Forbes on Estonia and meaningless statistics

13.07.2013, 22:50

Mark Adomanis, a blogger for, writes that Estonia is beloved of the international business press because it is, in many ways, the perfect laboratory for conservative economic policy.

The country eschews deficits, embraces hard money, loves technology, detests bureaucracy, and is generally about as free-market as any country is capable of being. This is why the country receives such laudatory coverage from places like The Economist:

“It takes just five minutes to register a firm in Estonia, says Mihkel Tikk, the head of the country’s online portal, a one-stop-shop for e-government services. Entrepreneurs wishing to start a firm log in with their national electronic identity-card and a few clicks later the confirmation arrives by e-mail. That service and many other equally convenient electronic offerings are a big reason why Tallinn, Estonia’s capital, is now mentioned in the same breath as Berlin, London and even Silicon Valley. According to one estimate, Estonia holds the world record in start-ups per person—a sizeable feat considering that the country has only 1.3m people.“

Sounds like a pretty amazing place! You never need to go to the Department of Licenses and Inspections, you can do almost all of your government paperwork online, opening a business takes less time than filling up with gas, and everyone and their cousin has a start up. Not bad for a former part of the Soviet Union!

The problem is that the story focuses on statistics that have no meaning for the great majority of Estonians who, like every other people in every other country in the world, will never start a business or try to attract venture capital funding. The first economic priority for Estonians, like everyone else, is to find gainful employment: it doesn’t matter how quickly the government processes your paperwork if you’re unemployed and don’t have any money. In fact you can read the article from start to finish and you will never ever stumble across the word “unemployment,” which is so inconvenient, backwards, and old-fashioned.

And what is Estonia’s employment situation like? Not that good! From 2004-13 it averaged 9.6%.

Estonia’s economy, despite the impressive number of start-ups, despite the awesomeness of Skype, and despite the chatter of the VC crowd, just doesn’t appear to be very good at creating jobs. But wait! Unemployment is decreasing – look at that huge drop at the beginning of 2013! Surely the Baltic Tiger is just stretching its limbs, waiting to pounce.

Well a drop in the unemployment rate can come either from an increase in the number of people working or a decrease in the size of the labor force. What do you think happened in Estonia? Surprise! The population is collapsing.

The 2012 census captured about 25,000 fewer people than expected. In most countries that’s a rounding error, but in Estonia, a nation of only 1.29 million, 25,000 is actually a pretty significant number. For comparison’s sake, since 2006 Estonia has lost about 50,000 people while “depopulating” Russia has gained 100,000. Estonia’s population loss is thus more severe than Russia’s not just in relative but in absolute terms.

It’s worth noting that the sudden acceleration in population loss wasn’t driven by a mortality surge or a plunge in fertility. Estonia’s natural rate of population loss actually improved significantly, and the country’s birth and death rates are more than respectable for Eastern Europe. The sudden plunge in Estonia’s population was driven by a large increase in emigration. That is to say, despite online business registration and fancy tech start-ups, increasing numbers of Estonians have decided that their futures are best pursued elsewhere. This is a fact that is curiously absent from The Economist’s narrative: why would people be abandoning such a fresh, dynamic, and innovative place? Well I don’t want to speak for Estonians, but I would hazard a guess that it has something to do with the fact that tech start-ups (by definition) employ tiny numbers of people and are a very poor foundation for a country’s overall labor market.

The facts that unemployment are high and that the population is rapidly shrinking do not, of course, negate Estonia’s accomplishments in IT. Estonians have made a name for themselves in the tech world, and that’s all to the good. But surely the basic, boring statistics I’ve highlighted above complicate the rosy picture painted by The Economist of a plucky upstart gradually making its way into the upper tiers of the tech world. Estonia’s main problem at the moment isn’t figuring out a way to “relax immigration rules” to “make it easier for start-ups to attract foreign talent” but to find a way to prevent its own citizens from abandoning the country in ever-greater numbers. Bureaucracy is usually annoying and counterproductive, and it’s nice that Estonia has done so much work to combat it. But eliminating red tape and fostering tech start-ups can’t be the only goals of economic policy because most people are never going to be well-educated or intelligent enough to work in such firms. Estonia now has a really serious population crisis on its hands, one that no amount of VC funding is going to solve. It’s worth remembering that when we talk about Tallinn’s burgeoning tech scene.