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Economic Freedom: Country Studies - Estonia

Rankings in Freedom in the World 2010: 1 Political Rights, 1 Civil Liberties (Free)


Estonia, a small country of 1.3 million people on the Baltic coast in northeastern Europe, emerged from Soviet rule in 1991 to become one of the freest and most economically dynamic countries in the world. It has earned the highest rankings for political rights and civil liberties in Freedom House's Freedom in the World 2007 survey while at the same time ranking 12th in the Heritage Foundation's 2007 Index of Economic Freedom. Since independence, Estonia has also become a leader in information technology. Its nominal gross domestic product (GDP) for 2006 was $16.4 billion, and its gross national income (GNI) per capita was $11,410, or 59th in the world. By purchasing power parity (PPP) rankings, which take into account relative price differences to provide a better picture of living standards, the figures are more impressive: approximately $24.6 billion and $17,540 (58th in the world). Former prime minister Mart Laar and others have called Estonia "the little country that could."


Estonia's current success contrasts with its history of subjugation by German, Danish, Swedish, Russian, and other overlords. A period of independence after World War I ended with the Soviet occupation (1939–41 and 1944–91), when Estonia again became a vassal state and Estonians nearly became a minority in their own country. Estonia's history reflects Europe's tumultuous religious and national conflicts and the Estonian people's centuries-long struggle toward political and economic freedom.


Former prime minister Mart Laar and others have called Estonia "the little country that could."
The Crusade for Livonia

In the 12th century, the tribes of Livonia (Estonia and Latvia) were living in mostly rural communities and remained loyal to local customs and beliefs. As part of a larger effort to Christianize the last pagan areas of northeastern Europe, the Roman Catholic bishop in Livonia formed the Order of the Brothers of the Sword—an organization of mostly German knights who took monastic vows—in 1202, and it soon conquered most of the region from the southwest. Allied Danish forces occupied the northern coastal area. The knights suffered a serious defeat in 1236, however, and in 1237 they merged with another German crusading order, the Teutonic Knights.

Rule of the Teutonic Knights

The Teutonic Order controlled much of the area, but some portions were under the feudal rule of bishops or vassals of the king of Denmark. Some of the major towns, which had significant German populations, were members of the Hanseatic League, an alliance of trading cities along the Baltic and North Sea coasts of Europe. Estonian peasants revolted unsuccessfully in 1343–45, and the Danish king, already weakened by conflicts at home, sold his domains in northern Estonia to the Teutonic Order in 1346. Over the subsequent centuries, the German ruling class gradually reduced most of the peasants to serfdom, meaning they were bound to the land and could be captured and returned if they tried to escape.

Sweden's Overlordship

The Livonian branch of the Teutonic Order reclaimed its independence in 1525, when the larger order's grand master accepted Protestantism. However, the knights' waning power was finally broken after Russian czar Ivan IV invaded from the east in 1558, and the order disbanded in 1561. Northern Estonia accepted Swedish overlordship in return for protection from Russia, and after a series of conflicts that also involved Denmark and Poland-Lithuania, a 1629 treaty gave Sweden control of all of mainland Estonia. Swedish rule, lasting about 150 years altogether, had a strong influence on Estonia, including the consolidation of Lutheranism as the leading religion and the expansion of peasant education and literacy in the Estonian language (in keeping with the Protestant encouragement of reading scripture in one's mother tongue). Although some short-lived Swedish reforms had the effect of improving conditions for the peasants in their relations with the nobles, the German landowning aristocracy remained firmly in place.

Russian Annexation

As part of a larger regional war against Sweden that broke out in 1700, Russia conquered all of Livonia in 1710. The czar ruled with the cooperation of the German-dominated towns and the nobility, whose power and privileges reached their peak in the 18th century. The Estonian peasantry, which formed the main component of the population, lived in an even more onerous state of serfdom.

