Since breaking away from the Soviet Union, Estonia has grasped new media as a way to reach prosperity, and its enthusiasm is drawing Baltic neighbours Latvia and Lithuania along as well. Rafael Behr reports from the Baltics.
AS THE MEASURES OF ECONOMIC advancement go, the Eurovision Song Contest is neither the most sophisticated, nor the most widely recognised. But when Estonia romped to victory in the 2001 competition, the triumph meant much more than one year's radio overexposure for the winning song 'Everybody', a second-rate disco ballad that extorted douze points out of most of euroland's Abba-phile nations.
Eurovision glory set the seal on Estonia's single greatest ambition since breaking free from the Soviet Union in 1991: to quit 'eastern Europe' and be recognised as a Nordic country. And aside from taking Eurovision seriously, being a Nordic country involves being fully wired. Estonia has become the Web capital of the former Soviet Union.
Internet penetration in the tiny Baltic state sits at about 30%, rivalling some west European states. The number of Internet hosts, at least 17 per 1,000 population, makes Estonia's 1.5m population almost as well wired as Germany's.
With at least 80m fewer Estonians than there are Germans, the precociously hi-tech Baltic state still has modest ambitions. Estonian companies are among the handful to have overcome deep-seated regional rivalries to go truly pan-Baltic. Their success has infected Latvia and Lithuania with IT zeal, not least because Estonia's Baltic neighbours have seen that pioneering Internet ventures bring a massive PR dividend to transitional countries looking for membership of international clubs such as the European Union and Nato.
Breaking free
Estonia is the good news story of the former Soviet Union, and it is thanks in no small part to the Internet. A key role was played by Hansabank, created in the early 1990s. The bank was a greenfield project and the entrepreneurs behind it, like many of their contemporaries, looked to Finland -- just 60km over the water -- for know-how.
The total absence of appropriate Soviet technology (the USSR paid its scientists to build weapons not payments systems) meant that Estonian companies brought in the newest systems, leap-frogging most west European companies. Hansabank now has more of its customers banking online -- about 30% -- than most European banks.
"Hansa is right up there with any of the big European banks," confirms Forrester Research consultant Brian Gross.
Hansabank's IT profile was a key factor in attracting a foreign strategic investor. Swedish bank Swedbank bought the Estonian financial services dynamo in 1998, the year that Russian financial meltdown made a Nordic partner all the more desirable. That purchase in turn enriched the first wave of Baltic entrepreneurs. Many of the young Estonian graduates and assorted geeks who had built up Hansa took a handsome payoff and went into financing start-ups and IT projects of their own.
Of course, the global technological know-how that made Hansa a safe bet for international investors was, in theory at least, available to companies in other former Communist countries. But, from the outset, Estonia's business climate has been conducive to modernisation. The national eagerness to cast off any remnants of Soviet rule meant that Estonia adopted a radically liberal economic reform programme from the first days of independence. This made it a preferred destination for foreign investment.
The state's hand in the rise of electronic Estonia, even if the main beneficiaries are private businessmen, makes the country a case study in the difficult transition to free market. Ten years later, Estonia is still reaping the rewards of its economic shock therapy. Cuba and North Korea take note.
"We were able to invite strategic partners into telecoms at an early stage," says Linnar Viik, the prime minister's advisor on IT issues and multi-purpose Estonian IT guru. The sale of stakes in the national telecoms company, Eesti Telekom, to Sonera and Telia of Finland and Sweden respectively between 1991 and 1993, meant that the infrastructure for the Internet was in place early compared to most former Communist countries labouring away with ageing copper wire connections.
Internet for all
The partial liberalisation of the telecoms market proved to be a double blessing for Estonia. Competition from Scandinavian investors forced Eesti Telekom to offer free Internet access to domestic customers. While users still pay for call charges, accessing the Internet from home is a workable prospect. This, in part, accounts for the fact that at least 6% of Estonians have made transactions over the Internet, about half the European average and at least double of neighbouring Latvia and Lithuania.
The Soviet Union left all public services in a state of decay and Estonia had to rebuild its state almost from scratch. "Between 1990 and 1994 there were a number of quite important decisions taken with the help of IT specialists close to policy makers," remembers Viik.
The necessity of rebuilding an entire state after Soviet rule meant IT-based solutions that might have seemed experimental and unnecessary in Western countries, were rational, even cost-effective solutions in Estonia. A particularly important step, says Viik, was the decision to centralise all IT procurement across government. The entire Estonian administration is wired and different departments have compatible systems. In March 2001, 10% of all Estonian tax declarations were made online -- a considerable proportion given that private tax declarations in themselves were unheard of under the Soviet system.
