Wednesday, June 25, 2008

Estonia - Free Market Paradise

Great article from yesterday on Estonia from the American Thinker's Nicholas Kaster. Estonia, one of the three Baltic Republics that suffered so much damage during World War 2 (invaded in succession by the Soviets, the Nazis, then the Soviets again) kick started their economy after the fall of European Communism by adopting the Milt Friedman approach, championed by Soviet dissident Mart Lar, Estonia's first Prime Minister after independence. First, the problems facing Lar:

"Laar, who became Estonia's first prime minister in 1992, inherited the bitter fruits of socialism - an economy in shambles and the citizenry dispirited. "In an era of socialism," Laar wrote, "people were not used to thinking for themselves, taking the initiative or assuming risks."

This was a problem common to Central and Eastern European countries. In a recent article for the American Spectator, Washington Post columnist Anne Applebaum observed that "[i]n a very short time, between the late 1980s and mid-1990s, much that had been illegal in that part of the world became legal again." But the private, charitable, and social institutions that form the fabric of a civil society had not existed for many decades. Without civil society, Abblebaum wrote, citizens "lost of the habit of organizing anything, whether economic activity, entertainment, education, politics, or charity, for themselves."

Estonia was no exception. As Laar himself noted, citizens "had to be shaken free of the illusion-common in post-communist countries-that somehow someone else would solve their problems for them." Accordingly, "the government declared that it could only help those who were prepared to do something for themselves." "

Lar instituted a set of radical economic reforms that have been wildly succesful in growing the economy at an average of 6% a year since their implementation. First, he privatized state owned assets and established a strong system of private property rights, and ended state subsidies to failing enterprises. Secondly, the nation abolished all import tariffs and established a free trade zone. Thirdly, the government established a flat tax regime with an introductory rate of 26%, which was later reduced to 24% in 2005, 23% in 2006, and is scheduled to be reduced 1% a year to reach a rate of just 18% in 2010.

Estonia is now the 12th freest economy in the world today as calculated by the 2008 Index of economic freedom, ahead of such major economic powers as Japan, Germany, the Netherlands, an impressive achievement considering wherre the nation was just 15 years ago. In contrast, while former East bloc nations are embracing free market principles and slashing their tax rates, the US seems destined to follow outdated archaic tax and regulatory schemes, particularly if Barack Obama ends up winning the 2008 presidential campaign.

I may have to make a visit to Estonia someday.

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