Sunday, October 23, 2011


Der Spiegel has a quite interesting article about the economy of Estonia, which is humming along even as much of Europe sputters. Part of the explanation for Estonia's success seems to hinge on cultural factors:
[Greek expatriate Loukas Nakosmatis] describes the two Estonian women he hired as waitresses. 
"They are hardworking, honest and never late," he says. The group of Greek men falls silent for a moment. "Strange country," says [fellow Greek expatriate] Elias.
This attitude stands in contrast to Nakosmatis' native Greece, with the article describing his travails attempting to collect money owed to him by customers -- a futile mission that eventually drove him into debt and off to Estonia in search of greener pastures.

A Spaniard, meanwhile, describes his interactions with the Estonian government, and contrasts it with the attitude found in his native country:
...When it was time to slash the government budget, Estonia's cabinet ministers started with their own salaries. 
"And they weren't making very much to begin with. I mean, these aren't the people who are filling their pockets, [says Naphtali Peral.] "Some of them are really smart, capable people, who could earn a lot more in other jobs!" 
Peral owns a small language coaching company. He gives courses, trains managers and advises film producers looking to work in the Baltic countries. Peral is from Almería in Spain's Andalusia region, where he completed high school and attended university. He says that a few of his fellow students were truly dim-witted -- and they were the ones who went into politics. 
"And what did our politicians do the minute they were in office?" he asks. "They ordered themselves an official car. Likely a BMW … preferably with a chauffeur. And they smeared gel into their hair, bought dark suits and were constantly on the road, dedicating buildings, touring sites or giving important speeches that someone else had written. But in that time, they could just as easily have worked for the country and for the people who voted for them.' 
...[In Estonia, meanwhile,] the business climate is fair and open, and you can trust the police, politicians and bureaucrats."
While culture undoubtably plays a strong role here, it probably also helps that opportunties for graft are reduced due to the dearth of paperwork/regulatory obstacles one encounters:
[Peral] says that he established his company here in only half a day, mainly online. The record for establishing a company, he adds, is only 18 minutes. In other words, the government doesn't say: Hey, Peral, who do you think you are, starting a company, just like that? No, he says, the state actually encourages entrepreneurship, and says things like: So you have an idea, Peral! Go for it! And then he says that it takes him 20 minutes to prepare his semi-annual tax return...
To fully appreciate this, consider in comparison the hassle one must endure just to set up a food truck in Michgan. And it isn't only paperwork that is minimized in Estonia, but the role of the government in general. Having suffered first-hand under communism, many Estonians apparently decided that they would opt for the exact opposite approach:
"When we had finally escaped from Soviet socialism, we were sick and tired of government centralism," [says economics minister Juhan Parts.] "We wanted precisely the opposite in all respects: We wanted a transparent state. A country that isn't constantly intervening, nationalizing businesses, placing a bureaucracy above everything and imposing rules on people in every respect." 
But doesn't the government have to help those on the losing end of social change? 
Of course, [Parts] says, it's important to help a society's losers, the ones who are left behind. It would be wonderful, he adds, to have a fantastic healthcare system and offer social guarantees for every emergency. "But you have to have the money. We don't have it. Our average monthly income is €800. So we have to reflect on what's important for a society's development. It's the top performers, the successful ones. Ideas! Companies! Products! If all you do is administer, nothing comes of it. The state must clear the way for those who want to achieve something. That's the function of the state." 
Estonia's approach is even less of a surprise when one recalls that Estonia's first post-communist prime minister, Mart Laar, admitted that Milton Friedman's Free to Choose was the only economics book he had ever read before he took office.

This ethos has carried through to the present day, as evidenced by Estonia's response to the 2008 financial crisis in which the country opted for a decidedly non-Keynesian approach:
...The government announced a harsh austerity program. The government bureaucracy was thinned out, healthcare and social services were cut back, and even the streetlights in Tallinn were switched off at 3:30 in the morning. Businesses reduced wages by up to 40 percent, with the promise they would be increased as soon as the economy improved. The government did not pump borrowed funds into the economic cycle. Instead, it did what economists call internal devaluation.
Indeed, as this New York Times article notes, Estonia slashed government spending by 9 percent of GDP or the equivalent of $1.28 trillion here in the US (even more radical than Ron Paul's proposed budget cuts!). If one believes the economic soothsayers that inhabit the Obama White House, this is the kind of approach guaranteed to produce economic catastrophe and societal breakdown. But that's not exactly what has happened:
In the middle of this year, two rating agencies, Standard & Poor's and Fitch, upgraded Estonia's credit rating. The country had a budget surplus of €115 million in the first two quarters, and it is expected to virtually balance its budget for the entire year. Government debt is about 6.6 percent of the gross domestic product, as compared with 120 percent in Italy, 160 percent in Greece and 80 percent in Germany. In the first two quarters of 2011, the Estonian economy grew at an annualized rate of 8 percent.
Estonia is ranked the world's 14th freeest economy by the Heritage Foundation and is notable for the flatness of its tax code (21 percent on corporate and individual income, 20 percent VAT). Estonia's GDP per capita roughly tripled from 2000-09.

A dissenting voice on Estonia's state of affairs can be found here.

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