The strange reversals of the Baltic nations' economic fortunes

The economic history has a curious way of rewriting itself. Around 150 years ago, Lithuania was the poorest and most underdeveloped of the Baltic nations, while Latvia stood as the region's economic frontrunner. Moving forward to the present, we now see that Lithuania has not only caught up to Estonia but also surpassed it, while Latvia, unexpectedly, is trailing behind its Baltic neighbours in terms of GDP per capita.

Indeed, the economic trajectories of the Baltic states – Lithuania, Latvia, and Estonia – have undergone remarkable and sometimes baffling shifts over the past century and a half.

Let's begin at the turn of the 20th century. By the 1870s or 1880s, Latvia was clearly emerging as the most dynamic of the Baltic economies – outpacing even Estonia. Riga had rapidly transformed into the third-largest industrial hub in the Russian Empire, behind only Saint Petersburg and Moscow. By 1913, its population had tripled that of Vilnius and was eight times greater than that of Tallinn. On the eve of World War I, Latvia boasted a substantial working class, a robust industrial sector, and a vibrant social democratic movement resembling somewhat those in the Scandinavian countries. In stark contrast, Lithuania lagged behind by approximately 20 to 30 years in socio-economic development. Its national awakening didn't take shape until the 1880s or 1890s – decades after its neighbours. Perhaps the clearest metric of this lag was literacy: in 1897, nearly 95% of Latvians and Estonians were literate, compared to less than 50% of Lithuanians.

But Latvia's golden era was short-lived. The devastation of World War I – particularly the German occupation and intense frontline battles – crippled the country, especially its industrial heartlands in the Riga and Kurzeme regions. Estonia seized the momentum, and during the interwar period, the socio-economic gap between the two nations narrowed significantly. Lithuania, however, remained the least developed of the trio. It is interesting to read the memoirs of the German soldiers of the Army Group North who invaded the Soviet Union and the Baltic States in the summer of 1941. Most of them mentioned the noticeable contrast when they passed the Lithuanian–Latvian border – it was like going back to Europe – the villages, towns, roads, and the ways how people dressed looked pretty much as in East Prussia (Germany at that time), while Lithuania was not much different from Eastern Poland and Belarus.

Paradoxically, the Soviet era proved something of a mixed blessing for Lithuania. While industrialization under Soviet rule was often brutal and inefficient, it nonetheless succeeded in dragging the country out of its agrarian past. Significant investments in various industries elevated Lithuania's GDP and enabled it to transform into a modern industrial society. By the time the Baltic states regained independence in 1991, Lithuania had largely closed the developmental gap with its northern neighbours.

In the early 1990s, many analysts believed Latvia was best positioned to become the region's economic powerhouse. With Riga as the largest city, with good ports, a well-developed industrial base, and solid infrastructure, the potential was undeniable. Yet that potential was never fully realized. Instead, Estonia surged ahead, thanks to swift and sweeping market reforms, a transparent privatization process, and the successful attraction of Nordic investment. Meanwhile, both Latvia and Lithuania stumbled – plagued by hesitant reforms, entrenched corruption (especially in Latvia), and prolonged dependence on Russian transit trade throughout the 1990s.

For a time, Estonia's lead appeared secure, and its economic success unmatched. But by the late 2010s, the tide began to turn. Lithuania's economy started to grow at a markedly faster pace, ultimately surpassing Estonia's by 2024. While a full analysis of the reasons behind this shift is beyond the scope of this article, the keyword seems to be the "activist state". Where Estonia adopted a more hands-off, neoliberal approach – trusting in market forces – Lithuania pursued a more interventionist path. The Lithuanian government has invested heavily in infrastructure, education, and energy and has taken strategic steps to diversify its ICT sector.

Today, we find ourselves witnessing a dramatic reversal of fortunes. A century and a half ago, Latvia was the clear leader and Lithuania the regional underdog. Now, the roles have reversed. Given the unpredictability of these economic developments, it would be premature to speculate about what the rankings might look like in 2075, for example. What is clear, however, is that in the Baltic region, economic luck is anything but static.