bout de papier, Vol. 16, No. 4 (1999-2000) — Winter 1999-2000 // Hiver 1999-2000, pp. 20–21
Eleven years ago, on the 23rd of August 1989, over one million Estonians, Latvians and Lithuanians of all ages stood hand-in-hand to form a human chain stretching from Tallinn in the north, through Riga, to Vilnius in the south. The occasion for the demonstration was the 50th anniversary of the signing of the Molotov-Ribbentrop pact which resulted in the loss of freedom for the three Baltic Republics for the next fifty years; the demand, renewed freedom, freedom from occupation, freedom at all costs.
The dreams of the million participants in the Baltic Way as well as of millions of other residents of Lithuania, Latvia and Estonia were eventually realized a short two years later after the sudden collapse of the Soviet Union in August 1991 and the rebirth of these once independent nations on the eastern shores of the Sea of Dreams. The renewed freedom, however, came at a cost, a cost which no one had calculated and which in the end proved to be far greater than anyone had expected. It is only now, eleven years later, that such international organizations as the United Nations are starting to question the policies that led to the immense suffering and hardships that have been, and are continuing to be, borne by the populations at large of the economies in “transition”. ’. And there can be no doubt, of all the nations of Central and Eastern Europe including the three Baltic Republics, no nation paid as dearly for its freedom as the Republic of Latvia.
Although precise measures of the actual wealth of the individual republics of the former Soviet Union are not available, most analysts agree that until the end of the 1980s, the Soviet Socialist Republic of Latvia enjoyed the highest standard of living of all the former republics. On a relative scale, leading European authorities have estimated that the GNP of the Latvian SSR was still 30 percent above the Soviet average about the time of the Baltic Way at the end of 1989, while that of the Estonian SSR was 20 percent above the average, and that the GNP’s of the Lithuanian SSR, the Belorussian SSR and the Russian SSR itself were 15 percent above the average. Nevertheless, by 1995, at the time of the submission of the accession documentation to the EU, Latvia ranked last of all eleven candidate countries, including Estonia and Lithuania, in terms of GNP per inhabitant, and had also fallen behind Russia and Belarus in these same terms. In the 1999 Human Development Report of the United Nations, released in July 1999 and based on 1997 GNP figures, Latvia continued to lag not only the other two Baltic states but also Russia and Belarus. What went wrong in Latvia? Was it simply the “transition” from a centrally-planned command economy to an open market economy that was the cause for the exceptional reversal in the standard of living of the average resident of Latvia or were there fundamental mistakes in the choice of policies?
One simplistic approach to understanding “what hit” Latvia is to think in terms of foreign investment in the broadest sense. Stripping away layer after layer of “foreign” funding that flowed into the economy of the Latvian SSR from central allocations and expenditures, one begins to gain a sense of the reasons for the relative wealth of Latvia under Soviet occupation and to comprehend the tremendous economic collapse that came after independence. The external investments in the economies of the Baltic republics included not only such obvious categories as infrastructure, plant and equipment, and social expenditures. They also included the hidden flow of funds resulting from a significant military presence in the region, the gains from a substantial inflow of tourists, and the disproportionately high levels of funding, relative to the size of the individual economies of the three republics, allocated to a broad spectrum of other categories such as culture, sports and recreation.
The importance of “foreign” investment to the individual republics of the former Soviet Union is best described by Algirdas Brazauskas (the former President of the Republic of Lithuania and the last head of the Communist Party in Lithuania prior to the renewal of independence) in a June 1999 interview when he recounts how he regularly lobbied the authorities in Moscow for increased investment in Lithuania: ’When it came to the turn of Lithuania to present its plans, we commenced a veritable litany of complaints and to calm our nerves, we were offered money…. We were able to realize 1.9 percent (of the total budget of the Soviet Union although the population of Lithuania was only 1.3 percent of the total population of the Union) and that was not at all a small sum.” The results of this lobbying effort by Brazauskas in the latter half of the 80s are still evident today. New highways, new housing developments, and relatively modern factories are to be seen throughout Lithuania, and Palanga, the summer beach resort community just north of the Port of Klaipeda is indistinguishable from equivalent summer holiday centres in Germany, Holland or Scandinavia. While no former Communist leader in Latvia has yet stood up to make similar claims on behalf of Latvia, judging by the sparse statistics that are available, one can be almost certain that Latvia too fared relatively well in the Moscow boardroom presentations process which determined the allocation of scarce resources in the former Soviet Union.
Another approach to understanding the collapse is to throw out the concept of a state in peaceful transition from one phase of development to another and to think instead, much more realistically, in terms of a large multinational corporation (head office Moscow) whose former foreign cost-center subsidiaries (the individual republics and their institutions) suddenly are totally abandoned and have to start fending for themselves. With no experience whatsoever in top level management, either of government or of corporate organizations, the new leaders were immediately faced with the prospect of managing economies and plants whose accustomed source of funds, and of funding and supply and distribution decisions, had abruptly disappeared. Neither their education nor their experience had prepared the politicians, the officials and the plant managers for the unexpected task of leadership without recourse to a higher level of authority.
Undoubtedly another reason for the relatively favourable position of the Latvian SSR in the former Soviet Union was its image as the most European of all the former Soviet republics. Tourism thrived, the seaside resort community of Jurmala just outside Riga having been a favourite summer destination of the elite (as former colleagues at the Canadian Embassy in Moscow have attested) and especially of the cultural elite who descended on Riga en masse every year. When setting up another new factory to service the needs of the Union, why not set it up in a location in which the best managers and key specialists will be glad to work, rather than in an isolated outpost of the empire? The senior military officers in Riga, too, outranked the senior officers in the neighbouring republics, which surely also influenced the allocation of military spending. In the “good old days,” the economy of Latvia was obviously a net beneficiary of a wide range of financial flows from the centre, flows that ceased the moment that independence was renewed. Even at the plant level, who can now say, ten years later, which party was the beneficiary and which the loser, in the intra-firm transfer pricing process practiced in the Soviet Union? Latvia was greatly subject to this process, owing to the large number of Soviet-scale plants in its territory, all of which were directly and intimately linked to many other centrally controlled plants and distribution centres in other regions of the Union.
