By Eric B. Schnurer
January 28, 2015
Virtual Governments Come Online
Last December, Estonia took the unprecedented step of offering any person in the world a chance to become an Estonian e-resident, a title that grants the holder access to many of the country’s top-notch online government services. Acquiring this status would allow, say, an Indian entrepreneur to establish an Estonian company that he runs from Dubai but which does the bulk of its business in Spain; he’d also be able to use his electronic signature to execute contracts with customers throughout the European Union–and pay no taxes by keeping his profits in Estonia. No wonder that 13,000 people have signed up to beta-test the program in its first nine weeks of operation, and 500 people have already received their e-residency cards.
The Estonian government has touted the program as a way to attract foreign entrepreneurs. But in launching the effort, Estonia has also laid claim to a growing new market that could transform the global economy: public services. In the future, governments, like transnational businesses, will transcend national borders, offering services, attracting customers, and deriving revenues without regard to physical territory. That would allow states to turn public goods into virtual business ventures–an opportunity that some creative countries, especially smaller ones such as Estonia, are already seizing.
WELCOME TO E-STONIA
Estonia has had to make great strides in the realm of virtual geography because its physical geography is challenging. This small Baltic country of only 1.3 million people sits wedged between Russia and the West. When it regained independence in 1991, after 50 years of Soviet domination, the country inherited two interrelated, dangerous shortfalls: decrepit infrastructure, especially when it came to IT, and a weak administrative structure. Estonia needed to quickly find a way to deliver effective governance. And for that, as Estonian President Toomas Hendrik Ilves recently explained, it had to “make up for the lack of human resources through automatization.”
Since then, the country has emerged as a global technology leader, boasting the largest number of startups per person in the world and a high-tech sector that accounts for about 15 percent of its GDP. The government has declared Internet access to be a human right, and most of the country has ample free WiFi–the world’s fastest. Recently, Tallinn has mandated that Estonian public schools teach all their students how to code, starting in the first grade. Estonia’s entire banking system runs online, allowing for almost every purchase to be made electronically, including food from street vendors. And health-care programs include an electronic prescription service.
But all this pales in comparison with the work the Estonian government has done on its own systems. In 2000, Estonia ruled that its citizens’ electronic signatures would be just as valid as handwritten ones, which has required all levels of government to develop the capacity to accept and process electronic documents. Estonia then instituted nationwide electronic ID cards, which allowed electronic access to all public services and provided secure online authentication. Today, 95 percent of Estonians file their taxes online–a process that takes about five minutes, because returns are automatically populated throughout the year.
The e-residency program is just the latest innovation, opening the door for foreigners to take advantage of some of these services through secure identity cards with microchips, similar to the ones used by Estonia’s physical residents. The first person to be awarded the Estonian e-residency card, the British journalist Edward Lucas, for example, has praised two of the card’s advantages: e-signature, which he hoped would make his contracts more secure, and a reliable method of identity verification. The government hopes that these kinds of advantgaes will ultimately entice foreigners to establish and run Estonian businesses. The government hopes that these kinds of advantages will ultimately entice foreigners to establish and run Estonian businesses.
Applicants can now sign up for the program by making a short trip to Estonia to verify their identity and record their biometrics, but in the future even that step might not be necessary. Registration might become possible through Estonian embassies as early as this coming April, and given the country’s proclivity for moving everything online, it can’t be long until an online contact is all that’s required. And, not least because of the robustness of Estonia’s online infrastructure, demand for its virtual public goods promises to be quite high. Estonia expects its population to be augmented by as many as ten million e-residents within a decade, which could earn it $565 million in registration fees alone, in addition to extra revenues from business taxes and expanded economic activity.
PUBLIC GOODS FOR SALE
Although Estonia’s business model stands out for its innovative use of cyberspace, the concept of governments selling their services to outsiders is not new. In fact, governments at regional and national levels have long figured out how to offer services to customers from afar–and make a profit doing so.
In the United States, Nevada may have been the first state to use a specific government service–divorce certification–as a marketing device. Nevada’s divorce procedure has been relatively simple since the 1860s, and it was further simplified during the Great Depression, when the state lowered the residency requirement for applicants to just six weeks and provided a raft of reasons that it would allow to legitimately end a marriage. The measures spurred an influx of people seeking so-called migratory divorces, reaching nearly 20,000 a year at its peak in the 1940s. Even though most of these people left after getting what they came for, their visits fueled a local building and services boom and helped build Nevada’s tourist economy.
