Is Estonia the Silicon Valley of digital government?

“snow covered brown, white, and gray concrete castle under cloudy skies” by Ilya Orehov on Unsplash

by Rainer Kattel | @rainerkattel and Ines Mergel | @InesMergel

In 2017, The New Yorker published an article titled ‘Estonia, the digital republic’ and subtitled, ‘Its government is virtual, borderless, blockchained and secure. Has this tiny post-Soviet nation found the way of the future?’. This summarises the buzz around Estonia’s digital government: from the outside, at least, it is seen as a major success and has been lauded in mainstream media such as the Financial Times, New York Times and Forbes. Given this success, it is somewhat surprising that this narrative, and its main drivers, has not been actually properly documented in academic research. In our new working paper, we do exactly that using interviews with all key architects of Estonia’s digital government.

What were the main drivers behind its digital transformation? And perhaps most importantly, what does Estonia’s digital transformation tell us about the future of (digital) governance?

What does success look like?

The Estonian e-government infrastructure and its success rest on two main pillars, both introduced in 2001, which essentially create digital access to state and digital citizens: the data infrastructure x-road and a compulsory national digital ID. X-road is an interoperability platform for existing decentralised databases and a data exchange layer that can be used by public and private sector actors. It is independent of platforms and architectures and provides secure interoperability for data exchanges and identification of trusted actors in digital service delivery. The digital ID makes it possible for citizens to be identified digitally and to use digital signatures. Together, x-road and the digital ID make it possible to digitally sign any contract, access essentially any public service, order prescriptions, file taxes, vote and so forth.

More than 2,300 public and private services use x-road, and the digital signature has been used almost 350 million times by Estonia’s population of 1.3 million. The digital ID penetration is close to 100%; 30% of votes are cast digitally (in both local and national elections); almost all personal income tax declarations and medical prescriptions are done online, and most medical records held by hospital and family doctors are accessible online. The Estonian government claims that its digital infrastructure has led to annual savings of about 2% of GDP and more than 800 years in working time for the public and private sectors.

According to the EU’s Digital Economy and Society Index (DESI), in 2017 Estonia was the leading nation in Europe in digital public services, although in 2018 it dropped to second place. However, in most other e-government rankings Estonia‘s digital success is less evident. In DESI’s overall ranking, Estonia is in ninth position for 2018 and, according to the UN’s 2018 e-government survey, it is ranked only 16th globally. This cognitive dissonance — high praise and leadership position in global news outlets versus relatively middling rankings in overall digital transformation indexes (for more discussion, see Drechsler’s contribution in this new book) — reflects the nature of Estonia’s digital success: Estonia is ranked high for its digital public service infrastructure, which is universally available and mandatory, and an integral backbone of public service delivery. Estonia’s digital success, however, is not about other digital offerings such as digital democracy, citizen engagement or digitally transforming public services such as the welfare state.

The specific nature of Estonia’s digital achievement and at the same time disconnect between technological infrastructure and degree of digital penetration is often overlooked in international coverage. As Estonia’s digital government came to be focused on the x-road, Estonia has effectively created its own legacy system — a move that the initial thinkers wanted to avoid. Indeed, in the early 1990s, the focus was as much on secure digital infrastructure as it was on advancing societal goals through digital means. Yet, in particular throughout the 2000s as Estonia blazed through an economic boom that created increasing inequalities in its wake, the evolution of digital government seems to stalled.

In some ways, Estonia’s digital government has been caught up in its own success: in 2014 Estonian introduced e-residency programme that opens some digital public services (establishing a company, paying taxes) globally. While more than 40,000 e-residents have signed up — most recently, the pope was gifted e-residency — and more than 4,000 companies have been created by e-residents, the programme has also faced domestic criticism as a something of a show-off that enables money laundering. (Similarly to India’s Aadhar, Estonia’s digital infrastructure faced constitutional court challenges that were related to e-voting; as in India, Estonian court ‘sided’ with digital solutions.)

While many digital services have brought efficiency gains to citizens and businesses in Estonia, citizen satisfaction with crucial services such as healthcare and education has remained low. As an example, according to OECD rankings in 2014, Estonia ranked fifth from bottom in satisfaction with health services (in 2007 it listed the lowest) and second from bottom in education system satisfaction (in 2007 it ranked third lowest). Further, Estonia performs poorly on some critical social indicators. For example, in 2016 it had the highest gender pay gap in Europe and a higher than EU average Gini index. While citizen satisfaction is not the only measure of the quality of public services — and digital infrastructure is only one component in the provision of sophisticated services such as health and education — it is indicative that there is a little-measured improvement in the provision of core public services.

How did the success come about?

Perhaps most surprisingly, Estonia has never had a central office for digital transformation, such as the UK’s Government Digital Service (GDS), even though such a central agency was initially envisioned to manage (among other things) vital public registries. Estonia’s digital transformation has been an extended and on-going process over three decades, starting in the early 1990s, when Estonia regained its independence and continuing to the present day. Much of this process has been ad hoc and informal. For example, many strategic policy documents for digital transformation have followed the rhythms of European (structural) funding periods rather than responding to domestic challenges and planning processes. Similarly, various overlapping and mostly self-managed public-private networks have provided the informal dynamic capacity and capability for change, few of which have been institutionalised or formalised. And above all, the process relied initially on what Albert Hirschman has called the principle of the hiding hand: policymakers push visionary changes without anticipating all the challenges and risks involved upfront, an approach that sometimes results in unexpected learning, creativity and — in this case — success.

