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The Baltic Conundrum
By Ben Slay, Michaela Pospíšilová, UNDP
After reporting very high growth rates as well as being seen as examples of successful economic transition, the “Baltic tigers” (Lithuania, Latvia and Estonia) are now among the worst victims of the global economic crisis. All three have reported large declines in GDP, income and employment, which threaten the significant development progress made since the mid 1990s. What went wrong? What should have been done differently? What lessons can be drawn from the Baltic crash? Realistically, there is very little that Baltic policy makers could have done differently—certainly not in light of what was known when these countries’ policy frameworks were constructed. In fact, even with the benefit of hindsight, it is not clear that fundamentally different policy regimes would have served their economies better. Instead, if overarching strategies of maximising the net gains of being small, open economies by emphasising institutional and income convergence towards European Union (EU) standards are accepted,then the policy regimes that were in place at the time of the crisis may need to be assessed as broadly correct— perhaps even in ex post terms. The Baltic economies’great misfortune—and the conundrum facing Baltic policy makers—lies in the fact that, however large or small the risks facing these policy regimes may have been, their consequences have turned out to be extremely costly.
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