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Tallinn, Estonia's Wired Capital August 29, 2007 Tallinn is not just a world heritage site with a history ranging far back to the Middle Ages -- by bestowing its citizens with the fundamental right to free Internet access, Estonia has also become the most-wired country in Eastern Europe. Almost every month, Tallinn is given a new superlative, a new award or a new compliment: The city is dubbed the "Hong Kong of the Baltics," one of the "seven most intelligent cities in the world," the "boom town of the new Europe" or the "tiger of the north." Tallinn successfully combines the world of high-tech with that of the Middle Ages, linking tradition with cyberspace. Just how successfully it does so only becomes apparent following a second, closer look at the city and conversations with Estonians like urban planner Endrik Mänd, corporate consultant Jüri Saar and university rector Signe Kivi. Mänd, a live wire unable to remain on his office chair for longer than five minutes, likes his job -- with one qualification. "I'm really too old for it," the 36-year-old says. His co-workers are almost a decade younger, on average, Mänd, who studied architecture, adds. He presents colorful graphs showing the 400,000-resident boom town's budget surplus. Tallinn's economic growth regularly exceeds that of the entire country, with an 11.4 percent increase last year alone. And when he proudly describes the city as a "surfer's paradise," it isn't the waves in the Gulf of Finland he's talking about. Few countries are as crazy about the Internet as Estonia, and no capital city can keep up with Tallinn on that count. All schools are connected to the Internet; more than 90 percent of all bank transactions are conducted online; and there are more mobile phones than residents. Tallinn's citizens pay for their parking tickets and their bus passes by sending text messages from their mobile phones. Time-consuming visits to public authorities are largely a thing of the past, too. Estonians can even obtain birth certificates via the Internet and request parental assistance payments from the government in the same way. "The state guarantees Internet access free of charge as a basic right," says Mänd. "And of course the politicians have to keep step with the civil servants." Tallinn has pushed persistently forward with its so-called "tiigrihüppe" (tiger leap) online offensive to wire the entire country. Since last year, citizens have been able to comfortably elect their parliamentarians from behind their home computers. Parliamentary and town hall debates are now recorded without producing any paper trail, and every seat in parliament and town hall is equipped with a laptop. Citizens can contact their e-government at any time, at least in theory. And Estonian citizens and travelers alike can log onto the Internet via wireless Internet hot spots in public buildings, bars and cafés -- in most cases for free. Full article can be read here
Confident Estonians fuel Tallinn's property boom "Please ignore the boxes, I haven't unpacked everything yet," says Natalia Omulchunka as she opens the door to her flat. "I'm still deciding what to do with the main room, but it's a bit complicated because, well, I'm married to the bank." Ms Omulchunka's new home is a sunny flat in a renovated 1930s block in the heart of Tallinn. She fell in love with it the first time she saw it in mid-January, and within two weeks the flat was hers. Twenty-three years old and a few months into her first ever job, Ms Omulchunka was able to arrange a mortgage in less than a month. "I didn't have a problem," she says. "It all went very quickly." Quick sales are not unusual in Estonia. Most of them take between two weeks and a month. Ever since banks started offering low interest mortgages about five years ago, the growth of the property market has been dramatic. Prices in the capital Tallinn went up 50% in the last year, and the country is in the grip of a building boom. Ms Omulchunka may have found what she wanted in a renovated building, but most Estonians want to live somewhere new. For estate agents like Taivi Lippmaa, it is perfectly understandable. "You have to think about the conditions we lived in for the past fifty years under the Soviet system," she says. "People want to live in better, newer and more modern places. They're just taking a loan for everything, mortgaging everything to buy a new place to live." The rush to fulfil that desire is transforming Tallinn. From the twenty-first floor of an unfinished block of flats in the city centre, Ardi Lossman, whose firm is building this block, points to other building sites across town. You can see cranes in every direction, and in the glass walls of new tower blocks, the reflection of the turrets of Tallinn's medieval Old Town. Yet, demand vastly outstrips supply. "If you put up a sign saying there will be a new building, the next day there's a