Baltic Economic Growth Under Foreign Occupations and Restored Independence

Abstract

In this chapter I argue that those looking for the times of an “economic miracle” on the eastern shores of the Baltic Sea are better advised to direct their sights upon the period of restored independence of the Baltic countries instead of the interwar years. Growth rates of the restored Baltic countries in 1989–2018 were much higher than in 1913–1938. In 1913–1938, Estonia’s economy grew at a rate of 0.79%, and under restoration at 1.99%. For Latvia, growth rates were 0.67% and 1.53%, for Lithuania—1.25% and 2.17% accordingly.

In this chapter I argue that those looking for the times of an “economic miracle” on the eastern shores of the Baltic Sea are better advised to direct their sights upon the period of restored independence of the Baltic countries instead of the interwar years. Growth rates of the restored Baltic countries in 1989–2018 were much higher than in 1913–1938. In 1913–1938, Estonia’s economy grew at a rate of 0.79%,¹ and under restoration at 1.99%. For Latvia, growth rates were 0.67% and 1.53%, for Lithuania—1.25% and 2.17% accordingly.

A longer retrospective allows comparing not only the challenges, but also the performance in meeting these challenges, as well as the outcomes of development during periods of similar duration. It also allows for a comparison of the performance of the restored Baltic States with that of the Soviet occupation regime. As time passes by, the periods being compared become increasingly longer. However, the MPD data currently available only allows making a comparison of the economic performance of the late (stagnation) period of the Soviet system (1973–1989) and the early restored independence period until the Great Recession, which engulfed Estonia and Latvia in 2008, and Lithuania a year later. The exception is Estonia, where Klesment et al. (2010) estimated Estonia’s GDP in 1950–1989 in 1990 US$ at PPP. Based on their research, for Estonia in 1950–1998, I am not using the ready-made MPD (2020) data, but my own estimates, as Klesment et al. (2010) estimates are not directly comparable with those in the actual MPD (2020) release.

Besides the three Baltic countries, Table 9.1 provides output per capita and annual growth rates of the Finland and the USA. The US data are provided because of the benchmark role of this country in the alternative version of the restoration economic success test (the American standard test; AST). Finland is included because of its role as a benchmark in the social imaginary of the indigenous Baltic populations. This role is especially strong in Estonia, as Finns and Estonians understand each other’s Finno-Ugric languages (with the scale of differences comparable to that between Russian and Ukrainian), and because the economies of both countries have been closely integrating during the post-Soviet period.

Table 9.1 GDPpc (in int$ 2011) and its annual growth rates in the Baltic countries, Finland and the USA in 1950–1990

Actually, during the interwar years, Western observers and travellers perceived and described Finland as the fourth Baltic State, since it too had emerged from Russian domination along with the other three countries under similar circumstances (e.g. Gibbons 1939; Graham 1927; Polson Newman 1930). The populations of the post-Soviet Baltic countries perceive Finland as a kind of “real utopia” or picture of the “lost future” because of their Soviet occupation, which Finland was able to avoid fighting in the Winter War of 1939–1940 and the Continuation War in 1941–1944. ‘One of the beliefs that helped sustain the peoples of the three Baltic states reincorporated into the Soviet Union at the end of the Second World War was that they had enjoyed a prewar living standard comparable to that of the Finns’ (Kirby 1995: 379). According to our (see Table 8.4) and Valge’s (see Table 8.3) results presented in the former chapter, this was not the case by 1938. In this year, Lithuania’s GDPpc made up 63.3%, Estonia’s 71.1% and Latvia’s 79.1% of the Finnish figure. Finnish historian Timo Myllyntaus (1992) came to a similar conclusion in his study of the standard of living in Estonia and Finland in the 1930s.

However, in 1913, Latvian output per capita still was above the Finnish value, and Estonia was very close to parity with Finland. After 50 years under the state socialist system, the lag behind Finland became much larger for all three Baltic countries. Namely, in 1989, the Lithuanian GDPpc only reached 54.4%, the Estonian 57.3%, and the Latvian 58.0% of the Finnish level (see Table 8.4). Importantly, the economic history of Finland is well researched. Therefore, findings gained from the macroeconomic measurement of Finland’s growth provide useful benchmarks (Hjerppe 1989) for estimating the output of other Baltic countries in cross-time and cross-country comparable measurement units.

