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The Underrated Country of Estonia

by Dissecting the Markets 2 months ago in investing
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Despite being a tiny Baltic country, Estonia is a role model for any country looking to prepare its citizens for the future.

The Underrated Country of Estonia
Photo by Nikola Johnny Mirkovic on Unsplash

When we think of the internet and innovation, we usually think of Silicon Valley. Silicon Valley is where major startups and innovations have been made. From Airbnb to Coinbase, many of the successful startup stories that happen there inspire people to move to the SF Bay Area in hopes of striking rich. While America is known for creating the "loonshot" innovations that change the world, Estonia is known for making them applicable on a wide scale.

Estonia is known as the most online country in the world. When kids enter Kindergarten, they're given coding and robotics classes. Bills, taxes, documents, voting, and even going to the police and filing a lawsuit are all done online. Unlike the US and other countries, Estonia has all data exchanges between authorities encrypted while also using blockchain technology to protect the most vulnerable and important information. Estonia was the first to do this on a national level.

Voting online is something relatively unheard of. Many countries are hesitant to move voting online because of the fear that hackers in foreign nations will try and manipulate the election results. Thankfully, Estonia invested immense sums of money on cybersecurity and because of this, they were able to conduct elections through the internet safely.

As for taxes, Estonia's tax system is quite simple. Compared to other nations, companies in Estonia spend a lot less on tax compliance. While many in America might want a simple tax system, there are issues that policymakers need to consider.

In a large country like the United States, there are many different kinds of people that are in various situations. Even if the US tax system is complex, the complexities of it allow the US to make taxes flexible for many people. As for Estonia, because it's a small nation, there are a lesser number of differences between people. Thus, a simple tax system is able to work well in Estonia, but not in the United States.

As for the fact that residents in Estonia can file lawsuits online, that is something unheard of in most parts of the world. Usually, a person would have to get a lawyer to file a lawsuit. But in the case of Estonia, they made it very convenient. While America and other parts of the world have LegalZoom, a service that let's people create legal documents without an attorney, they still don't offer the convenience of filing lawsuits remotely.

There are many parts of Estonia that I want to cover but I like to break it down into three parts: the Startup Scene and Economic History, Education, and Cybersecurity.

The Startup Scene & Economic History

To understand how Estonia became the country that it is today, we have to look back at its economic history.

By Artem Sapegin on Unsplash

Estonia gained independence from the USSR in 1991. When it gained independence, the country started out with little resources. Luckily, the internet was born around the same time. While many saw it as a fad, Estonians saw it as the future and the country doubled down on it.

The government of Estonia made many fast-track reforms to modernize the country. It utilized the internet in the process to help build the country. One policy that Estonia did was to put computers in every classroom. By the start of the new century, every school in Estonia had access to the internet. At the same time, the government offered free computer training courses for the people. Altogether, the number of people that used the internet in Estonia went from 29% in 2000 to 91% in 2016.

Coming out of the control of the USSR, Estonia's government started out as communist. Thanks to their independence, Estonia was able to dramatically reduce the size of its government. State-owned enterprises were removed and so were subsidies. The economy was opening itself up to the world market and the country received huge sums of foreign direct investment. Through strict monetary policy and balanced budgets, Estonia was able to bring macroeconomic stability.

Having nearly all of its services on the internet played a major role in the development of the country. For most developing countries, corruption plagues the development of those nations. In Estonia, since citizens do most of their necessary business with the government over the internet, there's less interaction between citizens and bad people in the government. Reducing interactions helps reduce the chances of bribery within the government.

In 1994, Estonia became the first country to enact a flat tax. Other nations in the region imposed similar tax policies afterwards. At the same time, Estonia reduced tariffs and other barriers to trade in order to attract investors and become a functioning and efficient market economy.

According to a report by BDO in January of 2022, Estonia's tech companies are worth 21 billion Euros while the government's budget is 13 billion Euros. It notes:

"Starting around the turn of the millennium, Estonia has continuously launched new initiatives to boost technology adoption throughout society. Simultaneously, it has retained and attracted technology talent through issuing digital nomad visas, competitive tax rates, flexible financing options, and comprehensive support systems for start-ups."

As mentioned earlier, Estonia did provide programs that trained people on how to use a computer and made the internet a big part of the school curriculum. That's how it was able to boost technology adoption throughout society.

Regarding the issue of talent, with a small population, Estonian companies have a harder time getting talent since there are many firms competing for a smaller pool of workers. This has led to the acceleration in the growth of incomes for Estonians.

