The Evolution of the Baltic Sea Region and its Conclusions for Germany


Dear Mr. Professor Doctor Thümmel, Vice-President of the American

Chamber of Commerce in Germany,
Dear ladies and gentlemen!

In the development of the Baltic Sea Region, occasional periods of dramatic success alternating with periods of slower, more peaceful
development are noticeable.

Let us have a look behind a thousand years. At the time, our background was the eastern trade route that connected us to the Orient via Lake Ladoga and the Caspian Sea. Along the other, western route, the first knowledge about Estonians reached the pages of Tacitus' ''Germania''. The fact proves that the explorers and tradesmen must also have moved in the contrary direction. But the development in our far north was at the time limited to peaceful evolution. It was the German Holy Roman Empire that integrated the Estonian ports to the Hanseatic League.

As we know, Hansa ensured its dominating position in the Baltic Sea region by efficient action in the 13th century. Often, I have considered the Hansa League as the dress rehearsal of the European Union. But the EU is not going to repeat the history, and this is so for three reasons.

First, geographical distances are history. The modern mass media and the changed nature of surplus value production have deprived distances of their power. Due to these changes, modern communication and hi-tech products, Finland for instance has become an important economic agent in the Baltic Sea region, and its voice is sounding clearer on global markets. This is a result of globalisation based on localisation, sometimes called glocalisation. The regions of little importance are becoming rare and will soon disappear from the map. Those interested in global influence must also be influential on local plane, in many different regions.

Among these regions, the Baltic Sea has a special significance - and not only for the countries situated on its shores. The Baltic Sea is becoming the first internal sea of the European Union. At the same time, the Baltic Sea region is one of the most important economic growth regions in the world. And even though competition on the Baltic Sea can sometimes be merciless, more and more new competitors find their way here. Considering though, that the economic growth potential of the region is about 80%, this no longer seems surprising.

Secondly: new power lines have emerged. Tallinn has restored its importance of the Hanseatic times. Measured in the number of visitors (nearly five million this year) Tallinn is one of the most popular Baltic Sea ports even today. Expensive renovation works are in progress in the airport in order to cope with the influx of visitors, which has grown five times in the last four years. Our information technology and communications are, both in quantity and quality, at the top of Central Europe today. Next, the railways are to be upgraded. For historical reasons, our railway tracks have the same gauge as those in Russia. Hence, our singular competence in the field of logistics. As both Russians and the Western businessmen know that the Estonian ports, the Estonian banks and the Estonian State can be trusted, most of the oil export flows through Tallinn. Trust is one of the vital factors of transit trade, and I am proud that Estonia has been able to win this trust. The major transit trade volumes have taught many a lesson to our companies. In the loading of goods from railway to ships and the other way round, we could compete with Rotterdam any time.

And thirdly: every year, I participate as the patron in awarding the prize of the Investors of the Year. Like on the years before, the winners also today offered a cross-section of the global business world. Our neighbours Sweden and Finland were the greatest investors.

But the companies of the US and Great Britain followed close behind. And a company from Singapore has been one of the winners for four consecutive years, each time in a new category.

How did we do it?

Despite the changing governments, we have remained true to the principles of free market economy. Our system has been built on simple rules:

Our Constitution requires the Parliament to pass a balanced budget.

Our monetary system is based on a currency board arrangement using a fixed 8:1 exchange rate with German Mark. As a result, the exchange rate has remained stable since 1991 and inflation will not exceed 3% this year.

With economic policy reforms, Estonia immediately established itself as an open and duty-free trade regime, one of the most liberal in the world. Estonia has working free trade agreements with the European Union, EFTA, and most of the former Soviet bloc. Soon, Estonia will become a member of World Trade Organisation.

Our tax system is fair and comprehensive. Estonia has a universal value added tax, and a flat rate corporate and personal income tax of 26%. Soon, the abolition of corporate income tax will create even more favourable conditions for enterprises. This is a subject I will discuss in more detail below.

In privatisation, the German Treuhand model has proved feasible. Today, nearly 90% of the enterprises are in private ownership. Private business gives about 70% of the GDP.

There are no restrictions placed on foreign ownership of business, repatriation of profits or ownership of land.

I am often asked whether Estonia offers any special benefits to foreign investors. Of course we do. But instead of filling thousands of pages with various restrictions, we have left them blank. The only ones not benefiting from this situation are the tax consultants.

