Estonian Economics

National Review, September 27, 2012 (October 15, 2012 issue) 

Raekoja Plats, Tallinn, August 2012 © Andrew Stuttaford

Tallinn, Estonia – Sitting shirt-sleeved and without, sadly, his trademark bow tie, in his official residence here in the Estonian capital, this Baltic nation’s Swedish-born, New Jersey–raised president, Toomas Hendrik Ilves, looks pained. He’s chewing antacid pills (I’d guess), but it’s the name that I just mentioned that is the problem, not indigestion: “Krugman.”

He sighs.

“I know this has been done to death,” I admit.

Ilves does not disagree.

Estonia has a tragic history of being a battleground for other people’s wars. Thankfully, the latest conflict into which the country has found itself unwillingly drawn — the debate over how the West can emerge from its post-Lehman malaise — has involved nothing more than a “snide” (to borrow Ilves’s adjective) bit of blogging by Paul Krugman for theNew York Times. And even that, the president concedes, ultimately turned out to be “good publicity” for a tale of economic recovery.

In 2008, Estonia’s boom, fueled to overheating by (primarily Scandinavian) banks attracted by the country’s post-Soviet revival, turned, like so many others, into bust. GDP fell by 3.7 percent in 2008 and by 14.3 percent in 2009, taking tax revenues with it: The budget went into a deficit of 2.7 percent in 2008, shocking in a country that aims to run a structural surplus. Unemployment soared to 16.9 percent in 2010, from 4.7 percent in 2007. Housing prices crashed 40 to 50 percent from their peak.

In response, the country’s governing coalition of conservatives and classical liberals cut spending and raised taxes (Estonia’s flat-rate income tax was, however, left untouched at 21 percent) in a squeeze equivalent to over 9 percent of GDP. But it was what happened next that must have really bothered Krugman: After pain came gain. GDP jumped 7.6 percent in 2011, and should grow by 2 to 3 percent this year and next. Unemployment has dropped to 10.2 percent and seems set to fall farther.

That did not fit comfortably with the sometimes-cartoonish Keynesianism that the professor has been pushing since the era of hope, change, and stimulus. So he took to his blog, cropped a graph, and took aim at “the poster child for austerity defenders” — not a role that the Estonians had sought for themselves. There had, wrote Krugman, been a “depression-level slump” (true enough) “followed by a significant but still incomplete recovery. . . . This is what passes for economic triumph?”

Well, no, but that is not what the Estonians, a modest bunch, are claiming. No one I talked to described times as easy, but progress is progress. What’s more, if you push the graph back a touch earlier than 2007, which Krugman used as his starting date, the broader picture is revealed to be rather prettier than the Nobel laureate let on. Yes, it was true that GDP had yet to return to 2007 levels, but it still stood slightly higher than in 2006, no plague year. President of one of Europe’s tech-savviest countries, an irritated Ilves turned to Twitter to rough up the “smug, overbearing & patronizing” Krugman.

Let’s take a step back: Estonia is not Greece. Government is transparent and thrifty. Taxes are paid. Private borrowing ballooned during the bubble years, but that of the public sector did not. At the end of 2008, the state’s debt stood at a sober 4.5 percent of GDP, a figure that might have tempted some governments to try to splurge their way out of recession. In rejecting that route, Estonia did the right thing. It depends on its external trade: Exports amounted to 79 percent of GDP in 2010 (compared, for example, with Greece’s 22 percent). With the European economy in savage, sudden free fall, efforts to pump up domestic demand would have achieved little.

Instead the government concentrated on maintaining the fiscal discipline that is one of the country’s most valuable assets and waited for better times, helped in the meantime by the fact that its banking system (dominated by the subsidiaries of large, well-capitalized Swedish banks) kept liquidity flowing. The wait was not too prolonged. Benefiting from policies often very different from those pursued by the tightwads of Tallinn, many of Estonia’s trading partners pulled out of their post-Lehman dive rather more rapidly than might otherwise have been expected, dragging the Estonian economy up in their wake as exports picked up again. The budget is (broadly) back in balance, and the ratio of central-government debt to GDP stood at 6 percent at the end of 2011, a time, ahem, when the U.S. number was over 100 percent. Estonia’s finances remained intact.

And so, largely, did the population. Demography is a sensitive topic in the three Baltic states, small nations with (in the case of Latvia and Estonia) ethnic balances severely distorted by the influx of Russians who arrived in the Soviet years. The slump has triggered a large wave of emigration. Estonia has been spared the worst of this, not least because of the presence of Finland (Finnish and Estonian are closely related languages) just across the Baltic Sea. Why emigrate if you can commute? There’s probably something else at play, too. All three countries have come a long way since their escape from Moscow in 1991, but Estonia has gone the farthest: Perhaps its citizens were more willing to believe that hanging on would be worth their while.

