Nikolay Maratovich Mezhevich — Doctor of Economic Sciences, Professor of the School of International Relations, Head of the International Master’s Program “Baltic and Nordic Studies” at the Saint-Petersburg State University, Chief Researcher at the Institute of the Problems of the Regional Economy of the Russian Academy of Sciences, Saint-Petersburg.
The Evolution of post-Soviet space suggests the emergence of a set of economic models. The three Baltic States (Estonia, Latvia, Lithuania) in the 1980-ies are building a new economic model (a unique to the post-Soviet space). The economy of the Baltic States is a complex system, which is highly dependent not only on economic but also on political realities. The objective of the study is to show the stages of evolution of the Baltic economic model, its main development features and prospects. The author used both economic and historical approaches to scientific analysis. The results of the study indicate that liberal Baltic economic model may persist in the medium term while maintaining previous support from the EU. Only good relations with Russia may help to maintain Baltic economic model.
Key words: Baltic States, Estonia, Russia, foreign economic relations, economic structure, economic model, the political elites.
The natural development of an economic model for the Baltic countries is an integrated process that is determined by political rather that economic reality. A quarter of a century after these countries gained economic independence (which existed long before August 1991), we can put Baltic economic developments into perspective.
Russian and foreign analysts always hit a wall when trying to view the economic development of Estonia, Latvia and Lithuania from both neo-Keynesian and neoclassical standpoints. Why? Because after 1991, the economy of the Baltics was harshly dictated by political reasons. The basis for the Baltic economic model were separatism and nationalism rather than balance and efficiency.[1]In reality. this European-looking model is not what it seems.
Prior to Perestroyka, the economic situation of the Baltic nations within the Soviet Union used to be as follows: in 1986, the fixed asset value was 5875 rubles for every Soviet citizen. This figure had noticeable disproportion throughout the country: on one hand, it made 8007 rubles in Estonia, 6923 rubles in Latvia, 6111 rubles in Lithuania; on the other hand, there was as low as 5500 rubles per citizen in Belorussia, 4500 rubles in Moldavia, 3823 rubles in Azerbaijan and 2291 rubles in Tajikistan.
The republics found themselves to be divided by a growing salary gap. In 1940, workers and employees’ salaries in different republics saw a maximum dispersion of 10 rubles. Then it reached 21 rubles in 1960, 33 rubles in 1970, and as high as 78 rubles in 1988. The contrasts looked even more striking in agriculture, with the difference between the top and bottom kolkhoz members’ salaries making 74 rubles in 1970 and 159 rubles in 1989.[2]It is worth noting that the Lithuanian, Latvian and Estonian Soviet Republics were holding the lead.
“Production reconstruction and enhancement process in the Baltic countries showed a faster rate than elsewhere in the Soviet Union, mainly due to the fact the Latvia and Estonia were reserves of qualified workforce for the whole Soviet state. Moreover, infrastructure in the Baltic region was almost intact during the war».[3]
The share of Baltic population with over 300 rubles of total income was the biggest in 1990. The national average for the whole USSR equaled 8.8 percent while reaching 19.8 percent in Estonia, 14.5 percent in Latvia and 13.8 percent in Lithuania. The poverty rate in these republics was also among the lowest, people with 75-ruble income making 1 percent of the whole Estonian and Latvian population and 1.2 percent of Lithuanians, whereas it was republics with the highest poverty headcount that developed into the severest autocracies in post-Soviet era.[4]
Since this region was the most efficient from the investment point of view, Moscow sought to allocate new industrial facilities here. Compared to other regions, it took less time to master production in the Baltics.
The share of new fixed assets in the Baltic republics was higher that the USSR average, with more up-to-date and less obsolete facilities and technology. Agriculture showed a similar picture: kolkhozes and sovkhozes were distributed fertilizers, machinery, forage, imported elite breeding cattle, etc. on more favorable terms.
In the early 1990s, Vilnius, Riga and Tallinn provided much similar models of economic development in the form of regional cost-accounting plans. The Baltic nations, yet Soviet at the time, viewed the future reforms based on their nostalgic, and sometimes inadequate, ideas and memories of what the so-called ‘first republics’ used to be. The mythology of their past played a key role in their denial of the present life within the USSR. It was as early as 1991 when we used to point out the importance of the Soviet heritage in the later economic development of the countries.[5] Later this idea was multiply referred to and developed in a number of academic papers.[6]L. Grigoriev and his fellow contributors believe that ‘the Baltic countries boasted the best starting conditions (compared to other post-Soviet states) for building a market economy, with huge innovational potential was accumulated there. The region was more like a laboratory where improved Soviet economic models were tested. The Baltic republics always enjoyed a privileged status among others, as seen from the investment figures of 1970–1980: the investment volume per capita was the highest.‘
The leaders of the Baltic ‘people’s fronts’ were not experts in market laws and could not estimate the real value of the national resources since they all were previously living in a centralized state-controlled planned economy, where one single center was busy allocating funds as well as distributing the product.