Influence of the Enlightenment

Europe's philosophical Enlightenment had a strong influence on the German elite and, in the 19th century, a rising Estonian intellectual and middle class that embraced ideas of national and individual liberty. A reform movement led to the abolition of serfdom in 1816–19. New land laws passed from the 1840s to the 1860s allowed peasants to move freely, buy property, govern their own affairs in local councils, and pay rent rather than obligatory labor to their landlords. Meanwhile, industrialization contributed to a larger and more powerful Estonian presence in the towns. By the end of the century, Estonian peasants possessed two-fifths of the private land in the country.

National Awakening

The first decades of the Estonian national movement, led by linguist Jakob Hurt, stressed the development of Estonian language and culture and idealized the period before the conquests by German knights. The nationalists of this period had few political ambitions, generally viewing the Russian authorities as a source of help against German cultural domination. However, the czar's aggressive policy of Russification in the 1880s, aimed principally at eliminating potential cultural sympathies with the newly unified Germany, had the effect of turning the Estonian national movement against the central government. Russification imposed the Russian language and Russian officials, sharply restricted both German and Estonian nationalist and cultural activities, and encouraged conversion from Lutheranism to Russian Orthodoxy.

Revolution and Independence

Estonians participated in the revolution that swept Russia in 1905, forming their first legal political parties, mounting strikes and demonstrations, and demanding various forms of autonomy. Violence broke out, with Estonians attacking the property of German nobles, but czarist authorities eventually suppressed the revolt and its nascent political institutions. The cataclysm of World War I finally shattered the Russian monarchy; Czar Nicholas II abdicated in March 1917. Russia's new provisional government united two long-standing provinces to create what is now Estonia, and it gained effective local governance and autonomy. After the Bolsheviks seized power in Russia in November 1917, Estonian voters and local leaders attempted to assert full independence, but with World War I still raging, the German army occupied the country in February 1918.

Estonian leaders again proclaimed independence when Germany surrendered to the Allies in November 1918, and an Estonian national army, aided by the Allies, repelled an attempt by the Soviet Red Army to reclaim the territory. The Soviet government later recognized Estonian independence in the Tartu peace treaty of 1920. Constituent assembly elections were held in 1919, and a constitution was adopted the following year. The new government quickly broke up the estates of the German nobility and abolished their aristocratic privileges, which had persisted for some 700 years. A series of fragile coalitions among the many parliamentary factions ruled until 1933, when a constitution with a stronger presidency was adopted, in part to deal with the turmoil of the Great Depression. However, the prime minister at the time, Konstantin Pats, seized dictatorial power before elections could be held in 1934, with the aim of blocking the rise of a new quasi-Fascist party. Pats eventually allowed elections under yet another constitution in 1938, but political rights and civil liberties remained restricted.

The Signing of the Molotov-Ribbentrop Pact in 1939
Soviet and German Occupations

The German-Soviet Nonaggression Pact of August 1939, also known as the Molotov-Ribbentrop Pact, included plans for dividing up Eastern Europe between the two countries. It assigned Estonia and the other Baltic states to a Soviet sphere of influence. Estonia was first forced into a "mutual assistance treaty," then came under full Soviet occupation in June 1940. A puppet government was installed, and Estonia was formally incorporated into the Soviet Union on August 6.

The Soviet takeover ushered in a period of brutality unmatched in any of Estonia's previous history. On June 14, 1941, the Soviets deported 10,205 men, women, and children to Siberia by cattle car, in conditions that killed most of them, largely to frighten the population into submission. A total of about 60,000 people were killed or deported in the first year of Soviet rule. Estonian guerrilla bands assisted the Nazi German invasion that followed, and many Estonians served the German war effort—as either volunteers or forced conscripts—during the occupation of June 1941 to 1944. Meanwhile, an estimated 7,000 Estonian citizens suspected of Soviet collaboration were rounded up and executed soon after the Germans arrived, and Estonia's relatively small Jewish population was targeted for extermination. The Soviet army's ultimate victory and reoccupation of Estonia prompted roughly 70,000 Estonians to flee the country. The restored Soviet rule would last until 1991.

