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The President of the Republic at the Economic Conference of Hansapank on May 9, 2001

Does entrepreneurship create or abolish inequality?

Dear Chairmen of the Board and Council of Hansapank, Professor Fukuyama,
ladies and gentlemen!

First, I would like to touch upon two conflictive terms of our changing world, namely on Shareholder Value on the one hand and New Public Management on the other hand. These two are despised as signs of cultural decline and extolled as the solution to today's conflictive problems. These terms will concern Estonia tomorrow more than they do today, as the trend of social democracy is strengthening in Estonia's very liberal economic thinking.

In the era of industrialisation economy was shaped by the entrepreneur. He had his own business ideas that had to be realised, and for which he was prepared to make a lot of sacrifices. He was driven by the idea of creating long-lasting values that could be inherited by the generations to come. The mentality was mostly patriarchal.

At that time, which ended for Estonia with the beginning of World War II; and from which the elderly generations still remember the advertisement of the company Puhk & Sons, the necessity of hierarchical structures was never questioned - neither in the state, nor in the church, in the army or in enterprising. Also the educational system with its definite status markers had a corresponding structure. The Estonian writer Juhan Smuul, who inherited a big farmstead at the Muhu Island, was sent to the Jäneda School of Agriculture so that the boy would learn how to modernise the farm and be wise in hiring the farm hands. The same pattern of thinking also shaped the organisation structures of the time. The bureaucratic form of organisation of those times presumed the existence of a stable environment, where it could prove its efficiency. Its obvious advantage was the clearly outlined distribution of responsibility. In the theory of organisation structures this hierarchical, bureaucratic thinking culminated in giving detailed descriptions of every worker's tasks. It proceeded from finer and finer fragmentation of duties, in which the general aim of an enterprise - or the general aim of public law - was divided into smaller and smaller areas of responsibility, which allowed to allocate clear-cut tasks, obligations and responsibilities to each contributor.

This patriarchal pattern of thinking, forgotten in modern Estonia but still alive in the world, has been confronted by a new mentality in the last decade or two.

From the economic system of enterprising, we have - imperceptibly in the world and quite perceptibly in Estonia - stepped into the system of investors. Where is the difference, if we address the entrepreneur's pattern of thinking? Investor proceeds from the presumption that all services can be purchased. He acts on the orders of time, and no longer in the name of his successors. Thereby, he also has to optimise the financial resources. In an ideal case, as in Estonia, he responds quickly to any changes and looks for the greatest monetary value. In Estonia, banks and chain stores have taken the leading position, whereas the chemical industry of the past, and the export of Estonian petrol to Finland, as well as oil export to Germany, and the electronic products export of "Reti" and "Are" to our neighbouring countries, have disappeared, as have our cable plants, our engine and aeroplane production, and foodstuffs industry - because the profit was easiest obtained in non-productive sectors. This is by no means a pessimistic conclusion. The citizens of the Republic of Estonia participate in the international distribution of labour much more intensively than our government or our policies foresee. We must not forget that the communist power moulded our industry into a shape that was never much use to us - and in the sphere of economy, this conclusion is, above all, an optimistic one. At the same time, we can point out the positive side of some privatisations, where the course was successfully taken to the world market and high technology - above all, I mean the Baltic plant in Narva, the Silmet or the Loksa shipyard. Yet these are exceptions that confirm the rule, and also political demands to the legislator: we must create an economic structure where entrepreneurship and initiative would be worthwhile. I consider it very important to highlight this idea, because the success of Estonian economy is unquestionable, but for this success we have paid a price that is very characteristic to the post-communist society - unemployment and growing inequality in the distribution of wealth. But I will come to that later if you allow me.

To return now to the concept of New Public Management - the investor does not follow the behaviour patterns of a traditional entrepreneur. He is not an entrepreneur. He hires managers to do the work of entrepreneurs, to take care of operative tasks; and at least in good times there is a trusting partnership between the investor and the manager, as they proceed from the goals set together.

