Estonia's entrepreneurs determined to defy downturn

By Carter Dougherty

FOR nearly two decades, Estonia embraced capitalism with such gusto that it seemed to be channelling the laissez-faire philosophy of economist Milton Friedman. Now Estonians, and some of their Baltic neighbours, are slogging through their first serious economic downturn since liberation from the Soviet grip in the early 1990s.

The country's political and business leaders say the challenge will be weathering not just the downturn but the transition from an economy based on breathless consumption to one founded on the hard work of selling goods and services to the world.

Many business executives say Estonia must emulate Switzerland and Luxembourg – two small countries that are more closely tied to the global economy than is Estonia. But that will require developing high-end, knowledge-intensive production and consumer-oriented design. Whatever happens, government officials say there will be no betrayal of Friedman's philosophy.

At the same time, though, Estonia will see more state direction in the economy than it is used to, not as a matter of ideology but as a matter of circumstance.

When it joined the EU in 2004, Estonia became eligible for 'cohesion funds', money given by rich countries to poorer ones to smooth out development across the 27-nation bloc. From 2007 to 2013, Estonia will receive ?3.4bn (£2.7bn) from this pot.

As a result, the government is investing heavily in areas it would have eschewed in the 1990s, such as financing for start-up companies, exports and technology.

Tarmo Kalvet, director of the innovation policy programme at Praxis, a research organisation in Tallinn, says these constituted a de facto industrial policy. "We have had a 'no policy' policy," Kalvet says. "Now we have a policy… sort of."

Modern Estonia has never lived through the downside of a normal business cycle. The population is accustomed to a steadily rising living standard based on cheap credit for boundless imports. "I'm an optimist," says Marje Josing, director of the Estonian Institute for Economic Research. "Fifteen years ago things looked bad, but they managed. A little real-life pressure won't hurt."

Indeed, so far the downturn has done little to discourage Estonia's ambitious entrepreneurs. If anything, it has made them look more avidly elsewhere for growth.

Annual growth exceeded 10% for three years before slowing sharply last year. Most forecasters expect the economy to be flat this year. A labour shortage has eased somewhat, leaving unemployment at around 4%.

Even so, the government urged Estonians last summer to tighten their belts. The state budget was cut by 1% of GDP to avoid running a deficit this year, even though Estonia has hefty fiscal reserves invested outside the country.

Fiscal stimulus and specified assistance, Estonian officials say, will only delay the inevitable. "The economy needs to adjust," says Märten Ross, deputy governor of the Bank of Estonia. "There is no sense in policies that try to keep construction workers in construction."

Whatever the approach, both business executives and government officials agree that Estonia needs to become much more export-oriented. With 1.3 million people and a GDP of £17.3bn, only about 18% of the country's companies export anything at all.

There are exceptions, however, as several businesses hint at Estonia's economic potential. Skype, the worldwide internet phone service owned by eBay, still has its technical operations in Tallinn, while Baltika, a garment producer and retailer, is expanding throughout eastern Europe.

The next step is for Estonia to develop a global identity that would make it easier for its companies to succeed with affluent consumers outside the country.