How Estonia led the Baltic economic resurgence

Dateline: Kuala Lumpur, Malaysia

The Baltic countries, namely Estonia, Lithuania, and Latvia are a model of economic success. After emerging from the destitution that came with the fall of the Soviet Union, every single one of them has achieved economic prosperity and enviable freedom.

Many of our articles have already praised the environment for entrepreneurship and the lifestyle possible in these countries. In fact, all three are among my top recommendations for second residencies in Europe.

Estonia, in particular, makes a compelling case for governments that create favorable environments for international investors and entrepreneurs.

Today, the country has a living standard similar to much of Western Europe, it’s one of the best countries in the world to do business in and is home to several successful entrepreneurs, such as the founders of Skype.

But just a few decades ago, things were quite different.

In 1987, Estonia’s per capita GDP was $2,000. Achieving independence in 1992, the Estonian economy collapsed. Russia accounted for 92 percent of Estonian international trade and the end of communism created chaos in the country, where almost everyone was employed by the state.

Estonia’s young Prime Minister

In the country’s first democratic election since World War II, it elected 32-year-old Mart Laar as Prime Minister, a man who claims that the only economics book he had ever read till that point was Free to Choose by Milton Friedman.

Laar and his party had won the election by a slim margin and decided to take advantage of the crisis that had befallen the country by passing sweeping economic reforms. They created the first national currency in post-Soviet Eastern Europe, ended tariffs and trade barriers, made massive cuts to balance the budget while rejecting loans from the IMF.

Laar looked at the pitfalls facing other emerging economies that were in transition from crisis periods and to avoid their fates, he took several decisive steps.

He understood that privatization and attracting capital was the only way to escape the situation that the country faced. While trade unions and government officials would fear privatization, he knew it would be the only way to keep people employed.

The other biggest issue he saw in developing economies was the prevalence of corruption. The causes he saw were that those involved in corrupt practices had much more to gain than they had to lose by taking a bribe.

To prevent an environment that fostered this behavior, he eliminated nontransparent rules, heavy regulations, and excessive power given to government officials.

By opening the economy to competition from the outside world, eliminating state banks and making clear rules for private banks, and allowing them to go bankrupt also prevented the crony capitalism that has unfortunately overtaken many other countries in a similar situation.

Today, Estonia is the least corrupt country in Eastern Europe and has some of the best banks in the world.

The final measure that Laar instituted was a simple, flat tax.

When he came to power in 1992, Estonia had about 2,000 enterprises. Two years later, that number was 70,000.

This flat tax was soon copied by much of the rest of Eastern Europe. The countries that have implemented it are the ones that have narrowed the per capita GDP gap with Western Europe most drastically.

Due to the friendly environment for business, Estonia received more foreign investment than any other Central or Eastern European country for the second half of the 1990s.

After being voted out of power in 1995, Laar was reelected in 1999 when Estonia was in the middle of an economic crisis due to the collapse in Russia’s economy. He implemented measures to further liberalize Estonia’s economy, increasing international trade, encouraging private enterprise and creating the growth the lead to the Baltic economic resurgence and the formation of the “Baltic Tigers”.

Go where you’re treated best

Estonia is not only a model for governments who want to improve their countries’ stature in the world and living conditions for their residents, it’s an example for anyone. Whether you’re already a successful business owner or you’re just an ordinary Joe looking to find a better place to raise your family, if you make a conscious decision to go where you’re treated best, you can benefit.

Countries like Estonia that are on their ways to becoming Singapores are still competing for you, if you fulfill a few simple requirements, others, like Cambodia, are in the same process but are not yet as far down the line.

While governments of some, once great, parts of the world are trying to get every last dollar from you to prolong their own survival, other emerging places are competing to make themselves more attractive to you.

If you’re reading this blog, you’re likely aware of the opportunities out there for you across the world.

The next step is to take action.