A big bang from a small eastern country

By Edward Lucas

Date: 13/04/06

The economic history of Estonia might sound arcane. But when the speaker is Mart Laar, twice prime minister and the father of its unique blend of free-market capitalism and internet government, it proves quite a draw.

A few weeks ago, I was watching Mart Laar launching the Polish-language edition of his book in Warsaw. The audience, at the city's top economics school, reminded me of a harried group of believers getting a red-hot sermon from a much-admired foreign preacher. It was much the same at a dinner in London, organised recently by Politeia, a conservative think-tank.

Estonia has that effect on both free-market liberals and geeks: it has done what other countries just dream about. Laar's administration in 1992 abolished all subsidies and tariffs, balanced the budget, introduced a flat tax, auctioned most industries to foreign investors and reformed the pension and welfare system. This wasn't just shock therapy: this was the most radical high-voltage treatment experienced by any economy in Europe, ever. (I was living there then. It was thrilling, but uncomfortable.)

Laar is chubby, bearded, rather rumpled, more like a university professor than a political icon. His Estonian-accented English takes a bit of getting used to (he pronounces "invite" and "invade" as if they were the same word). And he is very modest about his account of those exciting years. He didn't know much economics, he admits freely: he'd just read Hayek and Friedman and they made sense. He hoped that the flat tax would bring in roughly the same amount of money, but he couldn't be sure (in fact, of course, it brought in a lot more). He is far too polite about the bad advice Estonia received from outsiders (including a ninny from the International Monetary Fund who recommended a common post-Soviet currency "from Tallinn to Tashkent"). Laar, thank goodness, ignored it all.

But he certainly fires up his audience. The Poles wondered, wistfully, if radical reform could only work in a country with Estonia's small (1.3 million) population? (Answer: no.) And was it now too late to try such radical measures in Poland, 15 years on? (Again: no.) The UK Conservatives, whose current leader, David Cameron, is a platitudinous semi-socialist who shows not the slightest interest in low taxes and lean government, listened enviously. Their questions were admiring, but peppered with excuses about why real reforms wouldn't be practical, timely or popular in the UK. (Laar replied that necessary reforms are never practical, timely or popular, and you have to reckon that you may lose the election after you implement them: but they're still worth doing, all the same).

Amid the swooning admiration, I was struck by a paradox. Most of the parliamentarians and party groupies round the London dinner table were Europhobes, who would like the UK to leave the European Union, or reduce it to a free-trade area with no central institutions. I asked Laar what he thought. He replied that people who criticise the EU are just looking for someone to blame for problems they can't solve themselves. Joining the EU had not affected Estonia's economic freedom and the Brits should stop whingeing and start working to make it work better.

This didn't go down very well. But as UK Conservatives hunt around the nutty fringe parties of Europe for partners who are suitably Europhobic, they might stop to notice that a politician who has actually won an election in living memory and has promoted capitalism, freedom and European security with striking success, thinks they are plain wrong.

• Edward Lucas is central and eastern Europe correspondent for The Economist.

Comment feature on Mart Laar, Estonia's ex-Prime Minister and the father of its unique blend of free-market capitalism and internet government.