The Baltic Tiger: How Estonia Did It

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Mart Laar
September 14, 2006 | Universidad Francisco Marroquín | Duración:..
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  • Thank you for this introduction and it's really been an honour and pleasure for me to be here today and speak to you about my country and these experiences what we have in our way, and it all was freedom. And I must again congratulate you on this university, which is so marvellous place to develop ideas of liberty, which are most important ideas for the human beings.
  • In Estonia, first of all I'll tell you where it lies. This is the country in the northern Europe between Russia and the Baltic Sea and it's really very north northern country, which means there is lot of cold and some countries in the world somebody says have been chosen by God, we are frozen by God are so we are still competing with our Nordic neighbours Fins from where exactly Santa Claus comes to you. So we are both having Santa Claus villages and so on, what you can visit when you visit our countries. But it looks that as Finland is more in the north and near the North Pole, so they are winning this competition unfortunately.
  • But this difficult situation has really put us to the, in one way we have free world situation, in the other way the situation where we are situated on the border of the different civilizations, where by Samuel Huntington, the civilization clash, this you see the border river of Estonia with Russia, on one side the former German castle the Gothic, on other side the flat Russian castle. This has been described by the Samuel Huntington as the symbol of the clash or differences between the Western and Eastern Russian cultures. This situation of course has made our history very interesting for historians. And when you live there actually you probably has wanted that you had lived maybe in not so interesting country, because this to have the interesting history means to have lot of wars; lot of different countries who invade you, because really everybody was interested in our country.
  • From another point of view, it means lot of trade. Estonia has been a trading nation from the beginning of the history, because just laid on the junction of the different trade roads. Of course, at the same time, we have been very stubborn people, as we are Nordic individualists. So even when we were conquered by the different rulers, we kept our identity, we kept our nationality. And in 1918 we restored our independence. Unfortunately, this did not last too long, because in 1939-1940 Nazi-Germany and communist Russia made a deal between each other to start the second world war and to divide all countries between Russia and Germany, between themselves. So we fell a victim of the Soviet aggression and occupation. And we were occupied for more than fifty years.
  • Of course, we fought for our freedom. In these pictures you see the Estonian guerrilla fighters, or partisans, or in Estonia how we called them forest brothers, who fought a long time partisan war against the Soviet Communist invasion. This actively lasted more than ten years, but the last Estonian forest brother was killed in action in 1978. This is actually forty years after that the country was fully occupied. These men they died, nearly all of them, but they kept the tradition of the resistance and saved the soul of Estonian people. Because, even when they were destroyed and killed and actually nobody in the world were very interested in their fight, it still created the basis for the continuing the resistance movement, which lasted the whole Soviet time. Our losses were very hard, way more than thirty per cent of our population was repressed or arrested and sent to Siberia. And direct losses were twenty percent of population, as a result of the communist terror. So we know we're one of the nations which knows what it means when you are not free and what it means to live under totalitarian systems.
  • As I said we never gave up, we continued our political resistance, underground movement, underground magazines, underground leaflets, organisations of political activities, demonstrations and so on. And when the Soviet Union became weaker at the end of the Eighties, when the West had won the Cold War and pressed the Soviet Union to the corner, then they had to start their reforms, forgetting one simple truth that you actually couldn't reform communism. Every attempt to reform such a system ends with failure. And Mr. Gorbachev, who really thought that it will happen in other way, when he tried to save the Soviet Empire and Socialism, saw what will happen when you let democracy out to the people. Democracy namely, is like a tooth paste: it's really easy to let out, but you couldn't put it back anymore.
  • So we take the chance of the situation. We organized massive rallies, massive movements. And even when we were still attacked and pressed by the Soviet tanks, what you see in the pictures from Lithuania, from 1991, when the public demonstration was just oppressed by the, by the Soviet tanks. We have felt what the freedom means, what the liberty is, and we were not ready to give it away anymore.
  • In 1991, when the Soviet Union collapsed, we regained our freedom. This was a moment of joy and this was a moment of big happiness. It looked that everything will now go well and we will to enjoy fast development. Unfortunately, only then we understood what the communism really had meant to our country.
