Ireland and Estonia: the Economic Miracles

of the EU

Prepared by Prepared by

Asie Mustafa & Asie Mustafa &

Tatyana HristovaTatyana Hristova

Pre-accession Economic History of Pre-accession Economic History of IrelandIreland

► Until the 1950s: strong protectionist policies (tariffs, Until the 1950s: strong protectionist policies (tariffs, bans on foreign ownership, etc.), which gave perverse bans on foreign ownership, etc.), which gave perverse results;results;

► National debt reached 128% at a certain point;National debt reached 128% at a certain point;

► Emigration soared (400,000 people Ireland between Emigration soared (400,000 people Ireland between 1951 and 1961); Brain Drain;1951 and 1961); Brain Drain;

► High level of economic dependence on the state High level of economic dependence on the state through their ownership of major sectors and various through their ownership of major sectors and various programs for economic stabilization (IDA in the 1950s);programs for economic stabilization (IDA in the 1950s);

Ireland TodayIreland Today

► One of the fastest growing economies in the One of the fastest growing economies in the developed world:developed world: Celtic Tiger I (1990s – 2001,2002)Celtic Tiger I (1990s – 2001,2002) Celtic Tiger II (2003 – present)Celtic Tiger II (2003 – present)

► Open economy: international mobility of labor and Open economy: international mobility of labor and capitalcapital

► Employment growth (96,000 net job increases only Employment growth (96,000 net job increases only during 2005) during 2005)

► From being an agrarian and manufacturing-based From being an agrarian and manufacturing-based economy, today Ireland is increasingly dependent economy, today Ireland is increasingly dependent on high technology and international serviceson high technology and international services

What Created the Tiger?What Created the Tiger?

► Ireland is FDI-friendly:Ireland is FDI-friendly: Low corporate tax of 12.5%Low corporate tax of 12.5% Low level of bureaucracy: a company needs 44 Low level of bureaucracy: a company needs 44

hours to register as a domestic company, opposed hours to register as a domestic company, opposed to 500 hours in Bulgariato 500 hours in Bulgaria

Well-educated and productive workforce, not low-Well-educated and productive workforce, not low-wagedwaged

Tax credits for incremental expenditure on R&DTax credits for incremental expenditure on R&D Double taxation agreements with over 44 countriesDouble taxation agreements with over 44 countries

Nothing fundamentally innovative; Ireland simply proves “that fortune favors the prepared”.

What Created the Tiger?What Created the Tiger?

► Cooperation among government, employers and trade Cooperation among government, employers and trade unions: unions: Program for National Recovery (1987) : fiscal and Program for National Recovery (1987) : fiscal and

monetary stabilization, tax reform, pay moderation, monetary stabilization, tax reform, pay moderation, sectoral development;sectoral development;

Program for Economic and Social Progress (1991 to Program for Economic and Social Progress (1991 to 1993)1993)

Program for Competitiveness and Work (1994)Program for Competitiveness and Work (1994)

► Over the period of these programs, economic growth was Over the period of these programs, economic growth was twice the EU average, inflation had fallen to one of the twice the EU average, inflation had fallen to one of the lowest levels in the EU and employment was growinglowest levels in the EU and employment was growing

What Created the Tiger?What Created the Tiger?

► Constructive governmental reforms in problematic Constructive governmental reforms in problematic industry sectors:industry sectors: In the 1980s, the Irish telecommunication system In the 1980s, the Irish telecommunication system

was perhaps the worst in Western Europe was perhaps the worst in Western Europe (overstaffed, expensive and low-quality service);(overstaffed, expensive and low-quality service);

The government recognized this weakness as a The government recognized this weakness as a burden on foreign investors and initiated reforms; burden on foreign investors and initiated reforms;

Instead of offering it to the private market, they Instead of offering it to the private market, they committed a large capital investmentcommitted a large capital investment

It became the largest employer in IrelandIt became the largest employer in Ireland Service was significantly improvedService was significantly improved

Estonia - Estonia - Baltic’s Baltic’s VVery ery OOwn wn ‘Tiger’‘Tiger’

► Baltic Tigers is a term that refers to Estonia, Baltic Tigers is a term that refers to Estonia, Lithuania, Latvia. Lithuania, Latvia.