Estonia’s is an impressive story, but it is a distinctive one, with specifics — including a history of budgetary prudence, the presence of those Swedish banks, a heavy export orientation, assistance from the EU’s structural funds, and a windfall from the sale of emissions quotas — that mean that advocates of an Estonian solution to the euro-zone crisis should proceed with care. Crushing the economic activity on which tax revenues depend is increasing the burden of government debt in many of the PIIGS. In that sense, Krugman was right. Estonia is not a poster child for “austerity defenders.”

But it is a poster child for Estonia: Its frugal, free-market, low-tax, and transparent democracy is indeed something to emulate. An Estonian-style tightening could never have ended Greece’s slump, but if the Hellenic Republic had earlier taken a path that was more Baltic than Balkan, it would not be in the mess that it now is. Coulda, shoulda, drachma.

The sting in this tale is that the euro’s distress may mean that Estonia will not be allowed to follow its own example much longer. This will not be the first time that the trickster currency has caused trouble in Tallinn. It was the prospect of Estonia’s adoption of the euro that triggered that last, fatal surge in Scandinavian lending. On the other hand, it has also represented an additional incentive (and some political cover) for the maintenance of that budgetary discipline without which — ironically, in the light of the shambles elsewhere — the country would not have been eligible for membership in the currency union.

Switching to the euro was seen by most of the Estonian elite as final confirmation that the country had left its Soviet past behind. Even though the Estonian kroon had been pegged to the Deutsche mark, and then to the euro, since its rebirth, many ordinary Estonians were not so convinced that it should be swapped for the single currency, but the terms of the country’s accession into the EU in 2004 rendered their discontent moot. Calls for a referendum were ignored, and Estonia moved over to Brussels’s funny money on January 1, 2011.

If the alternative approach, retention and then devaluation of its own currency (frequently a useful tool in an economic crunch), was considered, it was not considered for long. Exports are vital to Estonia, but it adds comparatively little value to them. Devaluation would therefore have had little impact on their cost to international customers. What it would have done, however, is risk importing yet more inflation into Estonia’s small, open economy. Above all, devaluation would have, as Ilves explains, “wiped out” the middle class. Typically, the mortgages — often on properties that had since collapsed in value — that Estonians had taken out from those generous Scandinavians were denominated in euros. To repay them in depreciated krooni would have been a Sisyphean nightmare. Another alternative, redenominating those loans in local currency, was never a serious option: The liquidity that the Swedes provided throughout the crisis would have dried up overnight.

That was then. The problem now is that Estonia arrived in the euro zone at a very bad time. The safe haven has turned out to be anything but. And it could prove an expensive place to stay. Estonia dutifully helped underwrite the European Financial Stability Facility, the currency union’s temporary bailout fund, and just a few weeks ago ratified its commitment to the fund’s permanent successor, the European Stability Mechanism. If things go badly, that could leave this small country on an unnervingly large hook.

This has not played very well with the electorate. To date, the country’s voters, many of whom remember the infinitely harder Soviet period, have supported the hair shirt. The government was reelected with an increased majority last year. But bailing out feckless, richer folk in Europe’s south (for example, Estonian average earnings are only about one-third higher than the Greek minimum wage) has been a tougher sell. Most Estonians opposed participation in the EFSF and ESM. By contrast, the political class remains willing to trudge through euro-Calvary, although there are some signs that this resolve may begin to crumble if the bailouts grow bigger (and thus potentially more costly to Estonia) and more widespread. And it would be the insult, not just the cost. Should still-poor Estonia really be asked to stump up for Spain? Or Italy?

Ilves points out that, “to put it crassly,” Estonia has profited nicely from its membership in the EU (not least from the financial support that Brussels channels to the union’s less prosperous members), and it has — so far. But there’s an obvious danger that Santa could turn Fagin.

And the euro’s woes menace more than Estonia’s coffers. It now seems clear that attempts to fix the single currency will revolve around trying to integrate the euro zone into a deeper political and budgetary union. Such a union, were it to be formed, would be launched with promises of financial discipline, transparency, and democratic accountability, none of which, given such a construction’s artificial, ill-fitting, and unnatural character (not to speak of the EU’s own lamentable track record in these respects), are even remotely credible. And what then would happen to Estonia, trapped within a Frankenstein union that could be held together only by methods — budgetary and otherwise — that would be the antithesis of everything that independent Estonia has come to stand for?

