Edinburgh City Chambers
1 November 2005
Estonia -- A European Champion of Competitiveness
Ladies and gentlemen,
First of all, I would like to cordially welcome all of you participating in this, the Estonian–Scottish Business Seminar, at the Edinburgh City Chambers. I am delighted to see, that there is so much interest, here, in Estonia. This is obvious proof of the good relations that presently exist between our two countries, and a sign, that even closer relations will develop in the future.
The ongoing Estonian Days are taking place, for the first time, here in Scotland. Before addressing the main topic of my speech, I would like to express my sincerest thanks to the Edinburgh City Chambers for hosting this event. I would also like to thank the Scottish Council for Development and Industry, the Scottish Development International, and, particularly, the Honorary Consul of Estonia, Mr Iain Lawson, for their indispensable support in organising this event.
The relations between Scotland and Estonia go back centuries. As was often the case in earlier times, businessmen were active where politicians hadn’t even tread. Likewise in our case – traders were the ones to establish the first durable links between Scotland and Estonia. The sea has united our countries as far back as in the Middle Ages. It has also helped us during difficult times. Estonians appreciate the assistance given to those of their compatriots who arrived on Scottish shores, in 1945, as refugees. Not only was this a friendly and humanitarian gesture, but it actually helped save many a life. Now, the business people and governments of both countries are in the process of restoring the level of cooperation, which existed during the first period of Estonian independence, in the years 1918 to 1940.
Both I, personally, and the Estonian people, as a whole, have been happy to observe the growth of the Scottish business community in Estonia. It can be said, jokingly, that it all started with the arrival, in Tallinn, of numerous business-minded members of the Tartan Army in the mid-1990s, even if some of the football matches did not turn out to be as spectacular as expected. At any rate, by now, there are several Scottish electronics, engineering, and chemical companies successfully operating in Estonia. For the average Estonian, the most obvious reminders of Scotland are the lively Scottish pubs in Tallinn. They are a popular destination for many an Estonian reveller, even in the very early hours of the morning. They bring a piece of Scotland into the heart of Estonia’s capital, and enrich the city’s landscape. Another piece of Scotland in Tallinn is the Scotland House, which was officially opened in February. Estonia highly appreciates its establishment as a bridge for further promoting business links between the two countries.
Scotland and Estonia are on the same latitude – not only geographically, but also mentally. When conversing, Scots and Estonians quickly notice that they share a similar understanding of the world around them. We are, both of us, pragmatic and hard-working people. We tend to be critical and demanding of others, but also of ourselves. However, this does not prevent us from noticing and appreciating each other’s progress in carrying out economic reforms. Although we are critical of the world we presently live in, we regard our future optimistically. And we are keen to learn more about each other. It goes without saying, for this audience, that a basic mutual understanding between people makes the doing of business a lot easier.
Let me draw your attention to some of these reforms, that have made Estonia a champion in establishing a competitive business environment, and that make Estonia an attractive location for Scottish entrepreneurs.
The Estonian monetary reform of 1992 was the launching point for the newly restored republic’s economic reforms. It was a quickly planned radical move. The economic situation needed to be dealt with urgently. It was also a matter of the government’s credibility -- of the government’s ability to deliver promised reforms as quickly as possible, and to bring tangible improvements into people’s lives. Estonia’s rapid development, thereafter, proves that it was a wise decision. Successful monetary reform at the early stage of the transformation process provided the basis for Estonia’s successful economic and fiscal policy. It gave an early advantage to the Estonian economy, which accelerated the nation’s economic development through the 1990s.
Today, Estonia has one of the most stable fiscal policies in the European Union. Estonia’s monetary goal is to join the euro area by 1 January 2007. To achieve this, Estonia must be technically ready to convert to the euro by the middle of 2006. At present, Estonia meets most Maastricht criteria. The government sector’s debt burden is only about 5% of Gross Domestic Product, which is the EU’s lowest. And, in 2004, the national budget showed a surplus of 1.7%. In recent months, high oil prices have, unfortunately, caused Estonia some concern regarding its compliance with the Maastricht inflation criteria. Nevertheless, Estonia still hopes to be one of the first new Members to join the euro area.
Another change that is of crucial importance for the rapid economic development of Estonia is something, which, no doubt, is of interest to everyone here -- income tax reform. As of 1994, Estonia imposes a single uniform tax rate on both individuals and businesses. Until now, the rate was 26%. This year, however, it was lowered to 24%. In the course of the next four years, the income tax rate will decrease by 1% a year. Opting for a uniform tax rate was, above all, a pragmatic decision. Having escaped from the absurdities of the Soviet planned economy, the Estonian state had to find a way to motivate its people. It was found, that one of the best means for doing this is to promote the sense of entrepreneurship. At the same time, it was desirable to lower the cost of administering taxes. As a result, Estonia’s income tax system is now simple and transparent. Both individuals as well as companies find it easy to comprehend and cope with.
As you know, the flat income tax system is apparently becoming the norm in Europe. Already, eight countries have followed Estonia’s example -- Latvia and Lithuania in 1994, Russia in 2001, Serbia and Ukraine in 2003, Slovakia and Georgia in 2004, and this year, Romania. Most recently, big EU countries such as Poland and Germany have also started to debate the matter. As you have, of course, noticed, this has also become a topic for discussion in the United Kingdom. It is no wonder, that the weekly magazine, The Economist, is already calling this trend “The Flat Tax Revolution”.