In economic life, this new pattern of thought manifests itself as shareholder-value thinking, and in politics and administration as new public management. It is often debased as an egoistic attitude. And thereby, it is forgotten that from a transparent and linear system, the Estonian society has changed into a complex structure woven into different networks. Let us consider, for instance, the globalisation and the liberalisation, and the progress of technology that has evoked swift information exchanges via Internet, resulting in cash flows all round the world. We would be indulging in fruitless nostalgia, if we claimed that these new skills, experiments and intricate forms of co-operation were alien to our national identity and culture. Also here, as in politics, economy, and social life, quality is determined by balance. Let me bring you some examples. Law, police, and basic education must, by political decision, be left outside market regulation. Second: it is much more difficult today to determine and prioritise one's goals and the minimum necessary means to accomplish them than it used to be in the traditional private economy. The phrasing and approval of goals must be left to politicians, but it has now become much more complex and contradictory than it used to be in the former free market economy, where the factors were fiscally transparent and could eventually be evaluated through the market. And finally - the process aspect of management seems to have little importance, until one day we have to take complicated decisions in a difficult situation. This calls for higher qualifications, fewer legal restrictions, and more direct participation in the management process itself, involvement in the political and economic responsibility. In one way or another, these remarks point to a huge demand on education. The development of society presumes the responsibility, to a much greater extent, to be assumed by researchers, product developers, market openers, teachers, and physicians, and this is not the strongest side of our universities. Education and knowledge walk at one pace, whereas the faculty of enterprising and resolve to manage have another rhythm. A good teacher is not automatically a good headmaster, and this simple sentence brings me back to our current problems.

Some successful entrepreneurs are spreading the myth that ten years ago, we all had the same starting position. So, those who are rich today have simply worked harder. Those who are poor today only have themselves to blame. This is irresponsible and foolish. But it is just as irresponsible and foolish to paint a black-and-white picture of Estonia and to claim that we have no social problems, or to the contrary, that social problems are suffocating Estonia. It is true that more cars than children are born in Estonia. It is true that after the fall of the iron curtain, in 1993, 39,000 people booked their travels abroad through tourist agencies; and that last year, this number was 360,000. But it is also true that 60% of our GDP comes form Tallinn and Harju County; per capita, this nearly equals to the respective GDP of Greece; but in the rest of Estonia, the amount is two times smaller. To be brief: the income of the citizen of the Republic of Estonia has grown, but the inequality between different counties of Estonia has grown even faster, and the same can be said about the gap between the relatively rich and the relatively poor of Estonia.

When I speak of the Estonian state, the Estonian economy, or of Estonia's future, I am inevitably also talking about Estonia's identity. Inequality is inevitable, but it is also harder to bear for Estonians than it is, for instance, for Americans. Estonia is small, and the people of Estonia should be seen as a family. The concept of districts of the wealthy and districts of the poor seems strange to us, because our cities are too small for that. The children of the wealthy and the poor are born in the same hospitals, usually go to the same schools; and our elder generation, when they come to the end of their journey on earth, are buried in the same graveyards. In the United States, the extreme groups do not meet, but in our small Estonia they live side by side and must be united also by the will and the ethics of living together.

Unfortunately, we are wide of the mark here. The reforming of Estonian economy has been difficult, but according to the World Bank report, the inequality in Estonia has grown less than in other reform countries. And the recently published World Competitiveness Yearbook places Estonia 22nd on its list, leaving several EU member countries behind. But the 100,000 unemployed Estonians do not read the Competitiveness Yearbook, they hope for work - at least most of them do. Unfortunately, the government and the parliament have not given them any clear messages on how to abolish unemployment. One minister claims that 60,000 new jobs are created annually, whereas another demands additional 600 millions from the state budget for creating new jobs. At the same time, the Estonian economy is suffering from the lack of qualified labour force, and it is quite impossible to hire a farm hand.

I suppose that the Estonian entrepreneurs should approach this Gordian knot - the unemployment accompanied by the lack of qualified labour force - much more actively, not by means of written statements, but by means of various initiatives. Time will not solve, but aggravate this problem. In the last schoolyear, 8% of the boys in the last grade of main school had to stay for another year, and more than 700 young people terminate their main school studies every year. Two thirds of them are left without a job and increase the numbers of the unemployed, as well as social problems and criminality.