By Per Lööv on Unsplash

Raising wages isn't enough to help ensure that a company has enough workers. With a small population, there probably wouldn't be enough workers for all the startups that Estonia has. To solve the labor supply issue, Estonia's government e-Residency program. This program allows people to work in Estonian companies without having to live in Estonia physically. Also, Estonia offers digital nomad visas to workers that need to be physically present in Estonia in order to work. While many countries offer digital nomad visas, few countries have something similar to Estonia's e-Residency program. These programs, along with a business-friendly tax system, helped create a larger startup environment in the country as founders had more flexibility on how to source labor.

Being a small economy, Estonia's startup scene can get very competitive. With a smaller pool of customers, every startup is rushing to acquire as much market share as they can before their industry matures. According to a report by BDO, many startups are at risk of getting outcompeted by large corporations. Since large corporations have more resources, they're able to acquire more market share at a faster pace than startups. Because of this, startups are having a difficult time gaining traction. The situation gets worse as some startups are underfunded and other startups aren't prepared for what they need to do to survive.

The issues that come with having a small domestic market encourages many startups to look at expanding into international markets. If startups are underfunded or not prepared for the challenges that come with operating a multinational startup, then they will struggle to compete with the larger multinational corporations. When there are some major successes like Skype, there are many more that have failed.

A crazy fact about Estonia is that they have the highest venture capital funding per capita in the entire continent of Europe. Since the startup scene in Estonia is vibrant and the country welcomes foreign direct investment, it's understandable how Estonia was able to achieve this phenomenon.

Source

I wouldn't be surprised if more entrepreneurs flock to Estonia because the country has the most venture capital funding per capita. This chart shows that it's probably easier to raise venture capital funding in Estonia than anywhere else in Europe.

However, when you consider the number of startups per one million inhabitants...

Source

Estonia has over a thousand startups per a million inhabitants. This translates to 0.1% of the population being an entrepreneur. Israel, another small and innovative country, ranks second at around 900 startups per one million inhabitants. And the USA, despite having one of the largest populations in the world, it ranks third in this metric.

One would have to assume that there's a lot more innovation happening in Estonia than compared to the United States or Israel based on the fact that it has the most startups per one million inhabitants. However, the number of startups in a country doesn't correlate with whether there's more or less innovation in the country. Rather, it measures how entrepreneurial the people in a country are.

Education

If there's one thing about Estonia that surprises many in the West, it's that it spends less on its students yet their students perform a lot better than students who study in other countries. In the US, the government spends $13,000 per student. In Estonia, that number is $8,500. This shows that the idea that more dollars a government spendings on education per student leads to better education outcomes is false.

By Giovanni Gagliardi on Unsplash

Here's a quote about Estonian teachers that shows why teaching in Estonia is a lot different than teaching in other countries:

"Teachers feel empowered to get on with their job and there are almost twice as many per pupil in Estonia as in England. They spend less time in the classroom than most teachers in the OECD, meaning that they have more time for lesson preparation and professional development. All school teachers have a masters degree and kindergarten teachers have a first degree."

There's a lot to dissect from this quote alone. Firstly, for those wondering why they spend less time in the classroom, since homework and exams are mostly done online, teachers spend less time grading.

Secondly, since the conditions of teaching in Estonia are a lot better than compared to other nations, many in Estonia are encouraged to become teachers. In the US for example, many teachers are paid less and their benefits aren't as great compared to other professions within education. Because of this, fewer people go to college to become a teacher. Also, because many have had bad experiences with schooling in America, many don't see themselves wanting to work in a place where they had bad experiences.

An underrated reason for why Estonia's education system is superior to other education systems is that there's an entrepreneurial spirit that greatly influences how the school system is run. Here's another quote that describes the influence:

"Schools have a high degree of autonomy and head teachers are free to decide how to organize pupils’ lives and shape the curriculum. There are no regular inspections. Schools are evaluated every three years through online tests for pupils and the authorities intervene only if there is a problem."

With less oversight and a more laissez-faire approach, teachers feel more empowered than ever. In America, the government and the Teachers' Union have immense power on the curriculum and on the organization of pupils' lives. But in Estonia, the government and the unions have less power over those same things.

Estonia reserves their government power on education for when there are problems within the education system. Since most of the schools in Estonia are doing their job in ensuring that kids learn the things they need to learn, the government doesn't intervene and make things worse.

By Aditya Joshi on Unsplash

In Estonia, politics has been taken out of education. Their education strategy, which ends in 2035, has broad support from all political parties in the country. Since their education strategy is succeeding, many hope that the country will continue renewing it. If not, then they'll get concerned.

