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President of the Republic at the Deutsche Industrie- und Handelstag in Berlin, on November 7, 2000
07.11.2000

Economic miracle on the coasts of the Baltic Sea - without German participation?


Ladies and gentlemen,

I am glad that you have invited me to speak before the Deutsche Industrie- und Handelstag. Trade and economic relations have throughout many centuries been our tightest links beside cultural relations.

It is certainly no news to you that in the 13rd and 14th centuries, also the Estonian cities Tallinn/Reval, Tartu/Dorpat, Pärnu/Pernau ja Viljandi/Fellin belonged to the Hanseatic League of cities. Following the pattern of Germany, also Estonian cities were administered by means of magistrates and guilds. Estonia and Livonia became an important bridge between Western Europe and Russia. Close ties to Germany lasted for 800 years, until the Soviet occupation, and their restoration has been started only in the last decade.

In the seminar that just closed, you heard three presentations aiming to let you know that during the last decade, Estonia with her 1.4 million citizens has been the fastest growing economy in Central Europe. As soon as we were able to re-establish our independence in 1991 we realised that the only way we were going to bridge the economic gap that had opened up between us and our neighbours, Finland and Sweden, during the fifty years of Soviet occupation was through radical economic reforms.

This means that already in 1992, we launched radical economic reforms, much like the ones carried out in Germany at the end of the 1940s, which laid the basis for the German economic miracle at the time. Our new old currency, the Kroon, or crown, became instantly convertible and has remained fixed to this day, at a rate of 1 to 8 to the German Mark, and through the German Mark, it is now also fast bound to the Euro.

We passed a law requiring the Parliament to pass a balanced budget. This may be painful at times, but it has certainly imposed strong fiscal discipline. We also imposed a universal value added tax, and a flat rate corporate and personal income tax of 26%. From this year, not the profit itself, but only the withdrawal of profit is taxable in Estonia. This means that in Estonia reinvested profits are free from corporate income tax. There are no restrictions set on foreign ownership of business, repatriation of profits or ownership of land.

We have also worked hard to open up new markets for our domestic producers. Today I can proudly say to you that Estonia has one of the most liberal trade regimes in the world. We don't have any subsidies and practically no tariffs. We have functioning free trade agreements with the European Union, EFTA, and most of the CIS countries. Estonia is a member of the World Trade Organisation. The free market of Estonian goods has 600 million consumers.

All these steps have paid off, and I am glad that our efforts have also been reflected in several well-known international publications. For instance, in the recent Index of Economic Freedom, the Heritage Foundation placed Estonia 14th in a list of 161 countries, before Germany. In the latest UNDP Human Development Index, Estonia has been included to the first group, i.e. the group of highly developed countries.

So, what are the economic successes I referred to?

In the last 10 years we have changed our economic structure to be more or less comparable to modern Western European countries, two thirds of our economy is related to services sector, 25% to industry, and the share of agriculture is less than 5%.

Our trading relations with the EU have been growing fast. In the middle of 1990's everybody was expecting that the annual growth rate of trade would soon decrease to annual 5-10%, but our trade is still growing rapidly, for example in the years 1997-1999, our export grew altogether 35%. The share of EU countries is growing as well and by the second quarter 2000 the share of EU countries in our export was already 75%. Main trading groups are machinery and equipment, wood products, textiles and food products.

Estonia has received foreign direct investments in total amount of 5 billion DM. By the last World Investment Report the FDI stock as a percentage to GDP in Estonia was 35,6% in 1998, this is the highest number in Central and Eastern Europe but also double the size of EU average. This shows that Estonia is an attractive place for investments. Estonia has not only used the acquired knowledge domestically but we have invested and forwarded our experience also to neighbouring countries. For example Estonia has been one of the major direct investors in Latvia together with USA and Germany.

Today one of our main tasks is to raise the value added in production process and to become one of the innovators instead of being the user of innovations.
We have freed our entrepreneurs from unnecessary bureaucratic shackles with the result that we are today no longer only vying about a place in the front row of Central European countries, but are ahead of many European Union members in areas such as internet penetration per capita. One third of Estonians are using the Internet, the amount of mobile phone users is close to the number of fixed phone users. Over 80% of bank transactions are made via electronic means. The Wall Street Journal recently named the Estonian Hansapank among the three most technically advanced banks in the world.

When two or three years ago we were producing only some parts of mobile phones then today Nokia, Ericsson and Siemens are producing in Tallinn their mobiles up to the final products which can be shipped to the consumers. Another good example can be brought also from telecommunication sector. Estonia is the world leader in implementing mobile positioning system, which was worked out by 3 Estonian companies. Those applications can be used both for commercial services but also in close co-operation with rescue departments. Estonian engineers and IT specialists are also designing mobile networks in Brazil, Tanzania, the Czech Republic and many other places.

