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President Kersti Kaljulaid's keynote speech at the Northern Light Summit

29.06.2018

Ladies and gentlemen, dear listeners

It's an honour for me to stand before so many business leaders and decision-makers, and to describe to you the Estonian fairy tale of development of the last quarter of a century. All successful management strategies in rapidly changing or even unpredictable global environment involve grasping opportunities, while managing the risks. This applies for businesses and for states, even if their coping strategies have to be different.

I admit that for obvious reasons not all Estonians share the view that our development over the last 25 years has been 'great'. However, by the end of the day probably everybody understands that you cannot have the Scandinavian welfare system and Singaporean lean state, Scandinavian wage levels and Latvian low prices all at once. Anyway, this is roughly, what Estonian people demand from their rulers and I feel squaring these circles the best way is also a key to sustain the success what Estonia has achieved in last 25 years. Teething troubles of a young democracy, as you see.

In 1992, when Estonia exited the rouble zone and adopted Estonian krona, we did it in an innovative way. Our then President of the Central bank Siim Kallas, whom most of you here know very well, I believe, was facing resistance from the IMF to support our monetary reform. The reason? Nobody had gone so bold, so radical, so high risk and, from the other hand, so simple way. Simply adopting the krona, fixing its exchange rate to gain public confidence in it, floating it free from day one to avoid black market of currency exchange, and to adopt a law that budget has to balance, because you cannot sustain a currency board without fiscal stability. IMF said no. Impossible. Money would leave the country. You will never balance the budget, poor as you are. You will have to devalue at one point and therefore promising people that 8 kronas will buy you 1 deutsch-mark forever is not sustainable.

I am not saying IMF was not right about risks. Of course it was. But Estonia started to exhibit the character which later brought us the digital state which is now our global image. They could not consider this, as we ourselves could not say what it was. By now, we know. Estonia can, unlike no other country, create permissive legal environment for innovation, both public and private.

The model we thought up for monetary reform made sense from all technical aspects. Only if we could create a law space which supported it, and then stuck to it with national consensus. Estonian governments changed rapidly until we joined the EU. But they all kept to the legal base which guaranteed the stability of the krona until we joined the euro area in 2011. On the road, we saw the emerging market confidence crisis with markets betting against krona, d-mark was changed to euro and we kept the exchange rate exactly as it was from 92, even if it now meant an exchange rate ridiculously precise – 1 euro cost 15,6466 kronas. Then came the crisis of 2009, during which we laid the foundations to join the euro area. But this was our way of showing our people – our law space, smart, simple, stable, but very demanding – is to be trusted. It is innovative, but at the same time sticks not to political, but technical logic. The political discomfort of explaining this to the people and sustaining this environment even if your opponents created it in the first place has to be endured.

Our model of monetary reform later became textbook suggestion for IMF, by the way.

To sustain the krona, we had to get FDI and get it quickly. We needed massive capital investment to rise the productivity of Estonian industry, as we had educated workforce, but lacked technology and market access. No one but us believed our monetary system is sustainable in addition to being innovative. Therefore, we needed more.

We needed rapid privatization with no strings attached – no guarantees for jobs or other restrictions limiting the speed of the turnover. Another smart move technically, but suicidal politically. Yet the model sustained several governments. Again, we had been legally innovative, even if not absolutely original – German Treuhand model was our base, but we did it even simpler.

Then of course, the Estonian tax model had to be so innovative that investors started to look towards us, as we were not exactly a big lucrative market. We had to create tax space, which would sound like wonderland to FDI. We went for flat tax, same tax rate for personal income, rents, corporate income. Tax rate, which would not rise with rising incomes, to not quell initiative and to keep it simple. Later, when other countries started to copy our innovation, we boosted it by abolishing the corporate income tax and only taxing dividends in order to sustain FDI interest into massive capital investment. At that point, it was all about industrial development and productivity gains in production, as our cost base was still low.

