Estonia

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Welcome to the 38th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

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Today’s Publisher’s Parmesan talks about the incredible rise of Estonia. In just 30 years, Estonia went from being a poor Soviet state to becoming an advanced economy. This transformation was driven by the adoption of free market practices and the reliance on technology as a driver of progress.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

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Publisher’s Parmesan 🧀

Estonia

At the turn of the century, Estonia embarked on a mission to technologically transform its society and went on to become world-renowned for its digital-first ethos. This mission has seen Estonia rise to become one of the most digitally advanced nations in Europe, making itself home to numerous tech unicorns and leading the way in innovation and digital transformation across the world.

The Past

Since the beginning of the 20th century, Estonia had been one of the most developed regions of the Russian empire - housing some of the largest companies catering to the Russian markets. While agriculture accounted for more than 55% of the output, industrial output was gradually growing and made up almost 20% of the economy after the First World War.

However, things changed during World War II when the Soviet Union occupied Estonia - first in 1940 and then in 1944. This period brought with it a significant change in the socio-economic orientation of the region. Estonia went from being a market-driven economy to becoming a servant of the Soviet command ecosystem. Work became increasingly unfruitful, which made it impossible to pay workers reasonable wages and led to a drop in their motivation. At the same time, people realised that there was something fundamentally wrong with the whole system. In addition, the expensive arms race between the United States and the USSR played a part in Estonia’s economic collapse.

On August 23, 1989, around 2 million people from three Baltic countries stood on the Vilnius - Tallinn Road holding hands. This human chain stretched for more than 600 kilometres. In other incidents, more than 300,000 Estonians (making up more than 20% of the population at that time) staged demonstrations in Tallinn chanting national songs. Eventually, on August 19, 1991, a military coup d’etat against Mikhail Gorbachev offered an opportunity for the Baltic states occupied by the Soviets to restore their Independence. Estonia’s independence was finally restored on August 20, 1991.

Today’s Estonia is also the result of a painful economic recovery process. When the country opened up, a huge economic crisis started. People stood in lines for hours to buy food. Bread and milk products were rationed. Because there was no gas for heat, the government planned to evacuate much of the capital of Tallinn to the countryside. The only "institution" in Estonia that seemed to work was the informal market.

Estonia was completely dependent on Russia for all its requirements. The Soviet command economy had destroyed Estonia’s environment and prevented the development of infrastructure. There was little that Estonia could sell on the world markets.

In 1993, Estonia hit the bottom - the economy contracted by more than 9% and inflation was at 90%. The transition from a state-owned economy to a free-market-oriented economy was a painful process. However, green shoots began to be seen in the second half of 1993. By 1995, the Estonian economy returned to growth. By 1996, the GDP growth accelerated and inflation was finally brought under control.

Joining the Western world, Estonia soon entered the UN, the WTO, NATO, the European Union and OECD while Russia watched with annoyance. The newly independent and free nation of Estonia was thus born in 1991. Today Estonia is a stable multi-party democracy with a strong rule of law, an efficient bureaucracy and a high-tech system that is the envy of countries all over the world.

This rapid transformation was driven by two critical design choices made by Estonian leaders in the early 90s:

• Movement from a state-owned system to a free-market-oriented economy

• Invest in new technologies to make Estonia a leader of the digital age

Tiigrihupe or Tiger Leap

In 1991, at the time of the restoration of Independence, Estonia’s telecom or tech infrastructure was a ghostly reminder of its Soviet past. Most Estonians did not have a phone line or access to public services. This lack of infrastructure hindered Estonia’s progress as a newly minted free-market economy desperately trying to integrate itself into world trade. Most companies preferred to work in more developed economies around Western and Central Europe putting Estonia at risk of being stuck in a cycle of perpetual under-development.

To escape this predicament, then Prime Minister Mart Laar (only 32 years old at that time) decided to bet on turning Estonia into a leader of the digital age. The internet was just coming up at that time and he felt that technology could be a great equaliser. Unlike traditional industries that require heavy capital investment and preferred more established countries, the promising internet economy allowed Estonia to compete on a more level footing. Thirty years later, Estonia has emerged as a digital powerhouse integrating cutting-edge technologies such as blockchain and decentralised data storage into its day-to-day operations. Let alone Governments, most large companies would kill to have an ERP system that could replicate Estonian efficiency.

