Policies First, Institutions Second: Lessons from Estonia’s Economic Reforms

The collapse of communism ushered in widespread hopes that the countries of Eastern Europe would develop democratic regimes and Western-style capitalism. While democracy is alive and well in many countries, most of their economies remain dominated by corrupt and predatory elites who systematically undermine the rule of law.

There is perhaps one exception to this rule, and that is Estonia. A forthcoming article by M. Steven Fish and yours truly locates the roots of Estonian exceptionalism in the policies enacted by its early post-communist governments. These policies hardened budget constraints on business actors – that is, they eliminated the subsidies, sweetheart loans, tax breaks, and other privileges on which political capitalists thrive. Having marginalized opponents of the rule of law, Estonian leaders were free to build an effective set of property rights institutions that make their country the envy of its post-communist peers.

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