The Friedman Prize is awarded every two years to an individual who has made a significant contribution to the advancement of human freedom. It comes with $500,000 in prize money. The Cato Institute, which awards the Friedman Prize, is a non-profit public policy research foundation headquartered in Washington, D.C.
The winner of the Friedman Prize is selected by an international selection committee that this year included Anne Applebaum of the Washington Post, Fareed Zakaria of Newsweek International, Francisco Flores, former President of El Salvador, Fred Smith, Chairman of the Federal Express Corporation, and Rose Friedman.
The previous winners of the Friedman Prize were Peter Bauer, a British economist, for his pioneering work in development economics, and Hernando De Soto, a Peruvian economist, for his work on the importance of property rights in helping the poor to obtain access to capital. The two economists helped to create a theoretical basis for applying the market principles to fight global poverty. They showed that free market, characterized by trade openness, limited state intervention in the economy, and strong emphases on property rights and the rule of law, was the best available mechanism for alleviating global poverty. Mart Laar put those theoretical principles into practice to the benefit of his countrymen.
According to the Economic Freedom of the World: 2005 Annual Report, which is published by the Fraser Institute in Canada, Estonia is the ninth economically freest country in the world. Today, many people find it difficult to remember the days of the Soviet Union, when the Estonian economy was completely dominated by the state and marked by endless lines and shortages. Mart Laar replaced the “dead hand” of the government with Adam Smith’s “invisible hand.” His government eliminated import tariffs (a decision that was partly reversed by Estonia’s membership of the European Union) and established a flat income tax. Corporate taxes on reinvested profits fell to zero and a currency board was established to combat inflation. The government also undertook extensive privatization of state companies.
Though Estonia experienced a sharp but short recession that was shared by all transitional economies, by 1995 the economy was roaring again. According to the World Bank, between 1995 and 2004, Estonia’s per capita gross domestic product (GDP) grew at a compounded average annual rate of 6.6 percent. During that decade, Estonia’s GDP per capita adjusted for purchasing power parity rose from $6,847 to $12,773 in constant 2000 dollars, an increase of 86.5 percent. Estonia’s sustained, high growth rate was among the region’s highest and set the country on course to join the rest of the developed world.
Mart Laar’s premiership also marked Estonia’s return to democratic rule, which the country enjoyed during a brief period of independence between the two World Wars. It did not have to be that way. In Belarus, Alexander Lukashenko’s assumption of power in 1994 marked the return of that country to a communist dictatorship. Ukraine had to wait 13 years after her declaration of independence in 1991 before becoming democratic, and Russia has slid back into autocracy under the leadership of Vladimir Putin.
Mart Laar’s impact was felt beyond the influence he had on the lives of his fellow countrymen. Other post-communist countries learned from Estonia’s reforms and imitated them. Estonia’s successful adoption of the flat tax led the way for Russia, Slovakia, Ukraine, and others. Estonia’s unilateral trade liberalization is a continued inspiration for other countries; including, most recently, Georgia. There are also those who feel that the presence of a market-liberal Estonia in the European Union will lead the EU away from her socialist policies. Though I am not convinced that Estonia’s market-liberalism is safe in the EU, let alone that Estonia will be able to change the policy debate in Brussels, I certainly hope that Mart Laar’s optimism about the EU’s future evolution will be justified.
Mart Laar was a superb choice for the 2006 Friedman Prize. I am very pleased that my employer, the Cato Institute, is able to honor him is that way and I hope that the fire of liberty that Mart Laar and his colleagues set alight in Estonia will continue to spread to the rest of the world.