While Russia may be regressing toward a strong authoritarian state with some features of the old communist regime, the three Baltic states--Lithuania, Latvia, and Estonia--have been deliberately moving away from the Soviet legacy toward liberal democracy and market capitalism. Their behavior is motivated partly by Russia's hesitance to fully renounce its imperial ambitions, including the reincorporation of the Baltic states. Lithuania, Latvia, and Estonia have reached a tangible accomplishment on their road toward reintegration with Western and Central Europe: in 2004 they were all admitted as full members of NATO and the European Union. In symbolic and probably also in real geopolitical terms, the Baltic states seem to have foreclosed the possibility of reasserted Russian dominance. Yet some questions about the future remain.
The Move to Liberal Markets
After achieving independence from the Soviet Union, all three Baltic states embraced the market economy, with Estonia going the farthest in that direction. Estonia is the richest Baltic state, and it has acquired a reputation for economic stability despite rapid gross domestic product (GDP) growth. In the first quarter of 2005, the Estonian economy grew by 7 percent, compared with a relatively stagnant 1.4 percent rate in the euro-zone. The present government under Prime Minister Andrus Ansip plans to adopt the euro no later than January 2007. Known for high technology and innovation--where else can you buy tram tickets on your mobile phone?--Estonia became the first country in Europe to adopt a flat tax in 1994. The future of Western-style capitalism appears safe in Estonia, which is not dependent upon Russian energy supplies.
The other Baltic countries, however, have not witnessed as smooth a transition. In Lithuania's heated 2004 electoral campaigns for the European Parliament and the national legislature (Seimas) in October, one relatively successful politician said that discussion about liberal market reforms was premature because 80 percent of the Lithuanian population did not know what capitalism was. Russian-born Viktor Uspaskikh, the wealthy leader of the Lithuanian Labor Party, argued that Lithuania should focus on solving social problems while reining in unbridled capitalism and the shadow economy. Uspaskikh's anti-capitalist argument was an exaggeration, and he did not get enough votes to become prime minister.
Nonetheless, Lithuania's economy has experienced some real difficulties. Of the three Baltic countries, Lithuania has traded the most with Russia and was therefore most affected by the Russian financial crisis of 1998. Perhaps largely as a result, Lithuania did not become a full member of the World Trade Organization (WTO) until December 2000, while Latvia and Estonia both joined in 1999. But the relative positions of the three Baltic states evened when all three became full EU members on May 1, 2004.
During its period of independence between the world wars, Latvia exploited its geographic position as an important East-West commercial and trading center. Its industry served local markets while it exported timber, paper, and agricultural products. Under Soviet occupation, the republic was rapidly industrialized and grew dependent upon imports of energy and raw materials. Immediately after Latvia joined the European Union, two features of its Soviet economic legacy--low professional salaries and wages reportedly among the lowest in the European Union--started to work against its economy. Some estimates suggest that 50,000 Latvians have emigrated to other EU countries to work, producing a "brain drain" in such important sectors as nursing and medicine.
On the positive side, however, Latvia's Minister of Economics was able to boast in May 2005 that his country's 2004 economic growth rate was the highest in the European Union at 8.5 percent, that it had averaged 7 percent growth annually since 2000, and that growth would be similar in the next five years. …