Estonia. Bold monetary reforms have paid off
POLITICS & ECONOMY A NUMBER OF FACTORS ENSURED THE RAPID TRANSITION OF ESTONIA TO ECONOMIC STABILITY, INCLUDING BOLD MONETARY REFORMS AND THE PIONEERING, DETERMINED NATURE OF ITS PEOPLE.

KRISTIINA OJULAND Estonian Minister of Foreign Affairs: sees EU and NATO membership as primary goals

Estonia has impressed the world with its rapid and successful transition to democracy.
Since its independence from the former Soviet Union in 1991, the country has been busy implementing a liberal market economy, strict monetary reforms, and liberalization policies. Today, over 90% of the country's businesses are in private hands. Minister of Foreign Affairs, Kristiina Ojuland, comments, "We had our first free elections in 1992 and the first government of Estonia made some basic changes, the first and most important of which was the policy of a free market economy. Since then, Estonia has become one of the most liberal countries in the world in economic terms." Former minister of foreign affairs, Toomas Hendrik Ilves, states that the success of Estonia's rapid transition was largely a result of these economic reforms that took place immediately after independence, which other ex-Soviet bloc countries did not implement at that time.

SIIM KALLAS Prime Minister of Estonia: attributes much of country’s success to the innovative nature of its people

Prime Minister Siim Kallas, however, attributes a great part of the country's success to the ingenuity and sense of individualism of the Estonian people. He points out that Estonians led a slightly different life than that of their counterparts during the Soviet years, which further separated their reality from that of their neighbors. During the occupation, for example, Estonians still had access to Finnish television, an advantage not shared by other countries under Soviet rule. This served to diminish the isolation of the country, keeping people abreast of current affairs outside the Soviet realm. "I remember watching Finnish TV as a schoolboy and it was absolutely another world. As well as information, it gave us a huge desire to separate ourselves from the immediate Soviet reality," explains Mr. Kallas. "On top of that, Estonians have always been an individualistic type of people and have always taken a strong interest in their own businesses, as well as making constant efforts to keep their skills up to date. At the beginning of the 1990s, we could still imagine, if not remember, Estonia as a prosperous country before the occupation."

ESTONIAN CAPITAL Tallinn boasts close links to Scandinavia and a sophisticated Western outlook as pluses for investors

Another critical factor underlying Estonia's success was the stabilization of its currency, the result of a bold and controversial decision on the part of policymakers to establish a currency board and peg the kroon to the German deutschmark. Former minister of economic affairs, Henrik Hololei, comments, "10 years ago the currency board mechanism was only used in two other countries and we were warned against employing it since it takes away all the monetary instruments. Back then, 9 out of 10 experts told us that if we pegged the currency, we would fail and we would not be able to successfully maintain it. Well, nine and a half years have passed and we have kept the peg. A very stable monetary environment has been created and that, in turn, has brought in a lot of investment."

Vahur Kraft, governor of the Bank of Estonia, agrees, "I think that the fixed exchange rate against the deutschmark was the cornerstone of our very rapid change from the old economy to the new one."

VAHUR KRAFT Governor of the Bank of Estonia: pegging the kroon to the deutschmark was key to attaining economic stability

Estonia has had an average growth rate of 5% during the last five years and the country is well positioned to become a major business hub in the region; it has free trade agreements with a number of countries, including the European Union, and full membership in the EU is expected by 2004. The country is also investor friendly and foreign-owned companies account for 50% of the GDP. With tariff-free customs, low start-up and running costs, and a system of flat-rate taxes designed to encourage enterprise and maximize profits (as well as no tax on reinvested earnings), "Estonia really is the best place in Europe for investment" as the minister of foreign affairs, Ms. Ojuland states. "Furthermore, the country has a highly developed technological capacity–you can easily set up shop in Tallinn where you have all the technology within reach, plus you have the legislation on your side."