In addition, there are important comparative studies of the development of the Estonian and Finnish economies from the interwar years up to the restoration of Estonia’s independence, which provide additional illumination on the impact of the loss of independence on the economic growth of the Baltic States (Ahde and Rajasalu 1992; Lugus and Vartia 1993). An important circumstance is that among all advanced capitalist countries, Finland was the most deeply involved in trade with the USSR during the Cold War due to its special relations with the Soviet empire, imposed on Finland by the Finno-Soviet Treaty of 1948. This did amount to partial restoration of integration of Finnish and Russian economies before 1918, interrupted in 1918–1948. Fairly advanced integration of Finnish and Soviet economies makes Finland in 1948–1990 a bit like (only in economic terms) another “Soviet republic with a capitalist economic system”. Therefore, a comparison of Baltic countries with Finland helps to estimate the net (depressing) effect of the establishment of the state socialist economic system on the economic progress of the Baltic countries.

Therefore, in this chapter discussing the prospects of the Baltic countries to ultimately demonstrate (by 2040) the economic performance success of restoration, I will supplement the application of the OIST in the CREPS and the AST with the “Finnish standard” test, which is tailored to the Baltic countries. Under the strict version of this test, the economic success of restoration is indicated by complete convergence with (or catching up to) Finland by 2040. Under a more permissive version, complete success would mean the reduction of the GDPpc lag behind Finland to its extent in 1938.

Among all three tests of economic performance success (the OIST according to the CREPS, the American and the Finnish standard), the OIST may appear as being the easiest one to pass. However, although economic growth of the Soviet Baltic republics was no match to capitalist Finland, it was nevertheless quite formidable in comparison with other socialist countries. Taking MPD 2020 data at face value, in 1989, Estonia with its 18,779 int$ 2011 GDPpc was the second or third richest socialist country (MPD provides no data on East Germany), surpassed only by Slovenia (19,837). Its position in the ranking order in 1973 is the same (Estonia 13,799, Slovenia 15,079 int$ 2011). So, according to MPD 2020 (as well as all earlier versions), in 1973–1989, Soviet Estonia was richer than Hungary and Czechoslovakia. Perceiving this as an overestimation (Klesment et al. 2010: 34–35), Estonian researchers provide an alternative estimate.

It is based on the composite physical output index of Estonia in 1950–2000. The index includes four subindexes for industry, agriculture, transport and construction. Soviet-era statistical data on the output in kind of key products (collected and published in Klesment and Valge 2007) are used as primary information. Estonian researchers constructed separate indexes for each key product. For example, key products in industry are oil shale, shale oil, peat, peat briquette (energy), pig iron, steel, electric motors, power transformers (heavy industry), cotton fabric, linen fabric, wool fabric, cotton yarn (light industry), lumber, veneer, paper, cardboard, cellulose (timber industry), bricks, cement, lime, window glass and roof tiles (construction materials). A sectoral index was then computed as a geometric average of the individual key product indices. However, key agricultural products are aggregated by calculating the energy content of different products.

Aggregating sectoral indices into a composite index, they are weighted according to shares of sectors in the national income, calculated by the Soviet Estonian statistical office according to Soviet material product system (MPS) methodology (47–53% for industry, 17–27% for agriculture, 7–9% for construction and 4–5% for transport). For the 1980–1990 period, Estonian researchers could validate their index comparing its values with that of the monetary index (in roubles), based on the independent Estonia’s statistical office recalculation of national income in the SNA framework (Eesti Statistika 1992). The researchers admit that their index can underestimate the output during the last socialist decades, when the service sector share did increase, which is not reflected in the physical output index.

The final values from the composite physical output index are calculated by taking the physical output in the selected base year (1980) as a unit (1 or 100%) and expressing the output in other years as its fractions or multiples. Suspecting the MPD of an overestimation bias, the Estonian researchers used GDPpc data published in the United Nations Economic Commission for Europe (UNECE), taking the GDPpc value for Estonia in 1990 (6444 US$ 1990) as a benchmark from which GDPpc values (for 1950–1989) could be derived.

Thus, GDPpc values for the 1950–1989 period are derived by multiplying the 1990 GDPpc monetary value by the physical output value in the respective year (1990 = 0.92 or 92%). They also provide annual growth rates. The Estonian researchers calculated physical output index values up to the year 2000. However, they have not been used to estimate GDP for the 1990–2000 period; given the structural change of the economy (increase of the service sector share), physical output-based estimates very heavily underestimate real output. For this period, Estonian researchers used ready-made UNECE estimates (in 2005 US$) from 2010 release, but converted them to 1990 US$ according to the consumer price index.²

In my own calculations, I accept at face value the physical output index values provided by the Estonian researchers. However, their other steps cannot be replicated because the current release of the UNECE database (UNECE 2021) provides GDPpc values for Estonia and the other Baltic States only from 1995 (in US$ 2010 at PPP). The 1990 value has gone, and the same happened with GDPpc values for the early 1990s in the World Bank World Development Index (WDI) database. According to my searches in the WDI online archive, the WDI 2012 May release is the last one to provide total output data for all three Baltic States in the early 1990s (World Bank 2012). In later releases, GDP data for Estonia are provided from 1994, and for the other two Baltic countries—from 1995. Currently, the MPD (2020) is just the sole internationally authoritative source providing output data on the Baltic countries for 1973–1994.

