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11.05.07
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Estonia’s E-volution
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By Paul Abelsky
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TALLINN. Estonian parliamentary elections in March hardly shook up the international political scene, but in one respect they drew an unusual and deserved amount of attention. In the world’s first national Internet ballot, over 3 percent of the electorate, or about 36,600 people, made their choice via the Internet. Having experimented with e-voting in October 2005 on smaller scale, the authorities decided the new format was there to stay. All a voter needed was a valid Estonian ID card, an additional driver and a smart card reader for the computer - along with a certain infatuation with the convenience of e-democracy.
Estonia has not hesitated to lead the way in IT endeavors before, embarking early on everything from online banking to wi-fi coverage, from paying parking tickets by mobile phones to digitizing government operations. While these top-down initiatives have given Estonia a reputation of a nation of IT pioneers, a regional trendsetter in its eager embrace of the information age, the widespread adoption of new technologies by Estonians has carried the electronic revolution far beyond the government’s control or priorities. Commercial success came more recently with a number of projects developed and implemented by Estonian programmers. The best-known examples are Skype, which offers Voice over Internet Protocol (VOIP), and Playtech, producer of software for online gambling.
Whether or not the ongoing makeover will carry Estonia to the frontier of the next electronic transformation or simply establish it long-term as a reputable base for research and development, its experience stands out not only in the post-Soviet world, but also in a wider European context.
How the diminutive former Soviet republic leapt into the brave new world of high-tech may have had as much to do with mentality and social conditioning as with far-sighted strategic choices. Although today’s Estonians do not necessarily conform to the stereotype of a sullen Nordic temperament, many are quick to point out the connection between what are seen as the distinguishing national character traits and an initial pull toward IT. “People don’t much like personal communication, and small talk is almost impossible,” said Marek Maegi, director of Tallinn-based Enterprise Estonia, the agency in charge of foreign investments and trade promotion. “Perhaps that is why the technologies that made other forms of interaction possible were so successful.”
Anthropologists may inquire further into this dimension of Estonian e-volution, but besides the Soviet legacy of technical expertise and a strong educational and research cluster in Estonia, citizens of the newly sovereign state had ideas about democracy that meshed well with emerging technologies, finding in them a way of empowering people and opening up the public sphere. “One of the driving forces was that, after we regained independence, people wanted to have more freedom and more transparency on the government side,” said Tex Vertmann, who served as a technology adviser to three Estonian prime ministers and is now communications manager at OMX stock exchange in Tallinn. “They saw that IT could be a helpful tool to achieve these aims. And at the time, the government was headed by people who shared these ideals. That is why the officials paid a significant amount of attention to the development of IT solutions.”
The early governmental initiatives laid the foundations by upgrading the infrastructure and reforming the country’s fixed-line telecommunications market. Major projects followed, including the Ministry of Education’s Tiger Leap National Program between 1996-2000 with a starting budget of 10 million euros ($13.1 million), and a successor plan running to 2005, to connect all schools to the Internet and boost computer literacy among teachers and students. The Look@World initiative sought to increase Internet penetration throughout Estonia to more than 70 percent.
The Role of the Private Sector
The explosive development of some Estonian startups has shown how the society’s Internetization and the establishment of the earliest IT groundwork not only fueled the growth of knowledge-intensive companies but made their very emergence possible. One example is Tallinn-based MarkIT, which set up a system for e-purchasing of IT goods and became the largest such provider in the Baltic region, now expanding into Scandinavia, Central Europe and Russia.
Starting originally in 2001 as a subsidiary of Estonian company Helmes, it spun off two years later to establish separate operations throughout the Baltics. The idea of linking distributors of IT products into a single e-purchasing platform has given the company a region-wide reach, and its managers have now set their sights far beyond Estonia. But as a springboard for their ventures, few countries in Eastern and Central Europe could have provided a base with so many initial benefits.
“As we are trying to become an international company, Estonia was not a bad place to start,” said Andres Agasild, CEO and partner at MarkIT. “Much of the infrastructure we have here is not available in most places, and our business model relies on these existing capabilities. We also need quite a high IT literacy level from distribution companies to perform our operations.”
Another, more prosaic, factor for Estonia’s pace of development has been the country’s compact size, which reduced the scale of the needed infrastructure overhaul. “The country is small and densely settled, and that created the social and geographic preconditions for the effective incorporation of IT,” said Oleg Harlamov, counselor to the minister of economic affairs and communications, as well as co-founder and former chairman of BNS Baltic news service.
“It is also much easier to start from a blank slate than to rebuild an existing system,” he added. “For example, in the case of banking, there was practically nothing in place during the Soviet period, whereas banking was practiced in the West for centuries. Not having any conservative habits, Estonians found it much easier to accept the cutting-edge format when Internet banking came into use, becoming one of the first countries in the world to do so. Now it’s widespread everywhere, but Estonia has employed it for years.”