With the renewal of independence in 1991, Latvia, as all the newly independent states of the former Soviet Union, faced extremely difficult decisions. With no recent experience either of democracy and market economies or of statesmanship, the newly-elected policy makers in Latvia and their immediate advisers were hardly in a position to make sound judgments based on extensive experience and a thorough knowledge of the functions of the state and its management. This was particularly the case for economic questions, the political questions being far more visible and “human” and therefore easier to understand and to cope with. At the same time, the multinational organizations which were trying their best to provide the necessary support for the “transition” process in so many suddenly new countries were simply overloaded. As a consequence, they were only able to offer very general, simplistic advice to the “transition” economies — what is best for country “X” is also best for country “Y” type of advice. There was no time for more detailed, country specific advice, in situations in which in fact there were very considerable differences among the different nations!
The ensuing dilemma starts with the broadly accepted usage of the word “transition” itself. To the average ear, “transition” would imply a gradual serene transformation from one phase to another. There is nothing violent or abrupt about the term “transition,” nothing to lead one to think that it implies human suffering and hardships. For national economies, the term appears to have been adopted to describe the changes occurring in the economies of Central and Eastern Europe these last twenty years, and, when speaking of Poland, Czechoslovakia, Hungary, Bulgaria and Rumania, “transition” correctly describes the more or less gradual state of change within these more or less sovereign nations from one set of conditions to another. The term should hardly apply, however, to those economies which faced abrupt and immediate changes to a totally new set of political and economic circumstances. The concept of “transition” does not do justice to the severity and immediacy of the dramatic changes which occurred in those newly-founded nations which had been totally controlled by central authorities in Moscow for decades. Nevertheless, world opinion leaders chose to recommend the same policy advice for all economies in “transition” and developed a “Washington Consensus” as the prescription for all the economies of Central and Eastern Europe and of the former Soviet Union. (For the sake of argument, in the inconceivable event of the abrupt unfriendly secession of the Maritime Provinces, or the Western Provinces, from the rest of Canada, the support of much of the rest of the world and of leading multinational institutions, it is just as inconceivable that economists would term the change a “transition” and recommend policies of minimal government involvement in the economic adjustment phase to follow independence.)
Researching the economics of transition it becomes clear that both Latvia and Estonia provided fertile ground for the multinational experts advocating the “Washington Consensus.” Both countries, each in its own way, almost fully adopted the neoliberal monetarist policies in vogue at the end of the 80s — macroeconomic stabilization, microeconomic liberalization, privatization and creation of a market-conforming institutional and legal framework. Drastically limiting government involvement in the economy in order to let the market do the job of economic adjustment while maintaining a sound currency were to be the keys to a new level of prosperity in the now free and independent nations, so said the experts. There was no one at the receiving end of this advice willing, or perhaps more correctly, able, to provide counter arguments for a more gradualist approach, with greater government involvement in the process.
The results are to be seen today. In the case of Estonia, the layers of “foreign investment” in the economy were thinner on the one hand and on the other were rather quickly replaced by real foreign investment from the West, in particular from its sister nation of Finland. In the case of Latvia, the process has proven far more difficult, the initial losses having been far greater and the foreign investment gaps not being filled as rapidly. In both nations, however, a narrow privileged elite quickly emerged to control the economy, while the economic circumstances of the majority of the population grew progressively worse. In both nations, the creation of an economic environment which will nurture the growth and rapid expansion of the still far too small middle class is crucial to their aspirations to once again attain the European standards of living that Estonia and Latvia enjoyed prior to occupation.
Eleven years after Estonians, Latvians and Lithuanians stood hand-in-hand in a human chain to draw the attention of the world to their hunger for freedom, and a short eight years after regaining the independence of their homelands, the peoples of the Baltic States have come a long way. Ignoring the question of the severity of the collapse and the ensuing hardships that resulted, the macroeconomic progress of all three nations since the turnaround has been remarkably steady and is often cited as evidence for the success of the consensus policies. The vision of the future held by the majority of the population, and most importantly, the vast majority of the younger generation, is a vision of being a part of modern Europe, enjoying all the privileges and freedoms that such a status implies. More experienced national leaders, backed up by better educated advisers, coupled with greater sensitivity to the particular circumstances of each individual nation on the part of multinational institutions which have now progressed to a post-Washington consensus phase, provide assurance that reform will continue and more appropriate policies will be adopted. Most importantly, the people and their dreams and needs will become central to the government decision-making process in all three nations.
The Russian financial crisis has done much to alter the economic picture of the region described in this article written last August. The statistical indicators for 1998 of each of the candidate countries incorporated in the European Commission’s October 13, 1999 Report on Progress towards Accession show that the relative rankings of the GDP per inhabitant of the three Baltic States remain unchanged. Russia and Belarus too have seen a dramatic decrease in the relative economic well-being of their inhabitants following the exceptional devaluation of the Russian ruble since August 1998.
View the original scanned pages →
Originally published in bout de papier, Vol. 16, No. 4 (1999-2000) — Winter 1999-2000 // Hiver 1999-2000, pp. 20–21. Read the rest of this issue →
