THE LEGATUM PROSPERITY INDEX™ 2018

Creating the Pathways from Poverty to Prosperity

Estonia

Estonia is one of the clearest success stories to emerge from Eastern Europe since the fall of the Soviet Union. Since re-declaring independence in 1991, GDP per Capita has increased from less than $2,000 to more than $18,000, among the highest growth rates in the world. Our Prosperity Index illustrates just how dramatic these changes have been, where Estonia has risen to 26th in the world, from 29th, to rank only second behind Slovenia in Eastern Europe in terms of Prosperity. It has also recorded a rise in wellbeing over the last decade.

Estonia is one of the world’s most open and entrepreneurial economies. It achieved its success through establishing strong and effective governance, coupled with a clear vision for how to improve its business environment. Policy has been aimed at economic diversity and FDI, through the mechanisms of economic openness, improved business infrastructure and entrepreneurialism.

Introduction

Estonia is one of the clearest success stories to emerge from Eastern Europe since the fall of the Soviet Union. Since re-declaring independence in 1991, GDP per Capita has increased from less than $2,000 to more than $18,000, among the highest growth rates in the world. Our Prosperity Index illustrates just how dramatic these changes have been, where Estonia has risen to 26th in the world, from 29th, to rank only second behind Slovenia in Eastern Europe in terms of Prosperity. It has also recorded a rise in wellbeing over the last decade.

Estonia is one of the world’s most open and entrepreneurial economies. It achieved its success through establishing strong and effective governance, coupled with a clear vision for how to improve its business environment. Policy has been aimed at economic diversity and FDI, through the mechanisms of economic openness, improved business infrastructure and entrepreneurialism.

Governance

Estonia’s path to success was enabled by political reform during the 1990s which introduced property rights, a stable rule of law and the principle of separation of powers. This has all been underpinned by a cultural rejection of the past and a widespread embracing of the Nordic norm in terms of its governance structure. In 1992, a new constitution was enacted, drawing upon elements from the constitution of 1920 which resulted in a unicameral parliamentary structure, laying the foundations for a democratic future. A new government with state and local level representation was elected in 1992; this demonstrated a new political accountability to the people of Estonia.

Estonia has climbed five places over the past decade for perception of corruption and now has the best score in Eastern Europe. Property rights required for a market economy were established during the 1990s, for example when land and housing was re-privatised through a voucher programme. The independence of the judiciary was improved by guaranteeing the confidentiality of deliberations and by installing a chief justice to monitor judicial activity instead of the minister for justice. Reform has continued in this area, with Estonia rising eight places from 26th to 18th for judicial independence over the past 10 years.

Estonia has managed to maintain Safety and Security throughout its transformation. Estonia has joined NATO to safeguard national security. Domestically, homicides have fallen and people feel safer walking home at night. Critically, Estonia has been free from battlefield conflict or civilian casualties, despite significant conflict in Ukraine and other parts of Eastern Europe.

Business Environment

To bolster external and domestic confidence in Estonian business, strong investor protection policy has been in motion since the mid-1990s. Reforms have reduced the pressure on the court system by providing more tailored, faster and enforceable resolutions to business disputes outside the courts. This has reduced the average time taken for dispute resolution to 145 days (low by European standards) and contributed to Estonia rising from 34th to 26th in the investor protections sub-pillar since 2008.

The government has also been improving business infrastructure since the 1990s; this has included the digitisation of border crossings to improve access to markets and the introduction of high speed internet connections. Investment in infrastructure has continued, and Estonia is ranked number one in the world in cyber security and 12th in the world for wireless broadband connections per capita.

Estonia is ranked number one in the world in cyber security and 12th in the world for wireless broadband connections per capita

In order to achieve the aim of economic diversity, open economic policies to encourage FDI were implemented. No tariffs were placed on imports until 1999, at which point some tariffs against non-EU countries were put in place, to align with EU institutional structures. In 2001, Estonia ended the special monopoly of the state Estonian Telephone Company, effectively removing a barrier to entry to its domestic high-tech market. In addition to this, foreign firms were given the same freedoms as Estonian firms, and allowed to operate without specific restrictions. Estonia is now one of the most open economies in the world, with exports presently making up 78% of GDP.

The tax system was altered in the mid-2000s, leading Estonia to be described as the most competitive tax economy in the developed world. Since 2006, corporation tax is a low 21%, with only distributed incomes taxed, making the country attractive to multinational businesses. Income tax is 20%, and property taxes are levied against land value, not the value of structures on land.

Entrepreneurialism

In recent years and with the aim of further diversifying their economy, Estonia began to pursue policies intended to encourage entrepreneurialism. The government funded advertising, conferences and events, aimed at fostering enterprise amongst its workforce. Estonia is now ranked 10th in the world for ease of starting a business which can be done from online anywhere in the world in only 18 minutes. Online training content and business counselling for entrepreneurs provide a high level of education for SME managers.

These policies have made Estonia the most entrepreneurial country in Eastern Europe, with over 400 start-ups in the country. This is six times the European per capita average and 80% of these are opportunity (for example, taking advantage of a business opportunity), not necessity driven (when there are no better choices for work). An early success story was Skype Technologies, founded in 2003 in Estonia; whilst this was led by a Swede and a Dane, the software itself was developed by Estonians who had had previous success developing a peer-to-peer sharing platform. Skype alumni have since gone on to co-found an investment group which has ensured that management and innovation skills have stayed in the Estonian economy.

Social well-being

Social development in Estonia has occurred alongside its economic successes. Estonia is 11th globally for Education and is only behind Slovenia in the region, with particularly good access to education. Attainment of students at primary and secondary level is higher than most Western European nations, placing Estonia 8th in the world. Health outcomes have risen steadily, life expectancy has risen to 77 years – eight higher than during the latter stages of Soviet administration. Estonia has aimed to protect its citizens’ privacy rights through applying blockchain technology to health records and has embraced digital solutions to its healthcare system.

Estonia demonstrates how bold policy reform has a clear impact on economic and social development

Like the rest of Eastern Europe, Estonia’s primary weakness is Social Capital. It comes 69th globally for this pillar, with particular weaknesses in people saying they have opportunity to make friends, the opportunity to help strangers, and voicing opinions to public officials.

Estonia demonstrates how bold policy reform has a clear impact on economic and social development. Estonia’s strong political institutions – ranked highest in Eastern Europe for rule of law, regulatory quality and judicial independence – provided a platform to develop policies for economic improvement. Through encouraging FDI and fostering domestic high-tech industries, Estonia has created a diverse and open economy, capable of delivering widespread prosperity to its population.