Setting a Precedent
Indeed, Estonia ranks third in the world in its use of Internet banking. More than 60 percent of inhabitants conduct everyday transactions via the Internet. The first electronic banking services were offered by Hansapank in 1993, and the integration of Internet solutions started with Eesti Forekspank and Eesti Hoiupank in 1996. Soon online activities broadened to include a submission of tax declarations and equities trading. As with the liberalized telecommunications sector, the government and the Central Bank hold no stake in the country’s banking sector.
In a country with a population of just over 1.3 million, more than 50 percent are counted as Internet users and 42 percent of households boast a computer. High Internet penetration and computerized workplaces explain why around 80 percent of tax declarations were filed online last year. The issuance of over 900,000 ID cards with a crypto chip inside, a compulsory identity document since 2001, made possible ever more electronic operations. The use of digital signatures is now accepted for legal matters and financial transactions.
A number of precautions and safety measures seem to have allayed the inevitable concerns about privacy rights and security in the case of e-voting. To assure the inclusiveness of its e-democracy, Estonia has worked to overcome the digital divide among its population, promoting connectivity and computer literacy. Despite the widespread adoption of IT solutions for financial transactions and state-administered services, security breaches and cyberfraud are rare.
“Having brought so many people to the Internet, the next step is to protect this success,” said Mart Parve, e-Security Project Manager at the Look@World Foundation. “Our Internet banking, for example, is fundamentally more secure than in most countries because of our experience in that area. There is a host of reasons why we have lower than average computer crime here. The secure system that’s in place right now has also assured that there’s less concern about privacy invasion. For example, in the case of medical databases, information is kept separate from private data. Temporary identities are created for statistical studies that allow researchers to use the data without accessing any personal information.”
Marek Maegi of Enterprise Estonia says a degree of “hype” is associated with the country’s IT sector, but different studies attest to how much the adoption of new technologies has boosted Estonia’s economic standing. World Economic Forum’s Global Competitiveness Index for 2006-2007 ranked Estonia in 25th place, ahead of countries like Spain and Italy and mere decimal points behind South Korea, New Zealand, and Luxembourg. It also leads the pack of the EU’s new member states. The 2006 e-readiness rankings, released annually by the Economist Intelligence Unit, listed Estonia in 27th place worldwide, once again a regional leader and treading just behind major developed nations.
Estonia picked up another positive appraisal in the Lisbon Review 2006 last December, the third biennial report in a series that measures progress made by EU member states to meet the criteria of the EU’s Lisbon Strategy of economic and structural reforms. Estonia’s performance put the country at 12th place, ahead of several original union members. In the Information Society subindex, Estonia stands at an impressive 5th place in all of the EU.
Besides the government’s broad support for IT development during the transition to a networked economy, financing Internet access for educational and medical institutions, the authorities have also shifted many of their own operations online. The so-called Electronic Cabinet made it possible for ministers and other officials to examine legislation, debate proposals, and vote via the Internet. The prime minister’s office runs a website that allows online visitors to comment on legislative drafts and initiatives. An increasing number of the government’s documents and paper output is processed digitally. Official agencies seem eager to attach the “e-” prefix to almost every aspect of administrative management: some of the current government programs include Project eJustice, e-TaxBoard and e-State Treasury.
With some of the IT visionaries out of the government, however, Vertmann says the current administration has been extending less assistance. “The government’s focus has moved to other directions, partly because early on the introduction of computers and the Internet was a goal in itself and now these things have become a routine part of our lives,” he said. “But there are still lots of things in Estonia that could be improved if the government paid more attention. The more ambitious projects, e-government and Internetization of the whole country, for example, need leadership from the IT industry but also strong support from the government. We only had just one or two prime ministers who really prioritized IT development. Other agencies and ministries can put forward new ideas but they are aren’t able to tap into the budget, so their plans don’t lead anywhere.”
Harlamov noted that while the government may have limited its outreach, the private sector has taken on more significance. “Certainly, our government played a greatly positive role, but it is no longer the prime mover in the IT process,” he said. “Today, private businesses have assumed the leading role in the sector. It’s not that the government has backed away, but rather it tries to create broader preconditions for further growth with investments or programs like KuulaTee (Village Road), with the goal of establishing access to high-speed Internet throughout rural areas.”
Estonia’s openness to the West, as well as its historic ties to Scandinavia and particularly to Finland, continue to drive development. Many IT specialists in Tallinn mention the importance of their contact with foreigners during the earliest days of the Internet, as well as the availability of information and media from Finland, whose broadcasts were within reach even during the Soviet period. “Scandinavian investments came to Estonia very early, particularly from Sweden and Finland, in part because of geographic proximity and cultural and linguistic ties,” said Juri Kaljundi, CEO and co-founder of Nagi, an online social community and user-generated content company, and head of Customix, which offers management consulting to Estonian startups.
