Wednesday, December 19, 2007

Estonia: The Baltic Tiger

Dubbed as the Baltic Tiger, the small former Soviet Republic of Estonia has successfully rid itself of its communist-era shackles and has rapidly become the epitome of economic freedom. Merely fifteen years after Estonia first emerged from Communist oppression in 1992, Heritage.org ranks Estonia as the 12th freest economy in the world.

Estonia owes its transformation from an isolated, impoverished part of the Soviet Union to one of the most dynamic and modern economies of today to former Prime Minister, Mart Laar. The 2006 recipient of the Cato Institute’s Milton Friedman Prize for Advancing Liberty, Laar was responsible for implementing many of the late Nobel Prize-winning economist’s ideas in Estonia. Laar instituted many radical reforms; he unilaterally eliminated tariffs, allowed foreign investment, privatized government functions and drastically cut taxes on businesses and individuals.

One of the newest members of the European Union, Estonia has a simple flat income tax of 23 percent, which the government intends to reduce to 20 percent by 2009. It has no corporate income tax and charges only a flat tax rate on shareholder dividends.

In 1992, Estonia was wreaked by 1000 percent inflation and unemployment as high as 30 percent. With the extensive market reforms, however, Estonia’s GDP has grown at an average of 7 percent over the last five years, and inflation has been moderate and controlled at about 3 percent.

The Estonian government places no restrictions on foreign ownership of real estate which has fueled a property investment boom among overseas buyers. It is ranked higher than the U.S. in terms of the openness of its financial sector. The insurance sector is dominated by foreign firms, and the two largest banks which are foreign account for 60 percent of all financial sector assets.

The World Bank ranks Estonia 17th among 175 economies in ease of doing business, and sixth in ease of trading across borders. Starting a business in Estonia takes an average of 35 days, compared to the world average of 48 days.

The remarkable economic performance of Estonia seems set to continue into the future too. A hi-tech, knowledge-based economy, this small Baltic state is also referred to as E-stonia. As much as 95 percent of its banking operations are conducted electronically. The government also launched a virtual embassy which will be used to market Estonia across the Internet. In March 2007, it became the first country to hold a general election that allowed e-voting over the Web.

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