To end, here's a quote from an Estonian's view on government intervention on education:

“'It’s a problem if every time a government comes in they have their own plan and want to change everything,' Gunda Tire, the country’s head of international assessment, said. 'Education is a thing that takes time.'”

Here's how Estonia's education system works

Kids in Estonia don't start school until they're seven. Many start school earlier by going to kindergarten and they stay there for 18 months. The government subsidizes nurseries so that parents don't have to spend a huge chunk of their paycheck on childcare.

Once they finish kindergarten, kids get a school readiness card that describes where they're strong and where they're weak. Sometimes, they'll be recommended to a specialist (speech therapist, etc.) to get help before they start formal school, usually called "basic school".

Basic school is for kids ages seven to sixteen. In basic school, there's a strong emphasis on inclusion so that all the kids feel like they're together rather than in various social bubbles. To do this, schools offer free lunches, transportation, textbooks, and trips. Students that have behavior problems or struggle with certain things go into small teaching groups or meet with a specialist.

Mental health is a big deal in Estonian schools. Each school has their own psychologist and the government does nationwide well-being surveys to assess the mental health of students and teachers.

With free lunches, transportation, textbooks, trips, mental health services, and other specialized services, it's baffles me to see that Estonia still spends a lot less money per student while being able to provide all of those services. One could say that by having nearly everything on the internet, corruption gets rooted out and schools operate with less waste.

While most schools outside Estonia has a curriculum based on knowledge and understanding, Estonia's schools have a curriculum geared towards implementation, analysis, synthesis, and assessment. The reason why Estonia has those emphasis in its curriculum is because it wants to give its students problem solving, critical thinking, citizenship, entrepreneurship, and digital competence skills. This is why Estonia is one of the most entrepreneurial countries in the world and why its education system is a lot better than the education systems in other countries.

Here's a quote that surprised me about Estonia's curriculum:

"It is compulsory for pupils to study humanities and sciences up to the age of 19. Students must complete a cross-disciplinary creative project to graduate from basic school and a research project before they leave upper secondary school. Music, sport, drama and art are included in the curriculum."

My first impression was that I was surprised that Estonia's education system emphasized humanities. After taking two humanities classes in college, while I've gained insights that I will forever hold, I also didn't gain an understanding of its importance.

After doing research, the main benefit of studying humanities concurs with my takeaways from the two humanities classes I took in community college. The main benefit of studying humanities is that it gives a person a greater appreciation of art, music, theatre, and literature. Me personally, the biggest takeaway I got from studying humanities is that I appreciated nature on a whole new level.

My second impression was that the term "curriculum" has a broader definition in Estonia than compared to the rest of the world. Things like music, sports, drama, and art would be considered extracurricular activities in America. But in Estonia, they're considered to be a part of the curriculum.

The term "extracurricular" isn't something one would hear when learning about Estonia's curriculum. This is because what is "extracurricular" in other countries is considered "curriculum" in Estonia.

To conclude on my thoughts on Estonia's education system, learning about it teaches you a lot about the country. One gains a better understanding on why Estonians are more entrepreneurial than the rest of the world and why the country was able to digitize faster than the rest of the world.

When reading BDO's report on Estonia, learning about Estonia's education system will help you understand this excerpt:

"For example, Estonians rightfully pride themselves on being hardworking, innovative, and diligent. However, they do not take kindly to heavy-handed, hierarchal management approaches."

Cybersecurity

Cybersecurity is an emerging issue in international relations. When political science students meet with ambassadors from Estonia, the biggest takeaway that they gain from their discussions is that Estonia is the leader in cybersecurity. Another big takeaway is that their society is the most digitized in the world.

By Jefferson Santos on Unsplash

Being separate from the Soviet Union for a decade, Estonia has enjoyed its freedom and sovereignty. Russia still saw Estonia as a part of its own country, like how it saw Lithuania, Ukraine, Moldova, Latvia, Georgia, and other countries that were once part of the Soviet Union. Since relations with Estonia and Russia worsened since gaining independence, Russia has resorted to cyberattacks to punish Estonia for not wanting to be close to Russia.

The biggest cyberattack against a single country happened in Estonia in 2007. Tensions rose after Estonia chose to move a statue from the Soviet Era from the nation's capital to a military cemetery in a remote area. Russian hackers took out banks, government websites, and media outlets for weeks. Here's a noteworthy description of the attack:

"While no data was stolen during the incident, the websites of banks, the media and some government services were targeted with distributed denial of service attacks that lasted for 22 days. Some services were disrupted, while others were taken down completely."

