Economic Freedom: Country Studies — Estonia

 Estonia Country Study

Rankings in Freedom in the World 2016: Status: Free; Freedom Rating: 1; Political Rights: 1; Civil Liberties: 1.




Estonia broke free from the Soviet Union in 1991 to re-establish its inter-war independent republic. Since then, it has become one of the freest and most economically dynamic countries in the world. Estonia's current success contrasts with its history of subjugation. Until the 20th century, it was controlled by German, Danish, Swedish, and Russian overlords and empires. A brief period of independence that began in 1918 was ended by Soviet occupation in 1940, followed by German occupation (1941–44), and then Soviet re-occupation, upon which the country was forcibly incorporated as a republic into the Soviet Union (1944–91). During this period, Estonians nearly became a minority in their own country due to mass repression and a state policy encouraging the migration of ethnic Russians to the republic. Estonia regained its independence in 1991 after a national democratic movement organized the re-registration of citizens, held free elections for an Estonian Congress, and conducted a national referendum. Most countries recognized Estonia’s independence before the Soviet Union’s final collapse that December.

Estonia is a small country of 1.3 million people on the Baltic coast in northeastern Europe. Today, Estonians constitute 69 percent of the population, ethnic Russians 25 percent, and other nationalities 6 percent. Since re-establishing independence, Estonia has held seven free, multiparty elections for its reconstituted unicameral Parliament, called Riigikogu, which elects the president as head of state. It has also held six free municipal elections within its 15 districts. Estonia has consistently earned the highest score for both political rights and civil liberties in Freedom House's Survey of Freedom in the World and currently ranks 9th out of 178 countries measured in the Heritage Foundation's 2016 Index of Economic Freedom. According to the International Monetary Fund (IMF), its nominal gross domestic product (GDP) for 2014 was $26.5 billion, placing it 103rd in the world. Its nominal gross national income (GNI) per capita ranked much higher, 40th in the world, at $17,425 a year. Despite some recent cases of high-level corruption, Estonia overall is consistently ranked among the less corrupt countries in the world according to Transparency International (it is listed 22nd out of 176 countries in the 2016 index).


The Crusade for Livonia and the Rule of the Teutonic Knights

Up until the 12th century, the tribes of Livonia, remaining loyal to local customs and beliefs, lived in rural communities in what is now Estonia and Latvia. In AD 1202, as part of a larger effort to Christianize the last pagan areas of northeastern Europe, the Order of the Brothers of the Sword — an organization of monastic German knights created under authority of the Catholic Church — conquered the southwest region. The Order merged with the larger Order of Teutonic Knights, which went on to conquer much of the rest of Livonia. The Teutonic Order gained final control of northern Estonia when the Danish king, an ally in the crusade, agreed to sell his domains. The conquest brought to power a German ruling class that reduced most of the Estonian population to serfdom. Major towns joined the Hanseatic League, an alliance of trading cities along the Baltic and North Sea coasts of Europe.

Sweden's Overlordship and Russian Annexation

When Russian czar Ivan IV (known as “Ivan the Terrible”) invaded Livonia in 1558, the Livonian branch of the Teutonic Order was disbanded. Northern Estonia, however, sought protection from Russia and accepted Swedish over-lordship. A series of conflicts resulted in Sweden gaining control of all of mainland Estonia in 1629. Sweden’s rule lasted about 150 years had a major impact on Estonia. Most of the population adopted Lutheranism, which remains the dominant religion among Estonians today. Swedish authorities also increased literacy by expanding education in the Estonian language among peasants to encourage the reading of scripture in the population’s mother tongue. Still, despite reforms intended to benefit Estonian peasants, the German landowning aristocracy remained firmly in place.  As part of a larger regional war against Sweden, Russia conquered Estonia, in 1710. The czar ruled by cooperating with the dominant German elite. The Estonian peasantry remained in an onerous state of serfdom.

The Enlightenment Influence and Estonia’s National Awakening

By the 19th century, an Estonian intellectual and middle class arose that embraced Enlightenment ideas of national independence and individual liberty. A reform movement achieved the abolition of serfdom in 1816–19 (well before Russia). New land reform laws were passed in the mid-19th century that allowed peasants to move freely, buy property, and pay rent instead of owe obligatory labor to landlords. By the end of the century, Estonian peasants possessed two-fifths of the private land in the country, while the rise of industry brought a larger Estonian population to towns and cities. In the 1870s, an Estonian national movement arose that stressed the use and development of the Estonian language and culture and idealized the period before the German conquests. Initially, the nationalists allied themselves with Russian authorities against German cultural domination. But the czar's aggressive policy of Russification in the 1880s turned the Estonian national movement against the central government.