But even they are not going to starve in Estonia. The international consulting agencies contributed to the investment of seven billion rroons to Estonia in 1998. About 330 invested dollars per capita is a considerable sum, but we are trying to surpass it this year.

We are trying to make Estonia interesting to investors. In our opinion, the reliability and transparency of both the regulatory mechanisms and the administration, as well as functioning infrastructure, are the most important preconditions for creating a favourable business environment. I believe we have already achieved sufficient reliability. Last year's largest investment, the purchase of the Hansabank shares, reached Estonia precisely at the time when most of the Western investors were struggling with the Russian losses. In the crisis-ripped Central Europe, Swedes saw Estonia as the country to invest in. This was an important step on the way to reliability - and good business to both sides. Also our infrastructure in the narrower sense - telecommunications, streets, railways - is not to be ashamed of.

But in broader sense, the work with infrastructure is continuing. It is not only money we wish to attract to Estonia, but also talented people, managers with global experience and good connections. Also, we are deeply convinced that first and foremost we should focus on the transparency of both business and administration.

Ladies and Gentlemen:

In most respects, Estonia is ready to accede to the European Union today. And I believe we are able to make this true in the near future. What does this mean for Germany? It would be feasible to bring labour-consuming production to Estonia in time.

Allow me to bring the example of Finland: several textile manufacturers have brought part of the production to Estonia. Germany, too, should be able to make use of the atmosphere of creativity and advanced thinking in the field of technology on both sides of the Gulf of Finland. This presumes that the German enterprises would considerably increase their presence is Estonia.

In the era of glocalisation, Estonia does not need gigantic factories. Small ones will do. Young men in Hiiumaa are composing Microsoft software. The software of Hansabank's Internet version is probably the most efficient in Central Europe. Our software designers are creating Internet portals for the Swedish software companies, and their military simulation software is used all over Europe.

Speaking of electronic trade, I would like to remind you that the ordered goods do not reach the customers along the cable. Estonia's geographical position and infrastructure make us interesting also for the electronic trade logistics.

If Germany should leave the integration of the Baltic Sea region to Finland and Sweden, the next period of the region's evolution would perhaps be too one-sided and damage the interests of Central Europe. Therefore, I am convinced that German businessmen and investors should see the integration of the Baltic Sea region as one of their priorities.

On the Internet, all the necessary data concerning Estonia is available, as well as huge quantities of other information. The Estonian Embassy and international consulting agencies will have answers to all your questions on investing in Estonia.

Summa summarum: from time to time, I ask myself with concern whether you still consider Estonia to be a post-Soviet country with all the typical dangers common to such countries. Please don't. I can not blame you for not having seen Estonia with your own eyes. But I can assure you - Estonia is a state abiding the rule of law, the average education level is comparatively high; Estonians have a Protestant attitude towards work, which enables us to make up for the time lost during the last fifty years - both in work and in promoting democracy. This knowledge is sufficient for understanding why we have managed to surpass Western Europe in the number of Internet connections per one hundred people. In these matters, we are long past comparing ourselves with Central Europe. This will also help you to understand why the Estonian President is sitting at his desk till three o'clock in the morning, just to answer personally at least some of the letters he has received. This, too, is part of our small transparent country's democracy.

At the same time, I should emphasise also what we can not promise you. We can not guarantee quick profit. Yet we can guarantee your profit's stability. The Finns, whose language is similar to ours, were the first to discover the Estonian market, and I can not put the blame on Germans for this linguistic fact.

Still, I shall add that the Germans following the events in Estonia a little more closely should not fail to notice our continental culture
traditions. They have been influenced by the Nordic, Scandinavian traditions, and have therefore managed to retain their idiosyncrasy,
their local colour better than it has succeeded elsewhere in Europe. As a writer, I have always been fascinated by this unique link between the modern and the conservative, the Estonians' simultaneous aspiration towards modern technology and conservative lifestyle. The Estonians' eagerness to experiment is also noticeable in the fact that quite recently, we abolished corporate income tax for our enterprises. The enterprises themselves have always been free of tax - otherwise, we should also have introduced tax on solder irons or microscopes. Now, we also give up levying their income, being convinced that this is more in concord with the laws of economy and nature. We wish our enterprises to grow and prosper, to walk ''in step'' with Europe, if I may conclude my thoughts with the words of Uhland.

Ladies and gentlemen! Thank you for your attention.

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