European Affairs

Estonians feel they have earned some bragging rights in making our often-chilly streets compatible with hot technology. In the latest World Economic Forum’s Global Information Technology Report, Estonia, despite being one of the poorer countries in the European Union, ranked 23rd in the world in terms of its overall IT level. The little country moves up close to the head of the class when you look at how much IT is used in daily life. The figures, confirmed in eTrack and Eurostat surveys, showed that 56 percent of Estonians (aged 15-74) were using their computers last year, 53 percent regularly spent time on the web and mobile-phone penetration reached 107 percent.

These numbers put Estonia in the top ten EU countries for computer use. Almost every second Estonian between the ages of 15 and 75 has access to a computer at home, and 81 percent of all computer-owning households have internet access—including nearly a third with broadband connections. Naturally, “wi-fi” access is increasingly available in cafes and other locations across the country—including gas stations.

Estonia’s strong performance in IT is especially remarkable, since the country still has a comparatively low overall living standard. The general standard of living is still far below the EU average: a Eurostat survey this year estimated Estonians’ purchasing power as only 57 percent of the EU average. At current growth rates (roaring ahead at 12 percent in the second quarter of 2006), Estonia will catch up with Portugal in the coming decade and then Greece in the next.

Internet use is most active among the younger generation (ages 16-24, including 99 percent of students). Perhaps more surprisingly, use is also spreading fast among older people: a recent survey showed that nearly half of people aged 50 to 60 use the web regularly.

But a fundamental point about the special IT culture in “E-stonia” is an emphasis on making sure that IT innovations are applied to making daily life easier and more comfortable for everybody. Of all internet users, 83 percent go online to use e-mail; 77 percent to read newspapers, magazines and other online media; 75 percent for banking and 70 percent to look for products and services. Banks in Estonia have nearly 1.1 million on-line banking clients—in a country with a population of 1.3 million.

A key factor in explaining how IT succeeded in “taking over” in Estonia is the ease with which people can do so many errands from their computers, without leaving home. Estonia is the only country in Europe with well-established practices using “digital signatures” —in other words, a person’s identity can be authenticated electronically thanks to an electronic identity card. The introduction of such electronic ID cards remains controversial and blocked in many countries. Many other EU countries lack traditions of identity cards (such as Britain) or centralized electronics (such as Germany).

Even in Estonia, which is used to ID cards and electronics, the new system needed strong leadership to put in place. The nascent ID card was greeted with skepticism among many politicians. The results have proven them wrong. The first electronic ID cards were issued in January 2002. By October 2006, one million cards had been issued, with about 90 percent of residents in Estonia aged 15 to 74 having one. Linnar Viik, often described as “the guru of Estonian IT,” says that the only thing he hasn’t done with his ID-card is to spread butter on a slice of bread.

This little blue piece of plastic offers a wide variety of uses which are, although more sophisticated than spreading butter on your bread, still simple enough to be generally used. Many of these innovations based on the ID cards are directed at simplifying government bureaucracy and services.

Take electronic voting, as a major step toward electronic governance. Estonia was the first country anywhere to institute electronic voting in national elections in 2005, though several other countries had had smaller-scale pilot projects. The number of valid e-votes cast at national elections of local councils was 9,287, accounting for 1.85 percent of all votes cast.

Estonia started developing its e-voting system in 2003 with the objective of providing voters with an additional opportunity to cast their votes. Each voter can decide whether he prefers to go to the polling station or cast his ballot from his or her computer. (If a voter goes to a polling station after casting an e-vote, his or her e-vote is deleted and only the last ballot counted. 30 people decided to go to a polling station after casting e-votes in last year’s election.) Prior to the election, a database of citizens with the right to vote was developed, so that only people who were entitled to vote could cast their ballot, using their ID cards as the authentication mechanism.

While the first e-voting election may have proved too high-tech for most citizens, these same Estonians do not hesitate to use their electronic ID cards elsewhere. Take public transport as an example. Last year nearly a million public transportation tickets and cards were bought using the ID-card in Estonia. Using electronic ID cards, tickets can be bought via the internet, at vending kiosks or over the phone. The system covers public transport in the country’s two largest cities.

When the controller goes through the bus to check whether passengers have valid tickets, passengers present their ID-cards instead of paper tickets. The card can then be checked electronically to verify that it includes a valid “ticket.” The system has proved its convenience and reliability, according to Ain Järv, CEO of Sertifitseerimiskeskus, the company that developed the system and runs it. He notes that the last ID-ticket of 2005 was purchased on New Year’s Eve at 23:55 online and the first ticket of 2006 was purchased at 00:09 on a landline phone—just minutes into the New Year.

Drivers are also looked after electronically with “M-solutions.” For car parking, you have a “mobile account”—an on-line billing system. When you pull into a paid parking place, you use your mobile phone to send in a text message with your license plate number and location. When you pull out of the parking space, you send another message saying you are “checking out.” The system bills you. So drivers no longer have to worry about finding change and running out to feed the meter.

