Post-Socialism and the Study of Economics

Opening remarks by Mr. Toomas Hendrik Ilves, Estonian Minister of Foreign Affairs, at the AIESEC Nordic Management Seminar at the Pirita Hotel, Tallinn, January 27, 1997

Dear delegates,
I would like to take this opportunity to warmly welcome all of you to the 1997 AIESEC Nordic Management Seminar. To those of you who have travelled to Estonia from abroad, especially those who are here for the first time, welcome to Tallinn. I hope that this seminar allows you time to explore its historic streets and public squares. To the Estonian delegates, I hope that you will take advantage of the presence of the foreign delegates and open your minds to their methods of approaching problems. To all of you, I urge you to seize this chance to further your education. The time for working comes upon you very fast; use your years as a student well, as I can assure you that you will miss them soon enough.

Some of you may know that as a university student I studied psychology, not economics. However, with the re-establishment of Estonian independence, and the introduction of free-market reforms, every Estonian, myself included, has by virtue of necessity been forced to undergo a crash course in introductory economics. The queen of the social sciences, as the study of economics has been called, has simply been impossible to ignore.

Even before the founding of the Estonian AIESEC representation in Tartu in 1989, efforts had begun to introduce market elements into the ossified Soviet Estonian economic plan. A decade ago this year, the "IME" project, or "self-managing Estonia", produced a report on the Estonian economy that proposed market reforms and greatly increased economic autonomy within the Soviet structure. Real economic reform was made possible with the collapse of the hard-line coup in Moscow in 1991.

In setting about the creation of that economic reform, Estonia was lucky to have the assistance of several very bright economists at exactly the right time. Allow me to give you two examples. In the preparation for the re-introduction of the Estonian kroon in June of 1992, and the macroeconomic stabilisation package implemented shortly afterward, the Estonian government sought advice from Jeffrey Sachs, a Harvard economist, and one of his former doctoral students, Ardo Hansson. With their recommendation, and against the warnings of various international financial institutions, the Estonian government introduced the kroon immediately under a strict currency board system. That decision, which allowed the Estonian economy to rapidly uncouple itself from the Russian economy, was proven prescient by the subsequent hyperinflation in the ruble zone and provided the solid foundation that allowed Estonia to radically re-orient trade towards Western Europe in 1992 and 1993. In 1990, 98% of Estonia's exports went to other Union republics or socialist Eastern European states. In 1994, only 24% of exports went to Russia, and the vast majority flowed north and west to Finland and other European states.

A second example of valuable economic advice also came about in 1992 when the Estonian government's large enterprise privatisation program got under way. The Estonian Privatisation Agency sought the advice of the German Treuhandanstalt, which had overseen much of the privatisation in Eastern Germany. Their consultants recommended that international tenders, rather than pure voucher auctions to local citizens, be used to privatise large Estonian firms. The Estonian government proceeded to privatise majority stakes in large firms on the basis of bid price and business plan to bidders from Estonia and abroad; this approach paid heed to the needs for an injection of investment and efficient corporate governance in the immediate period after privatisation, in marked contrast to privatisation schemes used elsewhere in the transition economies. The results have been encouraging, as most of these firms have prospered under their new management.

These are but two examples of the help Estonia received from economists and business theorists in the remaking of the Estonian economy, but they were disproportionately important because they set Estonia on the right track from the beginning. In terms of the overall pace of reform, the European Bank for Reconstruction and Development has ranked Estonia behind only Hungary and the Czech Republic, two countries who had a vast head start on us in 1991. Estonia continues to press ahead with economic reform and is now privatising large enterprises in the infrastructural sector, namely telecommunications, energy, ports and railways. Estonia will soon have one of the highest private sector to GDP ratios in all of Europe.

The results of the reforms initiated on the basis of advice of Western trained economists and business theorists have been equally dramatic. These reforms have produced a flourishing of private enterprise, and the result in turn has been economic growth. Estonia's GDP began to grow again in 1994, and according to the International Monetary Fund, Estonia's economy should grow by 3.1% in 1996 and continue to accelerate year by year reaching 5.5% annual growth by the year 2000. What has been the main factor in the economic turnaround in Estonia? According to the IMF's most recent report on Estonia, it has been the sound reform policies pursued by the authorities.

I think that it is also worth noting that Estonia has met three out of four official requirements for participation in the European Monetary Union. While not formally part of the European Monetary System, the kroon has been pegged at 8:1 with the Deutschmark since its introduction in 1992, an arrangement that is, if anything, more rigid. Our debt to GDP ratio is only 7%, well within the allowable parameters, and since 1992 Estonia has had a financial budget deficit only once. The only EMU criteria that we have not met is that of a low inflation rate. From last October to this October the Consumer Price Index increased by 17.2%, placing Estonia not quite within the EMU range but showing remarkable progress from the 1992 inflation rate of almost 1000%.