After having seized power, the newly formed elite had to deal with the opposition which was all concentrated around key Soviet industrial facilities. Such factories and plants as Latvian VEF, RAF, Alfa or Estonian Dvigatel, Eesti Kabel, Kreenholm comprised the core and the basis of the opposition. Disrupting these would put an end to opposition. Low competitiveness of these firms was another pretext for de-industrialization. This process would also result in weaker trade union movement and potentially less social packages. However, Estonian and Latvian reformers (and their congenial Russian counterparts) acted in a different way, saying that “the destruction of what is unsustainable is not an argument against, but in support of the transformation”.[7]
Despite these facts, the biggest companies in the Baltics states were still those of the Soviet heritage as late as in 1997.
Table 1. The Biggest Latvian Industrial Companies (according to the number of employed)[8]
| Company | Industrial Segment | Number of Employees |
|
Railroad | 17 792 |
|
Postal service | 7493 |
|
Electric power | 7411 |
|
Telecommunications | 5266 |
|
Public transport | 4081 |
|
Gas (trade) | 2914 |
|
Synthetic fiber production | 2870 |
|
Railroad locomotive maintenance | 2689 |
|
Wood processing | 2687 |
Table 2. The Biggest Lithuanian Industrial Companies (according to the number of employed).
| Company | Industrial Segment | Number of Employees | |||
|
Railroad | 16 921 | |||
|
Electric power | 11 340 | |||
|
Telecommunications | 9913 | |||
|
Postal service | 8840 | |||
|
Nuclear power plant | 4918 | |||
|
TV equipment | 4563 | |||
|
Gaz (trade) | 3878 | |||
|
Oil refining | 3434 | |||
|
Commerce | 2398 | |||
|
Pumps and compressors | 2397 | |||
Table 3. The Biggest Estonain Industrial Companies (according to the number of employed).
| Company | Industrial Segment | Number of Employees | ||
|
Electric power | 7500 | ||
|
Railroad | 5510 | ||
|
Post service | 3423 | ||
|
Telecommunications | 3272 | ||
|
Electric lamp production | 2504 | ||
|
Oil shale extraction | 1766 | ||
|
Maritime navigation | 1716 | ||
|
Furniture production | 1486 | ||
|
Public transport | 1333 | ||
|
Stevedoring | 1295 | ||
The privatization of the Soviet heritage was greatly positive for the Baltic economies, encouraging progressive growth all through the most troublesome period of early 1990s.
At that very time, financial and monetary reforms took place in Estonia, Latvia and Lithuania. A strong and stable national currency safeguards a nation’s independence and economic stability. In the Baltic nations, deficit-free budget has become the strategic goal one was desperately trying to achieve. This cost the countries a lot, with serious budget limitations introduced especially affecting the social sphere. Borrowing was not even taken to account as a possible solution, until in recent years. By this time, however, the national financial systems have de jure seized to exist. One fact is worth noting in relation to this circumstances: when visiting Vilnius on Jan 14, 2015, Donald Tusk, Chairman of the European Council (Poland’s ex-Prime Minister) called euro adoption in Latvia ‘a historic moment’[9]. No one was curious then, though, why Mr. Tusk had done his best in his country for this ‘historic moment’ to be avoided there.
The fact is that joining the European Union had a relatively narrow effect on Baltic nations, since these countries already had the right to sell 60- to 65 percent of its commodities on a duty-free basis while being associated partners of the EU. Moreover, since 2001 industrial commodity trade there has been totally duty-free.[10]
Liberalism can be called the second cornerstone of the Estonian economic policy, meaning renunciation of protectionism, free and toll-free trade with neighbors (alcohol, tobacco and some other goods excluded), and relatively low taxes (business tax rate is 26%). This kind of approach encourages saturation of inner market and comparatively low prices, as well as foreign investment and cargo flow growth, which are per capita higher than in Russia. However, this approach creates certain obstacles. Taking into account the protectionist and discriminating fee policy currently maintained by other countries, the inner market stays vulnerable as Estonian-made goods are not competitive enough. This leads to the domination of imported goods, making it harder for its own producers to develop, especially in agriculture.
