NCPA - National Center for Policy Analysis

NEW EUROPE'S BOOMTOWN

September 5, 2006

Economists call Estonia the Baltic Tiger, the sequel to the Celtic Tiger as Europe's success story, and its policies are more radical than Ireland's, says columnist John Tierney.  On this year's State of World Liberty Index, a ranking of countries by their economic and political freedom, Estonia is in first place, just ahead of Ireland and seven places ahead of the United States (North Korea comes in last at 159th).

Estonia transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated.  He was 32 years old and had read just one book on economics, "Free to Choose," by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.  Laar was politically naïve enough to put the theories into practice:

  • Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs.
  • He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba).
  • He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

The results:

  • Wages have soared thanks to jobs created by foreign companies like Elcoteq of Finland, which bought a failing electronics factory and now employs more than 3,000 people making phones for Nokia and Ericsson.
  • Foreign investors worked with local software engineers to create Skype, the Internet telephone service, and the country has become so Web-savvy that it's known as E-stonia.
  • The growth over the past decade has produced so much unanticipated revenue that the tax rate is being gradually reduced to 20 percent. 

Source: John Tierney, "New Europe's Boomtown," New York Times, September 5, 2006.

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