You see? The only thing we did differently from other emerging markets was innovative law space. And the rest was left to free markets, as we had no time to overregulate and we could anyway not afford the cost of overregulation. This lead to smart, minimal, but sufficiently regulated legal space for economic growth. Business knew where it stood in Estonia - – even if you had just a few rules then companies understood that they applied equally to everybody.

By now we have foreign direct investments in Estonia for 20 billion euro and salaries growing by 6-7% per year. Direct foreign investments totals more than 85% of GDP. Additional inflow of direct foreign investments in 2017 was more than 1,5 billion euro, i.e. 8,5% and Estonia now ranks on the first place in the International Tax Competitiveness Index. Our GDP per capita in PPP terms in 2016 was on the same level – 29-30 thousand US dollars – as it was in the richest countries of EU in 2004. Remember, it was about 2300 dollars in back in 1991.

After introducing flat income tax the capital flew in. We were the solution to everybody in Scandinavia when they were trying to save costs. But we knew that this will only work to certain level and will not be the way to complete catch-up with the richest parts of the world. You can never catch anyone if you just do what they have done before you, can you?

We realized we cannot remain the recipients of the slightly outdated technology your companies were seeking to combine with our lower salaries. This had helped in the beginning, but was no way to leapfrog. We wanted more and we wanted it quickly, because the European labour market was opening up and we understood that otherwise people will start moving to countries with higher wages.

What is the interesting new thing the state can do to make Estonia more attractive to try out new technologies? It was obvious we can only be quick adapters, not developers, for that you need to be big and rich. But we saw there is a niche – most public sectors were falling behind in the creation of the legal space for new streams of technology. Our attention was brought particularly on digital and also on population level genomics.

We created a legally permissive environment for digital technologies at the same time making it safe so the people could trust it. Because as you know digital and trust is the big and major issue in Western countries. If the whole world had done like Estonia – creating safe digital environment for official use, digital ID with encryption, big companies like FB would not need to go from parlament to parlament apologizing for crimes they did not commit – but acting in legal vacuum which the states themselves had left. However, the other states did not what we were doing, because, of course, it made sense technically, far less so politically. For some reason, Estonia again managed the technically right law space, while avoiding political pitfalls and creating consensus around our single digital backbone for public and private services.

Our law space makes people to trust what we have. We were early adapters, so we got there cheap. We offered a digital sandbox for service developers, as other states could not compete and still cannot compete on legal space creation, providing safety for both users and businesses. Our digital environment is predictable law space more than cutting-edge technology. The technology comes from businesses, State only does legal space creation. But this space is vital for new ideas.

However, it was not only digital, there were other areas in the development in the technology where you could create similar legally permissive environments. We created another one, which is less known because this science has not developed as quickly as digital technology—it's population level genetic analysis. Roughly at the same time as e-Estonia, Estonian genome law was created and Estonian Genome Foundation started to operate on private investment basis. We offered legal space to work on population genetics, protected the personal data of our people, but allowed scientific and commercial use of this data in impersonalized format. Now, we think that by 2020, about 10% of our population will have their most common genetic risk markers analysed and can take measures to stay healthy on more informed basis. And if 10% is analysed, all their relatives are also somewhat more informed of their risks, so you have covered about one third of your people. This is population level preventive health care already. No other country but Iceland and Estonia offers this nationally. Participation is of course voluntary.

Again, as with digital, we could not afford to create the new technologies. But we did not need to. All we needed was legal space to bring investment and technology in. It seems to work, as we continue to catch up with developed economies, of course not in industrialization, but our services economy seems o compensate well for that, allowing us to even refuse some industrial investment if we think it might be environmentally detrimental. We may be wrong there, but you see – our success in embracing the new by smart legislation has made us somewhat overconfident that we can get rich while preserving environment, not on its expense as was necessary in 20th century. Some technologies that are currently being used in Finland, are actually being refused in Estonia as being too polluting.

For 1,3 million people we have 4 unicorns. Ten times denser than USA.