Neither Ilves nor any other of the political figures to whom I have spoken in Tallinn appear to believe that this is what lies ahead, but, even amid the confidence that is the product of past success and satisfaction at Estonia’s hard-won arrival in “Europe,” it is impossible to miss some hints of uncertainty over what comes next.

That uncertainty needs to be replaced by alarm.

Stranger In a Strange Land

Alexander Theroux: Estonia - A Ramble Though The Periphery

The Wall Street Journal, December 15, 2011

Tallinn, Estonia, January 1995 © Andrew Stuttaford 

Looking for someone to turn lemons into lemonade? In his own distinctive way, Alexander Theroux might be your man. In 2008, Mr. Theroux, an American author (among his works are "Laura Warholic," a novel, and "The Strange Case of Edward Gorey"), moved to Estonia, the northernmost Baltic state, to join his artist-wife, who was then in the former Soviet republic on a "dismally small" Fulbright grant.

It didn't work out. It was never going to. But it appears that Mr. Theroux did not so much succumb to despair as embrace it. In "Estonia: A Ramble Through the Periphery," he mines his disappointment and catalogs his discontents to impressively crotchety effect. He detested the "unforgiving darkness" of Estonia's long winter; and in a country where conversation can be more elusive, and the company cooler, than the wan November sun, he was infuriated by what he regarded as the locals' "pinched unforthcomingness" and "Völkisch suspicion." He was no more impressed by the natives' often "concave, vaguely worn-out appearance." He does admit to the extraordinary allure of Estonian women (a concession on a par with saying that the Grand Canyon is quite something) but then mars the moment by wondering why such "perfect beauty" should be found in such an unpromising place.

But the flak is not confined to Estonia. Other targets include Israel, Ayn Rand, America's treatment of the Arabs (positively Nazi-like, apparently) and the "dunce" George W. Bush, a "smirking, bowlegged . . . frat-boy" who reduces the usually inventive Mr. Theroux to cliché. Diluting this leftist blah are gibes hurled at secularism, Woody Allen, Oprah Winfrey and a number of the other Fulbright grant-winners (including a "pedantic sod" and "a textbook miser").

Narva, Estonia, February 1996 © Andrew Stuttaford

The book's subtitle promises a "ramble"—a gentle, bucolic word that gives no hint of the bedlam to come. Mr. Theroux does offer a lightning tour of Estonia's chaotic history and a discursive but weirdly gripping introduction to both the Estonian language and the country's "cuisine." (The scare quotes are Mr. Theroux's: In truth, Estonian food can have a certain Breughelian élan.) For the most part, however, readers are left to wend their way through an often beguiling maze of digression, reminiscence, yakety-yak erudition and occasional unreliability.

Tallinn, Estonia, January 1995 © Andrew Stuttaford

It doesn't matter too much that the "techno lezpop duo called t.A.T.u." was Russian, not Estonian, or that the tap water in Estonia is in fact fine, but Mr. Theroux's decision to play down the remarkable progress that this robustly laissez-faire nation has made since breaking from the Kremlin two decades ago is perverse, even if it fits in nicely with his depiction of the country as a Baltic Dogpatch. More strangely still, Mr. Theroux says little about the fraught relations between ethnic Estonians and the large Russian minority that Soviet rule left behind.

The gap left by those under-discussed Russians is filled by a large cast of characters united mainly by their lack of any obvious connection with Estonia and, frequently, distinctly faded fame. Thus, after noting the Estonian language's "primitive cast," Mr. Theroux turns his attention to Lord Monboddo, an 18th-century sage who believed that apes were essentially humans without the power of speech, enjoyably esoteric information that tells us little about Estonia but a lot about Mr. Theroux's magpie mind.

As Mr. Theroux eventually unnecessarily and endearingly explains, his book is as much about him as it is about Estonia. To be fair, amid all the grumbling he finds plenty to admire, not least the lovely medieval jumble of Old Town in Estonia's capital, Tallinn; the music of Arvo Pärt; the Grimm flair of Estonian names (Tarmo, Gerli, Epp); and, with characteristic contrariness, Vana Tallinn, a revolting liqueur of unidentifiable sickliness and bogus antiquity.

But like the country's many invaders—Russians and Germans, and, before them, Swedes and Danes—Mr. Theroux largely uses Estonia as a space for his own purposes, transforming this admirable country into a grotesque but clever caricature perfect for use as a foil. A rain-sodden backwater of "rough-hewn awfulness"—complete with "a queer language . . . rummy food [and] eccentric people"—becomes a stage for Mr. Theroux's verbal pyrotechnics and some fine jokes: "Regarding food, Estonians are accomplished generalists, like crows."

