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Volume 28, Number 4

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Baltic Development Model Lessons For Transforming Countries

The emergence of the Baltic nations of Estonia, Latvia, and Lithuania as independent, democratic nations from the ashes of the Soviet Union fourteen years ago was a milestone for transformation development models. During this period, the Baltic countries made a breathtaking journey from total dependence on a command economy directed by an oppressive government to becoming independent, prosperous democracies that are now members of NATO and the European Union. The preconditions for this rapid transition were educated people with cultures that valued the individual, entrepreneurial spirit and a vision for their future that was partly based on the memory of their prosperous, democratic past.

The “Baltic development model” (BDM), which was the foundation for this successful transition, was based on a democratic, pluralistic form of government, development of civil society institutions and a free market and enterprise approach to economic development. The most crucial ingredients for its success were popular support for a vision of change and political stability based in the rule of law.

In order to achieve rapid, sustainable, non-inflationary growth, the BDM prescribed the following policies:

  • Private sector lead in economic development, including the privatization of government enterprises and land. If they had been confiscated from their rightful owners, they were to be returned.
  • Free competition with gradual elimination of subsidies
  • Prudent fiscal policy—balanced budget (or very close to it)
  • Conservative monetary policy—low inflation
  • Stable, convertible currencies and free flow of capital
  • Favorable laws for local and foreign investors
  • Low, pro-growth and fair tax policy
  • Reformed labor laws: relatively unregulated labor markets with affordable spending on social protection
  • Efficient foreign trade, marked by the establishment of trade agreements with neighboring states, nations with complementary economies, and world bodies.

In addition, the BDM advocated the participation of all elements of the society, particularly women, in development.

The results speak for themselves. The following indicators in the table below show the effectiveness of the BDM.

Estonia Latvia Lithuania
GDP growth at constant prices % Average per year 7.8 5.6 5.8
GDP growth per capita at constant prices % Average per year 8.2 6.2 6.4
CPI growth (1997=100 %) 133.0 125.6 108.5
External debt as % of GDP At the end of 2004 2.7 7.5 22.1
Foreign direct investment per capita (cumulative) From independence to end of 2004 (USD) 7476.0 1942.0 1700.2

Despite the Baltic countries’ impressive progress, there are some dark clouds emerging on the horizon. At this stage of development there are certain problems which any nation undergoing transformation and rapid economic growth will be confronted with. There is no exception, even within the BDM. Some of these problems emanate from the Soviet culture and the mindset it created over the many decades that the Baltic nations were occupied. If for no other reason, it is in the enlightened long-term self-interest of the Baltic elite to start promoting policies and laws that will help reduce these problems and restore people’s trust. Hence, moral leadership, displaying attributes such as honesty, transparency, fairness and justice, consistency, competence, courage, and compassion, is required from the political, economic, and cultural leaders of the Baltic countries. The dark clouds show:

  1. The divergence of wealth and income, (mainly due to rapid economic growth and corruption), between different economic classes, regions, and nationalities, may create fertile ground for populist politicians and people of ill will who could arouse the envy and anger of people. These politicians could espouse the sort of populist policies that will undermine the tremendous progress in civil society and economic development that has been made. A good start to countering this problem would be for the financial elite to begin sharing, even a small part of their wealth, to help their society in areas that interest them, be it in cultural activities, education, and other charitable initiatives which may benefit the society.
  2. Corruption recognizes no boundaries. There are only degrees to which it can be overcome, and it is degrees that distinguish one nation from another. In the Baltics, combating corruption has made progress. But more serious work needs to be done.
  3. The principles of political and corporate governance are interrelated, with responsible behavior in the political sector reinforcing ethical corporate behavior, and vice versa. Practice of good governance - transparency, accountability, and respect for law and for all stakeholders at the political and economic institutions - needs to evolve at an even faster pace.
  4. There should be continued efforts to offer citizenship and to make available avenues for full integration into Baltic society to all members of the population who seek it. Lack of efforts to keep the doors open to integration to different nationalities provides the breeding ground for resentment, division, and opportunities for outside intrigue. A national language spoken by all is a source of unity in any country. Diversity of cultures and fusion of its many attributes in a nation are a source of creativity, strength, and enrichment for all its citizens.

The Baltic development model, despite its shortcomings, has proven itself to be a practical and successful transformation model. After fourteen years of experience (1991), the BDM can now be a source of inspiration and a blueprint for many other countries that are now in the throes of transformation from totalitarian regimes to more democratic, free market societies.

The most likely candidates are some of the countries near the Baltic nations, starting with Ukraine and Byelorussia, and continuing to Southern Caucasus countries like Georgia, Armenia, and Azerbaijan. Select countries in the greater Middle East and North Africa such as Iraq, Iran, Lebanon, Syria, Jordan, Egypt, Tunisia, and Morocco would also greatly benefit from BDM. Many have educated populations with ancient cultures possessing strong individualistic and entrepreneurial traditions. Some of these countries have also had periods of sustained economic and cultural growth in their past whose memory could serve as a basis of their vision for future development. Amongst these nations, there is also a strong thirst for some degree of social, economic, and political freedom.

Given that these countries have the foundations to pursue the kind of development model that has shown itself to be so successful in the Baltic states, what is holding them back? The problem starts at the top. Unrepresentative political leaders and the fiscally affluent cling to power at all costs in order to enhance their stature and expand their wealth at the expense of the people. They know that under the BDM, their position would be greatly diminished.

It is in the interest of Baltic leaders to help these other nations move forward and adapt the BDM. When nations share similar development policies, their connections are strengthened. These connections pay dividends in the form of increased commerce and trade, expanded foreign investment, shared innovations and cross-pollinated ideas, enhanced national security, and alliances that can benefit the global village beyond their immediate borders. Similar development policies also promote shared values, causing the expansion of freedom that has so much benefited the Baltic people.

How can Baltic leaders promote the BDM to other countries? By leveraging Estonia’s, Latvia’s, and Lithuania’s membership in international political, military, trade and labor organizations. The Baltic nations can seek alliances with individuals and institutions within these organizations that champion the ideas and values implicit in the Baltic Development Model. Joining forces with like-minded people creates a powerful bloc that can promote policies propagating the BDM. Such a move is most effective and resonant if the ruling establishment of the Baltic nations exercise moral courage and leadership and try to resolve the problems in their lands.

This article and its shorter versions have appeared in:

  • Leaders Magazine volume 28 number 4, October - December 2005
  • Baltic Times, a weekly paper published in Latvia, March 3-9, 2005
  • Diena, the leading Latvian daily newspaper, May 2005
  • Verslo Zinios, the leading Lithuanian daily business newspaper, April 29, 2005

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