  • How down we really were, how undeveloped we were. Estonia, before the occupation was more or less at the same level in all the social development, economic development, as the Nordic neighbours Finland. Then with fifty years of occupation, Finland has passed us, not only in the economy (Finnish GDP was nearly nine time higher than Estonian in this fifty years), but in all social development as well. But what the communist or leftist ideology are doing, they are offering to the people free health care, free education, both of them on paper. And actually, no development. The difference in all those standards between Estonia and Finland have grown tremendously and as a result of this, we only saw the absolute collapse of the economy and all society, because through the violence the communism has hidden this problem which really existed in the economy, in environment, in public relations and three the ruins.
  • When we look at the reality in Estonia, this is a picture in 1992, maybe you don't understand what this is, but this is a normal Estonian food shop. The only the only thing which was available was Russian vodka and Armenian brandy and not very much more. All other food stuff, the main food stuff, was on cards. When you wanted to have milk, you had to have at least three children to have it. And the situation was really very very devastated. There was no gas, which means there was no cars in the streets. Just now, looking at the Estonian capital, Tallinn, the people think maybe it was not so bad not to have cars at all, because by now there's just too many of them and there was really massive poverty, growth in the social inequality, and so on so on.
  • When we're looking at the figures of Estonia in 1992, before we started our economical reforms, we had inflation more than thousand percent a year, so the money did not have that much value at all. We had economy going down by thirty percent during this year. We had unemployment prognosis on the thirty to the forty percent of population, getting unemployed in the next years. We were absolutely depending from Russia in our economy. Ninety-two percent of our trade was with Russia, because no normal country wanted to buy this so-called goods what we produced, because they had such a low quality and they were not competitive in the world markets. And as I said, we had really very bad situation in the social stratums, food rationed, poverty raising, all criminality raising, all diseases raising and so on. So there was full collapse of the system.
  • And that was the moment when, by some reason, Estonians decided to vote to some banks of the young reformers to lead the country. The truth of it is the main reason was because nobody else wanted it, but still there was lot of run for the office in ninety-two, the first democratic elections. I happened to be in this time the young thirty-two-year-old historian, who had been participating in different resistance movements and in this liberation movements to get the Soviet Empire down. But I had never been very much interested in politics. I was little bit interested, of course, in the history of the economy, looking on the German economical miracle Ludwig Erhard reforms and I actually have read until this moment only one book on economy and this was the Milton Friedman's Freedom of Choice.
  • And that's, that was it. But somehow, as I was put by my party to put together my party's economic reform programme. So I just took a lot of ideas from this book, because they looked very reasonable for me. Of course, as one professor afterwards explained to me, the market economy is actually very simple, but these left-wing professors make it too complicated. And then we wrote all these ideas.
  • Moving away the custom tariffs, having the free trade, having the flat tax to our programme. And ehh. And we were not very sure what the people will think about this, as we had run the political campaign where we didn't have any money to do this. But as my friends, most of the Estonian rock singers and punk singers, and whomsoever, were very close friends. So they said that maybe we will organize just your campaign as one big concert. And then we just made a lot of rock concerts and in the mean time we talked a little bit about the politics and then there was a bwehbweh, very active music. And that's, that was it. But somehow, as I was put by my party to put together my party's economic reform programme. So I just took a lot of ideas from this book, because they looked very reasonable for me. Of course, as one professor afterwards explained to me, the market economy is actually very simple, but these left-wing professors make it too complicated. And then we wrote all these ideas.And that's, that was it.
  • But somehow, as I was put by my party to put together my party's economic reform programme. So I just took a lot of ideas from this book, because they looked very reasonable for me. Of course, as one professor afterwards explained to me, the market economy is actually very simple, but these left-wing professors make it too complicated. And then we wrote all these ideas.