Tallinn-Narva Road, February, 1996 © Andrew Stuttaford

I laughed a lot, but guiltily. (I have been visiting Estonia for nearly two decades.) Then I re-read the book as the draft of a play about a grumpy, logorrheic stranger stranded in a strange, laconic land, an exercise that turned the joke back on Mr. Theroux. His frustration and mounting fury—by the end he even hated the cows—became the stuff of more respectably comedic delight.

But it is a comedy performed on a stage built on bones. Mr. Theroux is evidently appalled by the tyranny imposed on Estonia by Stalin in the wake of the 1940 annexation and, again, in nightmare reprise, upon its "liberation" from brutal Nazi occupation in 1944, even if he skimps on illustrations of the savagery involved. He understands how nearly 50 years of communist despotism still deform behavior in this "wounded country," in ways that cannot solely be put down to direct memory of atrocity. Some of the rudeness that Mr. Theroux encountered was simply the post-Soviet standard, seen from Vladivostok to Vilnius; and, as he grasps, some of the distance he felt in his interactions with Estonians was merely the product of the way that living under a dictatorship had curdled the reserve natural to the peoples of the eastern Baltic.

But his empathy only goes so far: Mr. Theroux wants the Estonians to overcome their "insistent and terrible past" by a collective act of "forgetting." A dubious suggestion made all the more so if it would mean bidding a final farewell to Estonia's prosperous interwar republic, the first period of self-government in seven centuries—the one time when Estonians were just themselves. The memory of that cruelly shattered idyll still haunts this indomitable people, but it inspires them too: Look at who we were. Look at what we did. Look at what we are doing again. Look at who we are. Mr. Theroux looked. But what he saw were extras in his own drama.

Baltic Reflections

National Review Online, July 14, 2001

© Andrew Stuttaford

It is playtime now in Tallinn. The brief, bright northern summer has transformed the Estonian capital into a city of outdoor cafes, tourist buses, and long, lazy strolls. At night, if you can call it that, music bursts out of the bars and clubs, bouncing off old town walls, and echoing down winding streets still lit by a sun that seems never quite ready to set. Add to the picture some of Europe's most attractive architecture, a vista of church spires, merchant houses, and impressive medieval fortifications and you have, for once, a city that really does deserve the label "fairytale." But, as with all the best such tales, reality is not quite what it seems. A good portion of the old town is, in fact, a reconstruction, the product of years of careful rebuilding, a restoration made necessary by Russian bombardment towards the end of the Second World War. The country's prosperity is also less than Tallinn's glow may initially suggest. Estonia's current economic recovery, the most impressive of any former Soviet Republic, is the product of hard work and free-market economics, but it remains, inevitably, uneven. Outside Tallinn, much of the country remains trapped in post-Leninist torpor, while even in the capital itself existence is tough for many, particularly if they are old, dependent on a hopelessly inadequate pension, and wondering where it was that their lives had gone.

A new exhibition located, with characteristically blunt Estonian reproach, a hundred yards or so from the Russian embassy, gives part of the answer. It commemorates the 60th anniversary of the mass arrests and deportations of June 1941, an episode of totalitarian savagery that still haunts this small Baltic nation. The black mourning banners announcing the exhibit flutter in the breeze. They are dark reminders of a cruel past, a haunting contrast to the bright skies, pale stucco and cheery advertising of contemporary Tallinn, basking in the summer sun.

To enter the exhibit hall is to return to that past. Walk into the lobby and find yourself in a gray dawn, feet crunching on a gravel path. It was the last sound that many deportees were to hear in what they mistakenly thought was still their familiar, normal existence. It was the sound of visitors, but who was it, they must have wondered, so early in the morning? Secret policemen, their victims were soon to discover, prefer not to do their work in the full light of day.

The exhibit's second room, an old dining hall by the look of it, gives the background to the tragedy. On its stone floor, strangely, there are patches of illustration, faded signs of the zodiac, a relic, perhaps, of some earlier avant-garde daubing. They must have proved impossible to erase. In a way, that is appropriate. All around the room are relics of another modernist experiment, Soviet Communism, the future, the world was once told, that "worked," the future that, in June 1940, rolled into Tallinn on the back of Red Army tanks, and left an indelible stain on the history of Estonia.