ring of people ready to sign a contract, without knowing the plans, the design or anything." The boom is worrying some people, not least since household debt in Estonia has risen by more than 50% per year in the past three years. At the national Bank of Estonia, Sven Meimer, the head of the Financial Stability department, says it is impossible to predict how people will cope with paying the money back if and when the economic situation changes. "If things keep going well it's likely nothing will happen," he says, and indeed that's what the bank forecasts for the next two years. "But Estonians don't know what it means to have a loan for 30 years, and when interest rates rise rapidly, what it means to pay back more than you had planned. "We can't tell how they'll react." Few share such concerns. Debt levels have a long way to go before they reach those of wealthier European countries, and Estonians are feeling optimistic. True, Estonia remains one of the poorest countries in the European Union, with incomes half the average. But it also has one of the Union's fastest growing economies. For a while, the country was even hoping to be among the first new member states to adopt the euro in January 2007, though that plan has now been delayed until 2008 after Estonia recently admitted that it will not be able to keep inflation within the limits set for eurozone entrance. Fifteen years after regaining independence from the Soviet Union, Estonians have wholeheartedly embraced the transformation to a market economy, earning their country recognition as the leader of the 'Baltic Tigers'. After the difficult transitional years of the 1990s, when the country undertook major restructuring and weathered the Russian economic crisis, Estonia's growth really took off. Last year the country's economy grew by 9.6% and it is not about to slow down. The National Bank of Estonia predicts that the economy will grow by more than 8% this year, and by more than 7% in 2007. Some economists say the growth's roots can be found in Estonia's history. When it regained independence from the USSR, Estonia already had the highest income per head of any former Soviet republic, with one of the best educated workforces. Those relative advantages meant that the new nation was ready to make the most of its closeness, both physically and culturally, to wealthy neighbours Finland and the other Nordic states. Consequently, Estonia was one of the first post-Soviet countries to receive significant foreign investment. Finnish high-tech firms, in particular, developing new mobile phones and other equipment, turned to Estonians to actually produce them. And sitting as it does between Russia and Western Europe, the country flourished on international trade, a key source of income in the 1990s. Trade, while still important, is less crucial now, as Estonia has developed other local industries. Among the main ones are forestry and timber products, and the Estonian chemicals industry, which is growing again after collapsing with the dismantling of a former major customer, the Soviet military. While growth is rapid throughout the economy, it is fastest in the property market. Ordinary Estonians, now getting the chance to buy a home, are jumping at it - making house prices rise faster than in any other country in Europe. Having already lived through enormous changes, the enthusiasm with which people are buying property reflects their confidence that whatever may come, they'll be able to weather the storm.
Estonia: The world's fastest growing property market Property is growing in value in Estonia faster than anywhere else in the world, according to Knight Frank, one of the world’s leading international real estate firms. The report, which places Estonia at number one in the world growth league table, states that property prices in Estonia rose by 17% in the year to March 2006 and this follows on from growth of 18.6% in the year to March 2005. Meanwhile growth in a number of other locations perceived to be property hotspots was disappointing. Growth in Bulgaria reached only12.5%, South Africa recorded 12.1% and China, many people’s hot tip for the next decade could only muster a 4.7% rise over the same period. The report’s focuses on recent supply and demand trends together with an outlook for short term prospects. The market comments are supported by detailed statistics including price trends. The full report can be read here.
Estonia Europe's property hotspot for the second year Estonia was Europe's property hotspot last year, while UK house price inflation dropped faster than anywhere else on the continent, research has shown. An annual survey from the Royal Institution of Chartered Surveyors shows how much the property pendulum has swung in favour of Europe's younger democracies. Its other conclusions are that the riskiest place to buy is the Mediterranean coast and that Ireland and Holland have had the biggest house price booms.
