Estonia and Classical Liberalism

Don Boudreaux has an excerpt from a New York Times article about how classical liberal reforms in Estonia have worked.

[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.

These reforms were barely approved by the legislature amid warnings of disaster: huge budget deficits, legions of factory workers and farmers who would lose out to foreign competition. But today the chief concerns are what to do with the budget surplus and how to deal with a labor shortage.

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 spirit is so different here,” Benoit du Rey says. “If you come to the government here and want to start a company, they’ll tell you, ‘Good, do it right now.’ Then you can work free without being bothered by stupid things. Here I talk to my accountant once a month. In France, for every seven or eight workers, you need one full-time worker just to fill out the forms for taxes and other rules.”

If you want to read more about Mart Larr, try here.

When Mart Laar began his second term as prime minister of Estonia in 1999, the country was in the midst of a fiscal crisis. The collapse of Russia’s economy the year before had left Estonia’s stock market reeling, and the government was struggling to fund the benefits promised by Soviet-era social programs.

Laar realized that the only way for Estonia to weather the crisis was to finally leave behind the legacy of its communist past. He announced deep cuts to paternalistic state welfare programs, slashed business taxes, and urged liberalization of international trade. By the end of his term, the government’s Bureau of Privatization was dissolved; more than 90 percent of the economy was in private hands. The economy was growing 7 percent annually, and Laar was widely credited as the force behind the creation of the “Baltic Tiger.”

Wow, a government bureaucracy was actually disolved? Now that is impresisve by itself.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Maybe we should try some of that flat tax stuff here.