The naiveté and enthusiasm of the hiding hand that propelled the initial ‘crazy ideas’ of the early 1990s became ingrained in Estonia’s digital policymaking culture. As Mart Laar, prime minister in 1992–1994, and 1999–2002, and perhaps the key politician in this story, once said: “I was 32, I was young and crazy, so I didn’t know what was possible and what’s not, so I did impossible things.” (As he told us, for him the e-residency programme is simply not crazy enough.) Estonian digital government came to rely heavily on such charisma and hacker mentality.

The hiding hand was propelled by another rather simple phenomenon: envy. The success of Finland and Nokia became one of the guiding political reference points in the 1990s: ‘What is our Nokia?’ asked Lennart Meri, Estonia’s first president after Estonia regained independence in 1991, a question that has remained a popular catchphrase. Importantly, the confluence of Soviet industrialisation with ethnic tensions (mass immigration in post WWII era was related to rapid industrialisation during this period) explains why Estonia, despite being one of the most economically and technologically advanced countries within the Soviet Union, chose not to upgrade the inherited economy and instead sought to do something completely different. As an emerging general-purpose technology, ICT offered an almost perfect solution, particularly given the availability of R&D skills in this sector. ‘The digital’ thus came to express Estonia’s — or more precisely, its elite’s — ambitions and explains why, to this day, the ‘digital elite’, with some rare exceptions, is almost all ethnically Estonian.

There were three further vital contextual factors:

  • While the Soviet legacy had left Estonia with an outdated industrial structure and widespread aversion to industrialisation, it also left Estonia with a wealth of R&D talent in ICT through various Academy of Sciences institutes, such as the Institute of Cybernetics (established in 1960, its spin-off Cybernetica AS developed x-road and e-ID) and other similarly highly advanced academic institutions. As their funding collapsed in the early 1990s, much talent poured into emerging private companies, in particular, various joint ventures with Scandinavian telecoms and other companies.
  • Estonia has geographical proximity to Scandinavia, and in the 1990s the Nordic countries had one of the fastest developing telecommunications sectors globally. Opening up both policy-making processes (through advice and joint ventures) and markets (through privatisation and regulations) to Scandinavian partners brought know-how and investment.
  • Estonia is a small country with a high population concentration in its capital city: almost one-third of its 1.3 million inhabitants live in Tallinn. This clustering of population facilitated agile networks that were able to gain quick and lasting political support, and which required low initial infrastructure investment.

Within this ideational and historical context, three critical features of Estonia’s digital transformation, still dominant today, emerged:

  • future-oriented and almost utopian solutions — the realm of ‘crazy ideas’;
  • public digital architecture that is universal in nature; and
  • decentralised digital agendas (including databases) of line ministries and agencies.

Silicon Valley of digital government?

Estonia’s focus on ICT as general-purpose technology has proved to be one of the critical success factors as it enabled Estonia to create a digital infrastructure that is universal in nature. Yet by relying on decentralised and mostly informal networks to build this infrastructure, Estonia now faces a challenge to develop capacities and capabilities within the public sector to take advantage of the public digital infrastructure.

Thus, perhaps the most significant question faced by Estonian digital government is whether the main reasons for its success — particularly its charismatic leadership-based informal networks and civic hacker culture — provide enough capacity to harness the potential of Estonia’s digital infrastructure for more inclusive public services and society.

While the decentralised digital agendas of line ministries have provided needed agility, they have also created uneven digital capabilities across different departments and agencies. This reliance on bottom-up departmental initiatives seems to necessitate stronger and perhaps more formalised coordination structures than are currently present.

Furthermore, while e-voting is increasingly popular, other aspects of digital democracy, such as civic engagement, have remained weak (with the notable exception of the so-called Citizen Assembly of 2012–2014, which, however, failed to deliver any significant results).

Estonia’s digital success brings forth at least three lessons for the future of (digital) state:

  • Economic efficiency gains are not enough as value frameworks for digital transformation. Digital agendas should be more comprehensive in focus and combine social justice and other pressing socio-political issues with economic efficiency.
  • While digital infrastructure — from data registries to identification and payment systems — are sine qua non for digital governments, so are institutional innovations that would create, as John K Galbraith put it, “countervailing powers” to existing powers and routines within the bureaucracy and but also in the broader political landscape. Such examples would be public ownership option of private data.
  • Public sector organisations need new forms of capabilities that centre on socially conscious design and software skills in order to harness the power digital technologies for greater common good.

Estonia is indeed in many ways Silicon Valley of digital government, in the good and in the bad. Its success is based on highly decentralised and agile actors that are goal-focused but also with little regard to social outcomes.

Read the latest working paper from IIPP: Estonia’s digital transformation: Mission mystique and the hiding hand

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