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The Fast Track from the Soviet Union to the World Economy: External Liberalization in Estonia and Latvia

Published online by Cambridge University Press:  28 March 2014

Magnus Feldmann
Magnus Feldmann*
Affiliation:
Harvard University
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Extract

There Exists An Extensive Literature On The Political Economy of external liberalization in emerging markets. However, the remarkable progress of Estonia and Latvia in external liberalization has not yet been addressed systematically in the academic literature from a political economy angle. This article aims not only to make a contribution to fill this gap in the literature by focusing on trade policy reform, but also to address three other issues.

Type
Original Articles
Information
Government and Opposition , Volume 36 , Issue 4 , October 2001 , pp. 537 - 558
Copyright
Copyright © Government and Opposition Ltd 2001

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References

1 European Bank for Reconstruction and Development (EBRD), Transition Reports, 1994, 2000.

2 For a survey of economic reforms in Lithuania, see EBRD, Transition Reports, 1994, 2000 and Seija Lainela and Pekka Sutela, The Baltic Economies in Transition, Helsinki, Bank of Finland, 1994. It is also worth noting that in the past the term ‘Baltic states’ was often used to denote only Latvia and Estonia. This gives some further justification to the omission of Lithuania here. See von Rauch, Georg The Baltic States: The Years of Independence 1917–1940, London, C. Hurst & Company, 1970,Google Scholar p. xi.

3 Lainela, S. and Sutela, P. Baltic Economies, p. 117.Google Scholar

4 For a survey of the literature, see Rodrik, Dani, ‘Understanding Economic Policy Reform’, Journal of Economic Literature, 34:1 (March 1996), pp. 9–41.Google Scholar

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7 Rodrik, D. ‘Policy Reform’, p. 27. Note that e.g. India has faced several balance-of-payments crises since independence, but liberalization only started after the crisis in 1991. See Vijay, Joshi and Little, I. M. D. India: Macroeconomics and Political Economy, 1964–1991, Delhi, Oxford University Press, 1998.Google Scholar

8 Bhagwati, Jagdish Protectionism, Cambridge, Mass., MIT Press, 1990.Google Scholar

9 On the collective action problem see Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge, Mass., Harvard University Press, 1965.

10 On the window of opportunity in transition — the period of extraordinary politics — see Balcerowicz, Leszek Socialism, Capitalism, Transformation, Budapest, Central European University Press, 1995.Google Scholar

11 On the role of institutions and regimes in international political econmy, see e.g. Krasner, Stephen D. Internal Regimes, Ithaca, Cornell University Press, 1983 Google Scholar or Keohane, Robert O. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton, Princeton University Press, 1984.Google Scholar

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18 Estonia had the USSR’s first two joint ventures in 1987, and by July 1991 both countries had over 100 joint ventures. See Shen, Raphael Restructuring the Baltic Economies, Westport, Conn., Praeger, 1994.Google Scholar

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20 As S. Lainela and P. Sutela, Baltic Economies, pp. 62ff, argue, the differences between the two countries with respect to currency reform, exchange rate policy and stabilization merely illustrate different ways of achieving the same target.

21 R. Shen, Restructuring, op. cit.

22 WTO Accession Reports for Estonia (WT/ACC/EST/28) and Latvia (WT/ACC/ LVA/32), available http://www.wto.org/wto/ddf/ep/public.html and Niels Mygind, ‘The Internationalization of the Baltic Economies’, BRIE Working Paper 130, http://socrates.berkeley.edu/~briewww/pubs/wp/wp130.html, 1998.

23 Republic of Latvia Ministry of Economy, Report on the Economic Development of Latvia, Riga, Ministry of Economy, December 1999, p. 42.

24 K. Kukk, ‘Estonia, Latvia and Lithuania’, op. cit.

25 EBRD, Transition Report, 1994; and Inna Shteinbuka and Aleksandra Cirule, ‘Latvia’, in Richard N. Cooper and János Gács (eds), Trade Growth in Transition Economies: Export Impediments for Central and Eastern Europe, Cheltenham, Edward Elgar, 1997, for Latvia; as the latter figure comes from a different source, it should be viewed as indicative rather than strictly equivalent to the others.

26 Furs (16 per cent), sea scooters, small vessels and snow-scooters (10 per cent); see Alari Purju, ‘Estonia’, in R. Cooper and J. Gács, Trade Growth.

27 IMF Staff Country Report No. 99/99, Latvia: Selected Issues and Statistical Appendix, 1999. http://www.imf.org/external/pubs/ft/scr/1999/cr9999.pdf.

28 I. Shteinbuka and A. Cirule, ‘Latvia’.

29 Grain received as humanitarian aid was exported to Estonia. The tariffs were ineffective, as the agricultural goods were imported via Latvia instead. S. Lainela and P. Sutela, Baltic Economies and Ants Kala, ‘Foreign Trade’, in Olev Lugus and George A. Hachey, Jr (eds), Transforming the Estonian Economy, Tallinn, Estonian Academy of Sciences Institute of Economics, 1995.

30 I. Shteinbuka and A. Cirule, ‘Latvia’ and IMF, Latvia.

31 The average weighted import tariff on agricultural goods is now 3.3 per cent. Estonian Ministry of Economics Homepage, foreign trade section, http://www.mineco.ee/valiskaubandus/index.asp?9id=21.