The disappearance of output data for 1990–1993 from the UNECE and World Bank databases can only be explained by the doubts of the publishers of this data regarding its reliability. That said, the UNECE (2010) GDP data may not be the best benchmark choice for the retrospective derivation of output in 1950–1989. However, there is nothing sacrosanct about the MPD figures either. I share the suspicions of Klesment et al. (2010) that the MPD overestimated Estonia’s growth performance. However, my scepticism is limited to the MPD (2020) data on the 1980–1990 period. The reason for this scepticism is the large disparity which MPD (2020) (as well as its earlier versions) claims about the relative output levels of particular Baltic countries in 1989–1990. According to MPD (2020), in 1989, Lithuanian GDPpc (14,693 int$ 2011) made up 78.2% of Estonia’s GDPpc fig. (18,779), and Latvian GDPpc (15,661) was 83.4% of Estonia’s value.

These claims are not supported by other sources. According to estimates made by the Estonian Institute for Market Research, published already after the restoration of independence (Eesti konjunktuuriinstituut 1991: 20), in 1989, Latvia was the richest Baltic republic with 2844 roubles (at current prices) per capita of national income. Estonia (2780) was at near parity, and only Lithuania’s national income (2584) was noticeably smaller, reaching 93.0% of the Estonian figure. All three republics had a national income well above the USSR mean (2342). Table 9.2 provides data about the size of national income per capita of the Soviet republics in 1965 (the USSR mean = 100%).

Table 9.2 National income per capita of the Soviet Union republics (1965) as a percentage of the USSR mean level according to Soviet statistics

This ranking broadly corresponds to that of MPD (2020) for 1973, except that Lithuania lags much further behind the other Baltic countries. There is no contextual information suggesting that the level of prices in Estonia was lower than in the other Baltic republics in the 1980s (this would validate the claim that national income at PPP was larger), or about the structural differences between their economies. Quite the opposite, the last Soviet decade was a period of economic convergence of all three Baltic countries, due to Lithuania’s catching up on growth (Meškauskas 1992).

However, I do not consider the MPD estimates for 1973 incredible just because they make Estonia appear wealthier than Czechoslovakia and Hungary. If this were the main concern with MPD estimates, then it is common to all three Baltic republics, which are presented in all MPD releases as being wealthier than these Central European countries (see Table 8.4 above). In 1973, Estonia with its 13,799 int$ 2011 is presented as the wealthiest, followed by Latvia (12,506 or 91% of Estonia’s size) and Lithuania (12,103, 87%), while Czechoslovakia’s GDPpc (11,223) made up 81.3% of Estonia’s figure. Pondering on the credibility of these figures, it may be useful to take a long-term perspective (see Table 8.4) and notice that in 1913, there was exact parity between Hungary and Estonia, while Latvian output was still larger than that in Czechoslovakia. In 1938, there was still near parity between Latvia and Czechoslovakia (in 1937), as well as between Hungary and Estonia.

While the economic growth of all state socialist economies did slow down from the late 1960s, in 1945–1965, it might still have been economically more advantageous to be part of the formal Soviet empire (enclosed within the borders of the USSR) rather than a satellite state. From the 1970s, the USSR did subsidise (by delivering energy and other resources below world market prices) rather than exploit its satellites (Steiner 2017: 210). However, back in the late 1940s and the 1950s, a more classical relationship of exploitation of colonial peripheries by the metropolis did exist (Janos 2000: 265–268). Certainly, the Baltic countries were exploited too (Kukk 2019: 77–79). However, due to the advantages of their geographical location, educated work force and developed infrastructure, the re-annexed Baltic States (first of all, Estonia and Latvia) simply took up their positions as more developed “entrepôt industry” regions, the same ones they had as parts of the Russian Empire in 1914.

This time this position was not related to their appeal to foreign investors interested in the Russian market as locations to place their subsidiary companies inside Russian borders. The Potsdam agreements entitled the victorious Allied powers to make parts of Germany under their occupation pay war reparations. Along with industrial products, the Soviet occupational authorities shipped entire dismantled factories from East Germany (Nettl 1951). A large part of this machinery landed in Estonia and Latvia, so the industrial equipment that had been dismantled, evacuated to inland Russia in 1914–1915 and was not returned in the early 1920s was substituted by machinery seized in Germany in 1946–1950.

