From independence to the Euro introduction: varieties of capitalism in the Baltic States

www.ceejme.eu ww.wsb.pl/wroclaw/ceejme ISSN electronic version 2353 - 9119 Central and Eastern European Journal of Management and Economics Vol. 3, No. 1, 9-38, March 2015 From independence to the Euro introduction: varieties of capitalism in the Baltic States Ralph M. WROBEL West Saxon University of Applied Sciences, Zwickau, Germany Abstract: The Baltic States, Estonia, Latvia and Lithuania, are very successful in transformation. From 1991 to 2015 they regained independence and transformed their economies from socialist central planning into functioning market economies, joined the EU in 2004 and became member of the Euro zone. Estonia introduced the Euro al-ready in 2011 while Latvia followed in 2014 and Lithuania in 2015. Thereof follow two questions. First, why all three Baltic countries are so successful? And secondly, do we really find everywhere the pattern of the “Shining star” Estonia, followed by Latvia and at least Lithuania? According to modern Varieties of Capitalism theory all three economies can be classified as Central and Eastern European Countries in the style of Liberal Market Economies (CEEC-LME). As can be shown, there are also differences in the institutional setups of all three Baltic States. During the period of transformation a pattern of Estonia followed by Latvia and at least Lithuania evolved which is also reflected by the sequence of joining Euro area. But institutional patterns are not determined in the long run. Since the crisis of 2008/09 the pattern within the Baltics changed. While Estonia remains on the first rank Lithuania overtook Latvia in terms of growth and wealth. Deregulation in Lithuania – which may be observed by the development of the Economic Freedom Index of the Heritage Foundation within the last ten years – may be the main reason. But also, the low sophistication of the Lithuanian banking system as well as Latvia’s massive suffering from the crisis may explain the last change of the pattern in the Baltics. There are several possibilities to illustrate the different paths of development of the Baltic States. While Geography Hypothesis is not able to explain the differences, the extractive political institutions in Estonia and Latvia can illustrate the lead of both countries in contrast to Lithuania till the crisis in 2008/09. Additionally, different basic values in all three Baltic States are responsible for the different developmental paths. They can also be traced back to the different history and culture of the three Baltic countries. Keywords: VoC, Baltics, Estonia, Latvia, Lithuania, Euro introduction JEL: P16, P20, P51 1. Introduction The Baltic States, Estonia, Latvia and Lithuania, are very successful in transformation, but were starting from the scratch. Within a quarter of a century they regained independence and Correspondence Address: Ralph M. Wrobel, West Saxon University of Applied Sciences, Zwickau, PO Box 20 10 37, 08012 Zwickau, Germany. E-mail: . © 2015 Wrocław School of Banking Ralph M. WROBEL transformed their economies from socialist central planning into functioning market economies. As result, all three countries were able to join the EU in 2004 together with fife other Central and Eastern European countries. Additionally, after Slovenia and Slovakia they became member of the Euro zone within the last years, too. Estonia introduced the Euro already in 2011 while Latvia followed in 2014 and Lithuania in 2015. Nowadays, Estonia is the only Baltic State which is characterised as “innovation-driven” by the World Competitiveness Report 2014 – 2015 while Latvia and Lithuania remain between the status efficiency-driven and innovation-driven (World Economic Forum 2014: 11). Thereof follow two questions. First, why all three Baltic countries are so successful? Can we trace the fast development back to the introduction of inclusive political and economic institutions in the sense of Acemoglu / Robinson (2013)? And secondly, do we really find everywhere the pattern of the “Shining star” Estonia, followed by Latvia and at least Lithuania? And is this reducible the thesis of Hall / Soskice (2001) that consistent Liberal Market Economies (LMEs) as well as consistent Coordinated Market Economies (CMEs) are more successful than inconsistent types of economic systems? To answer these questions, first the transformation process as well as monetary and fiscal development in the three Baltic States will be described briefly, also focusing on the reactions on the economic crisis in 2008. Then, “Baltic Capitalism” as successful group of market economies will be described using Varieties of Capitalism (VoC) theory. Additionally, differences in institutional set-ups of all three Baltic States will be analysed according to Amable (2003). In the last chapter it will be tried out to find explanations for these differences beyond simple theory of institutions. 2. Transformation in the Baltic States 2.1 Introduction of political and economic institutions In contrast to the other transformation states in Central and Eastern Europe all three Baltic States were fully incorporated into the Soviet Union till 1991. As result they were deprived of any autonomous institutions and had to build up their political and economic set-up from the scratch in the beginning of the 1990s. Till this time their trade was geared towards the East. But after regaining independence they chose to distance from Russian influence and direct their policies westward, largely following the liberal prescriptions of the Washington Consensus to 10 FROM INDEPENDENCE TO THE EURO INTRODUCTION … become open market economies. Thanks to strong political will and public support reforms in all fields of institution building – from trade liberalization to privatisation – were really successful. (Maslauskaite / Zorgenfreija 2013: 34 – 35) First free elections in Estonia brought a clear victory for the liberal and nationalist parties in 1992. Therefore, first prime minister Mart Laar could start transformation urgently and radically following liberal patterns. Since then a bipolar political system developed without extreme parties which may be traced back to the fact that most of the Russian speaking migrants from Soviet times were not granted with citizenship (Wrobel 2013: 27). The first free elections in Latvia took place in 1993 but also here the Russian speaking population was mostly excluded as migrants. Because of huge migration during the Soviet period Latvians got near-to-minority status in their own country (Norkus 2012: 203). Still in 2010 15.5 % of the population could not participate in the political process because they were not granted with Latvian citizenship. Additionally, Latvia suffers from weak political parties and power of oligarchs who dominate political parties (Matthes 2013: 52 – 54). In Lithuania citizenship was granted to the whole population independent from their nationality but Russian speaking minority is quite unimportant comp (...truncated)