A secondary benefit of surrounding the government with foreign IT specialists, mostly from the US and Nordic countries, was that the state was enthused by technological developments abroad, even while most ordinary Estonians were still too poor to buy computers.
Progressing in 'Tiger Leaps'
In 1995, Estonia undertook a 'Tiger Leap' programme to put all of the country's schools on the Web, something that was achieved by 2000. And it turned out to be cheaper than expected: 30m-50m kroons ([pound]1.4m-[pound]2.1m) per year. The figure was "peanuts compared to the overall education budget," says Viik.
The Tiger Leap programme was also important in winning over a sceptical public. All Communist states had become used to high levels of social spending, non-existent unemployment and cradle-to-grave security (albeit shoddily delivered and systematically embezzled.) Some Estonians still question the wisdom of spending public money on state-of-the-art technology when there were pensions to be paid. But it was hard to argue with a government that delivered brand-new computers to schools even in rural areas.
The sword of the Internet crusade is now wielded by the private sector that grew out of Estonia's liberal reforms. The flagship is Look@World, a multi-million dollar, business-led initiative to spread the Internet to those parts of Estonia not yet wired. The target is to catch and exceed Finnish levels of Internet penetration (among the highest in the world) by 2004. The technique is to target those sectors of society so far excluded from the brave new world-the poor, the old, the rural-and to pay for training and Internet access.
According to Look@world's manifesto, "The Estonian government gave companies a 'present' in the form of elimination of income tax. We feel a responsibility to allocate part of that 'present' back for the development of society." And more people online means more people to buy Look@world's partners' services. Hansabank alone is stumping up l00m kroons ([pound]3.9m) for the project.
The fact that Look@world's stated aim is catching Finland typifies the ties between the two countries. What started as client-patron relationship is, as Estonia develops, turning more to healthy rivalry. Throughout the Soviet period, parts of Estonia could access Finnish television and radio. This media siege-breaking reinforced a linguistic and cultural affinity, and helped Estonia's reputation as the most Western-oriented corner of the US SR. By accident of fate, Finland also happened to be in the throes of a hi-tech transformation of its own when Estonia first came onto the market for foreign investors in the early 1990s.
"Early on we hired Finnish consultants," says Rain Lohmus, one of the founders of Hansabank, and now the head of LHV, an investment bank. "In the end, we did the exact opposite of what they told us to, but it was significant that we hired them."
LHV also runs an online brokerage, which, in the first nine months of its existence has attracted about 4,000 users.
LHV is also a major backer of CV-Online, a Web-based recruitment agency and consultancy that started in Estonia in 1996 with a few thousand dollars and has subsequently spread across the Baltic and into Central Europe, as well as Russia. Earlier this year, it secured second-phase funding of $26m ([pound]1.8m), and expects to make a profit in 2001 from revenues forecast at about $5m ([pound]3.5m).
According to Lohmus, the most important thing was that the hardware and software solutions that came from Finland were both up-to-date and well-suited to a small country.
Taken together, the Baltic states make up a market about the size of Sweden, and national rivalries make cross-Baltic investment harder than outsiders would like. The three 'Baltic states' resolutely refuse to coalesce into one coherent economic space.
Meanwhile, Estonia has a tiny population by any standards, 1.68m people. Factor in the number of people in the age and income bracket who work in the emerging IT sector and you have a very cosy elite. This, say Estonian entrepreneurs, played a crucial role in building up trust between government and small business, making the development of a 'new' Estonian economy easier.
What pan-Baltic companies there are have largely come from Estonia. Aside from CV-Online and Hansabank- which has sister banks across the region-there is Microlin, a company that started importing parts and building computers for sale in the first days of independence. The margins to be made turning cheap Asian components into PCs were, according to one Microlink executive "crazy". Microlink is also providing funds for the Look@world project. It subsequently created Delfi, a news and services portal that has sites across the Baltic.
But Delfi is a content-driven site, and, true to the pattern throughout the world, it has found that keen users and a high-profile brand are difficult to turn into revenue. While Microlink still shifts plenty of its hardware and software solutions (the company provided the services for the e-government programme) and despite anticipated turnover this year of up to 1bn kroons ([pound]47m), the company isn't expected to turn a profit thanks to Delfi.
