CNSNews_Former Communist Estonia, Georgia Leading in Economic Success (August 10)

10.08.2007

(CNSNews.com) - In the post-Soviet era, several former communist countries have enacted pro-capitalist, free market policies that are fueling tremendous economic growth and freedom. This week, Estonia's former prime minister explained the economic miracle that is his country - a country of 17,400 square miles and 1.4 million people with an economy that outshines many of its larger European neighbors.

Mart Laar became Estonia's prime minister in 1992. His country was then in shambles, having been ruled by the Soviet Union for 51 years. Shops stood abandoned, housing and highways were crumbling, infrastructure was crippled. It was, in some ways, reminiscent of the Great Depression, Laar said at a talk sponsored by the conservative Heritage Foundation.

Fuel costs had risen 10,000 percent. Inflation exceeded 1,000 percent, and the country depended on Russia for 92 percent of its international trade. But with the help of young idealists, Laar and his cabinet developed a plan to stabilize the economy by instituting hefty reforms - and without taking loans.

"We were not crazy to have such high aims, and young people didn't know what they couldn't do," he said. "We didn't know what was not possible."

Estonia today ranks 12th in the "Index of Economic Freedom," surpassing Japan, Germany and France. The U.S. ranks 4th , behind Hong Kong, Singapore and Australia. The "Index" is published jointly by The Wall Street Journal and the Heritage Foundation.

One of the world's fastest-growing economies, Estonia's gross domestic product is $19.6 billion. It experienced 7.2 percent growth in GDP last year and has experienced similar growth every year for more than a decade.

A country that maintains 7 percent growth for a decade doubles its economy, and Estonia did that between 1995 and 2004, explained Marian L. Tupy, a policy analyst at the Cato Institute's Center for Global Liberty and Prosperity. "Very few countries are able to do that, and they've done it," he said.

Laar launched his reforms at a critical juncture in Estonian history. When the nation's instability demanded immediate and comprehensive changes, he said.

"Time is the most important thing, which means you don't have time," he said of countries transitioning from a Soviet to a Western-style economy. "The biggest mistake is to wait. It's always better to aim high and launch reforms and do them at once."

The government didn't skimp in making changes, he said. The reform process was going to be painful, he knew, so he decided to dole out all the "medicine" at once.

"You must have big, big targets. The success or unsuccess will be seen only when the first reforming government is out of power," he said. "In most cases, when you've really done something, it will not be changed. Reasonable things are reasonable things. They work."

One key policy Estonia implemented was a flat tax. "The flat tax is owned by the Estonian people," Laar said of the 22 percent income tax. A flat tax applies equally to all levels of income, so poor and wealthy pay the same 22 percent from their paychecks.

Laar's government successfully entered Estonia into NATO and the European Union, and he now travels to countries transitioning out of communism to advise them on building free market economies. The most important thing he tells politicians is that they must be so focused on their mission that they don't care about getting re-elected.

"When you have the revolutionary spirit, then you look at the world with different eyes," Laar said, adding that economic reforms must accompany the overthrow of political oppression. "It's not enough only to get your country free from the foreign oppressions," he said. "You must really liberate its people to have power to have liberty with freedom."

Tupy calls Estonia a "massive success story" and praises its economic achievements. But he said the country still has a ways to go to rid itself of residual corruption from its Soviet past.

For instance, last year, the once-privatized railway system was re-nationalized. Some evidence seems to point to corrupt influences within the government as the deciding factor in the move, Tupy said. He added that corruption in all former Soviet countries is common.

Estonia and other former socialist economies need to address the remnants of socialist policy, including public health care, education, and the privatization of businesses, Tupy said. People fear touching those areas, he said, because of a prevailing perception that those services should be free - a perception that doesn't account for the support from taxpayers.

One of the other former Soviet countries following in Estonia's economic footsteps is Georgia.

When Georgia imitated Estonia in instituting a flat tax, they indicated a serious attitude toward creating a pro-business economic environment, said Tupy. And with former Prime Minister Laar advising their economic policy, Georgia is taking its cues from lessons the Estonians learned.

Georgia ranks 35th in the "Index of Economic Freedom," ahead of Israel, France and Italy. Last year, Georgia jumped from 112th to 37th in a World Bank ranking of business-friendly countries.

This year, average salaries increased 15 times, and Georgia's GDP grew 9 percent in spite of losing its main trading partner, Russia, which accounted for 15 percent of Georgia's trade, according to Georgian Senior Counselor Akaki Lomidze.

They are diversifying their exports to stabilize the markets, and 95 percent of imported goods are tax-free. Georgia is also attempting to become an economic hub for its Eastern European neighbors. And its leaders hope to eventually join NATO and the European Union, Lomidze told Cybercast News Service.

Although Georgia still receives 40 percent of its natural gas from Russia, that number is down from the 100 percent it formerly bought. Lomidze said that as his country expands its trade agreements with countries in the free economic region, they hope to eliminate their dependence on Russia within five to six years.

The tables apparently are turning. Russian investors at off-shore locations are now turning to Georgia for their ventures. The largest electrical company in Georgia is privately owned by Russians, said Lomidze.

And countries are responding favorably to the changes in Georgia. Before 2003, foreign investments totaled $60 million. This year, Georgia expects $1 billion from foreign investors.

Lomidze said that progress in his country is due, in large part, to the ideas of political philosophers such as Adam Smith and Thomas Jefferson - in short, capitalism and political and social liberty.

The same ideas that made the United States the leader of the free world are blanketing Georgia, said Lomidze, and this is primarily because of American and Western European universities.

Ninety-nine percent of Georgia's officials and 80 percent of mid-level officials graduated from U.S. universities - such as Columbia and Georgetown - said Lomidze. The other officials went to college in Western Europe.

"Business is business, and politics is politics," he said. "We learned all this from the United States. The western way is to combine these two ideas. The Soviet way is a central government with no economic or political freedom - no respect for human rights."

Today's political leaders "brought with them western ideas, western standards, western style," Lomidze said. "As soon as the government took the western values, we became successful. We are sharing western values, and we are happy we chose this western way."

Cato's Tupy said Georgia is on the right track, if still a few years behind the achievements of the Estonians. "I expect that it will take a few years for Georgia to put into place the policies and institutions that will provide for economic growth, but I have no doubt that that will happen," he said.

As for Estonia, the leader among transitioning countries, Tupy said the future looks bright when comparing their current situation to their situation 10 or 15 years ago.

"As hard as it is to believe, the world is going in the right direction. There are genuine success stories of poor countries becoming richer day by day and Estonia is a good example of that," he said.

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