It was to be the end of the country's pre-war independence, a brutal return to the foreign rule that had characterized this land for over seven hundred years, a return made worse by the fact that of all Estonia's alien rulers, the Soviets were the worst, barbarians with a Plan that had no room for small, inconvenient nationalities. Estonia's First Republic passed into memory and into myth; it was, as older people sometimes still refer to it, "the Estonian time," a lost Eden, a moment in the light no more durable, in the context of centuries of oppression, than the short Baltic summer. And yet its memory endured, preserved by the Estonians as a reminder to themselves, if not to an indifferent world, that they were still a nation. In Tallinn's museums you can still find lovingly preserved consumer products from the 1920s, chocolate bars and tins of coffee, resplendent under glass, poignant souvenirs of an outraged sovereignty.

You can see that same clutching for the past at the deportation exhibit. There is evidence, that all-important proof, of Estonia's inter-war existence prominently on display. Drawn from home movies and news reels,  jerking images of farmers, factories, picnics, politicians, parades with too many flags and all the other clumsy baby steps of a new nation flicker and shine as they are projected against the walls of the old banqueting hall.

Across the room, there are reproductions of the doomed republic's newspapers from 1940-41. They reflect the end of independence. In June and July, 1940 the front pages could still boast a few advertisements, for Alex Rahn's radio store, for example, or "Isis Kreem" ointment, but these suggestions of capitalist prosperity already have to coexist with pictures of arriving Soviet satraps, 'elections' where the communists win over 90 percent of the vote, and the first calls for Estonia to join the USSR. By August the same year, the advertising has gone, and so has the republic's independence. Free Estonia is mutated into the 'Estonian Soviet Socialist Republic', the latest recruit into Stalin's gargoyle Union. The headlines now jabber of progress, proletarians and production. The only significant information is what they leave out.

On June 14, 1941, the front page of the principal Estonian newspaper featured a photograph of rowers on a canal in Moscow. There was no mention, of course, of the real news that day, the simultaneous arrest and deportation of people across all three Baltic countries. Ten thousand were deported from tiny Estonia alone, of whom one third (counter-revolutionaries, I'm sure) were under the age of seventeen.

The Tallinn exhibit tells some of their stories. There was Niina (guilty!), arrested at 14, and Juula (guilty! Her brother was a philatelist, and thus, it was explained, a British spy). As for Ebba Saral, well, she was a criminal too dangerous to be confined to a mere cattle truck with the others. They put her on a sofa on a flatcar and, surrounded by guards, she rode into hell "like a queen." She and her husband (a professor — guilty!) both perished. There is a photograph of his grave, and copy of her death certificate, grudgingly issued nearly half a century after her execution. Fittingly, it is in Russian. This is, sadly, not a rare story. In the first year of the Soviet occupation a total of sixty thousand Estonians (four percent of the population, the equivalent of around eleven million Americans today) were deported, conscripted or murdered.

Two doors then lead from the exhibit's main hall. It is not much of a choice. One door leads to "prison," the other to "Siberia." "Prison" is an assembly of iron doors and a nightmare reconstruction of a squalid Soviet jail cell. "Siberia" displays homemade tools and rough-hewn luxuries, the former essential for existence, the latter for sanity. There are group photographs of the deportees, stoic in the tundra, dumped into a wilderness and left to adapt or to die. Some of them even managed to survive and so, miraculously, did the dream of freedom. An independent democratic Estonia finally reemerged from the wreckage of the Soviet Union in August 1991.

Understandably, this new Estonia has applied to join NATO. Russia's arrogant, disturbing opposition remains one of the best reasons to agree to the request. George W. Bush appears to sympathize. Speaking recently in Warsaw, he said that, "All of Europe's new democracies, from the Baltic to the Black Sea" should have the chance of NATO membership. It was, for the peoples of the former Soviet bloc, a marvelous moment. In Western Europe, needless to say, the political classes were not quite so sure. To many of those folks, the real threat lies elsewhere. Sweden's prime minister, a Social Democrat by the name of Goran Persson, marked Mr. Bush's arrival in Europe by calling on the European Union to build itself up as an alternative to American "domination."

Of course, Swedish Social Democrats know a thing or two about "domination." Not long after those Red Army tanks rolled into Tallinn, a few weeks, perhaps, after the day that Ebba Saral was taken to her death in the East, the Swedes (the government was led by a Social Democrat then, as now) decided to do something about Moscow's Baltic land grab. And what they did was give it diplomatic recognition, one of the first two countries in the world to do so.

The other was Nazi Germany.