Unprecedented demand for properties in the Baltic states helped push Estonian house prices up 28 percent in 2005. The country - whose popularity has been boosted by cheap flights to its capital, Tallinn - was top of the RICS European house price inflation league for the second year running. Experts said the country's success was also due to its proximity to Finland, which provides much of its investment.
Professor Michael Ball, author of the RICS report, said: "We are essentially talking about Tallinn here. There is a lot of overseas interest in property there, although it's essentially a very different market to other countries in Europe, is starting from a low base and is very small. They, along with a number of overseas countries, have also started to introduce mortgages recently, so domestic demand is now picking up."
The UK, which in 2004 was one of Europe's fastest-growing markets, had house price inflation of just 3 percent last year, making it one of Europe's worst performers. Prof Ball warned that the days when one could make thousands on the European property markets may now have passed.
"People from around the world have been buying houses in Europe," he said. "There might have been bargains five years ago but I'd be very surprised if there were now. The riskiest area to buy would be around the Mediterranean," he added. "There is a lot of local demand and, given the European Central Bank is raising interest rates, homeowners may suffer. There is also a lot of house building."
Economic Forecast of Eesti Pank for 2006-2007 According to the autumn forecast of Eesti Pank (Bank of Estonia), economic growth constituted 8% in 2005 and will remain slightly below 7% in 2006 and 2007. Demand conditions will continue to be favourable. Rapid income growth, a generous credit supply and favourable expectations account for growth in domestic demand. In addition, the gradually improving external environment prospects and dynamic integration into the EU trade market will ensure sufficient export demand growth. The forecast predicts household income in 2006-2007 will increase faster than private consumption expenditure. Such expectations are based on both the administrative changes in taxation as well as an expected slight increase in interest rates limiting consumption. Household investment has been sustained by the increase in income; disposable income has increased due to wage growth (predicted to remain around 10% in the forecast period). Employment has been accelerating since 2005. Demand for labour as a production input has grown considerably against the background of increased economic activity. As a result, wage growth has been increasing since the beginning of 2005 and employment growth will constitute 1.4% by the end of 2005. Over the next two years, employment growth is expected to gradually decline. The labour market related risk, which jeopardises the economy as a whole in both short and medium term, lies in the acceleration of wage growth arising from discrepancies between the demand for and supply of labour force. As regards long-term risks, the supply side of the economy has to cope with the upward movement in the value added chain. The country is facing a transition to more knowledge-based products and services, and this is occurring against the background of limited labour force. Further growth of export-oriented investment is important for Estonia. If the recent developments continue and investment increases mainly on account of investment in real estate, after a certain amount of time economic growth will slow down and the competitiveness of Estonian enterprises will decline. As the developments over the first half of 2005 were more favourable than expected, it allows the bank to be more optimistic concerning the further improvement of the external balance. At the same time, these developments are not certain enough to allow for downgrading the possible deterioration in the external environment. Estonia's exports have been able to maintain a sound growth rate, which allows forecasting a somewhat faster convergence of current account deficit. Current account deficit is expected to form 9.4% of GDP in 2005, and it should decline in the next few years. Inflation has been faster than expected during the past months. The main reason has been the rise in oil prices, which has caused upward adjustments of the inflation indicators in the autumn forecast. The forecast predicts a decline in the harmonised consumer price to 3.4% in 2006 and 2.9% in 2007. The share of motor fuel in the consumer basket in Estonia is twice that elsewhere in Europe, thus its impact in Estonia is also much stronger. The rise in oil prices has been accompanied by fast appreciation of other types of energy and transport services. The price growth of food is expected to slightly decline, but the pressures accompanying the growth in export demand may increase. The fast wage growth will also increase the risk of higher inflation. The full text of the forecast can be found on the Eesti Pank web site.
