TCS Daily

Brains vs. Asphalt

By Meelis Kitsing - December 17, 2002 12:00 AM

Seventy-four members of the Estonian parliament introduced a bill this week that would set September 14, 2003 as the date for referendum on joining the European Union. Having a referendum in a tiny, post-socialist country may seem like a mere technicality. Benefits of joining the EU should certainly outweigh the cost. Yet many Estonians disagree. If any of the candidate countries were to embarrass Brussels with a No-vote, then the likelihood of Estonia being the one to do so is highest among all candidate nations expected to join the EU in 2004.

Support for EU membership has been between 50 and 57 percent in Estonia this year. This statistic marks an improvement over last year, when support dropped to 35 percent, with 54 percent of those polled opposed to Estonia's accession to the European Union. It may seem a rare moment of skepticism but, during the last couple of years, support for membership has lingered somewhere around 50 percent. Hence, the outcome of next year's referendum is far from certain.

Many politicians would assume that opposition to EU membership is a result of voter ignorance and the bad communication skills of government officials. Improve the marketing of the EU and fanfare the budget deal that Estonia and the EU reached this week (where Estonia will get four times more money from the structural and cohesion funds than the country pays for membership in 2004-2006) and that will do it, they say. Additional benefits of the deal can be promoted, and Estonians can continue hunting bears and lynx. At least for a while.

There is some truth to the argument. Joining the EU has always been a project of the political elite in Estonia, with most politicians taking accession for granted while common man on the street is left out of the discussion. However, the opinion polls have demonstrated that opposition to EU membership comes from the poorest as well as from the wealthiest Estonians. The underlying opposition is based more on fundamental issues than on poor communication skills and voter ignorance.

Life has never been better in independent, modern-day Estonia. The self-confidence of people has increased tremendously since the tiny nation broke away from the Soviet Union in 1991. Life under Soviet rule was unpleasant for Estonians, to say the least. When it came time to escape the misery of its Soviet heritage, the country executed the most radical reforms in the former East bloc.

Estonia abolished all tariffs (including agriculture) and moved to unilateral free trade. It introduced a flat income tax, zero corporate income tax on re-invested profits, and a new Constitution which, among other things, required the central government budget to be balanced. Last year, the Index of Economic Freedom, published by The Wall Street Journal and Heritage Foundation, ranked Estonia 4th on the list, a position shared with the United States.

Estonia has pioneered innovative uses of technology. With Internet penetration over forty percent, the country outperforms most EU-applicant countries and one third of EU members. Most government services are available online. In many municipalities, even parking can be paid via mobile phones, a service available for several years now. The telecom market is the most competitive in the Central and Eastern Europe, with three mobile operators and many Internet and fixed-line telephone service providers. Estonia liberalized its telecomm market long before the EU suggested date of December 31, 2002.

Membership in the EU means one step back for the Estonian economic policy. The introduction of burdensome regulations in a dynamic economy in transition can make the 'institutional convergence,' as the economists call it, highly costly. Hence the real issue is not to compare the euros received from structural funds to the membership dues of the Estonians but to calculate the cost of lost economic dynamism. Furthermore, the probability of EU funds being spent on the wrong purposes is high, as the distributive mechanism for the funds is subject to political rent-seeking. Some other benefits may not be as clear-cut either - as the haggling over the free movement of labor has demonstrated - at least in the short term.

Complex economic policy arguments are not the core reason for Estonia's high degree of euro-skepticism. An embedded fear of being run by faceless bureaucrats from some faraway place, instilled by 50 years in the Soviet Union, is the main point of concern for many contemplating Estonia's EU accession. The two other Baltic states, Latvia and Lithuania, are much more euro-skeptic than, say Romania, which was not as bullied by the big brother in Moscow. But highly euro-optimistic Romania has not done its homework yet, nor has it received an invitation to join the EU at this stage.

Policy arguments in favor of open and dynamic economy and common man's simple sense for independence are different sides of the same coin. And that coin is not a euro, but rather the Estonian kroon (though the kroon is directly linked through its currency board mechanism to the euro). By the same token, Estonians want to be a part of Europe and connected with Europeans. Even if the independence of the small country is a symbolic issue, the symbolism creates that warm fuzzy feeling that cold-hearted social engineering in the EU apparatus does not accomplish.

This year, the country's leading experts at the Center for Strategic Initiatives suggested euros from the structural and cohesion funds be invested into human development and training to boost the knowledge economy, instead of putting all of the money, in typical EU fashion, toward agriculture and regional development. The proposal was killed by officials of the Ministry of Finance, as something that would not be accepted by Brussels. The debate labeled 'brains vs. asphalt' may help many voters set their preferences straight. If the EU is becoming more associated with asphalt, the probability of embarrassing Brussels just increased.

Meelis Kitsing is an International Policy Fellow at the Center for Policy Studies of Central European University in Budapest.

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