Estonia learned a big lesson from the 2007 cyberattack and ramped up its cybersecurity capabilities. First, Estonia’s Cyber Defence League came into emergence. This is a volunteer group of IT experts that work alongside the private sector to bolster Estonia's cybersecurity.

Second, Estonia started building its offensive cybersecurity capabilities. There's a saying that by attacking hackers once, you teach them to never mess with your IT again. But when you only focus on defense, you're giving your hackers a bigger challenge. I learned this saying from an international relations class in university. This saying is what Estonia's leaders had in mind when they were thinking of ways to improve its cybersecurity after the major 2007 attack.

Third, Estonia added cybersecurity to its curriculum. Here's a summary of those efforts:

"From awareness campaigns and workshops specifically targeting elderly citizens to 'coding' lessons for kindergarteners, the government is making sure every Estonian has access to the training they need to keep the country's IT systems secure."

A cybersecurity expert gave an interesting perspective on cybersecurity by saying that one "'can't learn defense if [they] don't know how to hack.'"

Kids in Estonia want to learn cybersecurity. They believe that by learning cybersecurity, they can be a part of the solution as the country continues to face cybersecurity threats. When looking back at how Estonia's curriculum shapes kids' minds, you understand why they would prefer to be at the frontlines of the nation's issues than listen to an adult that's telling them what to do.

Overall, Estonia has all of its citizens, from actual cybersecurity experts to children, all playing a role, however big or small, in ensuring the nation's protection against cyberattacks.

By Stanislav Rabunski on Unsplash

Importantly, Estonia has been at the frontlines of the cyber warfare between the West and the East. Because of this, Estonia has become the West's cybersecurity experts. The many things we learn about cyber threats all come from Estonia's experience with cyber attacks. One of those interesting things is that some of the most damaging cyberattacks are caused by phishing links rather than from expert hackers using the best hacking technology.

Estonia shares its success and mistakes regarding cyber security to other allied nations through its e-Estonia Briefing Centre, a publicly funded cyber security and digital services information hub. Having this information hub makes Estonia a key player in cyber diplomacy. Nations are incentivized to be friendly with Estonia because Estonia provides them with the best guidance on cybersecurity. As one would put it, Estonia is helping nations NOT reinvent the cybersecurity wheel.

To protect Estonia's society from cyberattacks, Estonia's government infrastructure relies on many layers of security. The focus is to store as little data as possible and to separate the data as far away as possible. Because of this, there's no duplicate data within the government databases.

For example, Estonians would have their address stored in the population register. If an organization like the tax authority or voting committee needs their address, then that organization would have to ask the population register through an encrypted data exchange for the information. The blockchain network that's built within Estonia's digital infrastructure verifies the data's integrity.

For comparison, the rest of the world would have large databases containing all kinds of data. Hackers need to target one database and they have everything they need to impersonate someone else and to even sell their information on the black market. This is why cyberattacks like the 2017 Equifax hack were detrimental to people.

In sum, unlike the rest of the world, Estonia was the first to encrypt any data exchange between authorities and to use blockchain technology on a national level.

Conclusion

The contrarian mindset of Estonia's leaders during the Dotcom bubble burst is the main reason why Estonia is the real leader of the internet today. Because the country embraced the internet while everyone else saw it as a fad, the country was able to reap benefits that other nations have yet to reap today.

El Salvador is a nation I see resembling Estonia from its early days. While the rest of the world is seeing cryptocurrency as a fad, the country continues to embrace it by buying the dips on Bitcoin and by building a cryptocurrency innovation hub called Bitcoin City. The country has also invested in educating its citizens on cryptocurrency. Seeing the parallels between El Salvador today and Estonia in the first two decades of independence, I wouldn't be surprised to see El Salvador become the world's role model in integrating cryptocurrencies into one's society.

For international relations students interested in the emerging world of cybersecurity, I hope this essay has inspired you to learn more about Estonia's cybersecurity efforts.

For policymakers (or future policymakers) looking for ways to enhance their country's education, I hope this essay has given you ideas on how you can enhance your country's education system.

For economists, I bet Estonia's economic policies came with the expected benefits that come with embracing free trade and flat taxes.

And for everyone else, I hope I've widened your view of the world.

By Matthew TenBruggencate on Unsplash

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About the author

Dissecting the Markets

My views on markets, investment strategies, perspectives on events, etc. usually differ from the mainstream consensus.

*All views expressed in my articles are my own and should be considered opinionated

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