Out of the great unknown

The Baltic Independent, November 24, 1993

STRANGE AS it may seem, Algirdas Brazauskas is not a household name. As citizens of a continent-sized superpower, Americans have never felt the need for information about other, much smaller, countries such as those on the Baltic, thousands of miles away. The US media generally reflects this lack of interest and, it its own way, does its best to add to the confusion. Take, for example, the most basic question of all. Where are the Baltic States? For fifty years they were nowhere, erased from the map and lost in the vast mass of the Soviet Union. Now Latvia, Lithuania and Estonia (or rather Lat., Lith., and Est.) have finally returned to the maps used by American newspapers and TV, but as nomads. Ignoring all international treaties, Latvia becomes Estonia and Estonia becomes Latvia. Meanwhile Lithuania lurches towards Belarus, ignoring the threat posed by a ballooning Kaliningrad oblast.

Outside the émigré community and a few specialists, Americans know little of the Baltic States, Arvo Pärt  may have his listeners and Jaan Kross some readers, but Baltic culture remains something of a mystery. Larger bookshops might stock phrasebooks for the languages of Southeast Asian hill people, but not for the languages of those remote tribes inhabiting Tallinn, Vilnius and Riga. Avowedly, Baltic products other than dusty piles of amber in “Russian”, shops, are equally difficult to find.

Amusing as it may be, American ignorance of the Baltics is not without its dangers for a region very dependent on Western support. For example, “the Baltics” are repeatedly muddled up with “the Balkans” (Slovakia and Slovenia are faced with a similar problem) and at times it seems that this confusion has also coloured, if only subconciously, the American media’s response to the question of the Baltic’s Russian population. There is little real awareness of the region’s history and it is not unusual to see discussion of “Eastern European nationalism” that draws little distinction between, say, Serbia and Estonia. This, of course, can then be exploited by a Russia all too ready to describe Baltic citizenship laws as a form of ethnic cleansing.

Such talk is well received by America’s liberal intelligentsia with their guilty nostalgia for the Pax Sovietica. Meanwhile their old adversaries, the cold warriors, who in the past could always be relied upon to take up the cudgels for a “captive nation” are hopelessly divided as to how to respond to a Russia that is no longer an evil empire.

All is not lost, however. Memories of Baltic resistance to Soviet rule from 1989-91 have not entirely faded and there are still many here who wish the republics well, even if they do not know exactly where they are. Ever larger numbers of American tourists are returning from a Baltic increasingly touted as an attractive if still somewhat off-beat, destination. In addition, not all the stories coming from the region have been negative. Economic reform, particularly in Estonia, has attracted favourable attention and even The New York Times recently felt free to talk of the “Baltics’ new glow.”

Further positive reports can be expected if the Baltic States can show that they are heading in the direction of the free market and liberal democracy. As these come about, Americans will increasingly come to think of Latvia, Lithuania and Estonia as Western and (perhaps an obscure) part of their world, rather than Eastern. This would not exactly constitute a security guarantee, but it would be a good second best. Besides, the Clinton administration is not in the business of offering guarantees to anyone, but that is a different story.

Back to Normal

National Review, November 1, 1993 

Tallinn, August 93  © Andrew Stuttaford

AFTER JFK or Moscow's Sheremetyevo, the airport in Tallinn is something of a shock. Passport inspection takes no more than a minute (visas are not required for an increasing number of Westerners), and customs is a quick walk-through. Taxis are plentiful, and the drive downtown is easy. In short, for the Western traveler all is normal—and that is just fine with the Estonians. Mart Laar, the cheery 33-year-old historian who is now this Baltic state's prime minister, explains, "We are trying to build a normal, open European society." Pointing to the physical and psychological devastation left by fifty years of Soviet occupation, Laar warns that this will not be easy. "We didn't promise the very good life, the very big and quick success. . . . The only thing I promised was an enormous lot of work." Undaunted, Estonia is pressing on with radical free-market reforms. These are currently the work of the Center-Right coalition led by the Isamaa (Fatherland) Party, but most parties seem to support the free market. Socialism is widely seen as a failure, and disagreement mainly concerns the details and pace of reform.

Raekoja Plats, August 1993  © Andrew Stuttaford

The early fruits of these reforms can already be seen in Tallinn, Estonia's capital. Restaurants and bars abound, and, to those familiar with Moscow's chaotic sidewalk retailers, Tallinn's shops are impressive. Other private businesses are appearing, with success usually evidenced by sleek mobile phones and even sleeker receptionists. The streetcars wear Coca-Cola's colors and "erootika" has long since replaced Pravda on the newsstands. From grey concrete suburbs to grey plastic shoes the Soviet inheritance is still visible; but, overall, the visitor is left in little doubt that this is a city rapidly rejoining the European mainstream.

