An inconsistent Baltic crisis.

For a year now no one uses the 'Baltic Tigers' euphemism anymore, when describing the three Baltic economies. The Baltic States' governments implemented the basic principles of economic neo-liberalism during their early post-independence years, and with the existence of cheap international credit their economies were sustainable.

The basic tenets of the Washington consensus were easy to implement then because of support among broad swathes of society. Ever since the start of the global economic downturn, representatives of all three governments have tried to stop the decline, and some circles have blamed the openness of the economy and the blind following of the Western partners as major culprits of the crisis. I believe that blind following of any advice given, without proper discussion, is detrimental to stability in any democracy. However, it would be too shortsighted to blame the Washington consensus principles as the major cause of the problem, because, ceteris paribus, why does this economic crisis have so different outcomes in the three Baltic States?

The Estonian and Lithuanian leadership announcements have passed almost unnoticed, but Latvia's former governors gained attention whilst putting the blame squarely on the Western financial institutions. Complacent former Prime Minister Aigars Kalvitis, being an economist, trusted the advice of the vocational school-trained minister of transport, and continued to heat up the galloping Latvian economy. The PM's party mate and former minister of finance was of no help, and considered an ever-widening current account deficit and the warnings of influential Western experts as 'nothing special.'

During the last week of July we learned that Lithuanian second quarter GDP slumped a staggering 22 percent. Latvia's second quarter results show a drop of 19.6 percent, and results for the Estonian economy are far from rosy. The decline of GDP, the rate of unemployment and credit ratings are appropriate for short term evaluation only. Therefore, if someone wants to understand the long term perspective for Estonia, Latvia and Lithuania, in coming out of the crisis, then quality of the rule of law, vigilance of civil society, and quality of civil service are important.

World Bank reports, acquis communautaire progress evaluations and academic inquiries continuously remind us that an unreformed state sector is an impediment to sustainable growth in the Baltic States. Estonian and Lithuanian elites reached reform consensus in the early 1990s, passing new constitutions. It allowed them to transform gradually, and also Europeanize their countries' political culture. Latvian MP's lacked similar farsightedness and, with some amendments, simply rolled over the constitution of 1922. Thus the Latvian political establishment avoided much needed fundamental constitutional debate, failed to spearhead much needed reforms, and allowed the ill tenets of post-Soviet political culture to ossify. Someone would probably accuse me of being too harsh on 'the sick man of the Baltics.' Alas, Latvia is the only Baltic country with a 7.5 billion euro mega loan, and where taxpayers' monies are used to resuscitate the country's failed second biggest bank.

Estonian and Lithuanian governments experience a predictable fall in popularity ratings, but it is the patchy Latvian coalition government that worries me. Estonian and Lithuanian political elites have an asset that Latvian colleague's lack ... legitimacy in the eyes of the populace. The 1922 Satversme (Constitution) serves not only as the symbol for sovereign statehood, but also as a democratic facade for the immutable Latvian nomenclature. State capture is embedded in Latvia, and my last hopes for prudent change withered away after the last parliamentary elections. The Latvian Supreme Court ruling on November 3, 2006, stated that People's Party and Latvian First /Latvian Way Party Union election campaign financing breached the law, but tangible repercussions ceased to follow. The possible fall of the Dombrovskis government is thus already engineered into the Latvian body politics.

The important question now is, whether EU cousins could convince the Latvian patchy coalition to change existing rules of the game? Formative change would benefit the fastest reformers, because Latvia's budding civil society is tired of its powerlessness, and the rest of the rather naive population looks for a shepherd. Without an overhaul of the rules that cater to short term solutions, stability in Latvia is unachievable. After all, the principles of open capital accounts and market liberalization also explain that instability in a member of the common market endangers the reputation and stability of its major trading partners and investors.

Veiko Spolitis--lecturer at the Riga Stradins University (spolitis.blogspot.com)