Revolution and Independence

During the revolution that swept Russia in 1905, Estonians formed their first legal political parties and demanded autonomy. Czarist authorities eventually suppressed the revolt, but World War I finally shattered the Russian monarchy. When Czar Nicholas II abdicated in March 1917, Russia's provisional government united two long-standing provinces to create modern Estonia and gave it autonomy. After the Bolsheviks seized power in Russia in November 1917, Estonia tried to establish full independence but was occupied by the German army in February 1918. When Germany finally surrendered to the Allies in November 1918, Estonian leaders again proclaimed independence. A newly formed Estonian national army, aided by the Allies, repelled the Bolshevik Red Army’s attempt to claim the territory for Soviet rule. The Soviet government later recognized Estonian independence in the Tartu peace treaty of 1920.

The new government quickly broke up the estates of the German nobility and abolished aristocratic privileges that had lasted for more than 700 years. A series of fragile coalitions among a number of parliamentary factions ruled until 1933. Prime Minister, Konstantin Pats seized power before elections in 1934 and imposed an authoritarian state in order to block the rise of a new anti-socialist party, made up of veterans of the independence war. Pats eventually allowed elections under another constitution adopted in 1938. Estonia was denied defense protection by Western countries and pursued a policy of neutrality.
The Signing of the Molotov-Ribbentrop Pact in 1939


Soviet and German Occupations

The 1939 Treaty of Nonaggression Between Germany and the Soviet Union, also known as the Molotov-Ribbentrop Pact, included secret protocols for dividing up Eastern Europe between the two countries. The Baltic States were assigned to the USSR. Estonia came under Soviet occupation in June 1940 and was incorporated into the Soviet Union two months later. It ushered in a period of unprecedented brutality for Estonia. Overall, about 60,000 people were killed or deported in the first year of Soviet rule. In one night, June 14, 1941, the Soviets deported 10,205 men, women, and children to Siberia by cattle car. Most died before reaching the camps. After Germany invaded the Soviet Union, Nazi forces occupied Estonia. An estimated 7,000 Estonians suspected of Soviet collaboration were swiftly executed. Estonia's relatively small Jewish population was targeted for extermination. The Soviet Red Army finally repelled the Nazi invasion and re-occupied Estonia in 1944. It was again incorporated as a republic into the USSR.

The German and Soviet wartime occupations together resulted in the loss of nearly a quarter of Estonia's population, including 70,000 who fled the Soviet takeover. The Soviets carried out additional deportations after the war and encouraged large numbers of Russians and other nationalities to move to Estonia. Estonians, who were 90 percent of the population before the war, fell to 60 percent in 1990. Russian speakers served in all top political, military, and administrative positions. Estonia's cultural institutions were abolished and the Estonian language was marginalized.

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

Throughout the Soviet occupation, Estonians actively opposing Communist rule were killed or imprisoned. Still, as in the 19th century, Estonians organized to preserve their culture and language and dissidents continued to press for human rights and independence. In the late 1980s, Soviet leader Mikhail Gorbachev adopted the policies of glasnost (openness) and perestroika (restructuring) in an attempt to reform the failing Soviet economy. Democrats throughout the Soviet Union used these policies to launch movements for greater autonomy and independence. In Estonia, groups emerged to restore Estonian culture. A moderate opposition Popular Front was formed in 1988 that advocated autonomy within a looser Soviet structure. At the same time, the Estonian National Independence Party (ENIP) arose to press for greater change. As a result of public pressure, 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, independence movements in Estonia, Latvia, and Lithuania organized a human chain of one million people stretching across the three Baltic countries to symbolize the Baltic people’s determination to regain statehood from illegal occupation. The ENIP organized citizens' committees to register prewar Estonian citizens and their descendants, excluding those who had migrated to Estonia during Soviet rule. The committees' voters then elected an Estonian Congress in 1990. Elections were also held for the formal Soviet-era legislature. Pressured by the Estonian Congress, it declared its intention to reestablish the country's independence. The legislature formally declared independence during the failed hardline coup in Moscow in August 1991 aimed at restoring Soviet power.

