Estonia: The World's First Digital Republic

The Republic of Estonia, a former Soviet Republic, gained its independence in 1991, adopted a market economy, joined the United Nations and turned its back on Russia to face the West. The Northern European country of 1.3 million citizens—which joined the European Union and NATO in 2004—hasn’t looked back. The “Baltic Tiger” roared loudest between 2004 and 2008, experiencing average real GDP growth of 7% per year, making it one of the European Union’s three fastest growing economies in terms of real GDP [1] The Financial Crisis of 2007-2008 took its toll, but Estonia achieved 4.9% real GDP growth in 2017 [2]
In 2000, Estonia became the first country in the world to declare Internet access a human right. Wired has called it “the most advanced digital society in the world”[3]. For Bryan Lufkin, writing for the BBC [4], the “digital society” could be “one of the biggest ideas of the 21st century”.

The New Yorker journalist Nathan Heller describes e-Estonia as “the most ambitious project in technological statecraft today” [5], and “a coordinated government effort to transform the country from a state into a digital society”.

Estonia’s journey towards its digital future started in 1997, when it made the decision to institute a system of e-Governance. According to the government’s e-Estonia website, 99% of public services are now available to its citizens as e-services.
“In 2005, Estonia introduced i-Voting, becoming the first nation in history to offer internet voting in a general election.”
e-Tax, introduced in 2000, allows Estonians to file their tax returns and pay their taxes online in a matter of minutes—approximately 95% of citizens use this method. In 2001, a mandatory Digital ID card was introduced to provide access to Estonia’s e-services, “releasing a person from tedious red tape and making daily tasks faster and more comfortable”[6]. In 2005, Estonia introduced i-Voting, becoming the first nation in history to offer internet voting in a general election. The introduction of the e-Police system in 2007 has, according to the Estonian government, made the police 50 times more efficient. e-Health, introduced in 2008, digitised 95% of medical data, allowing doctors and patients quick and easy access to their medical records.
“Information about business and land and property ownership is public and easily searchable.”
Each individual owns all their information and it is a criminal offence to access another individual’s secure data without good reason. Citizens can also restrict access to their data. For The New Yorker’s Nathan Heller, “the openness is startling”. Information about business and land and property ownership is public and easily searchable; this transparency allows citizens to hold the powerful and wealthy to account, a process that has required hours of painstaking work by investigative reporters elsewhere in Europe and the United States. But e-Governance doesn’t just benefit individual citizens. The digital society saves the country 2% of GDP[7].

Some have questioned the security of such a system of governance. In today’s febrile global political climate, where cyber war is as great a fear as nuclear war was in the latter part of the last century, surely this digital utopia is open to attack? In 2014, ahead of elections for the European Parliament, a team of independent international experts identified serious risks in the security of Estonia’s i-Voting system and recommended its immediate withdrawal.

But Estonia believes it has ample security in place. e-Estonia’s open-source data platform, X-Road, has no centralised database. Instead, information is held on individual servers linked through end-to-end encrypted pathways. Estonia has developed Blockchain technology that is used to protect its system from cyber attack. It has also been adopted by NATO, the US Department of Defence and the European Union, which speaks to its presumed effectiveness.

Unsurprisingly, the concept of a digital society appeals to tech entrepreneurs. Skype, founded in Tallinn in 2003, is just one of many successful tech start-ups that have originated in Estonia. For Rory Cellan-Jones, the BBC’s technology correspondent, “the legacy of Skype combined with the energy and engineering skills of young Estonians has made this into a start-up nation to rival any in Europe”[9].

According to the International Tax Competitiveness Index 2017, Estonia had the most competitive tax code in the OECD for the fourth year in a row. It also benefits from light touch regulation, especially for tech research.

“e-Residency, described by e-Estonia as “Estonia’s gift to the world”, enables anybody to be issued with a digital ID and full access to Estonia’s e-services.”
But most appealing is the e-Residency, introduced by Estonia’s then Chief Information Officer, Taavi Kotka, in 2014. e-Residency, described by e-Estonia as “Estonia’s gift to the world”, enables anybody to be issued with a digital ID and full access to Estonia’s e-services. International start-ups can exist digitally in Estonia while operating from anywhere in the world. Tim Draper, founder of venture capital firm Draper Fisher Jurvetson and Estonia’s second e-resident, told The New Yorker’s Nathan Heller that he sees Estonia’s e-Residency as the start of “competitive governance”, a situation in which governments compete for tech capital and talent.
Estonia’s neighbour, Finland, is already using X-Road, which Heller believes could be the harbinger of a “novel internationalism”. Speaking at the State of the Union Conference in May 2017, prior to Estonia assuming the presidency of the European Union Council, the country’s President, Kersti Kaljulaid, stated her belief that “the EU is turning into a digital society much like Estonia” [10]. In October 2017, the 32 countries of the European Union and the European Free Trade Area, signed the Tallinn Declaration, a commitment to work towards EU-wide digital government. Perhaps we will all live in a digital society soon.
This story is designed to throw an everyday lens on some of the issues being discussed and debated by investors across the world; it is not research, so please do not interpret it as a recommendation for your personal investments. However, if something has piqued your interest and you would like to find out more, please contact one of our Investment Managers on 020 7337 0777.