  • We were all so young, my ministers were actually even younger, my minister of foreign affairs was 27, my minister of Interior was 26, my minister of justice was 27 too. So I was quite old man in the cabinet. And in the first international European meeting, when there was a meeting, the security would not want to let us in, because they say nobody from us looked like a Prime Minister. But after wards they got used to us.
  • And when we were in such desperate situation there were two options left for us, one was what was offered by the different foreign advisors offered by the from the advisors, mostly from the so-called developed Western countries. And they said be now careful, you see, everything is so down, everything is so bad, your social situation is really deteriorated, move slowly, take reasonable steps. And when I started to talk to them about Milton Friedman, they said no no no, please don't do this. This only exists in the book, nobody has tried it. And when they have tried, they have failed. It will never work, it's not possible, don't do such stupid things. But it looked something ehh, I didn't trust this advice very much. Especially when you are young, then you don't listen very much to what the old people are saying to you. You are having your own mind and it's very hard to change it. So we didn't change our mind very much.
  • We decided actually that, when we want to get this country out of this situation, we really need very radical reforms. We didn't think very much about our own political future. When you are thirty-two years old, you don't think that all your live you will be part of the politics. You want to do your job and leave. That was the philosophy of it, because we understood that the reforms that we would do, this would be unpopular in the beginning. And which means that you can do this fast. And the first, actually, what we thought is important to do, is really not to be afraid. Because when you are in such a situation, The only way that this puppy survives, is that he is not afraid. immediately when you are/will try to run, then you are caught and killed by these big bad dogs.
  • So first of all, don't be afraid, really do the necessary things, do the radical reforms. Don't look at the peaceful solutions, because the peaceful solutions are unpopular as well. So it is not so that ehh ... every decision is always unpopular. And there is not a very big difference in the political unpopularity in the small decisions or in the big decisions, they are unpopular in the same way. So let's better do the big decisions. And the other thing that we learned is that you must really have the goals which are impossible, because by using the normal tools, you couldn't get out of this situation. So the next lesson is that you must aim high, because in such of desperate situation you will be in something I don't want to mention very much. And that were the two basics on which we started to base our reforms, Really have the radical approach, do the things, the labour and then when your time is over, you can just go and look how your country is moving forward.
  • So we started the reform process and as a result of these reforms, Estonia has really become a so-called model of success, a success story, or the Estonian miracle, or whatever, when you look at the international press, or international magazines of analysts, they are all referring to the Estonian very positive experience on economical and political reforms.
  • The first reform, which was done soon, before actually, my government took office , was monetary reform, to stabilise the monetary system to fight down inflation and create the basis for the economy. We created the currency board system, which does not leave a lot of room for the government to take popular decisions, but which creates a stable currency . Of course the currency board itself, which mostly, in the first case, it's really fighting down inflation what the currency board in Estonia did. We backed our currency with the D-mark, which then was quite a good decision, because it proved to be the most stable currency in Europe. And at the same time, this is a very crucial mistake, when the politicians start to think that their successful monetary reform, especially when it's based on the currency board, will be enough. It will be not enough.
  • Immediately when the governments are not continuing the reforms after it, it will fail and it will fail very badly, because when the currency board fails, then it is very bad failure. Because the government is not having enough tools to avoid the failure. Which means that it demands lot of decisiveness from the government to do the reforms and to keep the budget under control. When you're not stabilising the budget under this system, you will be gone. And when you're not doing the next level of reforms, the budget will not be stabilised for the long run. So this was the first basics and we understood that it's really necessary now to continue with the full speed and this was the good decision. Of course, it was easy to say but hard to do, because we had to really do the reforms which were not popular.
  • First of all, we had to open the economy, to really create competition in Estonia, because all those soviet-fashioned old very 'unfunctional' companies, they are used to that the state will always become a help to them, when they are in trouble, they will get some subsidy, they will gain some support, because they say otherwise we will go down. I kicked them all out and said to them you will now have two choices, or start to produce something what you can sell, or die. And I must say, most of them, in this situation, preferred to start to work. And this is only the competition, a really open competition, what pressed them to do. And really to abolish all customs tariffs is a really good thing for this. Estonia became really one big free trade area and as we are not having our own national resources, this brought a lot of investment and a lot of really good development into Estonia.