The portal alone lost about 1.5m kroons ([pound]586,000) in the first nine months of Microlink's financial year, which ends in July. Delfi plans to become a profitable part of Microlink's business by 2003, but meanwhile, in June, it was forced to abandon its Russian venture for want of online advertising revenue.
Content-based sites like Delfi are on the front line against declining investor interest towards all things digital. With Europe's economy slowing down and venture capital markets recoiling at risky hi-tech investments, Estonia's electronic exuberance seems strangely out of step. Some Estonian IT entrepreneurs are confident they can weather the storm building in larger markets elsewhere.
"Our biggest asset is our size," says Olari Ilison, the 23-year-old head of Web operations at Hansabank. "We're just big enough to do our own thing." Estonia, he adds, is a self-sufficient digital community. Any shortage of capacity, he hopes, will be filled when Look@world brings the rest of the society online.
Fortunately for Ilison's expensive projects, Hansa is a highly profitable company, able to subsidise its Internet ventures. The bank's strategy is to generate revenue from online transaction charges and to save costs by reducing branch overheads as more people bank online. Equally fortunately for Estonia's Internet ventures, the public is more than willing to use such online services, in part because there was no offline precedent worth keeping in the Soviet system. For many Estonians, private commercial banking and Internet banking started more or less at the same time.
Estonia has so far been largely insulated from the excesses at either end of the tech-stock crash. The Tallinn Stock Exchange was never liquid enough to lure entrepreneurs into over-valued IPOs, and there simply weren't enough start-ups or starry-eyed venture capitalists to inflate a local bubble.
What hype there has been around the Internet in Estonia has come as much from the government - much of it for external consumption - as from private business. Estonia bucked the trend of former Soviet Republics by installing a young untainted elite at the helm, as opposed to returning to power the same dour bureaucrats who had run the old system. Both politicians and businessmen in Tallinn are among the youngest in Europe. When Mart Laar became the Estonian prime minister in 1992, he was just 32 years old.
This youthful elite - unanimous in its zeal to integrate Estonia into the EU - has been quick to see the public relations value of ground-breaking digital projects. The Estonian cabinet room is entirely paperless. Ministers sit around their governmental table in which are embedded screens and keyboards, all in turn wired up to the administration network. The gleaming cabinet room is a world first that Laar - returned to office two years ago - proudly shows off to visiting dignitaries. The IT solutions for the project came courtesy of Microlink.
Other flagship ventures include a project pioneered by Tallinn municipality that enables drivers to reserve their parking spaces by mobile phone. Meanwhile, city authorities and the national government are competing to be the first administration to hold e-elections, as soon as the technology, legal framework and electoral calendar converge in such a way as to make the experiment possible (see boxout, p37).
The latest innovation, launched in June, is a government-sponsored portal that allows the public to offer suggestions and even amendments to bills drafted by various ministries.
Dangers from abroad
A small and open economy like Estonia's is unlikely to be completely protected from the chill winds blowing across the Baltic sea from international markets. A warning note was sounded earlier this year when Elcoteq, the Finnish electronics company that builds mobile phones in Estonia, announced it was laying off staff in its Tallinn plant due to falling demand.
In June, the Bank of Estonia cited weakening export demand as a major factor in its decision to reduce its forecasts for the country's growth by 1-1.5 percentage points to 4.5-5.3% -- still a robust figure nonetheless.
While the entrepreneurial end of the IT sector isn't yet a major component of the Estonian economy, manufacturing and services, bolstered by the electronics boom in Scandinavia, account for a significant portion of GDP.
"In overall capacity of the IT sector, Estonia is an integrated part of the Swedish and Finnish IT industries," says Viik. A state as small and as young Estonia isn't yet in a position to produce its own Nokia. "We don't have a volume of business which would allow local companies to play a role in global development of IT systems."
As profound a contribution as the economic benefits that the Internet has brought to this corner of the world is its use in demonstrating their modern, western orientation to the rest of the world. All three Baltic states are keen to reinforce the western credentials they see as having been denied them by illegal incorporation into the Soviet Union during the Second World War.
The strategy so far has worked. Estonia has the highest and most 'western' profile of any part of the former Soviet Union, much to the consternation of its Baltic neighbours. The country is universally recognised to be a front-runner for membership of the European Union.
Backwards Baltics
Internet penetration in Latvia and Lithuania stands at 13% and 9% respectively. Estonia's Baltic neighbours are playing catch-up, both with EU negotiations and with Internet-based vanity projects. 'E-Latvia' and 'E-Lithuania' projects have been initiated, each with a view to putting government administrations online and bringing public services to citizens over the Internet.
