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October 30 - November 5, 2003
Page 22

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Reaping the benefits of reform

Having spent over a decade involved in investment projects in the Baltics, Hamid Ladjevardi, has witnessed regional development firsthand. Prior to his current role as manager of American Baltic Investments, Ladjevardi was cofounder and manager of Baltic Fund I, the first and longest running private equity fund in the Baltics. He now also co-chairs the U.S.-Baltic Foundation and participates in numerous cultural projects. Roxanne Khamsi recently spoke with him about the region’s economic development in the future.

As manager of American Baltic Investments your focus is on investments in various spheres, including energy. How do you see the future in the Baltic energy market?
I believe there is a trend for both the United States and Europe to move toward less dependence on Middle East energy due to the perceived instability of the region and toward more reliance on Russian sources of energy than in the past, which is obviously welcomed by the Russians. The implication is that as the economies of Western Europe and the Unites States accelerate, over the next two years demand for Russian oil and gas and the geostrategic calculations of the energy business will encourage the Russians to use all economically viable routes for the export of their energy resources. To the extent that the Baltics have more diversified sources of energy, they will be less susceptible to the problems they have been confronted with.

In general, how would you describe the economic development model in the Baltics?
The most important ingredient for the economic development model is that it be implemented within a democratic, pluralistic form of government. This political precondition has been very essential for the free enterprise economic model that the Baltics have adopted. The Estonians went furthest in adopting the free market philosophy followed by the Latvians and Lithuanians.

The essential factors that led to the rapid economic growth included a conservative monetary policy, which resulted in reduced inflation along with stable currencies. They also adopted prudent fiscal policies, which led to low budget deficits - especially compared to their Western neighbors - and manageable external debt as a percentage of GDP.

Critically, in the beginning the Baltic countries adopted the principle of private sector lead in economic development, established free flow of capital, lowered tax rates, implemented favorable laws for investments and signed trade agreements with their neighbors, the Scandinavians and the European Union. The results speak for themselves - a period of rapid economic growth and a strong flow of foreign investment. This year the Baltic countries can boast one of the highest rates of economic growth in the world - at 5 percent to 7.5 percent for the first half of the year.

I must emphasize that the greatest asset of the Baltic countries is their people, who are well educated with a history of free enterprise and trade, and a northern European culture.

What do you think stands out about how the Baltic states have attracted foreign investment?
The Baltic countries have gone through a tremendous amount of change since regaining their independence. I remember the long lines of people waiting to buy tobacco or recently arrived cheese when I first visited the Baltics in November 1991. Today a few minutes of walk in most places tells a very different story. What has distinguished their performance is keeping their vision, determination and discipline to implement the principles of democracy and free enterprise that allowed them to join NTAO and the European Union in spite of so many different coalition governments espousing many contradictory policies. Their strong faith in democratic and free market principles, even when they were confronted with much suffering and displacement, is a testimony to their history, culture and a strong desire to join the free and democratic nations.

Would you say that current policies are headed in the right direction?
Yes. I see a continuation of all the major policies that have led to the success so far. Having created a stable and favorable environment for investment, the Baltics are reaping the fruits by seeing a continuing flow of investment from many counties, which they need for their economic development. This will pick up speed now that they have been accepted as members of NATO and the European Union.

Of course there are some problems that have arisen as a result of rapid economic growth that need to be confronted and resolved. The major problem is the divergence of wealth and income between different economic classes, regions and nationalities. For example, if you take the Riga area in Latvia and compare it to Latgale you easily see this divergence. The Tallinn region’s growth far outpaces the northeastern part.

Another problem is corruption or moral hazard, as my friends at [international financial institutions] would like to say. Great strides have already been made in decreasing the amount of corruption, and I believe joining the European Union will further decrease it.

Then there is the issue of governance based on the principles of transparency, accountability, respect for law and efficiency. Over the last 12 years that I have been involved in investment projects in the Baltics tremendous progress has been made in improving governance, but I believe more has to be done.

Should governments be doing more to pay attention to this?
Clearly these are issues that need to b addressed. I believe if these issues are not addressed more vigorously in the future they will create fertile ground for populist politicians and people of ill will who could arouse the anger of the people and espouse the sort of populist policies that will undermine the tremendous progress and economic development that has been made.

Do you see any kind of deceleration in economic growth in the near future?
It is possible. But excluding some unforeseen development and normal cyclical swings, I don’t see any major deceleration. If anything I continue to see strong growth.

What do you think will keep these economies going?
The same forces that have contributed to their rapid economic growth so far. Most importantly, the people, their culture, political and economic stability that entails all the points I have mentioned previously including competitive labor cost and favorable geographical location. As the Baltics join the European Union and NATO all these forces will give further boost to growth.

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