  • Of course, it was not popular, because the farmers said that I would destroy the Estonian farming, or the Estonian agriculture. And, actually the exact opposite has happened. Estonian farmers are the most competitive and aggressive now in the whole area, not only having their own land cultivated, but also buying the land massively in two other Baltic countries. And the Ukraine now, because they have not done such reforms, or not with such competitiveness. Or in the industry, which said that now everything will go down, and the opposite, they got new investment. They had to reconstruct and build up a modern industry which can really export something to the West.
  • The next step was really to introduce the rule of law, because this has been one mistake in a lot of reforming countries that they underestimate the importance of the independent court system, the rule of law, and to connect all to this in this reform process. Without rule of law it would be very hard to protect the property rights, or not possible at all. At the same time the property rights and support and protection of the property rights is the most important part of the market economy. When you're underestimating these, we can say very boring, very technical reforms, it's one of the biggest mistakes. And when you're studying why some countries in Central and Eastern Europe have failed, some of them very badly, in the reforms, underestimation of this part of the reform process has been very often the reason. So, of course, this actual really working law system, or judicial system, it has not happened in one year, so it means you must start immediately, because it takes time. And at the same time you must concentrate on this part of the reforms, which are supporting your economical development. This is mostly the property registration, which must be especially developed and especially supported.
  • And then you can go to the privatization, when your property relations are not clear, privatization can turn against it. It can be very 'cloony', very criminal process, it will not help the country and just move your state assets to the hands of the banks of criminals, which actually don't know what to do with them. That has happened in some countries as well, but when you're basing your privatization on the rule of law and the decree of principles, then actually that is very necessary and a very positive step forward, because the government couldn't run the businesses. They must do that themselves. It's a waste of money, it's a waste of time, it's a waste of resources, because the private business can do most of these things significantly better.
  • So we have had in Estonia very fast privatization. At the same time trying to really get the population with us. It means that in a lot of cases we privatised with one core owner the majority of the shares. But we privatised to the people, or we shared the so-called privatisation vouchers to the people, to make the people owners of the minority shares of the companies, which was a very clever thing to do. First of all it took down a lot of political pressure on the privatisation and the other thing is that it created owners. And to create owners is one of the big important parts of the reform. When the people understand that they own something, like this is in their property, or this is a share of the companies. The way of how things will change and change to the very positive direction. They will feel more responsible for their own future, they understand what is happening in the economy and actually it will be a very good base for an economy to develop. But only rely on voucher privatisation can lead to other problems, which means you must have the core investor who really does investments and will develop this industry. This is an important part to remember as well.
  • And of course, then came the tax revolution. because when you have most of the economy into private hands, then it will start works, or not. And it depends on what business conditions the government has created. Is the government supporting the good business climate or not. And one of the things in this is such a psychological thing, is the government really punishing the people who are more successful or more working than another. When we had this unemployment prognosis on the thirty percent and it really became true, because most of these big enterprises went down, then it was very important to support the development of small and medium businesses. And when these small and medium businesses understand that the tax system is such that when I start to work more, there will be taken away more, this is actually not what encourages them to invest and work. And that's one reason why we introduced this system in the beginning, to really encourage investments and the activity of the people.
  • And the results of this system was little bit even surprising for ourselves, as everybody told us don't do it. They said that we would loose such an amount of money, that the budget will go to the deficit, it will not work and we may tend to vary much of our calculation. Even from our positive point of view that we will earn, with taking the tax down to the flat level, we will earn more or less the same amount of money in the first budget year as we earned in the year before, calculating that the people are just getting more active and when the economy will start to grow and we have less unemployment we will get just this more money. So we think that we will more or less earn it back with the first year, or when there would be losses, they would be not big.
