Estonians are humble people and are not prone to boasting. They speak softly and use words sparingly. But, even in their own understated way, they seem astutely aware they are doing very well and are quietly proud of their national achievements. As well they should be: in the decade and a half since shaking off the shackles of Soviet communism, this Baltic Sea country of just over 1 million people has built an international reputation for efficiency, e-government and economic freedom.

Shaking off history

But history does not fade away so easily. The Alexander Nevsky Cathedral looms large atop Toompea Hill in the capital Tallinn’s Old Town, a constant reminder of Russian rule that still rankles with many residents. When asked by this writer to take a photograph of her in front of the offending building, a middle-aged local man muttered: “That damned cathedral, they’ve all got to have their picture with that damned cathedral.” Even so, he took great care to ensure the shot was nicely framed and, upon returning the camera, said he was not a great photographer but he hoped it turned out well nonetheless.

The prime minister, Andrus Ansip, has a similarly wry take on Estonia’s not-so-distant past. Giving a tour of Stenbock House, where he has his offices, he points to a row of large portraits of previous leaders of Estonia. Drawing attention to a few men in particular, whose lifelines all ended in the early to mid-1940s, he says: “See these dates – they all died.” One does not have to ask how. Moving on to another portrait, the prime minister explains that the man pictured died during a trip to Russia in 1956. “It was not,” he says, “a recreational trip.” In typical Estonian style, the short sentence is heavy with meaning.

Well connected

Not lingering on this sombre historical note, however, Mr Ansip quickly moves the tour to the wired-up, ultra-modern boardroom where his cabinet meets. Living up to the ‘e-government’ hype, there is not a trace of paper in sight. As with most other transactions in Estonia today, in the cabinet everything is done online, and has been for the past five years. “Decision making is much quicker and nobody can ‘accidentally’ lose any documents,” he says, with a laugh.

Estonians have embraced e-government enthusiastically – most file their tax returns online, each citizen has an internet ID card and Estonia was the first country to have e-voting in every district.

More than 90% of banking transactions are now carried out electronically too. In another quintessentially Estonian manner of speaking, Mr Ansip shrugs and says: “It is not really even something to be proud of – it is just what we do.”

But Estonia is clearly proud of its membership of the European Union, attained in May 2004. “Our first year in the EU was very successful for Estonia and for the EU,” Mr Ansip says. “Our economy is growing at 10% a year, exports are growing at 27% and the number of tourists is also growing rapidly. The unemployment rate five years ago was 14%; it is now 7% – still quite high but the trend is good.”

Drivers of growth

The minister of finance, Aivar Sõerd, says the main sources of growth are domestic demand, private consumption and exports of such goods as refinery equipment, forestry products and electronics.

“Growth has improved since joining the EU. Business has more possibilities to compete within the European market,” Mr Sõerd says. “The economy is stable and industrious and should improve further when Estonia becomes a member of the euro zone.” This is expected to happen in June 2008.

Estonia boasts one of the freest, most liberalised and least bureaucratic economies in the world – the cornerstone of which is its flat tax rate.

Mr Ansip says simply: “It works here and we think it is the best system.” Investors would be hard-pressed to disagree. The corporate tax rate is already enviable at 23% but the government plans to lop one percentage point off every year to bring it down to 20% by 2010. There is no tax on reinvested earnings – hence the 10-fold rise in these earnings over the past four years.

Tallinn and the university town of Tartu have tiny but thriving technology sectors, and Estonians are fast adopters of new IT gadgetry. Estonian programmers are highly sought after. However, more investment is needed in research and development for Estonia to better compete in high value-added industries. “We must invest more money in the R&D sector,” Mr Ansip says. “We’re not able to compete on low labour costs with India and China, so we have to put more knowledge in our projects.”

R&D spending as a percentage of R&D was only 0.77% in 2003 (the latest year for which figures are available). “Our problem is public investment in R&D is quite low,” the prime minister admits.

The Lisbon agenda, aimed at boosting Europe’s knowledge competitiveness, calls for government contributions to be raised to 1% of GDP and private-sector spending to 2% (see cover story, page 20). The Estonian government says it will spend 1.3% by 2010, and the 2006 figure is expected to be 70% higher than that of 2005.

But, Mr Ansip says: “It is not only a question of money. If we want to use the money wisely, we have to educate people. We need more PhDs than we have now.”

Given the small population, labour shortages cause some headaches and brain-drain is a worry.

Mailis Reps, minister of education and research, explains that physics and other sciences were popular during Soviet times but in the past 10 years humanities have become more popular. And, as is the case across the rest of the former Soviet bloc, professional skills education is weak.

Scientists wanted

Estonia is using some of its EU funding to build up technical institutes and science parks, however, and new ‘framework programmes’, as the government calls them, aim to recruit and retain a critical mass of scientists.

Yet the prime minister says Estonia is not afraid of global competition – an attitude that some of the older members of the EU do not always seem to share. But perhaps the Estonian experience can serve as a smaller-scale example of what is possible.

“When we opened up the economy in 1992, we were afraid and unsure how to cope with competition from abroad. So we made huge structural reforms,” Mr Ansip says. “If we can manage it, I am sure the EU can manage global competition.”