Estonia leads the Baltic states in economic development. Prime Minister Tiit Vähi; tells us why

What do you see as Estonia's major achievements since independence from the Soviet Union in 1991?

Estonia's major achievements since independence have been the country's gradual move away from an authoritarian, centrally-planned society towards one based on markets and liberal democracy. Of course, the process has not been without its setbacks but, given our initial position and compared with other transitional democracies, we have every reason to be proud of what we have achieved.

Thus, in a society where only five or six years ago the state used to call the tune in virtually every sphere of its citizens' lives, the private sector now accounts for about two-thirds of GDP. Virtually all large enterprises have been privatised, except for those in the transport, telecommunications and energy sectors. Our privatisation strategy has been based on the East German Treuhand model: most firms have been sold through tenders and direct sales, with no discrimination against foreign bidders. Important criteria for deciding on bids have been viable business plans submitted by bidders, as well as credible commitments to new capital investment. These criteria have favoured strategic investors over management and employees.

What are the key challenges ahead?

As the pain of restructuring, which in the first years was mitigated by an undervalued currency that made exports cheap and imports dear, has become more acute, more and more critics question the course of economic policy. In the last few months in particular, there has been a conspicuous revival of interventionist and protectionist opinion, which seems to subscribe to the naive view that it is possible for a country to become rich by subsidising and protecting its economy. If this argument has some validity for countries with big home markets - and I am very sceptical that this is the case - it is definitely not acceptable for a small economy like Estonia's, which is virtually dependent on foreign trade and the competitive pressures that it brings with it.

On the other hand, we see increasing regulatory ambitions coming from certain parts of the bureaucracy. When combined, these two forces - those who want regulation and those who are only too happy to provide regulation - may become a serious threat to sound economic policy. Thus, in the short term the biggest challenge lies in fighting off the interventionists and sticking to the policy which may have failed to make us rich overnight, but which has certainly saved us from the worst possibilities of independence.

In the medium term, the government must tap the huge productivity resources that have weathered the first post-reform years virtually untouched in the form of an inefficient and wasteful public sector. Currently, Estonia's public sector wage bill gobbles up almost 10 per cent of GDP, in comparison with the roughly 5 per cent for an average western European country. The only conclusion we can draw is that there are far too many people working in the public sector. Thus, public sector structural reform must become the highest priority on the government's medium-term economic policy agenda.

What does Estonia offer foreign investors that other post-Soviet states do not?

Estonia is one of the fastest-developing ex-Soviet countries. The country enjoys an attractive geographical position, quite good infrastructure, an educated and skilled workforce, low wages and energy costs, a liberal economic regime and a stable banking system. In per capita terms, Estonia has been the favoured target of foreign investors among East European countries.

Estonia has been prone to political instability since independence - for example, the resignation of the Foreign Minister last year. Why?

I don't agree. For example, Italy's governments change more frequently than Estonia's, but nobody considers Italy politically unstable. Since regaining independence in 1991, Estonia has had five governments, with three Prime Ministers, and they have all kept more or less the same political line - liberal economic policies, a stable currency and efforts to become a full member of the EU and NATO.

How significant a political force are Estonia's nationalists?

Estonians account for around two-thirds of the country's 1.5 million people. In certain regions, the over-industrialised north-east in particular, Estonians are in the minority and have serious problems in using their mother tongue. Estonia was occupied for 50 years and it is only natural that in such conditions most Estonians consider it extremely important to protect our language, culture and heritage. Thus, Estonian nationalism is mostly driven by the need to protect our culture and it is by no means destructive towards other nations and cultures in Estonia. The peaceful character of Estonian nationalism was convincingly demonstrated during the so-called 'Singing Revolution', when not a drop of blood was shed.

Opinion polls show that nationalist parties do not enjoy much popular support. The most radical of them are not even represented in parliament. As for the significant part of those who are not Estonian citizens, we have gone a long way to integrate them into our society. It is much easier to get Estonian citizenship than it is to get citizenship in most other countries. Choosing a citizenship can only be an act of free will taken by an individual, not something given en bloc without first asking whether or not a particular person wants to become a citizen of Estonia, Russia or some third state.

Are you confident that Estonia will eventually gain admission to the EU?

Yes, I am convinced that it will. Estonia is already an associate member, and we are working towards harmonising our legislation with EU norms. There is a minister of European affairs in our government who keeps an eye on everything that concerns European matters. We believe that Estonia will be ready when the EU is ready to take us.

Given the country's history and the presence of many ethnic Russians, relations with Russia are a key foreign policy issue. How do you view the growing support for nationalist/communist groups there?

Estonia is of course interested in having normal relations with Russia. We are willing to work with any legally-elected Russian government. It is in our interests, but also in the interests of the whole of Europe, that Russia should continue with democratic reforms. Estonia is ready to improve relations with Russia, but this takes goodwill on both sides. Estonia has already ratified the agreements on Russian troop withdrawal, and we are ready to accept the current demarcation as our state border with only minor corrections. We also signed a free-trade agreement with Russia in 1992. Although the agreement has never been ratified, Estonia does not levy customs tariffs on Russian goods, while Russia levies double duties on Estonian exports.

Has the loss of Russian markets had a significant impact on Estonia's economic development?

On the one hand, the loss of Russian markets has undoubtedly dealt a severe blow to the Estonian economy, and has caused the painful restructuring that we are now going through. On the other hand, however, the reorientation of trade towards the West would have been necessary anyway, for both economic and security reasons. At the same time, we would like, of course, to benefit from our location by playing the same role for Russia as Hong Kong does for China - obviously, without paying the same price in terms of our political independence. Our efforts to shift trade westwards have been successful: trade with the West has risen from 5 per cent of total trade in 1991 to more than 70 per cent today. Russian trade, on the other hand, has been adversely affected both by economic weakness at home and by Russian attempts to use trade for political leverage. In the long term, however, and assuming that some sort of modus vivendi can be achieved with Russia when the country stabilises, Estonia might well benefit from its position as half-way house between Russia and the West. Tallinn's ice-free ports are well-placed to take advantage of this, and the transit trade has been one of the biggest earners in recent years. Muuga, the largest Tallinn-area port, was built less than ten years ago, and there are plans for new dry bulk, container and oil terminals, which should further enhance Tallinn's position.

Finally, where do you see Estonia at the turn of the century?

I hope to see Estonia as a small, well-developed, independent state, a member of the EU, a bridge between the EU and the east and - perhaps - a member of NATO.

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©Kensington Publications 1996