Skype is Estonia’s best known success story. Launched by Niklas Zennstrom from Sweden and Janus Friis from Denmark, previously the founders of Kazaa, a file-sharing music service also developed in Estonia, a small team of Estonian programmers designed the software that powers Skype. In September 2005, Skype was acquired by eBay in a deal worth $2.5 billion, and it now counts millions of users worldwide. Playtech provides another such case of collaboration. Started by Israeli entrepreneurs, the company’s management is based on the Isle of Man, but Estonia is home to 90 percent of its workforce, a team of about 200 specialists in Tartu in southern Estonia. Last March, Playtech went public with a $460 million IPO on the London Stock Exchange’s Alternative Investment Market, and the company is valued at just under $1 billion.
Relationships with Western investors helped Estonian companies establish a foothold in outside markets, and they have continued to look to the lucrative possibilities in Europe and the United States for expanding their operations. As for outsourcing projects, despite some moves to establish a presence in places like Russia and Ukraine, new efficient outsourcing centers have emerged in Bulgaria and Romania, which have become an appealing low-cost alternative for Estonian and other European IT companies.
Kaljundi sees a symbiotic relationship developing between Western entrepreneurs and marketing specialists and Estonian IT innovators. “The idea is to match product development skills and technologies manufactured in Eastern Europe with management and marketing experience from Western Europe or the United States,” he said. “These types of collaboration have brought the biggest successes. It’s not that someone just comes in from outside to carry out basic work here, but Estonian teams have become major contributors of design and innovation.”
Plenty of Money
The availability of capital has not been a concern in Estonia, although the country’s first venture capital fund was only launched two years ago. The firm, Martinson Trigon Venture (MTVP), has established a presence throughout the Baltics and presently has two investment projects in Russia. At this point, sufficient funding seems to be in place for startups, and the problem more often is lack of ideas.
“Financing mechanisms are working well as there is lots of free money on the lookout for good ideas,” Vertmann said. “Discussions persist about what is Estonia’s “Nokia,” about what kind of brand can achieve a global presence, but the search still goes on. In the case of Skype, despite the Estonian contribution, it’s more a case of a joint project. The lack of original ideas here is the main problem, and companies tend to focus more on lucrative ventures and quick profits instead of investing enough into research and development.”
Estonia’s IT sector is still small, employing just upward of 10,000 people, and the shortage of specialists is expected to intensify. The largest companies feature staffs of only 200 workers. The lower wages that have given Estonian programmers a competitive edge in the past are now approaching European levels. Other drawbacks include not just the labor constraints inherent in a small country, but also limits on Estonia’s own market potential. For those harboring grander commercial ambitions, expanding abroad has become a vital component of company operations.
What is interesting is that, having established contacts with foreign companies, Estonian firms follow their clients to other countries, and that often takes them to Russia. For MarkIT, which facilitates e-purchasing of IT goods, establishing a base in Russia is next year’s priority. “The reason for us to expand there is to move with the clients and customers who are already working with us,” said Margus Pahtma, head of marketing at MarkIT. “Their presence in Russia is driving our operations and we just try to meet that demand.”
Allan Martinson, managing partner of MTVP venture capital fund and one of Estonia’s most accomplished IT entrepreneurs who formerly served as CEO of MicroLink, the region’s leading technology investment group, says lessons from Estonia’s recent development can also be constructively applied in Russia. “Although the Baltics are much ahead in corporate governance, tax and transparency issues, we still understand the post-Soviet realities and can help Russian companies to go through the transformation process,” he said. “Due to the small size of the local markets, the Baltic companies were forced to start international, multicultural, multilingual business operations at a very early stage. This experience can be used by Russian companies just starting to expand.”
Having leapfrogged the early phases of development and grown at a remarkable clip, Estonia’s IT sector has started slowing down. Some basic challenges still remain. Even with high Internet connectivity, not enough content has been put online. “Schools may be computerized now but we should create more content for students about Estonia, digitizing history, art, literature, so that it can be retrieved by anyone with an Internet connection,” Vertmann said. “What’s important is to give people more possibilities and choices of what they can do online”.
Estonian officials closely monitoring the development see the process as essentially limitless. “There may be some risks to the perpetual spread of IT, but this trend is without alternatives,” Harlamov said. “In the case of e-voting, for example, regular ballot boxes have not been abolished. Each person is free to choose. No one plans to make online activities compulsory.”
Estonia’s wholesale overhaul of the country’s IT infrastructure demonstrated that such a transformation can be coordinated within a reasonable time frame when accompanied with appropriate incentives and responsive policies. “The widespread adoption and use of IT and the Internet in Estonia have shown that such projects don’t have to be expensive or time-consuming,” Martinson said. “The main lesson is that solutions need not be complicated to really work.”
When asked to formulate how the government views its long-term objectives with regard to IT, Harlamov says both the immediate and future goal is the same: “The strategy is to use the new technologies to make life for people easier, better and more cost-effective. IT solutions may seem exciting or more elegant but that shouldn’t obscure our basic aims. As far as I can see, there is no ceiling to progress in this area.” |
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