1 - INTRODUCTION
2 - THE BEGINNING OF THE TRANSFORMATION
3 - MEASURES TAKEN BY THE BALTIC COUNTRIES
3.1 TACKLING INFLATION
3.3 FOREIGN DIRECT INVESTMENT AND TRADE LIBERALIZATION
3.4 OWN CURRENCY AND CURRENCY BOARDS
4 - CONCLUSIONS
5 - BIBLIOGRAPHY
1 - I NTRODUCTION
The Baltic countries (Estonia, Latvia and Lithuania) are about to become member states of the European Union in May 2004, a development that could not be foreseen at the beginning of the economic transformation in Russia, the Commonwealth of Independent States (CIS) and the Baltic countries. The emergence in late 1991 of 15 independent states from the territory of the former U.S.S.R presented policymakers in these countries, as well as the international financial community, with unprecedented economic challenges. My goal is to point out which factors were responsible for the relative success of the post-communist transformation in the Baltic countries, taking into account the problems and challenges that those countries faced at the beginning of their transformation to market economies.
2 - T HE BEGINNING OF THE TRANSFORMATION
The past decade has witnessed striking changes in the economies of the Baltic states, Russia, and the other countries of the former Soviet Union. Since the formal dissolution of the Soviet Union in late 1991, virtually all of these countries have abandoned most elements of the old command economy. Yet the pace and extent of their transition to a market economy and to sustained growth have differed greatly. During the initial years of transformation, a number of common developments and issues of concern have emerged across a wide range of the countries in the region. Among the problems that all countries faced were the extensive decline in output, high rates of inflation and inter-enterprise arrears as well the sharp decline in fiscal revenues and the question concerning exchange rate strategy. All countries faced the immediate need for macroeconomic stabilization measures, with some countries finding it more difficult than others to implement the measures necessary to ensure stability and growth in the long term.
The primary focus of this essay will be on four different facets of transformation: tackling inflation, privatisation, foreign direct investment and trade liberalization and finally the introduction of own currencies and the adoption of currency boards. Although one might argue that other elements should be taken into account, the author feels that these four elements sufficiently demonstrate the difficulties in economic transformation.
3 - M EASURES TAKEN BY THE B ALTIC COUNTRIES
The first decade of post-communism was an extremely important socio-economic experiment, during which central planning was replaced by decentralized market. While some might argue that it was the location on the Baltic sea and the fact that the countries had been independent between 1918 and 1939/40 that almost automatically lead to a favourable environment for success, one should not forget that sometimes unpopular measures were responsible for what Estonia, Latvia and Lithuania stand for nowadays.
3.1 TACKLING INFLATION
The Baltic countries followed Soviet pricing policies until December 1989, when a new law on prices was introduced in Estonia (Latvia and Lithuania followed in 1991). The new laws initiated price reforms by reducing the share of goods with fixed prices from 90 to 60 per cent, the proportion of goods with regulated or controlled prices was reduced steadily and reached just under ten per cent by January 1992. Consumer price inflation skyrocketed to more than 300 per cent between December 1990 and 1991 and to more than 950 per cent in 1992. The reasons behind the inflation were the price liberalization, rapid monetary expansion, increases in prices due to decisions by the authorities, the reduction in subsidies, which forced producers to raise prices as well as excess demand for goods (both domestically and internationally).
One might wonder why price liberalization was necessary, considered that it meant high rates of inflation. The answer is that liberalization of the economy is a prerequisite for a functioning market economy, because prices regain their role as an allocative instrument when administrative pricing mechanism is abolished. The fact that the liberalization of prices was embedded in a reasonable economic policy (own currency, privatisation, structural changes, foreign trade liberalization) has helped the Baltic countries to overcome the serious economic woes of the early 1990s. For example, the fast price reform improved Estonia’s terms of trade dramatically (because the ruble prices for Estonia’s exports to Russia rose faster than the prices Estonia had to pay for its imports), also the enterprises benefited from cheap imports. Overall, stabilization has lead to inflation rates of 1.7 per cent in Lithuania and 4.5 per cent in Estonia in 2000.
 Curzon Price, V./Landau, A. (1999) The enlargement of the European Union: dealing with complexity in Curzon Price, V. (et al.) The Enlargement of the European Union, London: Routledge, p. 10
 Citrin, D.A./Lahiri, A.K. (1995) Policy experiences and issues in the Baltics, Russia, and other countries of the former Soviet Union, Washington D.C.: International Monetary Fund (Occasional Paper No. 133), p. 1
 Odling-Smee, J. (1999) The world economy: Baltics, Russia, and other countries of the former Soviet Union in Finance & Development, Vol. 36, Iss. 4: Washington, p. 8
 Citrin/Lahiri (1995), p. 1
 Tiusanen, T./Jumpponen, J. (2000) The Baltic states in the 21 st century, 2nd ed., Lapeenranta: Lapeenranta University of Technology, p. 7
 The World Bank (1993) Estonia: the transition to a market economy, Washington, D.C.: The World Bank, p. 4
 Berengaut (1998), p. 11
 The World Bank (1993), p. 5
 Lainela, S./Sutela, P. (1994) The Baltic economies in transition, Helsinki: Bank of Finland, p. 115
 Tiusanen/Jumpponon (2000), pp. 32-33