As I mentioned before, the introduction of the kroon allowed a wholescale re-orientation of the Estonian economy, as well as an unprecedented opening up of the economy to the world. The percentage of our imports that go to the European Union was 55% and over 65% of our exports come from the European Union. In addition, the Estonian exports to GDP ratio is very high, an indication of a very open economy. Whereas Estonia once functioned in a closed system, we have now placed ourselves right in the middle of the global economy.

The ultimate barometer of international confidence in our economic reforms, is foreign investment. Foreign investment tells us very directly how much the world is willing to bet on Estonia's future, and it has been telling us that investors are willing to bet a record amount. According again to the IMF, by some accounts from 1993 to 1995 Estonia received more foreign direct investment per capita than any of the other transition economies of Eastern Europe and the Former Soviet Union. At times it has been almost 10% of our GDP, a phenomenal amount comparable only to that attained in the most rapidly growing Asian economies of Thailand and Malaysia.

Why am I telling you this? Why have I rattled off this list of figures to you? John Maynard Keynes, the British economist, once said that "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else." At the time he made this comment Keynes was thinking of the mature market democracies, where the main body of the economy had long existed in more or less the same form and economists argued about efficiency issues at the margins, like doctors debating the merits of various diets, or exercise regimes, on an otherwise healthy patient.

In Estonia, as in many other Central and Eastern European countries, Keynes' comment rings even truer. The fall of the Berlin Wall, and the subsequent dissolution of the Soviet Union, marked the beginning of one of the largest social experiments the world has ever known. A whole score of new countries have undertaken the same task, of moving from authoritarianism to democracy and from plan to market, simultaneously but with different methods.

In this post-socialist transition, economists have occupied quite a different role. The study of economics was able to move beyond being mainly descriptive, into being actively prescriptive. No longer just tinkering physicians, economists were on hand at the very creation of these new states. They had the opportunity to act almost as creators, as benevolent Dr. Frankensteins for lack of a better example, in bringing to life new societies, their advice providing some of the social DNA for these new countries in the first form of these new market economies. Like first constitutions, the first form of the market economy is incredibly important as it shapes actors' expectations of rewards and responsibilities; as a result, it leaves an indelible imprint on all citizens, even after later changes. In addition, the success of the initial reforms was vital for securing support for the reforms that followed.

That period of transition is not yet over. Even in Estonia, free-market reform is not absolutely complete. In other post-socialist states, the transition has barely begun. As well, now that the dust has settled on the "cowboy capitalism" that was typical of many emerging markets in the early nineties, and firms are becoming more established and facing tougher competition from both local and multinational firms in offering goods and services to consumers. As a result, they are increasingly turning to more sophisticated techniques to gain competitive advantage. This is where the study of management becomes important. Students who have absorbed the lessons of successful private managers in other market economies will be well-positioned to help ambitious firms capture that competitive advantage. The end result will be a globally competitive firm and a more satisfied consumer.

Delegates and guests,

My point is this: the study of economics and efficient private management has never been more important, has never mattered more, both here in Estonia and elsewhere. Theories that might have once been called obscure have had a practical effect on the daily lives of millions in Eastern and Central Europe. There is no doubt that there are bad economists as well. Karl Marx, for example, springs to mind. This does not cast doubt on the field as a whole, however, but rather only reinforces the necessity of serious study of the subject, of getting it right. I urge you not to look at your textbooks merely as the colourless doodling of impractical academics. Look at them instead as blueprints for ways of life, as the essence of vital debates that affect the way in which societies function.

Economics has been called the dismal science, because by definition, it is the study of how societies deal with the fact that their resources are finite, and that some method has to be found to allocate those resources. In Estonia, the demise of the Soviet Union has meant that we have been allowed to return to Adam Smith's invisible hand, rather than an imposed plan, as the allocator. As in so many other fields, it is individuals, with guaranteed rights and freedoms, who are the best arbiters of their own best interest. Sound reform at two crucial junctures, based on the advice of economists and management theorists, helped us get to that point successfully.

As a final note, looking around I am sure that here today I am looking at many of the future business leaders of Estonia and beyond. Many of you will choose to pursue careers in the private sector and there is no doubt that many of you will become financially very successful. The free market rightly encourages individualism. However, in your future success I urge you not to forget that the business sphere is but one realm of society, and that its rules should not be writ large over all of our lives.

While you learn the management skills developed in the West, take time as well to note the tradition of corporate philanthropy that has developed there. I encourage you and your firms to give back to the community whenever you can, as you will be repaid many times over. From your membership in the community, stems a moral obligation to look after those who cannot care for themselves. Remember that your success is dependent not only on your hard work, but also on your original endowment of intelligence and aptitude, which you received through no conscious action on your part. Others will not always have been so lucky. I leave you with an proverb that will be familiar to many of the Estonian delegates, that goes as follows,

Mine teisele abiks, siis tuleb teine ka sinule abiks.

which can be translated into English as: help your fellow man, and then in turn he will help you.

Thank you.