Pikk, August 1993  © Andrew Stuttaford

The consensus behind the economic reforms also reflects the current composition of the electorate. This is dominated by ethnic Estonians, despite the fact that today they account for only some 60 per cent of the population of 1.5 million. The preponderance of ethnic Estonian voters stems from the fact that the franchise at the time of the September 1992 elections was in effect restricted to citizens (and the descendants of citizens) of the independent, and largely homogeneous, Estonia annexed by the USSR in 1940. This has led to an electorate inspired and brought together by a common culture and history. In particular this electorate remembers the independent Estonia that emerged from the ruins of the Russian Empire in 1918 after centuries in which the Estonians had been dominated by (as one Tallinn museum glumly concedes) "German, Danish, Swedish, and Russian conquerors."

The development of the Estonian republic was far from smooth, but, by the time of its reconquest by Moscow in 1940, Estonia's per-capita income was roughly on a par with that of Finland. This is essential to understanding the drive behind today's reforms. Things may be difficult today, but Estonians can at least look back and see that it is possible to build an independent and prosperous Estonia.

In the two years since regaining independence in August 1991, Estonia has made extraordinary progress toward its goal of establishing a "normal" economy—despite suffering a (relatively modest) share of the post-Soviet disorder.

Tallinn, August 1993  © Andrew Stuttaford

Most importantly, perhaps, in June 1992 Estonia replaced the ruble with its own currency—the kroon. The kroon was linked to the Deutschmark at a fixed rate of 8 to 1. Devaluation is prohibited by law. The kroon is fully backed by Estonia's hard currency and gold reserves. The Estonian Central Bank, Eesti Pank, may issue new kroons only in line with increases in these reserves. Eesti Pank is not allowed to lend to the government, nor may the government run a deficit. In 1992, a year of deep economic crisis, the government's budget surplus was equivalent to 1.7 per cent of GDP, an achievement beyond the ability of most Western governments. By June 1993 foreign-exchange reserves had tripled, and even an initially skeptical IMF was impressed.

Tallinn, August 1993 @ Andrew Stuttaford

A "normal" money is the first step to a "normal" economy, and the kroon is, in the words of Eesti Pank's governor, "good for anything, from the latest model of Western car to a call girl." The contrast with the recent past is striking. In the dying days of the ruble, inflation was running at an annual rate of over 1,000 per cent. There was rationing, and many products were unavailable for those without hard currency. Inflation is now 40 per cent, a very good level by Eastern European standards, and falling. Goods have reappeared in the shops and are available to all, foreign or local, although to the average Estonian they remain expensive. To be sure, change has been far from painless. GDP has fallen by over 40 per cent since 1989, real disposable household income fell by more than 50 per cent in 1992 alone, and unemployment is many times higher than the official figure of 3 per cent. Estonians themselves, however, do not appear unduly downcast by this turn of events. Rather, they appear to relish their liberation from the lunatic Soviet economy. Anecdotal evidence suggests that the economy has bottomed out and that, particularly in Tallinn, the private sector is showing real growth, much of which is not reflected in the official statistics. This is almost certainly true of the service sector, while so far as manufacturing is concerned, it is interesting to note that energy consumption has fallen by far less than would be suggested by official figures of falling production. Equally, one small indicator of the real development of the Estonian economy may be found in the fact that, throughout Eastern Europe, only Hungary has, per capita, more cellular-telephone subscribers.

Times remain hard, notably for the heavily indebted state businesses, and maintaining a sound monetary policy has not been easy. Nevertheless, Eesti Pank's tough line has already survived a commercial-banking crisis. Despite pressure, the government appears to be adopting a similar approach to economic policy, resisting, so far as possible, a regime of bail-out and subsidy.

Tallinn Town Hall, August 1993  © Andrew Stuttaford 

Prime Minister Laar clearly rejects protectionism and, as Economy Minister Toomas Sildmae explains, with a well-educated work force and wage rates a tenth of those in Western Europe, Estonia wants trade, not aid. More generally, Sildmae sees his job as creating "the framework for the normal development of business" rather than managing that business. The hope is that the private sector will take up the slack left by the retreating state sector.

Privatization is obviously critical to this, but, as is typical in Eastern Europe, it has not been a smooth process. There are the usual allegations of corruption and "spontaneous privatization," although there seems far less evidence of this than elsewhere.

Attempts to provide restitution for former owners unlawfully expropriated in the 1940s have also led to delay. Mart Laar defends this in terms that would astonish the United States Congress. "Western countries have forgotten that the basis of their economic system is [private] property." Laar feels that it is impossible to have an effective free market without restoring the value of property. Therefore, he wants to show that it is possible to give property back to its rightful owners—even after fifty years. There is more to this policy, however, than the restoration of incentive. Put simply, it was made clear to me in a number of conversations with different officials that the government wants to return this property because, morally, it is the right thing to do.