At the end of May, I will be glad to receive the President of Ireland and to present her to you. Ireland is the most successful European country in attracting investments and enhancing its economy. When answering polls, the Irish business managers have emphasised that it is the educated labour force that attracts the investors, and that the favourable taxes are merely "the cream on the cake". Our Gordian knot, the paradoxical coexistence of unemployment and labour shortage, is already today undermining Estonia's future possibilities and ability to compete, as well as the quality of our products and our life. It seems we can be proud that the number of university and college students in Estonia has grown twofold, but this only concerns the fashionable disciplines. The numbers of future engineers, scientists, teachers and doctors have dropped at the same time. And to wind up the subject of education: do not forget that quite recently, the profession of customs official was one of the most popular in Estonia... I will leave the ethical conclusions to you.

George Soros has said that being a capitalist prevents no one from being human. Not everything you do can be done for the sake of business. I would like to add that everything can't be done for the sake of tomorrow's business - business logic itself dictates also the causes of next year's and next decade's success. The self-centred attitude of several small-scale entrepreneurs is the reason why, lately, opinions have been voiced against our accession to the European Union. The European Union is based on stability, competitiveness, prevention of corruption, and consumer protection - and of course this is a deterrent to all the gamblers who dream of easy money. Considering the above, let me conclude my speech with three comments.

1. A week ago, on my meeting with the President of Malta, I said that we have observed disturbing tendencies in the EU enlargement process. "It seems that the reunion of Europe is being reduced to deliberations on the export quota of carrots and potatoes. Of course, economic integration does have a prominent role in the EU, but the European Union is first and foremost the fulfilment of the Idea of a United Europe. It is an ideal that we must not and have no intention to exchange for potato-counting."

This is so, and I will never betray these ideals. But today, speaking to the entrepreneurs, I will elaborate my idea proceeding from your interests.

2. Euroscepticism has grown fast in Estonia in the last six months. Fortunately, the report of the Ariko Marketing research firm confirms that the managers of most enterprises are still in favour of accession to the EU. But unfortunately, also the proportion of pro-EU enterprises - 56 per cent today - has declined within last two years. Instead, the number of managers wishing to seek "the independent third path instead of the EU or integration towards the East". (Äripäev, April 25, p 26) has grown. Has anyone ever considered, what this third path would be like - with the EU border running not on the eastern border of Estonia but on the northern border of Latvia? What would the third path be like, if Estonia became a just a state in the vicinity of the European Union, such as Byelorussia or Morocco? Estonia can either belong to the European economic space, which is a stable market, and where 75% of our export goes already now. The alternative is to stay outside the European common market and to become a sub-contractor for the companies of Europe and Russia, with no independent access to the markets of those big neighbours. Of course, the Estonian Eurosceptics always refer to the case of Norway, deliberately forgetting that Norway's wealth comes from abundant oil resources. And also forgetting that whereas following 80% of the EU directives, Norway has no possibility to affect the decisions made within the EU.

3. Estonia has made steady progress on the accession negotiations with the European Union, and the solving of major problems has wisely been left for the final period of negotiations. Unfortunately, against this background, a disturbing tendency has recently become obvious. Estonia's success on the accession negotiations with the EU still depends on the firmness of the support the Government and the negotiating delegation receive at home. Regrettably, the representatives of some sectors (for instance shipping companies, who wish to have a transition period for the tax-free trade) do not attempt to co-operate with the Government and the negotiating delegation, but try to influence them through the press instead. Such public attacks will not serve to defend the entrepreneurs' business interests, and in addition, they undermine the reputation of the accession negotiations in the public eye, thus increasing the Euroscepticism. On the accession negotiations, the Estonian government proceeds from the interests of Estonian entrepreneurs, if those interests can be clearly expressed despite the competition between enterprises. Accession negotiations and accession to the European Union are not some hobby of the Government or the President - they are the common cause of all the Estonian society, including the Estonian entrepreneurs.

As you can see, the problems of Estonian economic policy are quite similar to those of the world, or at least to those of Western Europe. Now, we have to straighten our rows on the accession negotiations; and at home, to support an economic structure that would make initiative and entrepreneurship equally worthwhile for everybody - both for the employers and the employees.

Thank you.


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