Irish charm - would it work in the Baltics?

  • 2004-04-29
  • By Aaron Eglitis
RIGA - Now that EU membership has become a reality, the Baltic states, like all acceding countries, are eager to reap the fruits of belonging to an elite club and transform their economies - at the bottom of the EU25 scale in terms of GDP per capita - so that living standards here converge with those of wealthier Western members.

Estimates of real convergence for the Baltics vary from 25 to 40 years. Fortunately, all three currently have some of the fastest growing economies on the continent, with Lithuania having posted the largest GDP growth in 2003 among all member and acceding states.
Policy makers in all accession countries are actively questioning how to sustain and increase robust economic growth. What's more, to curtail the time until convergence, many have been looking toward Ireland as the ideal model of development.
Ireland, a country whose size and population corresponds to Lithuania's, underwent dramatic growth in the last 10 years to become one of the most dynamic economies in Europe. The effects of reform were nothing less than astounding. Gross domestic product per capita rose from less than 65 percent of the EU average in the end of the '80s to achieve parity by the end of the '90s. Unemployment sank from 17 percent to 4 percent.
It is namely this Celtic growth formula that many poorer, East European accession countries would like to copy.
"We certainly look to Ireland as an inspiring example, but of course we have to realize that the world is changing constantly, and it took Ireland 10 years to finally get off the ground," Latvian President Vaira Vike-Freiberga said in an interview with The Baltic Times.
Many analysts agreed with her viewpoint.
Ireland, according to Dublin based economist Frank Berry, benefited from a number of comparative advantages, such and language and sound macroeconomic policy, which eventually sparked growth rates of 9 percent per year.
"Both Ireland and the U.K. have higher levels of foreign direct investment from the U.S. than the rest of Western Europe, so that's an indication that language is a factor," Berry said.
But no less important, he said, were macroeconomic factors. "A flexible labor market so you keep unemployment low, and also keeping government deficits low," Berry explained.
Ireland also developed a coherent strategy to attract foreign investment, established a sound education policy and cut corporate tax rates.
All three Baltic states have cut corporate tax rates, and Estonia has openly courted companies based in Finland in the hope of luring them across the gulf with zero corporate gains taxes.
Curiously, structural funds in many acceding countries have been mythologized as the elixir to cure backwardness and jumpstart economies. According to Berry, these funds were only part of Ireland's success.
"You can't just ascribe the economic miracle to structural funds. They were important, but they definitely are not the whole story," he said.
No doubt that two comparative advantages which Ireland benefited from were geography and language - the same ones the Baltic states will enjoy in relation to their eastern neighbor Russia.
Indeed, no other member states within the European Union will have the advantages vis-à-vis Russia that the Baltics currently have.
"When the Russian economy does well the Latvian economy does also," Alf Vanags, head of the BICEPS think-tank, said. "What happens in the East is very important. We have a big advantage, and we would be foolish to ignore it."
Conversely, many see a flood of investment from the East as a two-edge sword, since more Russian money equates to more Russian influence.
"Russia has had a very clear strategy to influence these states starting in 1992 through the military, minorities and investment," said Atis Lejins, head of the Latvian Institute of International Affairs.
What's worse, relations between the Baltic states and Russia have exacerbated recently, though the latter finally caved in to European pressure and extended the existing Partnership and Cooperation Agreement to the 10 new acceding members, something the Kremlin did not want to do.
In the future, mediation between Russia and Latvia, Lithuania, and Estonia will take place in Brussels.
This "will make a difference in the way commercial relations develop," Vanags said.