The third important point is fast, successful reforms in agrarian and municipal sphere, as well as housing and utilities.
The economic recession during the transformation crisis was deep in the Baltic nations: the economy fell –35% in Estonia, –49% in Lithuania and –52% in Latvia. IEstonia was the first to cope with its consequences in 2001 and reach the pre-crisis level of 1989. The result was its GDP growing 158 percent of this base. Economic progress of Latvia and Lithuania was not that impressive: 115 and 111% respectively.[11]
The comprehension of the complicated development processes and the acknowledgement of initial mistakes in reforming become (though still not frequently) the subject for discussions among the economists in the Baltic counries.[12]Before 2008, such discussions were yet not acceptable in the ‘Baltic tiger’ countries that showed 7 to 9 percent growth each year. There was not much talk of the 12 to 19 percent decrease at the time. Instead, the fact that the country survived the 2008-2009 crisis was treated as a true success story.[13]
Table 4. GDP Growth, %.
| 2009 | 2010 | 2011 | 2012 | |
| Estonia[14] | - 14,1 | 3,3 | 8,3 | 3,2 |
| Latvia[15] | - 17,7 | - 0,9 | 5,5 | 5,6 |
| Lithuania[16] | -14,5 | 1,5 | 5,9 | 3,6 |
The Baltic countries’ dependency on Russian oil and gas and energy supply was a serious challenge for Latvia, Lithuania and Estonia, as well as the fact that the three were included in the Soviet-era cargo transportation system in which cargo flows from their sea ports were eastbound. The result was that the Baltic region obtained a predominant status of a transitional, by-pass cargo hub. Russia is Latvia’s third largest trade partner, with 10 percent of its trade operations, and Estonia’s fourth biggest trade partner (with 8.4%). Speaking of Lithuania, Russia is number one partner for the country, holding 25% of all trade volume, which is three times higher than with Lithuania’s second biggest partner, Germany (8.4%).[17]However, a shrinking trade volume with Russia has also tended to cause macroeconomic decrease. Unlike in 2013, in 2014 Estonia was the third among the Baltic states as far as GDP growth is concerned. Annual GDP growth was 2.4% in Latvia, 2,9% in Lithuania and 1,8% in Estonia[18]. These figures may look optimistic in present-day Europe, but they will never allow, as people used to say in the USSR, ‘to catch up and overtake’ any other EU country – except for Greece, perhaps.
Expert say that the total exports from the Baltic countries to Russia may fall 18 to 25 percent in 2015, resulting in $780 million deficit for Lithuania, Latvia and Estonia, however, their growth is expected to lose 1.3 to 1.7 percent less that last year. In terms of money, the countries are about to lose $1.58 billion[19]. Isthissum critical? Let’s see: the estimated budget revenue in 2015 is about 7.25 billion euros for Latvia[20], same for Estonia and a little more for Lithuania. Apparently, 250 million euros for each country is big money.
To summarize the above, the economic model that was built in the Baltic countries is economically viable, at least on the mid-term horizon. IF the outer conditions are relatively stable, one can predict a 1.5 to 2.0 GDP growth. In case military and infrastructural expenditures grow, the real income growth will be close to zero. Stagnation of exports and decrease in transit will contribute to destabilization of the economies in the region.
However, the real problem lies elsewhere. The fact that real historical problems of the past are constantly emphasized helps to preserve anti-Russian sentiments on the level of the elite, that tends to capitalize, politically and even financially while encouraging and practicing Russophobic rhetoric. The window of opportunities for co-operation with Russia is constantly shrinking. The Baltic elites preferred to stay away from consistent solution-seeking process and take part in political, rather than economic, discussions. One of the reasons for this (which has never mentioned before, nor will be in the foreseeable future) is that no elite in the Baltics is free to choose its political agenda. In this context, the Baltic countries are quite similar to Belarus rather than Poland or Russia.
There is an opinion that is often heard in the economist community, that European economic development has been derailed. In the past, we knew that politics and economy interact dialectically; nowadays, economy simply becomes a tool for policy to achieve its goals. The golden age of the European economy that lasted from the 1950s till about 2007, has come to an end. European growth will no longer be 3-5 percent, and this situation will take place until the whole political and economic paradigm is changed.
The brilliant success of European integration is obvious. Europeanist ideas that resurrected after WWII have proved to be robust and viable. However, new challenges of 2008-2015 put an end to the model of development which our European home had. This is true for the Baltic nations which are fully dependent on both European and their own model of development.
