The Power of Positive Memory Loss

By Peter Gumbel/Tallinn

With its 6-ft-thick walls and squalid cells, the Patarei sea fortress on the edge of Tallinn, capital of the Baltic republic of Estonia, has long borne witness to the brutality of occupation. Built in 1840 by Russian Czar Nicholas I, it was used as a prison and execution site by both Nazi Germany and the Soviet Union. But one Friday night not long ago the fortress was pulsating with hundreds of youngsters--some speaking Russian, others Estonian--packed into the place for an all-night techno rave. "It was an experiment, the first time we've done this," says Andrus Villem, the Patarei's project manager, who wants to exorcise the ghosts by turning the fortress into an impromptu arts center.

The party is a tailor-made metaphor for Estonia itself: freed from the confines of totalitarian rule, it's having a blast experimenting with unorthodox ideas as it makes up for lost time. Since regaining independence in 1991 with the collapse of the U.S.S.R., Estonia (pop. 1.35 million) was the first former Soviet republic to introduce its own currency and adopt a flat-tax system, now widely copied in the rest of Eastern Europe. It has also become one of the most technologically advanced places on the planet. You can use your mobile phone to pay for parking, buy bus tickets or check your children's school schedule. Wi-fi hot spots are ubiquitous, and the nation's most famous start-up is Skype, the Internet phone titan, which eBay acquired for $2.6 billion. That's slightly more than the annual output of the entire Estonian economy 15 years ago.

The economy is now one of Europe's most dynamic, racing along at an 11.3% growth clip. Estonia is the only new European Union member to have a budget surplus, and its national debt is shrinking rapidly. Naturally, there are growing pains: the unemployment rate has fallen so sharply, from 14% in 2000 to about 4% today, that businesses are scrambling to find workers. "This is the best time in our history," says Sten Tamkivi, Skype's Estonian operations manager. Skype has 250 people in Estonia and reckons that it will have exhausted the local labor market once it gets to 350. Employers are extra nice. "Every evening I'm almost standing at the door and asking everyone as they leave, 'Did you enjoy yourself, and can I expect to see you tomorrow?'" says Teet Jagomagi, not entirely joking. He runs a mapping-software company in Tartu, the second largest city.

Allan Martinson, a venture capitalist, reckons that Estonia's true innovative edge is speed. "We're fast early adopters. We're very good at getting innovation to work," he says. For example, the whole financial system leapfrogged into electronic banking in the mid-1990s, bypassing all messy dealings with checks and other paper transactions.

Oddly, the country's economic coherence of the past 15 years has gone hand in hand with political fractiousness. There have been 12 governments since 1991. And the nation still nurses deep wounds. Ethnic Russians make up about one-third of the population, many of them the families of people shipped in by the Soviets to tame its breakaway tendencies. Since independence, thousands of these Russians have passed an exam to become naturalized Estonians. But some 130,000, almost 10% of the population, haven't.

Yet this generation is uninterested in ethnic rivalries. It's one of Estonia's characteristics that many of the top jobs in politics and business are held by people under 40, who are too young to have been tainted by the Soviet legacy. They are also the ones buying the new homes that are shooting up on the outskirts of Tallinn. Much of the building is being done on credit, leading bankers to worry about a bubble economy. "Some people think they have discovered the never-ending hockey stick," frets Erkki Raasuke, chief executive of Hansabank, Estonia's biggest. He is 35.

Most Estonians, enjoying a boost in living standards, are hoping the boom can continue. But there's at least one caveat: Estonia needs to resolve its labor shortage. "We are running out of people," says Craig Rawlings, president of the American Chamber of Commerce in Tallinn. Still, Estonia has shown that it can improvise. "We're a very small country," says Skype's Tamkivi. "That means we just have to be efficient." So far, they've managed.