Pikk Jalg, August 1993  © Andrew Stuttaford

Despite the delays and difficulties, much of small business is now in private hands. In the important agricultural sector, the collective farms have been broken up. Overall, Economy Minister Sildmae estimates that 40 per cent of industrial production is now outside the state sector.

The larger enterprises continue to be a major economic problem, however. Although a surprising number have been sold, and more will be, others are clearly doomed. There is a general view that many of these factories are "too big for Estonia." They were built to satisfy the needs of the now-collapsed Soviet command economy, and, in the words of one official, they "are not exactly world class." Perhaps most seriously, they are largely manned by imported Russian workers and thereby combine the Soviet period's disastrous economic and demographic legacies.

THE FIRST Estonian Republic was a consciously ethnic state, home for a small nation denied self-determination for nearly seven hundred years. This was reflected in the racial mix; ethnic Estonians made up some 90 per cent of the population. Today's figure of 60 per cent is a direct result of the Soviet annexation, which led to massacre, deportation, and emigration, followed by a period of sustained Russian immigration.

Toompea, August 1993  © Andrew Stuttaford

There has been some Russian emigration over the past two years, but Estonians seem to recognize that there can never be a return to the old homogeneous republic. The new citizenship laws reflect this. In essence, most Russians will be eligible for permanent resident status. A substantial number are also immediately eligible for Estonian citizenship and many more will become so after a period of residence. Russians will enjoy full social rights, and there will continue to he access to Russian-language schools. Applicants for Estonian citizenship will have to pass a fairly basic language test; with little more than one million Estonian speakers worldwide, such a requirement is understandable.

Nevertheless, this has been a difficult period for Estonia's Russians, many of whom have lived there for decades. In the Soviet era there was no need to learn Estonian. Few Russians had any real consciousness that they were living in another country. Literally overnight this population found itself "abroad." Despite this, Mart Laar feels that ethnic relations are improving. "The hate that existed five years ago is gone."

Certainly this appears true in Tallinn, where Russians make up about 50 per cent of the population. Lenin Boulevard is no more, but Russian-language street signs remain unmolested. More of a problem are a number of towns close to the Russian border. Their inhabitants are predominantly Russian, moved there by Moscow to man the large factories that no one now wants. Narva, the largest of these towns, still displays a statue of Lenin and has politics to match. Poorly informed, somewhat apathetic, and with little visible economic future, the people there have proved relatively easy to manipulate by a Soviet-style leadership. It is primarily to this population that Laar is referring when he says, "The main problem that we have with the Russians is that they are not Russians. Most of them are not feeling themselves as Russians. They are feeling themselves as Soviets. ... If they become Russian all the problems are solved."

Tallinn, August 1993  © Andrew Stuttaford

Undoubtedly it is more complex than that, and it is surprising that more Estonians will not consider transferring Narva and its problems to Russia. Nevertheless there are signs of hope. There is certainly ethnic tension in Estonia, but it has led to less violence than in, say, Germany, where the standard of living is far higher and the immigrant population is comparatively small. Russian opinion also appears far from monolithic, not least, perhaps, because many Russians in Estonia are well aware that they are economically far better off than their counterparts in Russia itself.

Ethnic relations in Estonia are never going to be easy. To Estonians their Russian population will always be a living reminder of the Soviet occupation. Equally, transformation to minority status will be difficult for the once imperial Russians. Nevertheless, if Estonia is left to itself and its innovative economic policies succeed, there is a chance that a modus vivendi can be found.

The problem, as always in this part of the Baltic, is that Estonia may not be left to itself. Six thousand Russian troops remain there, including a sizable detachment in Tallinn itself. In increasingly threatening terms Moscow has made it clear that further withdrawals will be dependent on what it deems to be fair treatment of Estonia's Russian population. This is in line with a general shift on Russia's part toward greater assertiveness in protecting what it feels to be its interests in its "near abroad"—the republics of the former USSR.

Red Army 'liberator', August 1993  © Andrew Stuttaford

Much of this is no more than saber rattling, reflecting an increasingly complex political situation in Moscow. Nevertheless, the continued presence of Russian troops only serves to polarize opinion in Estonia. Equally, threats of external intervention give nothing but encouragement to hardliners on both sides.

Even with its current problems Estonia is (as I was repeatedly told) no Yugoslavia, but, if Russia continues to meddle, that is what much of the Baltic region may become.