  • Actually we were very wrong, because we got our thirty percent more taxes. this was a big surprise and I must say that it has happened with nearly every country that has introduced the flat tax. All the calculations, especially when they were done by the IMF and the World Bank were all wrong, because the power of the flat tax is more, is higher as the people expect. It's due not to the economical activities so much in the first year, but it really kills the grey sector in your economy. It really, there will be lot of more people to pay honestly the taxes than you have had before. And mainly from these people these high incomes in most countries are coming, because the flat tax, one of its best parts is that it's very simple, which means it's very simple to understand and people are more eager to pay taxes when they understand what this tax is.But what is the other most important part, it's very simple to collect and very hard to avoid.
  •  And to this actually adds that in most economies they underestimate the size of the grey economy in this economy, which is studied. Taking this size down, a lot more money would be collected to the revenues, as expected. Most importantly, it pushes the growth. When you are comparing the countries even in the Central and Eastern Europe in the same region, with all the same conditions, the countries who introduced the flat tax, they just started to move faster. It's sometimes, again, very hard to explain why it exactly happened. But it's a lot. We have now nearly twelve countries in the region moved to the flat tax and all of them had exactly the same results. All of them started to move faster. Because, as I have said, like Milton Friedman explains it, the people are just showing more initiative, they are becoming more creative.
  • This is a tax system which is not the Marxist one, because where the progressive taxation is coming from, you must remember that in the communist manifesto of Karl Marx there were two main economic demands, the first was to take away all property, that is in the Western countries not very recognised, but the second was doing the progressive taxation. So this is the interesting part, looking at the modern world, when even the quite conservative or right-wing politicians are explaining that the progressive taxation is a very good thing, not even remembering that actually they are basing their calculation on Marx' communist manifesto. So we have in one way destroyed the communist, but we are still trying to keep some part of this, it's heritage, which is not the most practical thing to do.
  • And through all this, of course, what has happened in Estonia, we created a lot of owners and we got our country changed beyond recognition. When you are looking at someone visiting Estonia now, who visited Estonia in the beginning of the nineties, he does not know the city. The city and all Estonia has changed so much. It really has become one of the vivid very modern economies moving very fast forward. The whole attitude of the people has changed. And the whole outlook of the country has changed. Most of my live, as I said, I had lived under the communist occupation and it was, in this sense, a very depressing time, because with every year you saw how the things were getting bad, how something is falling down, how something is destructed, something is destroyed, something is disappearing. So you saw all the negative news, every year something moved into a bad direction. Now, during the last fifteen years the really been a happy man, because I have seen with every month, with every day, how much the country changed for the better. So that's a very nice experience and it has created a lot of happiness in Estonian people.
  • Estonia by the index of economical freedoms, freedom measured by the Heritage Foundation and Wall street journalists as one of the most free countries economically in the world. And one of the most free in Europe. And, when some analysts just try to put together all different lists of freedom, this is the press freedom, the Amnesty International list, the corruption index, and so on, and in economical freedom. Estonia was found to be the most free country in the world, which can be true, because we are maybe not the best in any of these categories, what we were everywhere in some fifth, sixth, seventh position, which altogether made us really the country of free. And this country of free, when your are using your liberty, using your freedom, the results of your development are very fast.
  • Estonian growth has been very stable and very high during the last ten, fifteen years. In 2005 it was a little over ten percent. It will become even bigger in 2007, last quarter it was 12 percent, by example. We're not depending on Russia anymore. All our trade is with the world markets, where we are competing and most of our trade is high-tech industry products or heavy machinery. We have a low unemployment, or nearly non-existing unemployment at all anymore, so we hired the labour power from the neighbouring countries. We have balanced budgets, or this is the philosophy what we introduced.
  • Actually, the only problem with the flat tax is that it earns too much money to your budget, so we are not having actually balanced budgets, we have a strong surplus budget. In this year it will go to a surplus of 6 percent of GDP. This is a very big part actually and sometimes the governments really doesn't know what the with the money when they have too much of it. They can try to take the stupid decisions. So this is the only bad part that I see in the flat tax, because it's really very effective and it collects a lot of money. Even when you decrease the rate, it nevertheless collects a lot of money. And as a result of this we had, of course, a very positive social development. The poverty has gone down massively, the social inequality has gone down massively, and all other social standards, life, how long the people are living, or how healthy they are, or how educated they are, they all got higher and higher. So they are really positive changes and at the same we know in Estonia that, when we must, when we want to be successful in the future, we must orientate a lot of future economies too.
