Estonia’s radical transformation

In this essay, part of our Navigating Economic Change series, Rainer Kattel and Ringa Raudla explore Estonia’s apparent digital and economic success, looking at the successes and failures of ‘crazy ideas’ in the country’s transformation.

Estonia is often viewed as the most successful case of transition from communism to free market liberal democracy. Yet, this success contains at least two different kinds of story: first, Estonia’s economic success; and second, perhaps even more impressively, Estonia is often seen as global leader in digitally transforming its public sector. At the root of each success story lay transformative or, as the first prime minister Mart Laar called them, “crazy ideas.” Casual viewers, and perhaps even experts and analysts, would be forgiven in assuming that these success stories and ideas spring from the same well. Instead, they have different origins, main elements and key characters with rare overlaps. Thus, to understand Estonia’s radical transformation, and draw lessons from it, we need to understand the two different origin stories of economic growth and the digital transformation.

A further complicating factor is time: what might have looked like success, say, 15 years after regaining independence, in 1992, looks quite different after 30 years. The economic story now appears less positive, with rising concerns over high levels of inequality and middling productivity growth. So, the initial verdict needs to be revisited. When it comes to digital transformation, the government sees over 2.5 billion transactions per year, in a population of 1.3 million; the digital ID penetration is close to 100 per cent and almost all personal income tax declarations are done online. Yet even here, the steam seems to have run out of Estonia’s digital agenda.

This chapter, therefore, does two things. First, it tells the story of Estonia’s apparent digital and economic success, why and how they differ; and second, it analyses the strengths and weaknesses of both the economic strategy and digital transformation and considers some of the failings that have become clearer over time. It concludes by drawing some lessons from Estonia’s transformations for UK policy makers.

The Navigating Economic Change essays are written by a range of leading economists and national experts and reflect the views of the authors rather than those of the Resolution Foundation, the LSE or The Economy 2030 Inquiry.

They have been commissioned and edited by Gavin Kelly (Chair of the Resolution Foundation and member of the Economy 2030 steering group) and Richard Davies (Professor at University of Bristol and fellow at the LSE’s Centre for Economic Performance).