[1] Шадрин А. Экономический фактор политики сепаратизма в республиках Советской Прибалтики // КМЦ Прикладной этнографии Института этнологии и антропологии РАН Москва, 1996.
[2] Агафонов Н.Т, Литовка О.П, Исляев Р.А. Государственная стратегия регионального развития России: смена парадигмы территориальной организации общества СПб 1998 с.39
[3]Misiunas R. Taagepera R. The Baltic States: Year of dependence 1940-1980 L. 1983 р.104
[4] Гареева Н. Э., Шкель С. Н. Теория модернизации и социально-экономические факторы демократизации в контексте политических трансформаций на постсоветском пространстве
http://gisap.eu/ru/teoriya-modernizatsii-i-sotsialno-ekonomicheskie-faktory-demokratizatsii-v-kontekste-politicheskikh
[5] Межевич Н.М. Геополитическое положение Эстонской ССР: мифы и реальность // Политическая география и современность. Региональные и прикладные аспекты: Л.ЛГУ, 1991
[6] Самонис В. Трансформация литовской экономики: от Москвы к Вильнюсу и от плана
к рынку. Варшава: CASE, 1995; Григорьев, Л.М. Конкуренция и сотрудничество: экономические перспективы Восточной Балтики Москва 2005.
[7] Путь в Европу // Под. общ. ред. И. М. Клямкина и Л. Ф. Шевцовой. М.: Новое издательство. 2008. С. 39.
[8] Берзиньш Ингус Они дают нам работу[8] http://www.baltic-course.com/archive/rus/13/reyting.htm Дата обращения 11.03.2015
[9] Руководство ЕС приветствовало вступление Литвы в еврозону http://dw.de/p/1EKhU
15.01.2015
[10] Бройсс Ф. Макроэкономические последствия расширения ЕС для его старых и новых членов // Проблемы теории и практики управления. 2003. № 5. С. 29.
[11] Актуальные вопросы мировой экономики: 2010 – 2012. Под общей редакцией Григорьева Л.М., Иващенко А.С. Балтийский форум 2012 с.53
[12]Grigas A., Kasekamp A., Maslauskaite K., Zorgenfreija L., “The Baltic states in the EU: yesterday, today and tomorrow” // Studies & Reports No 98, Notre Europe – Jacques Delors Institute, July 2013.
[13]Dudzińska Kinga The Baltic States’ Success Story in Combating the Economic Crisis: Consequences for Regional Cooperation within the EU and with Russia // POLICY PAPER
No. 6 (54), POLSKI INSTYTUT SPRAW MIEDZYNARODOWYCH March 2013
[14] RAA012: SISEMAJANDUSE KOGUPRODUKT JA KOGURAHVATULU (KVARTALID) // Eesti Statistika andmebaas. URL: http://pub.stat.ee/px-web.2001/dialog/varval.asp?ma=RAA012&ti=SISEMAJANDUSE+KOGUPRODUKT+JA+KOGURAHVATULU+%28KVARTALID%29&path=../database/Majandus/15Rahvamajanduse_arvepidamine/06Sisemajanduse_koguprodukt_%28SKP%29/02Pehilised_rahvamajanduse_arvepidamise_naitajad/&search=SISEMAJANDUSE+KOGUPRODUKT+JA+KOGURAHVATULU&lang=2. Дата обновления: 11.03.2013.
[15]Eurostat http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115
[16] Statistical Yearbook of Lithuania, 2012 http://web.stat.gov.lt/uploads/metrastis/1_LSM_2012.pdf
[17] Зельценберг В. Легче застрелиться: страны Балтии подсчитывают убытки от девальвации рубля http://bb.lv/rinki-i-kompanii/item/9160776-legche-zastrelitsya-strany-baltii-podschityvayut-ubytki-ot-devalvatsii-rublya 22.12.2014
[18] По росту ВВП Эстония заметно отстает от остальных стран Балтии http://rup.ee/rus/novosti/ekonomika-i-biznes/po-rostu-vvp-estoniia-zametno-otstaet-ot-ostalnykh-stran-baltii 27.03.2015
[19] Как российский кризис скажется на экономиках стран Балтии http://rup.ee/rus/novosti/mirovaia-ekonomika/kak-rossiiskii-krizis-skazhetsia-na-ekonomikakh-stran-baltii 25.03.2015
[20] Доходы госбюджета Латвии в 2015 году составят 7,25 млрд. евро http://www.baltic-course.com/rus/finansi/?doc=99880 БК, Рига, 09.12.2014.