  • And one part, on which we are now, during the last year concentrating is e-government, e-Estonia. Estonia has made a very fast progress in the development of internet. We were absolutely down when we became independent, even in the telephone system. from this we have developed the first real e-government in the world, which is working without papers. Then you see the cabinet room, which has been described as the Starship Enterprise command. And really, you are getting the government working not only very fast, very effectively, but this is making the government really very transparent.
  • In Estonia, every decision which is made in the government is in twenty seconds in the electronic press release room and it's open for the people. The budget can be followed online by every person, so this was, in the beginning, a lot of scandals, when our journalists started to discover that some state officials were using their state credit cards in some squash clubs and in some other club which I don't want to mention. And of course there became a lot of scandals and those people are not working anymore in state administration. But it has trained to all even the budget to be transparent, to be open to the people, because when you use this modern technology, then you are really getting a lot of paper out. It's good for the environment and for the rain forest, not to use such an amount of paper anymore, but it is really making the people very 'knowledged' about the internet. And when the people are 'knowledged' about the internet, then you can offer a lot of services to them.
  • And we have introduced an electronic ID card for Estonia. And with the support of this, we have had the first e-elections in the world, which means that you are not going to some post station. and push some screen, but you can vote from home. We are online. We just had the last autumn elections, which were very successful. And, of course, some political parties don't like it too much, because they say (this is what the ID card looks like) because in the elections, when the young people got a chance to vote more actively and using the Internet of course, the elections on the internet were very different from the old country elections, because the young people supported the liberal ideas and not such left-wing politicians. This was a very clear development and of course, now we will run for the next Parliament elections which has e-elections as well. We have introduced a e-health system, e-driving licenses, which is on the same card. You can buy or sell, you use this as a ticket in the public transportation and so on.
  • So you can really do miracles taking down the costs, offer better services, and do it in the most transparent way. And all of this, as I say, has lead to the very fast development of Estonian IT industry. I think in the room are people who are using the Skype communication system. It was made in Estonia. It's technological centre is in Estonia and it was just voted the third most impressive or new innovation or trademark. And, of course, the same guys who are very young. The first project they did you probably know as well. It's not so good for Hollywood, it's the Kazaa operation system. That's how they started and then they moved on to the little bit more peaceful area of telecommunication. And this only one of them. Estonia is full of new internet developers companies, who are going to the London Stock Exchange and so on with their innovations and with their basics. So when you are developing such areas at the internet, you are not getting your country more transparent, but you get a quite modern economy, developing this kind of economy in which you will need to be competitive in the twenty-first century.
  • Of course, looking at all this and a lot of other reforms that were done in Estonia, you maybe think that the politicians who did this become very popular. This is not so. In the end you are named by all possible sides, because every decision that you take is actually hurting somebody and when you take a lot of decisions, then nearly everybody is hurt by your government. But this is not important, because it is not necessary for the government to be popular, this is not a governmental task, the government's task is to do the job. And the best thing what can happen to the government is to see in the opinion polls that the people don't like very much the government, but they like the direction where the country is going. Then you have done a good job.
  • I am a little bit afraid of the governments which become too popular, because this means that they are not concentrating on what they must do, this is the decision-making, they are just concentrating on the popular, or populist politics. This is not helping your country forward, because I really don't understand why my colleagues sometimes in the politics don't understand that in the democratic system you will be once ousted anyway. It's not important whether you are doing reforms or you are not doing reforms, you will be gone anyway. There is no evidence that when you are not doing anything, you are sitting there just four years, then you would be elected back, no. There are the same chances to be elected back, have you done something, or not. In my case actually, there are significantly better chances, because I have done something. And I am the only Prime Minister in Central and Eastern Europe that will be elected back in the office. And the people really ... it's not necessary that they like your personality, but they know that you can do something.