Estonia’s digital transformation began with the Tiigrihupe or the Tiger Leap program. Led by future President Toomas Hendrik Ives, the program focussed on two pillars:

• Heavy Government investment in network infrastructure via public-private partnerships

• Computers and support for schools across Estonia to set up large-scale digital education programs

Ives, who had spent a lot of time in the United States, understood that education and top-class infrastructure were critical to realising the dream of digital Estonia. He saw quick results: by 1997, more than 97% of Estonian schools had active internet connections and most Estonian banks offered online account management services. Once the basics were in place, he quickly moved on to the next phase.

Phase 2

The second phase of the Estonian revolution relied on the following five pillars:

• Digital Identity: All Estonians have a unified state-issued digital identity called eID. Citizens use this digital identity to access all public services- pay bills, vote online, access healthcare and much more. This ID can be accessed either with a mobile app or a via a smart card issued by the Government.

• Digital Governance: Estonia’s governance rests on three technologies. First, Internet voting (i-Voting) allows voters to cast their ballots from any internet-connected computer anywhere in the world. Second, the e-File is the heart of the Estonian judicial system; it provides data to the country’s court information system and the information systems of the police, jails, prosecutors, and criminal case management. Third, the Government Cloud supports the modernization and renewal of existing information systems, partnering with the private sector to embrace opportunities offered by new technologies as soon as they become available. As a result, 99% of public services are available online 24 hours a day, and Estonia saves over 1400 years of working time annually thanks to its digital governance infrastructure.

• Digital Healthcare: Anyone in Estonia who has visited a doctor gets an online Electronic Health Record that can be tracked via the smart ID. The e-Health Record System integrates data from different healthcare providers across the country. Even prescriptions are issued digitally - patients can access medication simply by presenting their ID card at any pharmacy in the country. The use of blockchain technology ensures data integrity and mitigates threats.

• Digital Business Infrastructure: Estonia’s e-Business Register is an advanced tool that allows entrepreneurs to register a new business online in just a few minutes without the need to visit any Govt office. Since 2011, most companies in Estonia have been registered using this service and as a result, the time to register a new company is now down to just a couple of hours.

• Cybersecurity: Estonia has designed its blockchain ecosystem (KSI) to ensure that networks, systems, and data are secure, decentralized, and 100% private. The government has also partnered with private companies specializing in data sharing to ensure that its digital services are interoperable and protected by state-of-the-art cryptography. The country has also established “data embassies” abroad to ensure that citizens’ data would remain attack-proof if government servers were hacked.

Furthermore, since 2000, many new technologies were progressively introduced in the “tech nation”. From the e-tax board (2000) to the e-school and digital signature (2002), the ID bus ticket and e-land registry (2003), the e-voting system (2005), the e-police (2007), the e-health system (2008), the e-prescription (2010), the e-residency (2014), the healthcare 4.0 (2018).

Today, there are just three transactions involving the Government where citizens need to show up to an office - getting married, divorce and sale of real estate. Everything else can be handled via digital systems that have been built over the last few years.

Becoming a market economy

In addition to the massive investments in the digital economy, Estonia took deliberate steps to become a market economy quickly post the Soviet occupation. Immediately after Independence, mechanisms were put in place to ensure the growth of private enterprise. Full convertibility of the current account and most capital account transactions was in place by the end of 1992. By 1994, more than 50% of state-owned enterprises has been privatised and the share of private exceeded that of the public sector for the first time. Virtually all trade restrictions inherited from the Soviet regime were taken down one by one - today Estonia has one of the most liberal trade regimes in the entire world. Economic transformations that underpin Estonia’s growth would require an article of its own!

The Results

The investments in digital transformation seem to be paying off. Today Estonia boasts the highest number of unicorn startups per capita and attracts top engineers from all over the world. Global startups like Skype and Bolt call Estonia home.

Since the fall of the USSR, Estonia has continued to grow its economy. Its per capita GDP increased from less than $15,000 in 1995 to more than $35,000 in 2021. In most years, Estonia’s GDP growth has exceeded 4% - making it one of the fastest-growing economies in the world.

Estonia has managed to achieve this growth rate while taming inflation and keeping unemployment rates low.

While Estonia was never a very poor country, the Soviet occupation definitely stunted its growth from a human development point of view. Post restoration of Independence, Estonia has made significant strides in increasing life expectancy with the average citizen expected to live to an age of 75+ years!

Being an early adopter of the Internet, Estonia always had a large share of the population using the Internet. Every school across the country has access to an internet connection coupled with a very strong digital literacy program.

In a short period of just three decades, Estonia went from a country struggling with a deep economic crisis to being at the forefront of the digital revolution. While travelling or working abroad, the biggest complaint of Estonians is the slow legacy of Government systems! Without leaders like Toomas Hendrik Ives, who bet on early-stage technologies, Estonia would not be where it is today.

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