, the picturesque medieval capital, but one of the government’s main objectives is to bring more prosperity to the smaller cities. “Since a lot of our industry is computerized, there’s really no difference whether you’re in Tallinn or at the university in Tartu,” the ambassador says.

He adds: “With a population of only 1.34 million, it is evident that Estonia has to orient itself toward IT industries rather than heavy industry. IT industries require an educated work force, so if we want Estonia to maintain its competitiveness in the global market for years to come, we must develop the educational system.”

Luik says EU membership has been “extremely positive” for the Estonian economy. The country’s GDP grew by 11.8 percent last year and is expected to grow by another 8.3 percent in 2007 and 7.6 percent in 2008. The largest investors are Sweden and Finland, together comprising 74 percent of total foreign investment. Other key investors are the Netherlands, Great Britain, Norway, United States, Germany, Denmark and Russia.

“We are now part of the larger European market. Secondly, there are a lot of legal opportunities to invest in EU countries or receive investments from them,” he says. “Studies today show an overwhelming percentage of Estonians are content. When people voted against the EU, there was a lot of suspicion. Nowadays, it’s clear that this has not hampered our sovereignty at all.”

EU membership has also encouraged a boost in tourism from Sweden and Finland. Located only an hour’s ferry ride from Helsinki, Tallinn is a favorite of cruise-ship passengers, with its medieval architecture, sidewalk cafés, broad plazas and antique shops.

“Estonia in a way is very similar to Scandinavia, and we consider ourselves part of the Nordic countries,” says Luik. “It has been a long-term aim of Estonia to become a politically and economically stable Nordic country.”

Like its prosperous neighbors to the north, Estonia’s people enjoy one of the planet’s highest mobile telephone penetration rates, with 118 cellular phone lines per 100 inhabitants. The country is also considered a leader in e-government and is one of the world’s most Internet-friendly countries.

“I can participate in the elections from my desktop because we have a special identity-card reader,” touts Luik. “You can use it to mark your identity and then vote electronically. We tried that in the local elections, and now for the first time in general elections. Desktop voting is useful to bring in young people.”

One of the biggest issues in the upcoming elections will be whether to maintain Estonia’s flat-tax system—a system critics say favors the rich while penalizing the poor.

“We chose a proportional, not a progressive, tax system, meaning that whatever you earn, you pay the same flat tax, which encourages people to earn more,” Luik explains. “We don’t have many loopholes, and it’s a very easy system. So far, this system has been very favorable. The center-left says we should use the progressive tax system, while the center-right says what we have now is the best vehicle for social justice.”

Another contentious issue at the moment is Estonia’s rocky relationship with its former occupier.

“Our relationship with Russia is calm and stable, but there are ups and downs,” Luik admits. “There are people in Russia who haven’t yet accepted that Estonia is a sovereign country. One of the issues where we have clear disagreements is what actually happened in 1939 to ’40, when Estonia was occupied, and in the last months of World War II, when the Soviets moved in again.

“The Soviet government called it a liberation, and the present Russian government continues this line. The sad truth is that Estonia was occupied by Russians, then by Hitler, and then again by Stalin. Unfortunately, there was no liberation for Estonia until 1991, when we really became an independent country,” Luik says.

Tallinn’s uneasy relationship with Moscow often triggers strong emotions, especially when it comes to issues such as Estonia’s controversial Citizenship Law and the requirement that only the Estonian language be used in schools.

“While Estonia has very few restrictions on academic freedom, both officials in Moscow and ethnic Russians living in Estonia have opposed legislation that mandates the use of Estonian as the language of instruction in what are currently Russian-language schools,” notes Freedom in the World 2005.

According to the report, approximately 170,000 people in Estonia are not citizens, most of them ethnic Russians. “Estonia’s Citizenship Law has been criticized for effectively disenfranchising many Russian speakers through an excessively difficult naturalization process,” it says.

Luik doesn’t pull any punches here. “If Russia wants to criticize us, it’s their business, but we are members of the EU, and you cannot bluff. If you want to become a citizen of Estonia, you must pass a language exam,” he says. “But you can live and work in Estonia without being a citizen, like here in the United States if you have a green card.”

The ambassador adds: “Since we didn’t have any control over our borders during Soviet times, our immigration policy is fairly careful. We are not opening our doors wide, but obviously specialists are always welcome.”

Controversy is also currently raging over the possibility that the Estonian government might remove a large bronze statue dedicated to Soviet troops that for years has dominated one of Tallinn’s main plazas.

“The debate is not whether to destroy the statue, but whether to remove it to the Soviet military cemetery, which is also in Tallinn. That statue would be there, together with the Soviet graves, to remind people of the events that happened,” Luik says.

On Feb. 7, Russian President Vladimir Putin said that if Estonia goes ahead with its plan, the remains of fallen Soviet fighters should be returned to Russian soil. “I find that this is an absolutely short-sighted, extremist nationalist policy which does not take into consideration the history connected with the fight against Nazism or today’s reality,” Putin charged, continuing Moscow’s oft-repeated claim that the Bronze Soldier Monument is a symbol against fascism rather than of Soviet occupation.

Luik counters that the Bronze Soldier debate “is a minor issue” and that the government has made no decision yet.

Surprisingly, one issue that’s not making too many headlines at home is the presence of 40 Estonian soldiers in the middle of Baghdad and another 150 troops in southern Afghanistan. In addition, since 1999, more than 300 Estonian peacekeeping troops have served in Kosovo.

“The operation in Afghanistan is more popular than the one in Iraq, which is more controversial. But there haven’t been serious demands from the people or the parliament to withdraw them,” says the ambassador. “Since Estonia lived under a very nasty dictatorship for a long time, we support the idea that brutal dictators should be removed. Estonia is trying as much as it can to support democracy all around the world.”

About the Author

Larry Luxner is a contributing writer for The Washington Diplomat.

Last Edited on November 29, 1999