Estonia received international recognition of its independence including from the dying Soviet Union over the following weeks. The United States recognized the restoration of Estonia’s independence on September 2, 1991. (In fact, the US never formally recognized the incorporation of the Baltic States into the Soviet Union and maintained continuous relations with these countries under international law through their governments-in-exile and representatives at legations in Washington, DC.) The Soviet Union was formally disbanded in December.

Economic Freedom

Estonia’s independence after World War I was the result of a national movement that, over a century, had won freedom for Estonian serfs, established property rights for both peasants and city-dwellers, and restored the Estonian language and culture following centuries of dominance by foreign powers. Economic freedom was eradicated by the Soviet Union when it occupied Estonia in 1940 and incorporated it into the USSR. As in all its republics, property was collectivized and all economic activity was determined through state planning and direction. Like its other Baltic neighbors, Estonia reestablished independence in 1991 after 47 years of Soviet rule based on its sovereignty from between the World Wars. In doing so, the country undertook to restore political rights, civil liberties, and economic freedom.

A Model Democracy prime minister Mart Laar and others have called Estonia "the little country that could."

From the outset of its restored independence, Estonia quickly enacted political changes. A constitution was adopted in 1992 based on an earlier model from its first period of independence. It established a parliamentary democracy with a unicameral parliament. The 101-member chamber, called the Riigikogu, is elected in proportional voting by district. The President, a less powerful post, is selected by vote of parliament (the post is currently held by Toomas Hendrik Ilves, a graduate of Columbia University in New York). The head of government is the Prime Minister, usually the leader of the party that has gained the most seats in parliament to form a majority coalition. Since regaining independence, Estonia has held seven national elections and seven local elections (in alternate four-year cycles). It has also participated in three elections for the European Parliament. Estonia, well known for embracing high technology in its economy, has mandatory voting by internet. (Voter turnout for 2015 parliamentary elections was 64.2percent.)

Since 1991, elections have been contested mainly among parties that evolved from the independence movement and the Popular Front — ranging from social democratic to national conservative. The center-right “Fatherland Bloc,” led by Mart Laar, won a plurality in the first elections with 22 percent of the vote, and was joined by the Estonian National Independence Party (9 percent) and the Centrist Moderates (6 percent) to form the first government. ENIP merged with a Christian Democratic and conservative coalition to form the Pro Patria Union in 1995 and in 2007 merged with the Res Publica party, also led by Mart Laar. The current leading party, the centrist Reform Party, was created out of a split in 1994 with the conservative coalition that formed Pro Patria Union. The Social Democratic Party, the Coalition Party, and the Center Party emerged from the Popular Front and have also participated in coalition governments.

From 2005 to 2014, the prime minister was Andrus Ansip, leader of the liberal Reform Party, heading three government coalitions. In the 2011 elections, the Reform Party received the highest number of seats, 29, and formed a government with the Union of Pro Patria and Res Publica, which was third in the voting, getting 23 seats, just behind the Center Party. Ansip resigned in 2014 to allow the party to choose a new leader ahead of the 2015 national elections (see below).

A controversial decision in the 1990s was the parliament’s adoption of citizenship and language laws. These laws required all postwar immigrants and their descendants to apply for citizenship and meet minimum naturalization requirements. The requirements include two years of residence and knowledge of Estonian — the country’s only recognized official language. These rules have been criticized for disenfranchising some ethnic Russian and other Russian speaking residents. However, most Estonians considered the requirements an essential means of restoring independence and strengthening a national community decimated by Soviet policies. Most immigrants and their descendants have qualified for citizenship. often referred to as "radical," Estonia's free-market reformers might be considered "conservative" in U.S. political language.

A Model Economy

The first coalition government formed following the 1992 elections instituted quick and lasting economic reforms under Prime Minister Mart Laar. Reforms included 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 and to enter the Euro zone in 2011 (the first Eastern European country to do so).

In 1994, Prime Minister Mart Laar pushed for adoption of a 26 percent flat tax for both corporate and individual income, which was later reduced to 21 percent (the current rate today). The policy is considered to have been the lynchpin for Estonia’s rapid economic growth. In 2004, Estonia further anchored its foreign policy to the West by joining NATO (North Atlantic Treaty Alliance).

