BALTIC ECONOMIC REFORMS: A Crisis Review of Baltic Economic Policy by Fredrik Erixon

1. BALTIC ECONOMIC REFORMS: A Crisis Review of Baltic Economic Policy by Fredrik Erixon Tomas Chalimavičius @ 2013

2. Contents

3. Geography

4. Contents

5. 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.

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7. 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.

9. 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.

10. 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)

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12. 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.

14. 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.

15. Projections

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20. 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%.

21. Case study: Estonia • Currency board had been created due to 3 main reasons: • Macroeconomic stability (ending inflation). • FDI attractiveness. • Political establishment of own currency.

24. Case study: Estonia • Main reforms (trade): • 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.

25. 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)

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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.

30. 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.

31. 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.

32. 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.

33. 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.