How The Baltic States’ Economies Exploded Post-U.S.S.R.

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TACOMA, Washington — Due to each country’s proximity to the Baltic Sea, Latvia, Lithuania and Estonia are often collectively referred to as The Baltic States. While many former republics of the Soviet Union, such as Belarus, Ukraine and even Russia itself, suffer from high rates of corruption and stagnant economic growth, these three states stand out. Historically known for triggering the U.S.S.R.’s collapse through continued resistance efforts, these nations are now considered the economic marvels of Eastern Europe. Each Baltic State is classified as a high-income economy by the World Bank. Furthermore, they are all in the top 40 countries in terms of the Human Development Index. This begs the question: what are the policies that led to the growth of the Baltic States’ economies? Also, how can these policies be implemented further to help bring Eastern Europe on par with its Western neighbors?

Background

The Soviet Union absorbed the three Baltic States of Latvia, Lithuania and Estonia during the Second World War. As members of the Soviet Union, the countries’ markets faced limits in exchange for state-run enterprises and a hierarchical management system based in Moscow. Each Baltic nation became reliant on imported energy, raw materials and Soviet public finances.

Consistent calls for independence by the Baltic people eventually came to fruition in 1991 after the Soviet Union collapsed. Unfortunately, this collapse also led to the downfall of many sectors of the Baltic States’ economies and the entirety of the Soviet banking system. In all three Baltic States, currency inflation reached as high as 1000% in the year 1992. The resulting economic recessions were harsh, especially for Lithuania, which recorded a GDP decline of 35%. The Baltic economies continued to decline until 1995. Though modest recovery began, another Russian financial collapse in 1998 led to recessions again.

Challenges

Following the collapse of the Soviet Union, the transition from state-run enterprise to free-market capitalism remains an ongoing and challenging process for many of the former Soviet states. The fall of the U.S.S.R. meant that all of the former union states, with the exception of Russia, had no central banks or ministries of finance. This meant they had no recognizable currency and no way to stimulate their economies through public financing.

Furthermore, turning bloated state-run establishments designed to meet national targets into businesses focused on serving customers led to a multitude of issues. Some of these issues include economic inequality, monetary mismanagement and, most notably, corruption. According to the Corruption Perception Index, corruption is extremely prominent in many former Soviet states, with the largest former state, Russia, ranking 137 out of 198 nations.

Limiting Corruption

While the Corruption Perception Index ranks the majority of the former Soviet Union among the bottom half of nations in corruption levels, the Baltic States score far better. Latvia ranked 44, Lithuania ranked 35 and Estonia ranked 18. Estonia has been one of the most successful nations in the world at tackling corruption. It passed an anti-corruption bill in 2012 that furthered transparency at the government level primarily by making the transactions between the private sector and members of parliament public. This included the prime minister’s transactions. This law serves as a regional template for the other Baltic States in how to reduce systemic corruption.

Increasing Economic Freedom

The Baltic States’ ability to transition from the state-run enterprise to a free-market approach is nothing short of remarkable. According to the Economic Freedom of the World Index, the Baltic States’ economies have the highest levels of economic freedom in all of Eastern Europe. From the economic low point in 1995 to 2017, Estonia’s economic freedom rose from 53 to 13, Latvia’s rose from 77 to 24 and Lithuania rose from 82 to 16.

The subsequent increase in foreign investment, namely from the European Union, facilitated the rapid growth in the Baltic States’ economies, averaging more than 9% year-over-year growth for much of the 21st century. Furthermore, high rates of economic growth allowed for stronger relationships with the European Union, leading to elevated living standards and a more insulated economy.

The Role of International Organizations

The Baltic states experienced considerable successes in reducing corruption and improving economic freedoms since their departure from the Soviet Union. However, with a perennially powerful and often aggressive neighbor in Russia, their successes are never guaranteed. A number of international and domestic organizations continue to encourage Baltic political leaders to avoid the pressures from Moscow. One NGO, International Democracy Watch, partnered with the Council of Baltic Sea States to stabilize economic and political leadership within the Baltic states immediately after the collapse of the U.S.S.R.

The transformation of Estonia, Latvia and Lithuania from occupied states within the Soviet Union to economic marvels of Eastern Europe is admirable. Many other former Soviet states continue to struggle with rampant corruption, economic mismanagement and high rates of poverty. However, these nations have collectively showcased how to use both the public and private sectors to boost economic growth and tackle poverty. Through investments in economic freedom, strong anti-corruption laws and a will to govern ethically, the Baltic model serves as empirical evidence that economic miracles are possible regardless of the circumstances.

Saarthak Madan
Photo: Wikimedia Commons

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