Ireland and Estonia: the Economic Miracles of the EU

1. Ireland and Estonia: the Economic Miracles of the EU Prepared by Asie Mustafa & Tatyana Hristova

2. Pre-accession Economic History of Ireland Until the 1950s: strong protectionist policies (tariffs, bans on foreign ownership, etc.), which gave perverse results; National debt reached 128% at a certain point; Emigration soared (400,000 people Ireland between 1951 and 1961); Brain Drain; High level of economic dependence on the state through their ownership of major sectors and various programs for economic stabilization (IDA in the 1950s);

3. Ireland Today One of the fastest growing economies in the developed world: Celtic Tiger I (1990s – 2001,2002) Celtic Tiger II (2003 – present) Open economy: international mobility of labor and capital Employment growth (96,000 net job increases only during 2005) From being an agrarian and manufacturing-based economy, today Ireland is increasingly dependent on high technology and international services

4. What Created the Tiger? Nothing fundamentally innovative; Ireland simply proves “that fortune favors the prepared”. • Ireland is FDI-friendly: • Low corporate tax of 12.5% • Low level of bureaucracy: a company needs 44 hours to register as a domestic company, opposed to 500 hours in Bulgaria • Well-educated and productive workforce, not low-waged • Tax credits for incremental expenditure on R&D • Double taxation agreements with over 44 countries

5. What Created the Tiger? • Cooperation among government, employers and trade unions: • Program for National Recovery (1987) : fiscal and monetary stabilization, tax reform, pay moderation, sectoral development; • Program for Economic and Social Progress (1991 to 1993) • Program for Competitiveness and Work (1994) • Over the period of these programs, economic growth was twice the EU average, inflation had fallen to one of the lowest levels in the EU and employment was growing

6. What Created the Tiger? • Constructive governmental reforms in problematic industry sectors: • In the 1980s, the Irish telecommunication system was perhaps the worst in Western Europe (overstaffed, expensive and low-quality service); • The government recognized this weakness as a burden on foreign investors and initiated reforms; • Instead of offering it to the private market, they committed a large capital investment • It became the largest employer in Ireland • Service was significantly improved

7. Estonia - Baltic’s Very Own ‘Tiger’ • Baltic Tigers is a term that refers to Estonia, Lithuania, Latvia. • Estonia is, among the threeconsidered countries, the one that is performing best and growing at the fastest rate. Data from IMF

8. From a Communist Past to a Model of Modern Economy • Estonia regains independence in 1991 ( later than the other ex-communist countries) • Gateway between East and West BUT aggressively pursuing economic reform and integration with the West. • Reforms start immediately after 1992, with Mart Laar being the force behind those reforms. • Mart Laar 32 years old when becomes PM in 1992, serves 2 mandates – 1992-1996 and 1999-2002. • He is a historian not an economist, and claims that he has read only one economic book - “Free to Choose” by Milton Friedman.

9. Transition Period with Numerous Reforms • Rapid privatisation and restructuring • Privatization of the state-owned companies started in 1992. • Privatization Law enacted in 1993. • Including infrastructure, eg complete liberalisation of the telecom market, airlines and transport. • The level of state aid one of the lowest in EU • The sale of assets, generally based on an open tender system, has been notable for its high degree of efficiency and relative absence of corruption.

10. Creating an Investor Friendly Environment • Banking sector • Soft credits to inefficient enterprises were discontinued • Foreign investment in the Estonian banking system • Currency • Ruble was removed from circulation and Kroon was introduced – 1992 • Fixed exchange rate at the D-Mark, later on the Euro • The introduction of a currency board was crucial in achieving disinflation • Inflation was 1000% in 1992 ; 2.5 % today

11. Creating an Investor Friendly Environment • Liberal trade and investment regime since 1991 -equal treatment of local and foreign investors • Tax system–motivating, transparent, simple – flat income tax rate (20%), tax-exempt personal income EEK 24 000 per year • corporate income tax on dividends only, reinvested profits not taxed • Property rights • Norestrictions on foreign citizens and foreign companies purchasing apartments, houses or buildings. • Foreign companies and individuals also have the first option of buying the land under the buildings they have acquired.

12. E-Estonia – Leader in the World in the Field of E-Governance • e-government project (august 2000) • e-tax board- income tax statements can be filled out via internet (spring 2001) • digital signature act came into force (december 2000) • 90% electronic transactions, 80% of the population using internet banking (end 2005) • e-billing (july 2000) • e-voting - the first case world-wideof a country that has actually passed overall e-voting laws

13. Main Lessons from Estonia and Ireland • There is not a single formula for success, however some patterns can be observed in both countries: • Education of the workforce • Sectoral development • Revised tax policy • Transparency and fighting against corruption • Economic success is driven by political unity and determination.