  • And this important that the government will really encourage such activity in the people, making it clear that this is not the government who is running this country, this is the people who are running this country. And the government's task is only to create these conditions for the people to be active to really realise their dreams, because as it was said to me, as it was mentioned in the introduction, you couldn't walk 'in' the water, it's absolutely true. Nobody from us can walk 'in' the water. But when you have dreams, when you have courage, when you don't think too much about what is possible and what is not possible, then you can actually do the miracles, because this lizard doesn't know that you cannot walk in the water, so he does it and this way he's hoping for all of us. We just must have courage to have the dreams and then the courage to realise these dreams and then do the miracles for ourselves and for our country. And really this is what all of us can do. Thank you.
  • Mr. Laar, what have you done in Estonia to lock in these reforms, so that future politicians don't come in and restore the old order? What sort of system? I think that's the most important question, because the only way to see that the reforms are successful is to see how they are lasting, after you, because as I said, once we will be ousted. And in the Estonian case, there were two main things that we did. First of all, you must bolster all your reforms with the laws, because when there are just some ... that the measures that they have used, then they are easy to change. When you have laws, it's always a little bit more complicated to change in the parliament, it demands some work and most left politicians don't like to work. So they are lazy people, at least in my part of the world.
  • And the other thing that is even more important is that you must do your reforms fast, when you come to the power, there is no time to waste, because that's the only chance that they start to work in practice. Because when they start to work, then actually nobody will change it. In Estonia flat tax, it was massive, the it was absolute, it was very unpopular when I introduced it. There was a massive political fighting against it. The leader of the opposition, who was the most popular politician in this time and probable next Prime Minister, he declared that the first thing when he would come to the Prime Minister position, ... the first thing is to remove this stupid tax reform. And by the irony of the history, after a year and a half he became the Prime Minister and he didn't change anything. Because why would you kill such system, which is producing such results. And this is the same in all reforms. When you really can see that they are working and the people will then start to like them actually and especially when you're a left-wing politician, it's very simple then to sit down, doing nothing, because everything is moving quite well, or it looks that it is moving quite well.
  • And that is maybe the one biggest advice, when you do reforms, do them fast. That's politically even harder of course, to do the reforms after some time that you have been in power, but to really make them last after you, it is important that the results will come so quickly as well, because no reform will work immediately. They all demand some time. And the people and the politicians must see that they are having practical results. And so we have had after me, I think, all possible government coalitions in Estonia. Lots of them have come to the power with the slogan to change everything what I have done. Nothing has been changed. Sometimes it even worries me, because in fifteen years your system needs some changes. But it looks like we are coming back in the next elections. And we have now the possibility to change it again, or to modernise it, not to change it. Because you must always look where the world is going and to think what you can do to be the fastest, especially for such a small country as Estonia is, and Guatemala is quite small too. It is a big advantage to be small. We can change faster. We can do the things that for the economies of the bigger countries are not possible, so we must only use this advantage well.
  • Mr. Laar, in your experience with advising Latin-American governments, what do you think are the main obstacles that are keeping us from becoming Tigers, or something? I think there are a lot of ... First of all, when I am advising some government, I always say to listen to my advice and then think with your own head. Because any foreign advisor can't know exactly your situation or your context and you must really look at all the reforms, on how they all work and then think how they can work in your country. And really do it in your own way. This is the first thing.
  • The second, which I think is the main obstacle in the political thinking. I believe the politicians want too much to stay in power and they really think that they can stay in power doing nothing. And I think this is the biggest obstacle. And in some countries which have moved from the totalitarian system to the democracy, or to the more market-oriented system, the people don't understand that you must really clean the place from this former more totalitarian type of politicians. You must really have the administration that works and which is not corrupted. And this is sometimes only possible when you really clean the place. You couldn't put new wine in old sacks, it said in the bible. And this is very often forgotten by the democratic parties, when they come to the power. And I have at least known one country in your neighbourhood who made the bad mistake not to do this. And it has been not too successful in the reforms, even as the political change happened.