32 WTO Accession Reports. See also M. Feldmann and R. Sally, ‘From the Soviet Union to the European Union: Estonian Trade Policy, 1991–2000’, The World Economy, 25:1 (January 2002), forthcoming.

33 I. Shteinbuka and A. Cirule, ‘Latvia’ and K. Kukk, ‘Baltic States’.

34 S. Lainela and P. Sutela, Baltic Economies, p. 118.

35 Bank of Finland Institute for Economies in Transition, Russian and Baltic Economies: The Week in Review, 11 (2000).

36 S. Lainela and P. Sutela, Baltic Economies.

37 Kornai, János ‘Transformational Recession: The Main Causes’, Journal of Comparative Economics, 19:1 (1994).CrossRefGoogle Scholar

38 Poland already conducted about 20 per cent of its trade with Western Europe in the mid-1980s, whereas the corresponding figure for the Baltic States was negligible. See Urmas Varblane, ‘The Trade Policy Implications of Joining the EU: Poland and Estonia Compared’, in Marzenna Waresa (ed.), Foreign Direct Investment in a Transition Economy: The Case of Poland, London, SSEES/UCL, 2000.

39 EBRD, Transition Reports (various years).

40 Kenneth Waltz, Theory of International Politics, Reading, Mass., Addison-Wesley, 1979.

41 R. Shen, Restructuring and Rein Taagepera, Estonia: Return to Independence, Oxford and Boulder, Colo., Westview Press, 1993.

42 V. Varblane, Trade Policy, op. cit.

43 Different perceptions of the security dilemma and the opportunity cost of independence in economic terms may constitute a partial explanation, given that Baltic living standards were higher, whereas the Caucasian living standards were lower than in Russia.

44 G. von Rauch, Baltic States, op. cit., pp. 125ff.

45 L. Balcerowicz, Socialism, Capitalism, Transformation, op. cit.

46 There are differences here between Estonia and Latvia, where interest politics has been more prominent.

47 The political backlash against reforms in Lithuania coincided with the election of the ex-communists to government in 1992. In Estonia and Latvia moderate backlashes occurred in 1995. See N. Mygind, ‘Internationalization’.

48 R. Taagepera, Estonia, p. 176.

49 N. Mygind, ‘The Internationalization of the Baltic Economies’.

50 For an elaboration of this argument with respect to Poland, see Sachs, Jeffrey D. Poland’s Jump to the Market Economy, Cambridge, Mass., MIT Press, 1993.Google Scholar

51 This is broadly true of Russia.

52 A public choice based account of bureaucratic decision-making would usually assume that administrators want to maximize their bureaux and budgets, which would not necessarily point towards external liberalization, but quite possibly the opposite.

53 J. Goldstein and R. O. Keohane, ‘Ideas’, pp. 3ff.

54 These were the key parties in the reformist governments of 1992–93.

55 The differences between Estonia and Latvia will be discussed below.

56 It may be hard to separate the economic and political factors in practice, as one of the main motivations for the rapprochement with Western Europe was probably the idea that ‘being in Europe creates good preconditions for being rich’.

57 R. Taagepera, Estonia, pp. 128ff and Mart Laar, Urmas Ott and Sirje Endre, Teine Eesti: Eesti Iseseisvuse Taassünd 1985–1991, Tallinn, SE&JS, 2000, pp. 189–212.

58 David Arter, Parties and Democracy in the Post-Soviet Republics: The Case of Estonia, Aldershot, Dartmouth, 1996, pp.55.

59 A small difference later on in transition may be that Latvia has a Most Favoured Nation trade agreement with Russia, whereas Estonia does not. This may have contributed to Estonia’s reorientation to the West.

60 Ilves, Toomas Hendrik ‘Yuleland’, Northern Enterprise, 1:1 (1999), Helsinki, p. 66.Google Scholar See also Huntington, Samuel P. The Clash of Civilisations and the Remaking of World Order, New York, Simon & Schuster, 1996.Google Scholar

61 R. Shen, Restructuring, p. 215, and N. Mygind, ‘Internationalization’.

62 They are virtually impossible to test empirically and can easily become ‘catch-all’ categories accounting for everything that we cannot explain in other ways. See also Olson, ‘Big Bills’.

63 Interviews; N. Mygind, ‘Internationalization’.

64 R. Shen, Restructuring.

65 See D. Arter, Parties.

66 Nissinen, Marja Latvia’s Transition to a Market Economy, New York, St Martin’s Press, 1999, pp. 174ff.CrossRefGoogle Scholar

67 N. Mygind, ‘The Internationalization of the Baltic Economies’.

68 Interviews.

69 Interviews; see also M. Nissinen, ‘Latvia’s Transition’, pp. 174ff.

70 Both Estonian and Latvian diplomats that I have spoken to have stressed that WTO membership was prioritized much more by the Latvian MFA, whereas the Estonians maintained a focus on the unilateral track and viewed WTO membership largely as a way of locking previous domestic reforms. See M. Feldmann and R. Sally, ‘Estonian Trade Policy’, op. cit.

71 The Estonian tariffs against third countries only partly reflect interest group pressures. The main reason seems to be the need to establish customs practices and gather experience from tariff collection before EU accession, as suggested by Estonian civil servants. See also Urmas Varblane, Europa Liiduga Ühenemisest tulenevad muutused Eesti kaubanduspoliitikas, Tartu, University of Tartu, 2000.