Paying taxes is a major item in electronic government in Estonia. In the United States, the Brookings Institution recently launched a new program, the Hamilton Project that promotes the idea of having the Internal Revenue Service send pre-filled tax returns to taxpayers. For this, the IRS would use the information about income that it receives from employers and banks, then compute the amount of tax due and distribute precompleted returns. Brookings estimates that this procedure can cover up to 40 percent of taxpayers, saving taxpayers annually up to 225 million hours of time in filing preparations and more than two billion dollars in preparation fees.

Reading about this in the New York Times as an innovation, an Estonian is inclined to wonder, where have you been? Estonians take it for granted that they will get a pre-filled tax return. As a result, four-fifths of Estonian taxpayers file their declarations on line. (The rate is even higher for companies.) For a person with one employer and no other income to declare, it takes a couple of minutes to push the “enter” button a few times to confirm and file an income return.

As an incentive to internet-savvy taxpayers, the Estonian taxation and customs office tries to refund any overpaid tax within five business days of receiving an electronic return. (Employers withhold a flat-rate income tax, so some taxpayers in the lower bracket have overpayments due to be returned to them at the end of the tax year.) Last year the tax authorities claimed to have delivered more than 90 percent of refunds on time.

E-governance extends to school. Estonian parents can now follow their children’s performance on the internet or on mobile phones. And this year for the first time future students could apply to university without the nostalgic ritual of “taking the papers” to the campus. Over 26,000 applicants preferred to apply using the new online system this spring, sending in their applications a few weeks after they had received their final high school grades—on their mobile phones, of course.

Against this background, it was obviously not a coincidence that Estonia was the birthplace of Skype, the world’s largest provider of phone services using the “voice over internet protocol,” or VOIP, to make telephone calls between any two locations in the world—free of charge—via computers and the internet.

Skype is unquestionably Estonian IT’s greatest international success story. In 2005 Skype Technologies was purchased by Ebay Inc. for $2.6 billion. (That figure amounts to nearly half of Estonia’s national budget.) Although most of the sale proceeds went to the Scandinavian investors behind the company and its legal headquarters are in Luxembourg, the company’s rise and success is a very Estonian story. Most of the firm’s employees are based in Tallinn, the Estonian capital, and this is where the Skype software was written—by the same team that had created the popular (and controversial) file-sharing program, Kazaa.

“Skype has brought more fame to Estonia than any other business or person from this country,” Allan Martinson, former head of the successful Estonian ITcompany Microlink, has said. Writing in the Estonian business daily Äripäev shortly after the Skype-Ebay deal was announced, he noted that the head of the U.S. Federal Communications Commission had said that after downloading Skype, he understood that the world of telecommunications would never be the same again. Today Skype has nearly 150 million users, with a quarter-million more customers joining every day. (In other words, Skype gains as many clients a week as the entire population of Estonia.)

Amid such success, people often ask whether Estonia can keep up the pace and hold onto its leading position. Estonians are beginning to catch up with Scandinavian entrepreneurs in access to capital markets, but there are at least two other obvious threats to Estonia’s hopes in the sector of electronic innovation: bad (or even just stagnant) government policy and a lack of skilled labor. These problems could easily combine. Across the board, from companies such as Skype to the E-minded government agencies, there are signs of a shortage of IT specialists. Yet Skype executives complain about their problems getting work permits to bring highly-skilled foreign IT-specialists to work in the Skype offices.

“I believe that there is no other company in Estonia where 33 nations are working together. With this in mind, I am simply dumbfounded by some of the views expressed in the public debate here about foreign labor,’’ Sten Tamkivi, head of Skype’s Estonia operations, has said. Tamkivi has called for “temporary work visas” as a solution. But so far the government has continued to pursue discussions, not action.

Domestically, Estonian universities, drawing on a good school system that has scientific strengths from Soviet-era education, are turning out a couple of hundred IT-specialists a year. But this is not enough: Skype alone said last year that it was hoping to hire 300 additional people. Moreover, as young specialists are being grabbed up by the market (many even without degrees), they are not available to stay in academia and pass on their knowledge.

There are encouraging signs, however. This year the number of applications in IT-related studies grew by 40 percent in Estonian universities. Half of that growth was attributed to the Estonian Information Technology College, the country’s only institution of higher education focusing on IT fields: it had a record number of applications this year. So the field is becoming more competitive, and universities are creating more places for students who are ready to pay their way. Which means the supply of Estonian IT-specialists is set to expand.

But what about the chemistry of innovation? As Microlink’s Martinson noted, the most important impact on Estonia of Ebay’s purchase of Skype may be as an inspiration for others. According to Martinson, “we’ve got the taste of it now. We have over a hundred men and women who have witnessed the creation of Skype from the inside and learned a lesson. What are hundreds of young people asking themselves today? If Skype can do it, why can’t I?”

Ultimately, even after all the major investors got their pay-outs from the Skype sale, $130 million of the proceeds stayed in Estonia in the hands of four gifted local programmers. Much of that money has been reinvested in high-tech start-ups that are deemed to have international potential. For such people a few million dollars can go a long way.

So E-stonia may be only beginning to surprise the world.


This article was published in European Affairs: Volume number 8, Issue number 1 in the Spring of 2007.