Getting It Right

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This generation finds ethnic rivalries far less interesting than the economic boom. It's one of Estonia's characteristics that many of the top jobs in politics and business are held by people under 40, who were too young to have been tainted by the Soviet past. They are also the ones building the new homes that are shooting up on the outskirts of Tallinn, and refurbishing their apartments. Much of this is being done on credit; banks report that their lending is up by a startling 50% this year, leading some to worry about a bubble economy, especially in real estate. "Some people think they have discovered the never-ending hockey stick," frets Erkki Raasuke, 35, chief executive of Hansabank, the country's biggest bank. Estonia's current torrid growth took him by surprise; he thought it would calm down once the country joined the E.U. in May 2004. Instead, it has accelerated, from an annual rate of 7.1% in 2003, to 8.1% in 2004 and 10.5% in 2005, according to revised figures published by the national statistics office last month. "If we keep going like this," Raasuke worries, "we'll hit a wall in the next 18 to 24 months."

There's still a lot of catching up to do. Productivity remains below the E.U. average, as does the average monthly wage of $650. "We're just halfway," says Prime Minister Andrus Ansip, whose aim is for Estonia to become one of the five wealthiest E.U. nations on a per-capita basis in the next 15 years. He heads a different party from that of Economics Minister Savisaar and doesn't see why anybody should take issue with the current policies. "When the economy is growing so fast it's very difficult to complain," he says, describing life in the country as being "like a fairy tale."

Even fairy tales can have bad scenes, of course. Savisaar is currently negotiating for the government to buy back the national railway, which it privatized in 2001 — a decision it now regrets. Plans to sell the state-owned energy company collapsed in 2002 when the acquiring U.S. firm couldn't obtain financing in the wake of Enron's bankruptcy. Estonia went through a brief recession and the government had to slash spending when Russia's financial crisis hit in 1998. The birthrate collapsed in the 1990s and has only now begun to turn upward again, helped by incentives including 15 months' maternity leave on full pay. And while the nation has prospered by linking its currency to the German mark in the 1990s and to the euro this decade, it is paying a price for not having a monetary policy of its own: it is very limited in its ability to bring inflation down from its current 5%. That rate is the only remaining impediment to Estonia adopting the euro as its currency.

None of this has deterred investors. Foreign money is pouring in and now totals more than $12 billion. Companies partly or wholly owned by foreigners account for one-third of Estonia's total economy and more than 50% of exports. About three-quarters of the funds have come from just two countries, Finland and Sweden. Can the money continue flowing? Most seem to think it can, with at least one key caveat: Estonia needs to resolve its shortage of labor. "We are running out of people," says Craig Rawlings, president of the American Chamber of Commerce in Tallinn. He recounts a tale of two foreign-owned machinery factories, now in a mad fight for each other's engineers. And it's not just foreigners who are feeling the pinch. Estonian doctors, nurses, construction workers and bus drivers are all being lured to higher-paid jobs abroad, leaving some gaping holes at home.

Still, for 15 years, Estonia has shown that it can improvise and adapt. "We're a very small country and the No. 1 question is always: Do we have the resources?" says Skype's Tamkivi. "That means we just have to be efficient." They've managed so far.