Estonia's Power to Pull in Foreign Investments Grows Estonia’s inward investment, most of it from Sweden and Finland, is higher than that of any other European country when measured against the size of the population, whose radical tax system is helping fuel an economic boom that rivals growth in Asia’s tiger economies. The inflows helped fuel economic growth of 8.6 percent in the first half of this year, an achievement that is prompting calls in neighbouring Finland for the government to follow Estonia’s example of decisive economic liberalisation. Mr Helenius sums up the challenge facing Finland’s high-tax social model: ‘Why remain based in Helsinki if you can move operations to Tallinn, from where your client base can be served just as efficiently but in a much more cost-efficient way?’’The competitive pressure from Estonia is set to increase further as the government prepares to cut both the income and corporate tax rates by 4 percentage points to 20 percent over the next four years.
Land of opportunity David Bain believes his company is in the right place at the right time. He's chief executive of Galvex Services, which manufactures galvanized steel near Estonia's Port of Muuga. Until recently, Estonia was considered an economic backwater. But with the collapse of communism and the European Union's eastward expansion on May 1, the tiny Baltic nation has become a compelling location for manufacturers such as Galvex. "We are very centrally located between Scandinavia, Western Europe and the former Soviet Union," Bain said. "Muuga is the deepest ice-free port on the Baltic, and it allows us to be in Europe yet have proximity to the Russian market." Galvex imports cold-rolled steel from the U.S., Turkey, Russia, China and Taiwan, and processes it for markets in East and Central Europe. Estonia's transportation rates are competitive, and land and labor costs are substantially lower than in the EU's 15 older member states. The EU's expansion has attracted interest from many companies seeking new markets and low costs. The new member states have already been growing at a faster pace than the mature economies of the EU's 15 older members, largely because of increased foreign investment, in anticipation of membership. In 2002 and 2003, the new members enjoyed an average annual gross domestic product growth rate of 3.3 percent, compared with an average growth of only 2.2 percent for the 15 older members. The EU now is the world's largest trading bloc. Its 25 nations have a combined population of 450 million and account for nearly 20 percent of world trade in goods and 24 percent of total world trade in services. The EU's 10 new members - Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia - have brought a combined population of 80 million into the EU. Even by North American standards of geography, the new European Union is vast - "like a United States of North America being created stretching from Canada all the way down to the Panama Canal," said Anthony Gooch, spokesman for the European Commission Delegation to the United States. The new EU is also much more comprehensive than the North American Free Trade Agreement that loosely binds the U.S., Canada and Mexico. Unlike NAFTA, the EU is a customs union in which all members "negotiate all trade agreements, be they regional or in the WTO, as one bloc," Gooch said. From Lisbon to Lithuania, EU bureaucrats based in Brussels manage all rules regarding trade. EU members enjoy all the benefits of belonging to this powerful bloc: free movement of goods, services, labor and capital within the 25; common border protection; and a single set of standards for all manufacturers from Lisbon to Lithuania. A European Commission report predicts that prices for new members' industrial imports will drop as export volumes expand because of the EU's "dense network of bilateral agreements" with other nations and trading blocs around the world. Many multinationals have been lured to Poland because its population of 40 million is by far the largest among the EU's new entrants. General Electric is already among the 10 largest investors in Poland, and U.S. Steel has transformed an unprofitable state- owned operation in Slovakia into an efficient operation, said E. Anthony Wayne, U.S. assistant secretary for economic and business affairs. Following in the footsteps of Volkswagen, both Peugeot (France) and Kia (Korea) are planning to assemble in Slovakia. "By 2006, Slovakia will produce more cars per capita than any country in the world," said Michael Weidokal, director of International Strategy Analysis, which provides economic forecast and analysis of investment trends. In 2002, foreign direct investment in Central and Eastern Europe amounted to $29 billion, about 15 percent higher than in 2001. It was only region in the world where the inflow of foreign direct investment rose during 2002, according to the United Nations Conference on Trade and Development. The EU's latest expansion, however, brings