On 8th December 1999, the European Commission launched the initiative of ''Europe - An Information Society for all''. This programme includes targets that should be met by EU member states by the end of 2001:
- All schools will have access to the Internet and multimedia resources.
- Support services will be made available to all teachers and pupils.
- Access to Internet/multimedia in public centres will be made available, including in less-favoured areas.

I'm happy to say that we have already reached these goals. We started with the program to bring Internet connection to every school in Estonia and to open public Internet points all over the country already 3 years ago. We even have introduced a special traffic sign to show where public Internet points can be found. All this will give us good possibilities to be among the leaders in developments of mobile Internet. Those 2 projects have received many awards in Europe, and the State of Maryland has considered following our example in introduction of special traffic signs.

Here, I can bring also a good example of Estonian-German relations. For many years, the German Society for International Legal Co-operation has helped us to modernise our legislation. Especially the Business Code has been important. Today, we are proud to be able to return Germany's help. The IT solutions used for the Estonian Business Register have roused keen interest in the German side. The talks between the two Ministries of Justice will be closing soon, and after that the first test version will be tried in the State of Schleswig-Holstein. If this is a success, the whole of Germany's business register will be functioning in electronic form created on the basis of our solutions.

All of these facts should make it eminently clear that not only is Estonia a good place to deposit your money in terms of investments, it is also a market for your goods. And there is nothing to stop you. Estonia and Germany have concluded more than 10 agreements facilitating business activities, including the agreement on mutual promotion and protection of investments and also the agreement for avoidance of double taxation of profits and capital. In addition, several agreements concluded between Estonia and the European Union also extend to our relations.

Unfortunately, I must admit that when compared to Germany's legislative, political, cultural, and educational support, the role of Germany's economic powers in all the changes we have undergone has remained relatively modest.

Only due to the developments of recent years, Germany has acquired the sound third place on the list of our trade partners; now, only Finland and Sweden are in front of her. Our export to Germany has increased threefold when compared to 1994, and our import from Germany has grown more than two times. I am glad the fastest developments have taken place in the field of machinery and technology, especially in the export of electronic goods.

Germany's former modest position in our economy is in many respects related to the volume of investments. German companies and entrepreneurs have made direct foreign investments to Estonia in the amount of 130 million DEM, which constitutes only 2.6% of all the foreign investments made to Estonia. Today, ca 250 Estonian companies with a German partnership have been registered. Most of the investments have still been made by small or medium-sized enterprises, the largest single investment from Germany barely amounts to 20 million DEM.

I hope that my presentation today, as well as the seminars taking place during this visit in Stuttgart, Berlin, and Fleesensee, would contribute to Germany's restoring her historically established eminent position in Estonian economy. Although our good neighbours Finland and Sweden are our main trade and investment partners, we are also interested in more balanced economy and in stronger economic ties between Estonia and Germany, the leading country in the economy of European Union.

But as you know, we are interested in more than trade with the European Union countries. We also wish to accede to the EU - and as soon as possible. What we expect from Germany and other EU member states is readiness to accept the candidates in accordance with their readiness to join. Not because of our common history or our common cultural background, although this is the very basis of the enlargement, but because a certain country is actually ready to meet the requirements of the European Union. The enlargement must and can - if it is to be a success - take place according to the principle of individuality, so that 'wer fertig ist, kann rein'. Chancellor Schröder belongs to these European politicians who have repeatedly confirmed that the first new countries would be acceding to the European Union already in 2003. And I assure you that Estonia will be among these countries.

And the enlargement as such is useful. Not just politically, but above all economically. Although, unfortunately, not often mentioned, it is a fact that the growing economies of the candidate countries - which are partly growing due to foreign investments made in the expectation of their EU membership - that these growing economies have given a lot new customers to the enterprises of the EU member states. Western Europe has gained from the fact that Central and Eastern Europe are developing, just as we have gained from export to the European Union. Enlargement is good for the economy.

Estonia wants a strong European Union. Why else would we want to accede at all? If we only wanted free trade, our relations could also stay on the current level. We want strong and efficient Europe that would be ready to face the challenges of the new century.

Ladies and gentlemen,

In the heading of my speech, I called the changes that have taken place in the Estonian economy an economic miracle. I believe you agree that this change - a 90% dependence on the CIS states has been replaced by trade of which 75-80% is connected to the EU, and a flow of direct investments from the EU - is extraordinary. Most states have not been forced to carry out so radical changes within such a brief period of time. Germany is one of the few countries who has undergone such an experience - even twice, both after the end of World War II and again when building up the new federal states after the fall of the iron curtain. I believe that you understand, better than anyone, how important the support and investments of wealthy economies are at a time like this. I hope that this presentation also succeeded in convincing you that considering the economic political position of Germany both in Europe and in the world, and the development of Estonia in recent years, it is possible to increase considerably Germany's role in Estonia's further development into a full-fledged member of the European Union.

Thank you for your attention.

 

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