Estonia's free-market reformers were often termed “radical” because they quickly transformed a Soviet economy into a capitalist one. But they would more likely be considered "conservative" in U.S. political language (with a heavy emphasis on low regulation, private property rights, and low taxation). Whatever the term used, Estonia has emerged after twenty-five years of independence as one of the freest and most economically dynamic and transparent countries in the world. It is well known today as an innovator of technology (an Estonian company created Skype) and has many start-up technology firms. The country’s growth rate in the 1990-2014 period averaged around 15 percent in both GDP and GDP per capita, despite a severe economic downturn in 2008-10 due to the international financial crisis (see below). Overall, its GDP and GDP per capita have grown more than four times since 1990. Estonia has outpaced all former Soviet bloc countries and established itself in the mid-level of European countries in per capita at $17,425 for 2014.

Current Issues

The 2008-09 world financial crisis hit Estonia harder than most countries. The crisis was compounded by plummeting real estate values fueled by over-speculation from Nordic investors. Growth fell more than 19 percent in this period; unemployment rose to near 20 percent in 2010. The right coalition government of the Reform Party and the Party of Pro Patria and Res Publica adopted strict austerity policies to protect its currency from devaluation, in part to maintain its schedule for joining the Euro zone in 2011. While some credit the austerity policy for leading Estonia back to growth in 2010–11, its GDP only recently surpassed its 2008 level and growth rates were less than 2 percent for the last three years.

Due to prolonged austerity policies and party finance scandals, the coalition government faced declining favorability ratings heading into the 2015 national elections. Andrus Ansip, the leader of the center-right Reform Party, resigned as Prime Minister in February 2014 after nine years in the post to allow the party to select a new leader ahead of the next elections. The party chose Cultural Affairs Minister Taavi Röivas, who, at 34 years old, became the youngest prime minister in the EU. Röivas jettisoned its long-time coalition partner, the Union of Pro Patria and Res Publica, to form a new government with the Social Democratic Party. In the elections, the Reform Party and Social Democratic Parties declined slightly from 2011, but the Pro Patria Union and Res Publica saw a sharp decline from 20 to 13 percent, and lost nine seats in parliament. The main winner was the Center Party, a postcommunist party that relies on much of its support from the Russian speaking population. After prolonged negotiations, the Reform, Social Democratic, and Union of Pro Patria and Res Publica parties formed a governing coalition.

The most urgent current issue is national security. Estonia has voiced alarm at the Russian Federation’s invasion and forcible annexation of Crimea, a territory of Ukraine, and its ongoing military support of separatist rebels in other eastern territories of Ukraine. Russian President Vladimir Putin’s stated reasons for ordering the annexation was to reverse Russia’s “humiliation” since the collapse of the Soviet Union, restore its claim of Russian territory, and to “protect” Russian speakers out of “ethnic solidarity.” Putin has similar justifications for Russia’s support of armed separatists in Ukraine. In the view of Estonian President Tomas Ilves and other leaders, these arguments mirror Hitler’s justification for Nazi Germany’s annexation of Sudetenland in 1938. In an article in the Wall Street Journal, Ilves warned that the annexation threatens world security by blatantly violating the most basic post-World War II principle of the UN Charter to safeguard national sovereignty from aggression. The annexation, he noted, also violates the Russian Federation’s formal recognition of Ukraine’s borders (including Crimea) in the Budapest Agreement of 1994, in which Ukraine agreed to give up its nuclear weapons. Most of the international community does not recognize the annexation. The U.S. and the EU imposed sanctions on the Russian Federation, demanding that it return Crimea to Ukrainian sovereignty and cease support of separatists in Ukraine.

Estonia and other Baltic countries, each with sizeable ethnic Russian minorities, fear Russian aggression in their countries. There have been several incidents involving intrusion of borders and arrests of Baltic citizens by Russia. In response to requests from the Baltic States and Poland, NATO is stationing rotating deployments in these countries and has increased deliveries of defensive military equipment in order to deter aggression and intimidation by the Russian Federation.

In an article evaluating the 25 years since independence, Tunne Kelam, one of the founders of the Estonian National Independence Party and currently a member of the European Parliament, credits the success of Estonia with the “bottom-up citizens’ movement of 1987–91,” which created conditions for quickly re-establishing democratic institutions and restoring Estonia’s statehood. At the same time, he points out that “the heavy legacy of Soviet times” continues to play “an important role in Estonia today.” One “heavy price” for Estonia’s peaceful transition was allowing the Soviet nomenklatura in Estonia to benefit from the economic transition. This resulted in a concentration of economic power within a post-communist elite and its dominance in such fields as media, an important concern as Estonia continues to deal with Russian propaganda efforts aimed at the Russian-speaking minority.