Academic journal article Business Economics

The Baltics: Continuing Boom or Bursting Bubble? A Rocky Short-Run Should Not Obscure a Promising Long-Run

Academic journal article Business Economics

The Baltics: Continuing Boom or Bursting Bubble? A Rocky Short-Run Should Not Obscure a Promising Long-Run

Article excerpt

Since the late 1990s, Estonia, Latvia and Lithuania (the Baltics)--three small countries to the northwest of Russia--have experienced unprecedented annual growth, reaching double digits in some years. Naturally, this boom has attracted foreign investors, who have provided a substantial share of the monetary fuel that has driven this rapid economic expansion. American corporations were among the first to invest in the region. As early as 1993, companies like Kraft Foods, Philip Morris, and Coca Cola sought the business opportunities offered by these economies as they made the transition from Soviet communism to market economies. The current state of the Baltics is shown in Table 1. (1)

To date, American corporations have invested more than $1 billion in the Baltics. Nevertheless, since 2006, economists and rating agencies alike have increasingly warned that the rapid growth might come to a quick and unpleasant end. In the spring of 2007, Standard & Poor's downgraded the three countries and put them on negative outlook (Anderson, 2007), while Lawrence White (2007) of Euromoney asked if "the Baltics boom [is] set to bust?"

             Area    Population        GDP *            Inflation 
           (sq. ml) 
                                 Nominal  per Capita 
Estonia     45,226   1,342,409   $ 21.3   $ 21,094     6.7 percent 
Latvia      64,589   2,281,305   $27.3    $ 17,416    10.1 percent 
Lithuania   65,200   3,384,879   $ 38.3   $ 17,661     5.8 percent 
* Data from the International Monetary Fund (2007) 

This question can serve as a guideline for the following paper, which examines whether the Baltic countries are still attractive markets for American foreign direct investment and the degree to which caution should be applied by investors in the long run. Before an analysis of the current situation is made and potential future developments are considered, it is necessary to briefly look at the political and economic history of the three nations because history, politics, and economics are inextricably linked in the development and nature of market economies (Reardon, 1996).

1. The Political and Economic Development of the Baltic Nations before 1989

The Baltic countries are by no means a homogeneous region. They have different religions, traditions, cultures, and languages. Despite their differences, however, the three countries are frequently regarded as one region, referred to as the "Baltics" or "Baltic states," because of the many similarities in their histories. In the middle ages, German influence in the region was strong. The social and economic upper class was primarily of German descent and established a profound merchant tradition. By 1795, most of the territory of the modern Baltic states had been incorporated into the Czarist empire, which lost control over them in the course of the First World War. In 1920, the three countries were able to set up independent republics. The two decades that followed brought economic prosperity and showed a pattern that again was observable 50 years later. During this period, free from Russian rule, the Baltic nations turned away from the eastern hegemon and established extensive trade relations with nations in the north and west. However, the Baltic bloom came to a rapid end with the beginning of the Second World War. In 1940, the Soviet Union formally annexed the three states and integrated them into its economic system. (2) This integration had a lasting effect on the Baltic economies.

First, Moscow showed little concern for the traditional industries of the region and shifted the focus away from textiles, food, and small manufacturing towards heavy industry. …

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