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BALTIC ECONOMIC REFORMS: A Crisis Review of Baltic Economic Policy by Fredrik Erixon Tomas Chalimavičius @ 2013 Contents Geography 3 Paper Abstract 5 Background 7 Brief Historical Commentary 12 Reforms (case study: Estonia) 20 Conclusion 29 Geography Contents Geography 3 Paper Abstract 5 Background 7 Brief Historical Commentary 12 Reforms (case study: Estonia) 20 Conclusion 29 Paper Abstract The paper analysis how and what happened in the Baltic countries from Independence period to the 2008 recession and Erixen analyses all main aspects: Economic structures and reforms after independence. Reform strategies. Comparisons between Baltic countries and rest of Eastern European countries. Joining of the European Union. Analysis now that they’ve joined EU. Contents Geography 3 Paper Abstract 5 Background 7 Brief Historical Commentary 12 Reforms (case study: Estonia) 20 Conclusion 29 Background All three Baltic countries were hit severely by 2008 recession. The GDP has fell over 11.5%+ in all three countries in the 1st year of recession. Unemployment over 15%+ in all three countries. Risk-of-poverty indicator nearly doubled. Background All of this has led to a main question: was not past economic growth in the Baltic countries a chimera; was it not, like in Iceland, all built on air? The answer is no. Growth in the Baltic countries has been for real. This means that in order to understand the situation, we must evaluate the policies and other background information. Background The actual reasons/problems are: Baltic Economies over-heated (Economic bubble) Baltic countries lost control over their macro economy. Vast number of economic reforms stopped after the countries joined the EU. Leftovers from Soviet Union. (both historical and economic) Contents Geography 3 Paper Abstract 5 Background 7 Brief Historical Commentary 12 Reforms (case study: Estonia) 20 Conclusion 29 Brief Historical Commentary After leaving Soviet Union, all Baltic Countries had to ask one main question: where does one start such a process of root-and-branch nation building? Estonia had no previous experience except before World War II, while Lithuania and Latvia had enough of historical background, but still a lot of it had been lost. All three countries had very limited growth while in the Soviet Union compared to other neighbouring countries. Brief Historical Commentary The word of the day after gaining independence was REFORMS. Soon after it, at 1991-1992 there was a mini-slump due to rather rapid liberalization and privatization while countries still suffered shortages and nearly all lost trade (90% of all trade was with Russia). Once all of that had been under control, Baltic countries soon outperformed their neighbours in nearly all macroeconomic indicators. Projections Contents Geography 3 Paper Abstract 5 Background 7 Brief Historical Commentary 12 Reforms (case study: Estonia) 20 Conclusion 29 Case study: Estonia Main reforms (monetary): Estonian Currency Board and Bank of Estonia. 1992 abandonment of the rouble. Kroon had helped prevention of a much worse crisis as value of roubles fell over 600%. Case study: Estonia Currency board had been created due to 3 main reasons: Macroeconomic stability (ending inflation). FDI attractiveness. Political establishment of own currency. Case study: Estonia Main reforms (trade): Baltic countries trade collapsed after leaving the Soviet Union. Transition from centralized price system to supply-anddemand liberal economy. Trade within Soviet Union can’t be explained using general economic principles. Case study: Estonia Main reforms (trade/privatization): Baltic countries trade collapsed after leaving the Soviet Union. Transition from centralized price system to supply-and-demand liberal economy. Trade within Soviet Union can’t be explained using general economic principles. Hunt for new partners (Scandinavia, Germany and EU, Hong Kong) Liberalize, then negotiate! (liberalization, privatization, Hong Kong model and lack of tariffs) Contents Geography 3 Paper Abstract 5 Background 7 Brief Historical Commentary 12 Reforms (case study: Estonia) 20 Conclusion 29 Conclusion The Baltic reform model (criticism): Go for already tried and tested reforms and models. Country and culture specific reforms in all 3 countries that make it hard to generalize. Conclusion The Baltic reform model was possible due to: Reform-minded people were in charge of key departments and ministries. Simplicity and transparency were guiding principles of the reforms. Time was of the essence. Comprehensive economic reforms were combined with political and constitutional reforms. Conclusion Before: Central planning, Moscow rule and Soviet oppression are the core foundations. After: Free market economy, constitutional democracy and civil liberties have triumphed and again brought civilisation and good institutions to the countries. Radical reforms were not functions of academic studies or theoretical reflection; more than anything they were acts of faith. Most of reforms were done before EU from 1992 to 1997. Conclusion (Main points) Baltic countries opted for the right set of institutional economic structures at the time of independence. As the Baltic economies matured and entered the European Union, the passion for continued economic reforms slowed down markedly. Conclusion (Main points) As the economies matured, there should ideally have been a shift in some macroeconomic policies to help cool economies that were overheating and building up asset bubbles. The proper economic policy strategy for the Baltic countries is to entrench its economic policy integration with Europe.