The adoption of the policy of not levying income tax upon reinvested corporate profits was Estonia’s third landmark decision. This is one of the few exemptions in Estonia’s income tax system, and applies to all businesses equally. The objective, of course, is to stimulate businesses, in Estonia, to reinvest their profits. The long-term aim is to enhance the nation’s business potential, as well as to motivate business enterprises in Estonia to expand their activities and to increase their production capacities. The exempting of reinvested profits from taxation makes Estonia attractive for business enterprises, and this reinvesting helps to increase employment opportunities for Estonians.
Estonia has a business-friendly economic environment, and, what can be termed as, a young public administration. In this case, youth means modernity. Both the modernity and efficiency of Estonia’s public administration is often a great surprise to people when they first get to know Estonia. The aim is to make things easier both for individuals, as well as for businesses. Therefore, the Estonian state offers a well-functioning system of electronic services. The most salient example is the option for the submitting of income tax declarations electronically, which has become very popular, since it was introduced six years ago. Last year, for instance, 75% of all tax declarations were submitted electronically via the Internet. Among other things, the electronic submission of tax declarations saves a lot of time. And, as business people well know, time is money. Various other public services are also available, via the Internet, to both individuals as well as businesses. And it goes without saying, that all national legislation – most of it having also been translated into English – is, of course, accessible to everyone via the Internet.
Estonia’s modernity is also reflected by innovative solutions in various aspects of everyday life. The Estonian Government, for instance, has introduced electronic sessions, which save a lot of time and paper. Also, this system enables ministers, who are not physically present, to directly participate. The man on the street, meanwhile, can use a mobile phone to pay for his bus ticket, or for parking his car. Estonia is one of the leading countries in terms of Internet banking usage, both by individuals as well as businesses. You might have heard, that two weeks ago, Estonians, for the first time, held their first e-elections -- namely, those who wished to do so, were able to cast their vote at the nation-wide elections for local administrations via the Internet. By 2007, the Estonian people will be able to participate in their first parliamentary e-elections. As we can see, Estonia is, and will no doubt continue to be, a testing ground for innovations. Estonia is considered to be one of the countries with the most developed infrastructure in the world.
Estonia’s favourable business climate translates into a high economic growth rate and into favourable ratings in international surveys. The recent World Competitiveness Report of the Institute of Management Development listed Estonia, for the second time, as being in 20th place. Thus, Estonia achieved a higher standing than any other Central or Eastern European state, including our southern neighbours Latvia and Lithuania. Also, it is especially noteworthy, that in the survey dealing with economic freedom, Estonia was rated as being fourth in the world, preceding even the United States. Of all the other European countries, only Luxemburg was given a higher rating than Estonia. It is encouraging for Estonians, that their favourable economic environment has been preserved, and even strengthened, after EU accession. This indicates, that Estonia will be able to maintain its economic competitiveness in the future. And the fact that Estonia is regarded as a state with very low corruption indicators is a significant compliment to not only local administrations and the national government, but also the Estonian people that they represent.
And these very people are the Estonian nation’s greatest asset. Estonia has a highly motivated skilled labour force, that is well educated and multi-lingual. Many of these people have extensive experience with working in the industrial manufacturing sphere. And today, modern information technology makes it possible to use Estonia’s human resources in many creative and innovative ways. In addition to all the aforementioned, labour costs in Estonia are still considerably lower than in most other EU member countries. And Estonians, with their extensive knowledge of, and good contacts in, the other transition countries, as well as neighbouring Russia, can help to open many doors for ambitious Western European entrepreneurs. The result is, that many foreign companies have been unable to resist all the advantages that Estonia has to offer, and have moved their operations to Estonia. I therefore invite even more Scottish enterprises to also take advantage of all these benefits that I have just talked about.
Let me put it plainly: with a flat rate income tax, and with legislation that stipulates a balanced national budget, as well as permits the foreign ownership of real estate, Estonia is one of the most successful, business-friendly, and rapidly developing countries in Europe. As I stated earlier, this attractive business environment has not remained unnoticed for Scottish entrepreneurs.
At the same time tough, I sincerely hope, that Estonian enterprises will become more active in Scotland. And I’m confident, that this will be the case. The business delegation accompanying me is an indication of how enthusiastically many Estonians are interested in Scotland. I believe, that particularly tourism has a lot of potential, since Scotland has always fascinated Estonians. Hopefully, the first charter flight from Tallinn to Edinburgh, which I, and my travelling companions, had the pleasure of taking last night, will be followed by many more. And if all goes well, it’s not impossible, that in the not too far future, there will be a regular airline connection between the two cities, bringing us closer to each other, than we have ever been before.
A lot is going on in the realm of Estonian-Scottish business relations, but its full potential still remains to be achieved. The prospects for cooperation range from innovative sectors, like information technology and biotechnology, to more traditional spheres such as food, textiles, and, of course, tourism. Mutual cooperation offers opportunities for both parties. Contrary to what some may think, it does not just transfer jobs from Scotland to Estonia, or, for that matter, the other way round. But rather, it offers the business communities of both nations additional opportunities from which we both can benefit. I’m sure, that the Estonian business people accompanying me will make full use of this trip to discover new business opportunities here in Scotland, and will establish new contacts with local entrepreneurs. I also hope, that my presentation has contributed to making these same Scottish entrepreneurs more aware of the possibilities that await them in Estonia.
So now, let us see to it that this week of Estonian Days in Scotland will be a great success – just as the Scottish Week in Estonia was, in the summer of 2004. I wish you all an informative seminar, and recommend, that you get to know Estonia better by enjoying some of the cultural events being offered in the course of this week.
Thank you for your attention.