  • And a very concrete advice, of course, in Latin America I have been always wondering why the countries here are not going so well, until I read the De Soto. Because I am not an expert in your area and I this is one thing, which is maybe in your area the most, most, most important to develop. Without this, without the property relation, because there are really property claims, without having the clear property rights, it's very hard to build the market economy. It's nearly impossible.
  • Mr. Laar, I am a Mexican and I am a visiting professor here in Guatemala. I would like to ask you, have you thought or have you been invited to talk to the president elected Calderon, because I think that your experience could be very important for Mexico. Some of my Mexican friends who have fought for the Calderon campaign have done it, yes, and I have met with the former president Fox' advisors too as well. But I must say, the Calderon programme is a really good chance for Mexico. The question is, can he really implement it or will he have courage and strength to do this what he has promised. When this programme will be realised, I think that Mexico can go very fast forward. But, of course, looking at the current situation in Mexico, it's very hard to say and it does not, unfortunately, depend 100 percent from the President, now. But of course, very soon has been ... some people have turned to me, to come when the political situation a little bit calms down and to look what is possible to do.
  • Muchas gracias, señor Primer Ministro. Estoy seguro que sus experiencias políticas y económicas van a ser de mucha inspiración, y de mucho ánimo para nosotros. Ahora quiero invitar al rector de la universidad, porque ... he's going to present you ... I'd like to present to you, on behalf of the board of directors of the Universidad Francisco Marroquín this diploma that reads, to Dr. Mart Laar, in recognition for his conferences on the political and economical reforms in Estonia. And the board names you visiting professor of the Universidad Francisco Marroquín. ... Since Dr. Laar is thinking of going back to politics or stay in the academia, we told him he has an open door to stay at this academia. He can stay for as long as he wants. And we also present to you the UFM, the Marroquín tie. It has the Marroquín emblem which says truth, liberty, and justice. We hope that you will wear it proudly. Thank you very much.
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  • Initial credits
  • Luis Figueroa: Welcome
  • Giancarlo Ibárgüen: Introduction
  • Giancarlo Ibárgüen: Words of acknowledgment
  • Final credits
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About this video
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Mart Laar lectures on the transformation that Estonia went through due to its various reforms, which took place after the collapse of the Soviet Union. He offers a brief description of this country’s geographical location and explains that it is the cause this nation has been on the borders of two different civilizations: Western and Eastern cultures. He also shares a political history of how, because of its location, it has been a trading nation and how it became part of the Soviet Union as a result of World War II. He also makes a comparison between Estonia’s economic and social situation in 1992 and 2005. The improvements that this country has achieved are due to the monetary reform and the privatization that has taken place. Furthermore, Mart Laar illustrates Estonia’s success by mentioning the creation of Skype, which is a world renowned innovation created in this nation.



The Baltic Tiger: How Estonia Did It
Mart Laar

Milton Friedman Auditorium
Universidad Francisco Marroquín
Guatemala, September 14, 2006

A New Media - UFM production. Guatemala, September 2006
Camera 1: Jorge Samayoa; camera 2: Rodrigo Escalante; camera 3, digital editing: Sergio Miranda; index: Christiaan Ketelaar; synopsis: Sebastian del Buey; synopsis reviser: Daphne Ortiz; publication: Pedro David España

Imagen: cc.jpgThis work is licensed under a Creative Commons 3.0 License
Este trabajo ha sido registrado con una licencia Creative Commons 3.0

Mart Laar

Mart Laar
Mart Laar is the former prime minister of Estonia where he instituted the flat rate personal income tax reforms that elevated that country's economy to impressive levels. Laar studied history at Tartu University before going on to earn a master's in philosophy and a doctorate degree. He has received several recognitions, including the European Bull 2000, the Adam Smith Award 2002, the Polar Award 2003, and the Cato Institute's 2006 Milton Friedman Prize for Advancing Liberty.

Last update: 05/11/2007

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