Normally, when you think of Estonia, you think of…well, have you even “normally” thought of Estonia? I have nothing against the country, but it’s not exactly in the headlines very often and most folks couldn’t find it on a map of Europe. It is, however, leading an economic resurgence that could spread to the rest of Europe if only the leaders of those nations had the sense to follow its lead. Daniel Mitchell gives us some of the details.
…Estonia’s long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.
This doesn’t mean Estonia is perfect. It did experience a credit/real estate bubble, and there was a deep recession when the bubble burst. And the politicians let government spending explode during the bubble years, almost doubling the budget between 2004 and 2008.
But Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.
And now that spending has been curtailed, it’s worth noting that growth has resumed.
Estonia’s economy grew at 7.6 percent past year. It’s debt is a tiny fraction of GDP. It’s running a budget surplus while larger European nations are headed toward disastrous default.
The key has been spending cuts, aided by a population who understood that shared sacrifice doesn’t mean jacking up taxes on “millionaires and billionaires”.
“It was very difficult, but we managed it,” explains Economy Minister Juhan Parts.
“Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told GlobalPost.
“In normal times cutting the salaries of civil servants, of policemen etc. is extremely unpopular, but I think the people showed a good understanding that if you do not have revenues, you have to cut costs,” adds Parts, who served as prime minister from 2003-2004.
As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.
Estonia is rather proud of its accomplishments, as it should be. When New York Times columnist, and big-government advocate Paul Krugman wrote a condescending column about the country, its President rebuked him harshly on Twitter.
We here in America could learn a couple things from tiny Estonia. We can turn out economic woes into success. The CNBC article notes that just a couple years ago, Estonia’s economy shrank by 18 percent, yet today they are seeing the first of what will likely be several years of prosperity. They did it with a couple simple economic principles: 1) only the private sector can bring long-term national prosperity, and 2) big government and economic revival simply do not go together.
That sounds like a recipe for American success as well, don’t you think?