Society & Politics

Economic Miracle: Estonia

Estonia is one of the most interesting countries I've been learning about recently as far as economies go. While the country is far from perfect, Estonia now ranks 6th in terms of economic freedom in the world by The Heritage Foundation and has achieved economic growth of a kind that makes it one of the most competitive economies in Europe. Compared to how it was in the early 90s, its transformation is nothing short of remarkable.

Economic Miracle: Estonia

Singing Revolution

Estonia established its independence, along with its Baltic neighbors, Latvia and Lithuania, initially through mass demonstrations singing national hymns and anthems which were strictly prohibited by the Soviet Union.

Yet immediately following its independence, Estonia was far from prosperous.

Mart Laar

In 1992, historian Mart Laar was elected as prime minister of Estonia. He was only 32-years old while most of his cabinet members were in their 20s. His campaign consisted of holding rock concerts where he'd talk to the audience in between loud music.

Economic Miracle: Estonia

Unfortunately he inherited a legacy of economic crisis. Inflation rates were at 1000%, there were mass food shortages, and unemployment was estimated to be over 30%. The economy was on a steady path of decline.

Free to Choose

Looking at dire economic circumstances, Mart Laar turned to one book on economics by Milton and Rose Friedman, Free to Choose.

Economic Miracle: Estonia

Against the advice of just about everyone around him including older and more experienced advisers from the US, he followed the untested theories behind the book and applied them in his economic policies.

Friedman was a strong advocate of freedom for ethical reasons, pragmatic economical reasons, and perhaps most importantly, American reasons. He favored a small, highly-limited government as the founders of the United States intended.

Economic Miracle: Estonia

Milton Friedman was particularly appealing to Mart Laar since Friedman was considered a horrible man among communists. He figured that the enemy of communists must be a great man. The result of following Friedman's book was one of the fastest-growing economies in all of Europe.

Flat-Rate Income Tax

One of the most controversial policies Laar implemented from Friedman's book was the flat-rate income tax. To many Americans today who tend to favor the highly progressive tax system proposed by Karl Marx, this might seem like an epic tax cut for the rich. In actuality, it's simply taking the same low rate from everyone's income, eliminating the concept of tax brackets.

This combined with a low corporate tax rate helped put Estonia at the top of the world in terms of tax competitiveness.

Economic Miracle: Estonia

Many advised Mart Laar that such a tax system could not possibly provide the government enough revenue. They projected deficit after deficit.

The opposite happened. Instead the government saw surplus after surplus, giving them more money than they knew what to do with in spite of such low tax rates. The model was so incredibly successful that Estonia's neighbors: Lithuania, Latvia, and later Russia, Ukraine, and Romania all ended up copying it.

Two reasons likely contributed to these unexpected surpluses. First, the economic policies skyrocketed economic growth in ways that probably no one could have anticipated. Second, it largely eliminated the informal/grey economy.

Economic Miracle: Estonia

With complex, progressive tax systems, people often find ways not to pay their taxes. Those who are well off can hire skilled accountants and lawyers, finding loopholes that allow them to pay less. Some may resort to criminal activity and evade taxes outright.

Given such an elegant and simple tax system that offers the most competitive rates in the world, there were no loopholes to be exploited, and the incentives to avoid paying taxes were largely eliminated.

e-Estonia

An interesting development in Estonia was that it became one of the most advanced e-societies in the world. As a result, it has received the nickname, "e-Estonia" or sometimes just "e-stonia".

Everything is digital and wired, including an e-cabinet for politicians which has completely eliminated all paperwork.

A side effect of this digital and wired system is that it has made government operations extremely transparent to its citizens. Some citizens even managed to discover evidence of inappropriate spending of government funds by corrupt politicians which lead to their resignation.

Freedom

Most inspiring to me besides the economic progress is how Mart Laar has become a champion of freedom. Unfortunately favoring freedom doesn't always make you popular. A lot of people often fail to comprehend the full benefits of freedom.

Those who advocate freedom of speech might be thought of as people who advocate propaganda and hate speech. What people don't realize is that it's generally when a country lacks that freedom of speech that we end up with only propaganda and hate speech.

Those who advocate economic freedom might be thought of as those who favor the rich at the cost of the poor. What people don't realize is that it's one of the most successful ways to lift people out of poverty. When people lack economic freedom, typically everyone is dirt poor.

In 2006, Mart Laar was awarded the Cato Institute's Milton Friedman Prize for Advancing Liberty in spite of the opposition.

For those who are interested in more details about how Mart Laar and his cabinet achieved such economic success, this video is a bit lengthy but goes into considerable detail (the main presentation is in English but turn on captions for a translation of the director's introduction).

A detailed report can also be found here, written by Laar himself: https://www.heritage.org/report/the-estonian-economic-miracle.

Most of all, I think Estonia is worth studying for Americans who value freedom. As Laar said, it's difficult to appreciate the value of freedom when you have it. It's something people tend to appreciate only when they lack it. Meanwhile America is gradually becoming less and less free while Estonia is becoming more and more free.

Economic Miracle: Estonia
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