Political reforms lead to stronger economies, OECD says

TALLINN – Despite rapid economic reform that has liberalized the Baltic economies and put them on a path to European integration, Estonia, Latvia and Lithuania still lack certain political and economic structures that may inhibit further stabilized development, a new study finds.

The Organization for Economic Cooperation and Development released on Feb. 9 a regional economic assessment of the Baltic states that pointed out the three countries' weak political institutions which may become "bottlenecks" in the transition process.

"Markets are not spontaneous creations of nature," Joaquim Oliveira Martins, principal economist at the OECD and one of the study's authors, said. "They need a strong institutional base in order to develop and bring the benefits of a better allocation of resources."

The failure of the Baltics to link economic reforms with improving administrative capacity via political restructuring may disrupt further economic development, the report says. The OECD finds that without policy links between the financial community and the political one fiscal discipline cannot be observed.

"Both domestic and foreign enterprises active in the Baltic states confront administrative obstacles. Such barriers can discourage foreign investment, curtail job growth, lead to corruption and hinder the further development of market-based economies," said Bart Edes, principal administrator at SIGMA, a joint initiative of the OECD and EU, principally financed by the EU's Phare Program.

A more transparent judicial system, better trained civil servants, more effective tax collection and a clearer working relationship between central and local governments is key to maintaining the rigorous reform policies the Baltics have imposed during the past decade.

"Estonia, Latvia and Lithuania have made notable strides in public administration reform, yet they all have to enhance financial control and external audit of public monies," Edes said.

He added: "Public administration reform is not easy and cannot be addressed with quick-fixes or piece-meal solutions. It requires a long-term view, a comprehensive approach and sustained political commitment."

The transition from communism, the authors say, must be realized as "a package of interdependent reforms" rather than individual changes that will eventually create a stable economic and political environment.

"This is a lesson for all countries," Oliveira Martins said during a telephone interview from OECD headquarters in Paris. "Managing transition is difficult and all reforms must be done in parallel with others, otherwise it can be counterproductive."

Oliveira Martins commended the Baltic countries for weathering the 1998 Russian crisis that halted much of the fast growth here. Estonia, he said, has managed to recover a bit more quickly than her Baltic neighbors, probably because of this country's comprehensive and full implementation of reforms in the early 1990s.

Lithuania, on the other hand, was much more affected by the collapse of the Russian economy as the southern-most Baltic country was more dependent on Russia as a trading partner.

"When there is a crisis, you do see the benefits of certain policies," Oliveira Martins said of Estonia's close ties to Finland, rather than Russia. "When you need to quickly reorient yourself to another market, it is much more difficult to do without the political structures in place."

Despite Oliveira Martins' comparisons of the three Baltics during the interview, the OECD report minimized talking about specifics from each countries' transition period and pitting them against each other. Rather the authors say it is important to evaluate transformation in the region as a whole.

"It is important that the OECD send a strong signal to [the Baltics] to recognize what they have done in the transition years, which is great. They are in a much better state than other regions of the former Soviet Union," he said.

He added that although the OECD recognizes the individuality of each country, Estonia, Latvia and Lithuania must cooperate for further success of the region. "They need to learn from each other and emulate each other. Cooperation makes a lot of sense. They are all at the starting line of the European Union. Cross fertilization and coordination of certain policies would be beneficial to all the states."