The next big thing is artificial intelligence. We started to realize that there will be driverless cars and robots walking on the street quite early and so we changed our traffic-law in Estonia. It has been put to practice already, when we had an accident and the car driver was found guilty.

We are quite good at regulating for concrete, existing technologies to make it safe for them to thrive in Estonia. But today this is not enough anymore. We see that technological cycle is far too short today to regulate for each round. What to do?

We in Estonia think we must regulate the relations between human beings and algorithms in a technology neutral way. I am sure that no matter who wins the coming elections in 8 months, all parties would do it. They have to, because our people demand proactive state services, not just digital. For example, people don't understand anymore why you have to apply separately for child support, when the baby gets and digital identity already in the hospital, and the state knows my bank account number? They want..... and we will give it ot them. For that you have to regulate how algorithms can operate with humans off the loops, and while it is not as dramatic-looking as driverless cars, it is as important steps toward our coexistence with automatic, autonomous and one day, AI systems.

We are also quite confident with our e-residency offer. It is very much like a normal start-up. Right now we have some 40 000 e-residents, 1% of Estonian companies already accredit e-residents and we are now going to take a look how to turn that into moneymaking machine or benefits for the country – enlarging our economy, bringing in more tax money etc.

Globally it is not yet recognized that technology has made people free. You can work in Australia in the morning, in United States in the evening, you can sit in Sweden or Mediterranean. However, most governments expect citizens to have an address and working address, so that the tax revenue can be collected. Now you need to be thinking very differently in the digital society.

If your people are working everywhere, to whom are they going to pay taxes? Probably for those who offer them a safe harbour of services globally. It is urgent to figure out the new, free social contract between a state and a citizen, where the state takes responsibility to continue providing services to their citizens wherever they work and wherever they live. The citizens, in exchange, can contribute to the state's resources according to their income, whichever and wherever its origin. Of ocurse everything we can today think of in this direction runs into direct conflict of OECD rules, but we are sure that one day this will be changed. As a country of many e-residents we will then probably be the select safe hub for much more than 1 million people.

While this is not yet the case, we can offer a low bureaucracy business environment in the pocket for our e-resdience, and a citizenship complete with public services in the pocket for Estonian citizens. This is much more than public offer of most states globally. It has to keep sustaining economic growth if we keep playing smart, safe and innovative, acceptable and understandable to our citizens and constantly adapting to the new technological realities.

Finally, a few words about geography.Estonia has not neglected its geopolitical environment. We strove to join EU and NATO since we regained independence. We are OECD member state and an aspiring UN Security Council member. We trust in global networks based on rule of law, human rights and liberal democratic values. We work tirelessly with all our partners and allies to make sure no one would question our right to chose our own path as a free and independent nation. We are pretty good at risk assessment, communicating this to out partners an constantly seeking workable solutions to make sure what we achieved can be preserved and further developed in safety.

The trauma of 1940, succumbing to occupation without a fight, has made us to work on independent defence capacity very much like our Finnish brethren. While saying this, we are also dedicated to continue to positively engage with our Eastern neighbor. Hoping that by working bilaterally and through EU programs, to strengthen Russian civil society, we might one day see a positively transforming eastern neighbor we thought we had in early 90ies. We are sad to see to which extent our Eastern neighbor has closed off the communication space between western democracies and itself, to the detriment of its own economic development and also of course lessening the developmental capacity for the whole region. One day thatmight change, and we are eagerly waiting for that day, never giving up hope. But being cut off from Russian market has probably added a new twist to the Nordic economies, particularly Finland and Estonia, to be more global economies.

Technology comes to our aid here, as geography can be neglected in 21st century economies. So maybe it is no coincidence that Estonia and Finland are only two sovereign states globally who have technical capacity to exchange real time data between their e-governance platforms and build joint services on this. So, our people can basically work everywhere in the world, without ever leaving the Nordics – which truly is the best place in the world where to live, as you all very well know.

Thank you for listening!