VZCZCXRO9675
PP RUEHAST
DE RUEHTL #0568/01 1660807
ZNR UUUUU ZZH
P 150807Z JUN 06
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC PRIORITY 8737
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 TALLINN 000568 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETTC PREL EUN EN
SUBJECT:  TREASURY UNDER SECRETARY ADAMS STUDIES ESTONIAN 
ECONOMIC REFORM MODEL 
 
 
TALLINN 00000568  001.2 OF 002 
 
 
¶1.  (U) Summary: In a June 12 visit to Estonia, Treasury 
Under Secretary for International Affairs Timothy Adams 
met with Finance Minister Aivar Soerd, Central Bank 
Governor Andres Lipstok and representatives of the 
American Chamber of Commerce.  He also hosted a 
roundtable discussion with leading reformers who managed 
Estonia's successful post-Soviet economic transition. 
Adams' trip focused on lessons the successful Estonian 
economic reform model might offer for other economies in 
transition, but it also provided an opportunity to hear 
about the challenges the Estonian economy faces moving 
forward.  End Summary. 
 
U.S. Business Community on Success and Challenges 
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¶2.  (SBU) In a meeting with the Estonian AmCham 
participating companies gave a broad overview of the 
Estonian tax system, which, with its flat tax and zero 
corporate tax rate on reinvested profits, is simple and 
competitive.  The companies also pointed to technological 
innovation as a reason for Estonia's rapid economic 
transformation.  They described Estonian usage of e- 
banking, electronic signatures, and e-voting as examples 
of ways Estonia is well ahead of other western states in 
terms of technology usage. 
 
¶3.  (SBU) The companies cited the amount of time and 
money it takes to register a business and a cumbersome 
notarial system as areas where improvement is needed. 
The companies agreed that the biggest challenge facing 
the Estonian economy in the future is labor.  A 
representative of the North Carolina-based veneer company 
Baltispoon noted that the labor shortage is causing the 
company to rethink its plans for expansion in Estonia. 
Estonian Railways CEO Chris Aadnesen said that his 
company had to increase wages for its train operators 70 
percent in a three month period.  The companies agreed 
that the GOE needed to do more to simplify immigration 
and foreign work permit procedures in order to keep 
Estonia competitive.  They also expressed concern about 
uncertainly over future Estonian tax policy, as EU 
requirements demand that Estonia give up its present 
corporate tax structure by January 2008. 
 
Minister of Finance Notes Record Growth 
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¶4. (SBU) Minister of Finance Aivar Soerd told U/S Adams 
that the Estonian economy is seeing record growth.  The 
first quarter of 2006 showed 11.6 percent real GDP 
growth, with unemployment at seven percent and falling. 
Soerd noted that Estonian public sector debt is the 
lowest in the EU at 4.8 percent of GDP, and mentioned 
that Estonia ran a budget surplus last year of 1.6 
percent of GDP.  Soerd said the government had just 
approved a comprehensive budget strategy through 2010, 
and confirmed that Estonia's new target for entering the 
euro zone is January 1, 2008.  Adams welcomed the 
Minister's statement that Estonia planned to gradually 
graduate from the EBRD.  Adams also raised a tax issue 
faced by the USAID-funded Baltic American Enterprise 
Fund. 
 
Central Bank: Estonia Victim of its Own Success 
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¶5. (SBU) At the Central Bank Governor Andres Lipstok 
reviewed Estonia's economic reform process, focusing on 
the creation of the currency board.  Turning to the 
present, the delegation discussed the integration of the 
Nordic-Baltic banking market and the effect membership in 
the euro would have on Estonia.  In conversation on the 
delay in Estonia's planned adoption of the euro due to 
higher-than-expected inflation, Lipstok lamented that 
Estonia was becoming a victim of its own success.  He 
called the EU's euro accession criteria "excessively 
legalistic."  Adams closed the meeting with an update on 
G-8 preparations and focused on the impact of rising 
energy prices on the world economy. 
 
Reform Roundtable 
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¶6. (SBU) A roundtable on Estonian reform at the Embassy 
brought together officials who shaped the Estonian reform 
policy and experience in the 1990s.  Participants 
included Vaino Sarnet, former head of the Estonian 
privatization agency; Ain Aaviksoo, chairman of Estonia's 
leading social policy think tank Praxis; Hardo Pajula, a 
 
TALLINN 00000568  002.2 OF 002 
 
 
former economic advisor to Estonian Prime Ministers; and 
Allan Martinson, a leading entrepreneur and venture 
capitalist.  All representatives agreed on three keys to 
Estonian reform success.  First, Estonia kept 
administrative reforms simple.  It introduced a flat tax 
and zero tariffs, for example, because these would be 
easy to understand and administer.  Second, Estonian 
reformers offered sufficient incentives to convince 
Estonians to endure tough reforms.  At the beginning of 
the reform process, the GOE quickly restituted 
apartments, homes, and land, while at the same time 
administering the less popular, rapid privatization of 
industry. 
 
¶7. (SBU) The third key to Estonian reform success was 
strategic management, or knowing what the state was not 
capable of managing effectively.  Estonia's reform 
governments recognized they lacked broad economic 
experience, so they created a currency board arrangement 
to take monetary policy out of the hands of the 
government.  For the same reason they adopted a simple, 
virtually unregulated, liberal trade policy, and put a 
balanced budget provision in the constitution.  All of 
these efforts built confidence in Estonia's economic 
policies and encouraged increased trade and foreign 
direct investment, allowing the Estonian economy to 
expand at a rapid rate. 
 
¶8. (U) Following the reform roundtable U/S Adams held a 
press conference which resulted in positive media 
coverage in Estonian print and television media outlets. 
 
WOS