a unique set of challenges as the richer nations in Western Europe are joined by the 10 newcomers. With the collapse of East Germany in 1990, the EU absorbed a reunited Germany, but the impact of that enlargement is still rippling through the 15 older members. And this time the EU is digesting several former communist countries all at once. Apart from the tiny islands of Cyprus and Malta, the new members are either former components of the Soviet Union (Estonia, Latvia, Lithuania); former Communist bloc allies of the U.S.S.R. (Poland, Hungary, Czech Republic, Slovakia); or constituents of the former Yugoslavia (Slovenia). Unlike East Germany before its reunification with West Germany, the 10 nations that joined the EU this year have spent more than a decade opening their economies in preparation for EU membership. More adjustments will be needed. "Over the next six months, EU accession will mean adjusting to a lot of new regulations, customs duties and value-added taxes," Bain said. "The EU has quotas on products and trade agreements. You have to put all your systems in place to fit around that." Average per-capita income of the 10 new members remains less than half that of the old members, according to the European Commission. "The gap in income distribution within the EU 25 will rise by about 20 percent - twice as much as the increase when the EU went from nine to 12 in the 1980s," Gooch said. The 10 new members added only 5 percent to the total GDP of the expanded EU. Wage levels in the new members are much lower - industrial wages in Slovakia are one-sixth of those of Germany. Productivity and research and development lag far behind. The new nations also face internal political barriers: Each new EU member has a separate development agenda. Poland, for example, has an unemployment rate of 20 percent, despite its wealth of skilled workers. Moreover, foreign investors have been more cautious about jumping into the Polish market recently. During the first six months of 2003, the latest period for which statistics are available, foreign firms invested $2.53 billion in Poland, down from $3.23 billion a year earlier, according to the Polish Information and Foreign Investment Agency. Skeptics argue that bringing so many relatively poor countries into the EU all at once could thwart the EU's ambitious Lisbon Strategy, adopted in 2000. The EU goal for 2010 is to make Europe "the most competitive and most dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion." To achieve that goal, the 10 new members will have to grow much faster than the more mature economies of Western Europe. A recent report by the European Commission projects that the new member states will get a much bigger boost from accession than the EU's first 15 members. The report says the new members will derive additional yearly GDP growth of 1.7 percent from accession, while the first 15 will enjoy a boost of only 0.6 percent. However, wage rates in Poland, Hungary and the Czech Republic have risen so high that labor-intensive manufacturers are looking further afield to Romania and Bulgaria, Weidokal said. An additional problem in Poland, he said, is that "infrastructure is a mess. There are only 60 miles of highways because every landowner can veto road construction." Much infrastructure designed in the communist era must be upgraded to EU standards. Weidokal said the sectors most likely to grow quickly in Poland and Hungary are pharmaceuticals and biotechnology - in response to an aging population - and environmental engineering. Wieslaw Wodyk, economics counselor at the Polish Embassy in Washington, admitted that his country's highways need help. But he added, "The EU will be providing structural funds for improving our transport network. There will be great competition for construction companies to build highways in Poland." Optimists point out that this year's class of new members is accustomed to rapid economic and social change. "Estonia has a very progressive system and attitude," Bain said. "They rank in the top five countries in the latest index of economic freedom. For example, there is no corporate income tax on retained earnings." Estonia has achieved star status in the region, moreover, by developing a paperless Web platform that its government ministers use to save 200,000 euros a year. Sixty percent of Estonians use the Internet daily, and 71 percent of PCs are Web-connected. Internet access is free for Estonian citizens. Bain said companies such as Galvex are enjoying superior productivity. Borrowing concepts from such progressive U.S. steelmakers as ISG and Nucor, Galvex stimulates output with a "very aggressive" bonus program that rewards workers for more production and higher quality. "We have tried to push responsibility down to the workers," Bain said. "People in the New Europe are extremely enthusiastic, and they are hungry. In the Older Europe, people are more complacent."
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