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Tiny Estonia Shines as Post-Soviet Economic, Democratic Powerhouse
The Washington Diplomat / March 2007

By Larry Luxner

When Estonians go to the polls Mar. 4 to vote in parliamentary elections, they'll have some serious issues to contend with, like 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 1 out of 7 — the highest possible score — in both political rights and civil liberties, noting in its Freedom of the World 2005 report that "Estonia's civil liberties score improved from 2 to 1 due to the effective implementation of judicial reforms and greater economic freedom."

Separately, the Heritage Foundation ranks Estonia 7th out of 155 countries in its 2006 Economic Freedom Index — even higher than the United States.

"Hallmarks of Estonia's free, market-based economy," says 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."

Jόri 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," said Luik, whose pronounced English accent is a consequence of several years of study at the University of London.

At present, Estonia has a GDP of $13.3 billion, translating into per-capita income of $9,936, or purchasing power parity of $17,802, the highest of any of the former Soviet republics. Unemployment stands at only 4.5%.

"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 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 IT 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 nine 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," said Luik. "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% — meaning that for every 10 births, there are 13 deaths. That translates into a fertility rate of barely 1.4 chidren 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," said 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 post was as head of the Estonian team negotiating the withdrawal of 25,000 Russian troops, the last 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 in an interview 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. 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 noted that most of the other 12 republics won back their independence simply because the USSR had collapsed.

"It was very difficult for them to choose a clear path towards 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 said. "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 multi-ethnic country with more than 40 groups, though ethnic Estonians comprise about 70% of the population. Roughly one-third of the country's inhabitants reside in Tallinn, the picturesque medieval capital, though one of the government's main objectives is to bring more prosperity to 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," he noted.

"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 of any former Soviet republic. The country's GDP grew by 11.8% last year and is expected to grow by another 8.3% in 2007 and 7.6% in 208. The largest investors are Sweden and Finland, together comprising 74% 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 said. "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 cafes, broad plazas and antique shops.

"Estonia in a way is very similar to Scandinavia, and we consider ourselves part of the Nordic countries," said 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," said 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 favor 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," he said. "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," he said. "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 1939-40, 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."

Tallinn's uneasy relationship with Moscow often triggers strong emotions, especially when it comes to issues like 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 of 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."

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 said. "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 added: "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 currently raging over the possibility that the Estonian government might remove a large bronze statue 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."

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 said, continuing Moscow's oft-repeated claim that the Bronze Soldier is a monument against fascism rather than a symbol of Soviet occupation.

Luik countered that the Bronze Soldier debate "is a minor issue" and that the government has made no decision.

He also defended Estonia against criticism that the country didn't do enough to protect its small Jewish community during World War II, and that removing the Bronze Soldier is an insult to the memory of the 1,000 Jews who were murdered by Hitler and his Estonian collaborators.

"We were under the German occupation, as were France, Belgium, Poland and other countries. The Nazi government did awful things all over Europe, and there were concentraton camps in Estonia, but these had nothing to do with Estonia because the Estonian people were not able to stop them. The same was true in Ukraine and Russia, where a lot of Jews were killed. The question is how do you define liberation. On the contrary, Stalin did not restore the independence of Estonia, so we had no choice but to continue under the occupation."

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," noted 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."

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