Estonia’s success demonstrates power of economic freedom

Early this month, a rumor flew that Estonia’s Prime Minister Kaja Kallas would be the new head of NATO. It turned out to be an April Fool’s joke, but I’m guessing Vladimir Putin didn’t find it terribly funny, especially just a month after Estonians marked the 75th anniversary of the notorious Soviet deportations of thousands of their people to Siberia for refusing to join socialist farms. The tough-talking Kallas has been outspoken about Russian belligerence, often comparing the war in Ukraine to what the Soviet Union once did to her country. In response, Russia has issued a warrant for her arrest.

But Estonia is an inconvenient neighbour for another reason. It’s an uncomfortable reminder to Russians of what could have been. It’s also a reminder to Americans that we must preserve a free economy in an era when populism and socialism are popular.

Since leaving the Soviet Union in 1991, Estonia has grown faster than any other former Soviet state. Today, the average Estonian earns nearly 40 per cent more than the average Russian. The share of Estonians living in poverty is one-sixth the share in Russia. Relative to its population, Estonia has 50 times (!) as many business startups as Russia and the highest percentage of any European country.

Estonia’s greater wealth has yielded greater health. The average Estonian can expect to live nearly eight years longer than the average Russian. Estonian infants die at less than half the rate of Russian infants.

Estonians are far more likely to report satisfaction with their lives (ranking 38 slots ahead of Russia) and with their government services. Estonia has one of the lowest perceptions of corruption in the world (tied with Canada, Iceland and Uruguay at 14th while Russia ranks 137th out of 180 countries).

All of this helps explain the net migration flows between the two countries. Since 1990, for every Estonian moving to Russia, three Russians have moved to Estonia.

How did this happen? I tell the story in a new book coauthored with Peter Boettke and Konstantin Zhukov.

For its part, once Estonia left the Soviet Union, it embarked on a seemingly radical plan to free its people and economy. Adopting the capitalistic slogan, “just do it,” Estonia’s leaders privatized every business they could. They reduced government spending and consistently balanced the budget. They introduced the world’s first flat personal income tax at half the rate of other industrialized countries. They stabilized the growth rate of their money supply to bring inflation under control. They reduced regulations and made it easier to start businesses. Almost unprecedented in the modern era, they unilaterally eliminated all tariffs and barriers to trade, giving their people true access to the global marketplace.

About a decade later, Estonia had the 12th-freest-economy on Earth according to the Fraser Institute’s Economic Freedom of the World report. Thanks to strong marks for the rule of law, security and safety, freedom of movement, freedom of religion, freedom of association, freedom of expression, and freedom to enter into relationships, Estonia also ranks fifth in the world for overall human freedom.

The tragedy for Russia is that for a time, it looked like it might follow suit. Early in his term, Vladimir Putin appointed a reform-minded economic advisor named Andrei Illarionov who invited free-market American economists to Russia and asked for advice. Russia replaced its income tax—which had a top rate of 80 per cent—with a flat 13 per cent personal income tax in the Estonian mold.

But Putin never followed through on other reforms. To this day, the Russian state continues to own and control large swaths of the economy. Contracts and property rights are poorly enforced. Russian courts are not impartial. International barriers to trade remain high and business regulations are costly. Russia currently ranks 134 out of 165 countries worldwide in terms of economic freedom and 121st in overall human freedom. Putin nonetheless just won 87.8 per cent of the vote in elections that were neither free nor fair.

Rigged Soviet-era elections once masked the rot in Estonia as well. But after they gained genuine freedom, Estonians astonished the world with what they could do. Over its long history, America has done the same. Hopefully, the Russian people will one day have their chance to astonish us as well.