Today’s global economic malaise has been contributed to a variety of factors including loose lending standards, collateralization of debt, the shakiness of exotic investment derivatives and a lack of necessary regulatory controls.
I pondered upon this for a while. But, what I did other that think about this was go back in time to basic economic theory. Now bear in mind, that this is not my expertise – I’m someone who tries to understand human psychology and find a middle ground where business and humankind can co-exist in ‘profitable’ harmony, some people call that field marketing.
Milton Friedman’s philosophies and the influence of his thinking on Estonia
Reading about Milton Friedman and his seminal work ‘ Free to choose’ gave me further food for thought. An example of a successful implementation of Friedman’s philosophies was Estonia.
Using sound free-market policies influenced primarily by Milton Friedman’s school of thought, the democratically-elected government transformed Estonia into one of the world’s most modern and dynamic free-market economies. Estonians have have enjoyed unprecedented increases in living standards as well as economic growth rates well over 5% since the turn of the century. The big question : how did Estonia shrug off the legacy of a socialist government-controlled economy and emerge into this shining example of capitalism and free markets?
In 2007, the Economic Freedom Network, a global association of research and educational institutes noted that Estonia’s economy grew by over 11% in 2006 and that it was the most prosperous of all all countries in Eastern Europe under the Soviet bloc.
Mart Laar, the newly elected head of government of Estonia in 1992 was in his early thirties and the members of his cabinet were in their twenties. All he knew about economics was “The Power of Choice” by Milton Friedman, a book which he had read years ago. The economy that he inherited was in a shambles : 1000% inflation, a decrepit loss-making industrial structure and high unemployment. His response was radical and very Milton Friedman-like. He removed price controls, deregulated the business environment, government-owned industries were divested or privatized, social welfare programs were reduced. A flat income tax of 26% was introduced in 1994 with Estonia being one of the first few countries in the world to do so. This rate was subsequently reduced to 21% in 2008 having gone through a series of reductions over the years. The kroon (Estonia’s old currency before the Soviet invasion of 1940) was reintroduced as Estonia’s currency replacing the soviet rouble. It was pegged to the Deutsche Mark of 8 krooni = 1 Deutsche Mark.
There was also work done in upgrading the communications infrastructure and attractive incentives were offered to Internet startups. Estonia’s close proximity to Finland also saw a surge of repatriations since Estonians would migrate to Finland to word and send back their earnings.The country joined the WTO in 1999 and is a member of the EU today.
Impact of today’s recessionary environment on Estonia :
The global economic recession has affected Estonia in the same way as any other market -driven economy. Its GDP reduced by over 9% in Q4 2008. Low global and domestic demand have reduced the country output with the economy contracting by 15% in Q1 2009. Economists have noted that Estonia’s fundamentals remain strong and once economic conditions improve, it will revert to its earlier dynamic growth.
In conclusion …
But, these circumstances apart, Estonia is a prime example of Friedman’s principles at work where free-market forces dictate the success or failure of modern capitalism with minimum government intervention. One of the prerequisites for a free market economy was that there had to be political freedom – Mr. Friedman was adamant on that point. Chile, after it emerged from the shadow of Pinochet’s rule progressed tremendously when Friedman’s market-driven economic policies were adopted.
I’d like to end with something that Milton Friedman said ” The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with en equal measure of both”
It was with sadness that I realized that Mr. Friedman passed away in 2006. From what I read about him, he was such a vibrant personality and an all-round excellent human being. I will write more on him as I get to know more about this great man in time…