► Estonia is, among the threeEstonia is, among the three considered considered countries, the one that is performing best and countries, the one that is performing best and growing at the fastest rate.growing at the fastest rate.

Data from IMF

From a Communist Past to a From a Communist Past to a Model of Modern EconomyModel of Modern Economy

► Estonia regains independence in 1991 ( later than the Estonia regains independence in 1991 ( later than the other ex-communist countries) other ex-communist countries)

► GGateway between East and West ateway between East and West BUT BUT aggressively aggressively pursupursuing ing economic reform and integration with the economic reform and integration with the WestWest. .

► Reforms start immediately after 1992, with Mart Laar Reforms start immediately after 1992, with Mart Laar being the force behind those reforms. being the force behind those reforms.

► Mart Laar 32 years old when becomes PM in 1992, Mart Laar 32 years old when becomes PM in 1992, serves 2 mandates – 1992-1996 and 1999-2002. serves 2 mandates – 1992-1996 and 1999-2002.

► He is a historian not an economist, and claims that he He is a historian not an economist, and claims that he has read only one economic book - has read only one economic book - “Free to Choose“Free to Choose” by ” by Milton Friedman.Milton Friedman.

Transition Period with Numerous Transition Period with Numerous ReformsReforms

►Rapid privatisation and Rapid privatisation and restructuringrestructuring Privatization of the state-owned companies Privatization of the state-owned companies

started in 1992.started in 1992. Privatization Law enacted in 1993.Privatization Law enacted in 1993. Including infrastructure, eg complete Including infrastructure, eg complete

liberalisation of the telecom market, airlines liberalisation of the telecom market, airlines and transport. and transport.

The level of state aid one of the lowest in EUThe level of state aid one of the lowest in EU The sale of assets, generally based on an open The sale of assets, generally based on an open

tender system, has been notable for its high tender system, has been notable for its high degree of efficiency and relative absence of degree of efficiency and relative absence of corruption.corruption.

Creating an Investor Friendly EnvironmentCreating an Investor Friendly Environment

► Banking sectorBanking sector Soft credits to inefficient enterprises were discontinuedSoft credits to inefficient enterprises were discontinued- Foreign investment in the Estonian banking systemForeign investment in the Estonian banking system

- Currency Currency - Ruble was removed from circulation and Kroon was Ruble was removed from circulation and Kroon was

introduced – 1992 introduced – 1992 - Fixed exchange rate at the D-Mark, later on the EuroFixed exchange rate at the D-Mark, later on the Euro- The introduction of a currency board was crucial in The introduction of a currency board was crucial in

achieving disinflation achieving disinflation - Inflation was 1000% in 1992 ; 2.5 % todayInflation was 1000% in 1992 ; 2.5 % today

Creating an Investor Friendly Creating an Investor Friendly EnvironmentEnvironment

► Liberal trade and investment regime Liberal trade and investment regime since 1991since 1991

-equal treatment of local and foreign investors-equal treatment of local and foreign investors► Tax systemTax system–motivating, transparent, simple–motivating, transparent, simple

– – flat income tax rate (20%), tax-exempt personal income flat income tax rate (20%), tax-exempt personal income EEK 24 000 per yearEEK 24 000 per year

corporate income tax on dividends only, reinvested profits corporate income tax on dividends only, reinvested profits not taxed not taxed

► Property rightsProperty rights NoNorestrictions on foreign citizens and foreign companies restrictions on foreign citizens and foreign companies

purchasing apartments, houses or buildings. purchasing apartments, houses or buildings. Foreign companies and individuals also have the first Foreign companies and individuals also have the first

option of buying the land under the buildings they have option of buying the land under the buildings they have acquired. acquired.

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-wide of a country that has actually passed overall e-voting laws

Main Lessons from Estonia and Main Lessons from Estonia and Ireland Ireland

► There is not a single formula for There is not a single formula for success, however some patterns can success, however some patterns can be observed in both countries: be observed in both countries: Education of the workforceEducation of the workforce Sectoral development Sectoral development Revised tax policy Revised tax policy Transparency and fighting against Transparency and fighting against

corruptioncorruption►Economic success is driven by political Economic success is driven by political

unity and determination. unity and determination.