The German and Soviet wartime occupations resulted in the loss of nearly a quarter of Estonia's population. The Soviets initiated additional deportations after the war and encouraged large numbers of Russians and other nationalities to immigrate, so that the proportion of ethnic Estonians in the country fell from 90 percent before the war to 60 percent in 1990. Estonians were replaced with Russian speakers in top political, military, and administrative positions, Estonia's cultural institutions were abolished, and the Estonian language was marginalized.

The German and Soviet wartime occupations resulted in the loss of nearly a quarter of Estonia's population.
Soviet Collapse

Throughout the Soviet occupation, Estonian nationalists and others expressing opposition to Communist rule were imprisoned or killed. But as in the 19th century, Estonians organized to preserve Estonian culture, language, and independence. By the 1980s, the Soviet Union was disintegrating. Soviet leader Mikhail Gorbachev's policies of glasnost (openness) and perestroika (restructuring), aimed at reforming communism, ultimately could not contain the democracy and independence movements that emerged in many Soviet republics and Russia itself.

National Renewal

A moderate opposition Popular Front was formed in 1988, demanding autonomy within a looser union, and more radical pro-democracy and independence movements followed. That year, the head of the Estonian Communist Party was replaced, and the legislature voted to assert the country's right to sovereignty. On the 50th anniversary of the signing of the Molotov-Ribbentrop Pact in 1989, at least a million people joined hands to form a human chain across the three Baltic countries (Estonia, Latvia, and Lithuania) that had been occupied as a result of the pact. Independence supporters organized citizens' committees to register prewar Estonian citizens and their descendants, excluding those who had immigrated during Soviet rule. The committees' voters then elected an Estonian Congress in 1990. However, elections were also held for the formal Soviet-era legislature, and it too declared its intention to reestablish the country's independence. The government made its final break during a hard-line coup attempt in Moscow in August 1991, and Estonia received international recognition of its independence—including from the dying Soviet Union—over the following weeks.

Economic Freedom

Like its Baltic neighbors, Estonia reestablished independence on the basis of continuity from the period of state sovereignty before World War II. The United States and its allies had never formally recognized the Baltic states' incorporation into the Soviet Union, and the countries had continued to exist under international law. Today, under a constitution adopted in 1992, Estonia is a parliamentary democracy with a unicameral parliament (the 101-member Riigikogu) in which several parties are represented. Political control has fluctuated between various coalitions of parties, including the successors of the more radical proindependence forces, which supported Estonia's wholesale transformation, and political parties that emerged from the Popular Front, reflecting a more cautious approach. The parties range from social democratic to conservative on the political spectrum.

A Model Democracy

Estonia has quickly enacted political changes and transformed itself into a model democracy, consistently receiving high scores in Freedom House's Freedom in the World survey. However, the parliament adopted citizenship and language laws requiring all postwar immigrants and their descendants to apply for citizenship and meet minimum naturalization requirements, including two years of residence and knowledge of Estonian, the only recognized official language. These rules have been criticized on the grounds that they disenfranchised many residents and discriminated against the Russian-speaking population. Still, many Estonians considered the requirements an essential means of restoring independence.

While often referred to as "radical", Estonia's free-market reformers might be considered "conservative" in U.S. political language.
A Model Economy

The governments of the 1990s succeeded in instituting lasting economic reforms, including wholesale privatization of state enterprises, reestablishment of private property and title rights, and a quick transformation of the legal and tax structures to conform to European Union (EU) standards. These achievements allowed Estonia to gain EU membership in 2004. Estonia has adopted a 23 percent flat tax for both corporate and individual income, a trailblazing policy that contributed to the country's ranking of 12 on the Heritage Foundation's 2007 Index of Economic Freedom, and even higher rankings in previous years.

While often referred to as "radical," Estonia's free-market reformers might be considered "conservative" in U.S. political language. But their approach is certainly transformational. Estonia today is among the freest and most economically dynamic, technologically advanced, and transparent countries in the world. The fact that its 2006 GDP was ranked 91st in the world while its GNI per capita was ranked 59th suggests an impressive level of productivity and wealth distribution for such a small country in transition from communism. Still, these advances have left a sizable minority behind, especially among rural residents, Russian speakers who have rejected or been excluded from Estonia's independence, and workers displaced by the shift away from Soviet-era industries.