According to hints by the new government, the road to Serbia’s economic recovery could follow Baltic models. Painful reforms should be implemented quickly and decisively, as quickly as was done for example in Estonia from 1992 to 1994. Once the reform processes are completed, Serbia too could, with a little luck, become so miraculously successful as the Baltic states are today.
What lessons were learned from the Baltic experience, what are the key elements of success and what ideas form its foundations ?
1. Too much knowledge is harmful. Reforms are most successful if they are implemented by someone who knows nothing about economics.
The best known Baltic reformist and twice prime minister of Estonia, Mart Laar, is a historian. In his own words, it was huge luck for Estonia that he is not an economist. Laar has only read one book on economics and misunderstood the purpose and the message of that book, Friedman’s „Free to choose“. In his mistaken conviction that Friedman’s radical proposals are already being applied in Western economies, Laar pushed through one of the most radical and most consistent neoliberal reforms – privatization of everything, liberalization, proportional flat tax rates etc. .
2. In order to implement painful reforms, it is important to alter the mentality of citizens.
As Mart Laar preaches, problems and resistance to reformist ways are based on retrograde socialist mentality. It is therefore imperative to change this mental legacy. Reforms cannot be implemented without altering the mentality. Luckily there is always a part of the political elite in transitional states who are not infected by the socialist/socio-democratic bug and they are the leaders of change.
3. Reforms must be terribly painful in the beginning – so terrible that all subsequent troubles and pain seem almost pleasurable. The more the GDP sinks today, the more impressive GDP growth will be tomorrow.
In the nineties, during the transitional reforms, Baltic republics experienced something bordering on a humanitarian catastrophe. Real wages had been reduced by about two thirds, and the share of household expenditure on food rose from 34% to 62%. Life expectancy dropped by four years in the early nineties and infant mortality increased by 60% .
At the very end of the 20th century, as the reforms began to deliver results and economies recovered, real wages surged to as much as half of what they were at the start of the transition.
For the purposes of perception and measurement of future success, it is crucial to start from the lowest possible baseline, and there is no better way for that than the shock therapy. The deeper the economic fall during the reforms, the greater the decline in GDP, the more impressive the subsequent growth rates appear to be when compared to that low base.
4. Infatuation with industrialization is just another socialist myth. It is more efficient to sell key industries to foreign investors.
Industry doesn’t matter. Industrial heritage is part of failed, bad investments, which according to Mart Laar, were part of the process of Soviet colonization. In this sense, de-industrialization is at the same time a process of national emancipation. Unlike the Soviet industrialization, Finnish industrial investments are not a form of colonization but something else altogether, and Estonia is proud of the latter.
With regard to industrial sectors, it is crucial to privatize and sell telecommunications and energy to foreign investors, along with all other segments of infrastructure that they are willing to buy. This will help them function more efficiently.
5. Instead of industry, we should rely on finances, real estate and construction.
The modern market concept of growth is only possible if the financial system is in the safe hands of foreign banks. Instead of local savings and local currency, the necessary capital will be provided by foreigners. Therefore the key to success are loans, private consumption and investments, especially in real estate. From 2002 to 2006 real estate prices in the Baltics grew at 24% to 26% p.a.
Anyway, there is no quicker or better way of increasing living standards than by financing it through debt.
6. Pensioners are always a problem but there are solutions.
Pensions are always a huge burden for states in transition and it cannot be sufficiently mitigated by the decreasing life expectancy. When reforming pension systems, pensioners’ existential needs are not the issue, the key consideration is the financial requirements of a sound, balanced budget.
Since the state must cut pensions radically, it also needs a radical justification to do so. One former Minister of Welfare for Latvia has explained it nicely to his pensioners: „you do not need big pensions, because you worked under the Communist regime, and your work accomplished nothing“.
Perhaps the pensions in Serbia could also be cut on the basis of a similar argument: you don’t need big pensions because you worked in the public sector and your work accomplished nothing.
7. When analysing economic results, one must be selective and insist on results which fit well with the neoliberal script.
Baltic republics have produced good results in the battle against inflation and have enjoyed high GDP growth rates in recent years. From 2000 to 2007, these countries had the highest growth in GDP in Europe.
Even more important for the reputation of the Baltic states is the level of public debt and public expenditure. Public debt does not exceed 40% of GDP even today, in this post-crisis period. In fact, in the case of Estonia, it is fantastically low, a mere 11%.
On the other hand, excessive private consumption is never a problem, at least not from a neoliberal point of view. Therefore the huge chronic current account deficits (never before seen at that level in Europe) do not diminish the brilliant reputation of the Baltic states. In order to finance the deficits, the Baltic states accumulated enormous external (foreign) debts. The total external debt of this area, accounting for around just 6.2 million people, is close to $100bn. It’s a spectacular achievement even by high east-European standards, but it does not jeopardize the economic reputation of the Baltics.
8. High unemployment rates are not a problem and emigration is welcome. The more people that leave the Baltic republics, the better the labour statistics will be.
Unemployment in the Baltic states remains quite high, in double digits as a rule. This is somewhat strange for economically successful states, particularly with high emigration.
The demographic statistics of the Baltics are catastrophic and bordering on implosion. In the last 20 years, population dropped by 20%. In the period 2004-2007, Estonian emigration was estimated to be 5.4%, Latvian emigration was 8.7% and Lithuanian emigration was as high as 12.6%. During those years (and only then) their unemployment rates were very low .
9. When a crisis strikes, it is crucial to protect the interests of foreign creditors.
The great recession struck these model Baltic republics the hardest. In 2009 Estonia had a negative growth rate of 14%, Latvia 18% and Lithuania 15%. They hold the world record in that respect.
When troubles come, as they did in 2008 and 2009, and there is financial collapse, the interests of banks must always come first, before the interests of the citizens. It is therefore crucial not to allow currency depreciation, since it could jeopardize the ability to service foreign currency-pegged loans. That could badly impact the balance sheets and profits of banks.
In this context, the Baltic recipe to overcome the crisis did not only involve belt-tightening, but amputations, as London’s Financial Times stated .
It should be noted that not even the Baltic states proposed the idea to subsidize interest rates. This powerful instrument and a brilliant example of state generosity is exclusively Serbian.
10. Finally and most importantly – if you don’t praise yourself who will? A little help from your friends is welcome, of course.
Irrespective of the real results of reforms, a mainstream international media campaign works wonders. As the Estonians crumbled under reformist policy, as the wages melted away and poverty spread, the media campaign that Mart Laar and his government financed, produced fantastic results. A new myth of the „Estonian miracle“ was created and this myth was supported by world media, as well as by powerful neoliberal institutions.
In order to declare the achievements of the transition states a triumph, the processes and the direction of reform were more important than the economic results and performance. The most praised states are not those where people live best, but those that went furthest in reforms and market liberalization. The economic freedoms are much more important than the quality of life of the citizens. Which is also logical, because the reforms in transition countries are most often pushed to please foreign investors. They will give the final and meritorious judgement on a state and its economy.
As for the citizens, they have understood the transition messages well. Withdrawing to their own privacy, they will not try to participate in the political process and only half of the population will continue to vote in elections. There they will meet old faces in new parties, populist programs without ideology and repeated promises of a fierce struggle against corruption and abuse of power. Everything will be different and everything will be the same.
 This text is based on the book „Capitalist Diversity on Europe’s Periphery“, Dorothee Bohle & Byla Greskovits.