Latvia has also prepared legislation that would offer tax breaks to companies investing in the IT sector. Meanwhile, in Lithuania, the mayor of Vilnius, Arturas Zuokas, has started carrying his daily business in full view of a Webcam in a bid to boost the city's online profile.
But neither Latvia nor Lithuania has champions of the digital age as high up the administrative ladder as in Estonia. And neither country has yet produced companies that have used IT as a springboard for cross-border investment.
Estonia has had some unique advantages. The Finnish connection is one. Particularly difficult relations with Russia, forcing the country to start an economy more or less from scratch, is another. The modest size of the country, making electronic statehood a more plnusible concept, is a third. But an aptitude for public relations has also done no harm to Estonia's IT profile. Passing EU officials are assiduously herded past gleaming monitors and digital displays.
The day after Estonia won the Eurovision Song Contest, narrowly beating Lithuania, the chatrooms and bulletin boards at Delfi erupted into inter-Baltic sniping and abuse, tempered occasionally with congratulations and pleas for pan-Baltic unity. Deli excluded a record number of users and eventually pulled the plug. It was a significant display, revealing how seriously the competition for world recognition -- even when it comes from Eurovision -- is taken, and how readily the rivalries that emerge in that competition are played out online.
The prize for Eurovision victory is the right to host the following year's contest. When the song contest comes to Tallinn, one thing that is certain, aside from the myriad Abba imitations, is that the event will be turned into a showcase of electronic gadgetry. It might even compensate for the inevitable repeat performance of 2001's winning entry.
BALTIC INTERNET USE Estonia Latvia Lithuania Use of Internet in the past six months (%) Spring 1999 16 5 2 Spring 2000 28 13 8 Growth 99/00 75% 160% 400% Weekly Internet reach (%) Spring 1999 10 4 1 Spring 2000 20 9 4 Growth 99/00 100% 125% 400% Sources 1999: BMF Gallup Media, BMD Gallup Media Latvia, SIC Gallup Media Sources 2000: Emor e-track, BMF Gallup Media Latvia, SIC Gallup Media Periods 2000: Estonia -- April-June 2000, Latvia--Spring 2000, Lithuania--April 2000 Estonian Web access locations January - March 2001 January - March 2000 Work 51% 48% School 30% 29% Home 32% 27% Friends home 22% 16% Public access 11% 6% Elsewhere 1% 2% Note: Table made from bar graph Estonian Internet access and intent January - March 2000 Home PC with Internet access 47% Planning to sign for Web 44% access in next 12 months January - March 2001 Home PC with Internet access 54% Planning to sign for Web 64% access in next 12 months Sources: Emor ltd, BMF Latvia, SIC Gallup Media Note: Table made from bar graph
QUICK TAKE
* Estonia's neighbours have played a vital role in the rolling out of the Internet in the country. Its proximity to Scandinavia has created a productive rivalry. Similarly, its break to independence from the Soviet in the late 80s has meant that all the newest technology systems have had to be installed.
* Estonia's "Tiger Leap" programme was launched in 1995. This aimed to give all of the country's schools access to the Internet and was achieved by 2000.
* Look@World is a larger project which plans to provide Internet connectivity to all parts of Estonia. The project's aim is to surpass Finnish levels of Internet penetration by 2004.
* The other Baltic States, Latvia and Lithuania are struggling to catch up with Estonia. Their Internet penetration is 13% and 9% respectively, while in Estonia it sits at 30%.
ONLINE VOTING IN ESTONIA
Last March, the Estonian Government announced plans to launch a new online voting system in time for its 2003 parliamentary elections. Compare this with the back seat role of the Internet in the UK elections just passed.
The Estonian Government hopes that e-voting will attract greater participation in the election process. In the last General Election in 1999, less than half of the potential voters took part.
Ulle Madise, a lawyer with the Ministry of Justice in Estonia, told the Worldwide Forum on Electronic Democracy in Paris in May that: "Democracy needs freshening up because the process of decision-making has become much quicker and the old system doesn't work any more."
Estonia has already set the ball rolling. Legislation for digital signature keys, a pre-requisite for voting online, has been adopted in Estonia. And in August last year, a Webbased document system which allows for paperless government sessions, known as e-government, was introduced.
The 'E-law' project is also in the process of being tested, which would enable digital consultation on drafts laws. According to Reuters, 35% of the 1.4m population of Estonia is now connected. This ranks the country at the top in eastern and central Europe and above a number of countries in Western Europe.
Sara Davies
