The Fall and Rise and Fall Again of the Baltic States

But the biggest reason for the success of the Baltic states was good policymaking, usually introduced first in Estonia and then copied by the other two. In barely two years, from 1992 to 1994, the radical reforming Estonian government of Mart Laar introduced a flat tax, privatized most national industry in transparent public tenders, abolished tariffs and subsidies, stabilized the economy, balanced the budget, and perhaps most crucially, restored the prewar kroon and pegged it to the rock-solid deutsche mark. As a result, Estonia became one of the most open and transparent economies in Europe, and with growth came political stability: Russian troops left the Baltic region by 1994, fears of Balkan-style ethnic conflicts receded, and Soviet noncitizens in Estonia and Latvia began to assimilate.

Competitive advantage began to emerge. The first business to boom was transit. Then, though the Baltic states had practically no indigenous metallurgical industry, they became major players in the metals trade. Next came manufacturing, thanks to outsourcing from old Europe. Foreign investment poured in, and with it technology and know-how. Productivity soared, and tourism took off, as foreigners discovered the chocolate-box charms of Tallinn, the vistas of Jugendstil buildings in Riga, and the baroque splendors of Vilnius.

Estonia did particularly well. High-tech companies set up there and became some of the country’s largest employers. Estonian geeks in 2002 invented Skype, a peer-to-peer Internet telephony software that now has more than 400 million users worldwide. The state also pioneered "e-government," the idea of putting public administration online. At a time when these innovations were unheard of elsewhere in Europe, Estonians could file their taxes on the Internet, vote electronically, and even watch a live Webcast of their prime minister’s official waiting room. Visitors the world over came to study the Estonian model of flat taxes, lean government, and rapid innovation, which inspired no little envy among Lithuanians and Latvians, not to mention resentment from the Russians next door.

As the new millennium dawned, Atlantis was back in business, free and democratic. But it was not secure. That seemed to change in 2004, when after frustrating false starts and Western foot-dragging the Baltic states gained membership in the European Union and nato. The change was partly nominal. The states passed huge lumps of eu regulation into law, often with only cursory scrutiny of their implementation. nato, for its part, fudged the question of whether it would really be willing to defend its new Baltic frontiers against Russia. The alliance’s presence to this day in the Baltic states consists of a small squadron of fighter planes, provided by other countries on a rotating basis.

Still, the Baltic states seemed set for their happiest period ever. They were useful allies, the epitome of post-communist success, and an integral part of the Euro-atlantic world. They were secure and prosperous as never before. And they had begun to lose the "ex-Soviet" label; that was for basket cases like Georgia and Ukraine.

PREVIOUS 123456789NEXT