Economic and political institutions continue to evolve in the Baltic countries. After a temporary period of high inflation and declining real income, inflation rates have diminished and real economic growth has returned. Recent economic performance in the Baltics has been among the best in Central and Eastern Europe. In 1997, inflation rates in all three Baltic countries were below those of Poland and Hungary and very close to the Czech Republic.
Inflation rates are primarily determined by monetary policy, and a new evaluation of Baltic monetary policy has just been published in the Bank of Finland's Review of Economies in Transition. The study by Kuusta Aima can be interpreted as an objective outsider's view of Baltic monetary policy. The topic of the study is the relative independence of central banks in the Baltics. A large amount of literature on central banks around the world has concluded that central banks with greater independence from their governments have produced lower inflation rates than central banks whose daily operations have been heavily influenced by their governments.
For example, finance ministries are prone to ask central banks to finance their budget deficits by printing more money. In low inflation countries, governments tend to assign a clear goal, such as low inflation, to the bank, and then give the bank the authority to pursue the goal without interference.
In assessing the degree of independence, it is common to consider the legal relationship between the bank, the president, the bureaucracy, and the parliament. It is also common to take into account the way these relationships actually work out by, for example, the number of times the head of the central bank is forced out of office.
The conclusion of the study is that the Banks of Latvia and Estonia have had significantly greater independence from their governments in carrying out monetary policy than has the Bank of Lithuania. The Bank of Lithuania was judged to have less legal independence and less de facto political independence than its neighbors. The differences were attributable partly, but not entirely, to higher frequency of turnover of the head of the Bank of Lithuania.
During the short period since regaining independence, Lithuania has had six heads of its central bank, while Estonia has had two and Latvia has had but one.
This conclusion is not necessarily a criticism of Lithuanian central bankers. In spite of frequent meddling by politicians, the Bank has produced an inflation rate that continues to decline and is now very close to the rates in its Baltic neighbors. In 1997, the Lithuanian inflation rate (8.9 percent) was below the Estonian rate and just above the Latvian rate. The presence of a currency board in Lithuania during part of this period may have influenced the outcome. Instead, the conclusion about lack of independence is a criticism of Lithuanian politicians relative to their neighbors.
One can cite two other pieces of information about the relative intrusiveness of Lithuanian politicians in the economy. One is that foreign direct investment per capita has been consistently lower in Lithuania than in Estonia and Latvia. Lithuania has ranked third in investment throughout the recent independence period. Government meddling in business has been a frequently given barrier to foreign investment.
Another supporting piece of evidence comes from the World Index of Economic Freedom compiled for the Wall Street Journal and the Heritage Foundation. In the 1997, rankings of 150 countries, Lithuania was 78th, Latvia was 67th, and Estonia was 25th. The countries with the greatest economic freedom were Hong Kong and Singapore. The United States ranked 5th. Russia and all the non-Baltic former Soviet republics ranked below Lithuania.
However, institutions continue to evolve in Lithuania and elsewhere. All the data cited above occurred before the election of President Valdas Adamkus. Old political parties are changing, new ones are emerging, and new coalitions are being formed. Furthermore, if the Baltic countries ever become members of the European Monetary Union, litas, lats, and kroons will be replaced by euros. Baltic politicians seeking to influence monetary policy will have to target the European Central Bank in Frankfurt.
Mr. Grennes, an occasional contributor to The Baltic Times, is an economist who recently returned to the United States after a stint at the Stockholm School of Economics in Riga. He teaches Russian and Baltic economy at North Carolina State University.