Whereas Nevada requires at least some fleeting physical presence within the state to receive its services, other jurisdictions have found ways to reduce or eliminate even this restriction. As one example, Delaware now serves as the legal home to more than a million U.S. corporations–including more than half of publicly traded U.S. companies and nearly two-thirds of the Fortune 500 firms–even though most of them do not have physical offices there. Delaware accomplished this feat by offering several incentives for businesses to register in the state, including an easy incorporation process, laws that protect sitting management teams, and a separate court system with highly skilled judges dedicated to business litigation. Thanks to these policies, franchise taxes form a core part of Delaware’s income, accounting for about one-fifth of the state’s revenues.
Several foreign governments have adopted similar strategies. Like Delaware, Liechtenstein has used low tax rates, easy incorporation procedures, and loose corporate oversight policies to attract nearly 75,000 holding companies that have established a nominal presence in the country. These companies now generate some 30 percent of the principality’s revenues. Similarly, Switzerland’s bank privacy laws have allowed it to become home to the money of many of the world’s richest people, if not those individuals themselves.
Some governments have even found ways to provide foreigners with the basic function of the state: physical security. For instance, over the past century, ship owners have been able to obtain the sovereign protection of a nation of their choice–usually one with more lax regulations–by registering their vessel in that country for a fee. This practice, known as “flag of convenience,” has brought much of the world’s shipping trade under Liberian, Marshall Islander, and Panamanian jurisdiction. Even the personal passports and the extraterritorial protections national governments provide are increasingly for sale and the underlying citizenship increasingly virtual. Both Malta and Bulgaria have moved to sell citizenship to applicants without any connections to those countries.
Some countries have found ways to provide location-specific services across borders as well. Norway Post has begun doing business in Sweden, pushing Sweden and Denmark to form the first cross-border postal service merger five years ago in order to boost their competitiveness.
The Internet makes the potential scope of this market for extraterritorial services infinitely broad. Governments can now offer different kinds of services to customers located just about anywhere in the world–if only these services can somehow be put online.
Education, a classic public good, is also increasingly delivered online–especially when it comes to higher education, where many public universities are major players. But elementary and secondary education are entering the online marketplace, too, and provision of online K-12 courses is poised to become a growing business. In the United States, one of the leading sources for such courses is a public provider, the Florida Virtual School, which sells its content to other schools around the country. With more families around the world seeking U.S. education for not only their college-age students but also their younger children, online public schooling could present a huge opportunity as an export market.
Another potential market is the provision of governments’ economic security services across borders. Public pension and social insurance programs, such as Social Security and Medicare in the United States, become cheaper to run, relative to the benefits they pay, as they increase in size. So they stand to benefit from attracting more members–including from outside the country. This scenario need not include the country’s own citizens sponsoring foreigners’ retirement; rather, foreigners themselves would contribute the funds. Mechanisms to enable such transactions already exist in the European Union and a number of Caribbean nations. Other countries, such as Sweden and Denmark, have begun exporting their welfare systems to others.
The growing range of extraterritorial, virtual services raises a question: How far will such virtualization of the state go? In this regard, Estonia serves as the most instructive example. The country has not only brought many of its government functions online but is now exploring the option of moving its entire e-government into the cloud through servers based out of its embassies in other countries. This tactic would allow Estonia to continue operating as a state even if its physical territory were ever seized–ensuring uninterrupted delivery of all its prior services to Estonians and, for that matter, its virtual citizens. The strategy would also reduce the government’s vulnerability to large-scale cyberattacks of the kind waged on Estonia by Russian hackers in 2007, which paralyzed some government agencies for weeks.
The Estonian government’s move to the cloud would be a first. And such a scenario could in turn make its government services attractive and available to an even wider range of potential customers. The more a state goes virtual, and the less its government depends on territory and other physical resources, the more smaller, more nimble competitors such as Estonia would be able to innovate and compete for new customers. Most of the world’s governments might not be at this point yet, but Estonia offers an indication of things to come.
What’s clear is that the line between governments and businesses is thinning. Both need to convince people to pay for their services and offer incentives over competitors. Americans might soon choose to get their Social Security benefits from Sweden, tax rates from Estonia, online security from Chile, education from Singapore, and adjudication from Delaware.
How soon? Virtually any day now.