There were many reasons for the selection of these particular places (Vaskela 2013). Firstly, part of this machinery could only be transported by sea, and the ports of the Baltic countries were the closest destination. Secondly, many Baltic cities had developed infrastructure (an electricity grid, railway junctions) to locate this equipment. Thirdly (and most importantly), despite the wartime population losses, an educated workforce was still available that possessed the linguistic and other skills necessary to efficiently operate this transferred German industrial equipment. Local labour was still insufficient because of war-related population losses, but the demand could be satisfied by employing demobilised Soviet soldiers. In this way, the Soviet reindustrialisation of the Baltic countries served the secondary purpose of planting “civil garrisons” of Soviet occupants, inaugurating the Russian colonisation of the Baltic countries, which continued until the restoration of their independence.

However, from a purely economic point of view, the huge influx of immigrants (mainly of a younger age) could only accelerate the economic recovery of the territories devastated by war. In Estonia, the north-eastern part of the country (today’s Ida-Viru County) became the area of the most intense immigrant settlement. The reason for this was Moscow’s decision to invest (from 1946) into the development of the oil shale industry to supply Leningrad with gas and electricity (Holmberg 2008). While this industrial project can be considered an example of colonial exploitation (Kukk 2019: 79–85), according to the rules of national accounting, its realisation could only boost the GDP of Estonia.

It is necessary to provide these details to assess the credibility of my estimate of the GDPpc for Estonia in 1950 (4108 int$), which along with other GDPpc values for the 1950–1989 period is derived from my benchmark value (13,799 int$ 2011) in 1973, using composite physical output index values from Klesment et al. (2010: 44). It is very close to Valge’s (2003) estimate for 1938 (4068 int$, according to my conversion from 1990 to 2011 int$). Different from Klesment et al. (2010: 46) and Mertelsmann (2006: 261), I do not consider Estonia’s GDPpc recovering to 1938 values already by 1950 as being so incredible. According to MPD (2020), GDPpc did recover to the pre-war level by 1950 in most socialist countries that have data available, including Czechoslovakia, Poland and (most importantly) the USSR itself.

The opposing opinion is based on the evidence that real wages and the standard of living in Estonia in the 1950s was still far below the last interwar period (Mertelsmann 2006: 135–165). However, standards of living are directly related to disposable (personal) income as a component of GDP, but not to the complete GDP. A distinguishing feature of state socialist economies (especially in their earlier phases) was the drastic increase of share capital formation (investment) in GDP to the detriment of its part allocated for consumption. Therefore, the standard of living could have remained below the interwar level until the 1960s, as Mertelsmann (2006: 57) argues despite the marked increase in GDP levels. Another important thing to note, the national income of the Baltic republics could remain much below their GDP size on account of transfers to the central budget and expenditure to maintain Soviet military forces, which were massively present on their territories (Krūmiņš 2017a). This did indeed imprint features of colonial exploitation on economic relations between the central administration of the Soviet empire and the Baltic republics.

However, the comparative advantages of the Baltic countries did continue to play a part even under the socialist economic system. They included educated populations with a strong work ethic, which survived even under the conditions of a socialist economy, where shirking and petty theft were merely attractive survival strategies. The advantages of their geographic location also continued to matter. Planners in Moscow perceived an economic rationale in locating those industries running on imported equipment and producing technologically complex production with higher added value specifically in the Baltic countries (Krastiņš 2018; Meškauskas 1992; Meškauskas and Meškauskienė 1980; Tomson 1999; Kahk 1997).

This may explain why the Baltic countries’ edge in GDP levels over the Soviet mean in 1938 increased during occupation, despite colonial exploitation. In 1938, Lithuanian GDPpc was 6% above the USSR mean, the Estonian—by 19% and the Latvian—by 39% (it may be appropriate to repeat the reservation that differences in standards of living were much more considerable due to the larger share of capital formation and military spending in the USSR). In 1989, the Lithuanian GDPpc surpassed the Soviet mean by 30%, the Latvian—by 38% and the Estonian—by 36.5% (see Table 8.4). This also explains why the GDPpc levels of the Baltic republics surpassed that of the Soviet satellites in Central Europe (except (probably) for East Germany, which is missing in all MPD releases).

The trend of group convergence between the Baltic countries, already discernible in the interwar period, continued in the Soviet years. Lithuania remained behind the northern Baltic republics, but the GDPpc gap did decrease due to the industrialisation of Lithuania since the late 1950s (Meškauskas 1992; Meškauskas and Meškauskienė 1980). Out of all the three Baltic republics, Lithuania gained most from Moscow’s policies, which made them locations of “entrepôt agriculture” in the 1970s–1980s. Due to the failure of Soviet agriculture to feed the Soviet population, the Soviet government had to import (from 1963–1964) large quantities of grain from the USA, Canada and other cereal exporters (Brada 1983).

A majority of these imports were used in animal husbandry to satisfy increasing demand for meat and milk. Again, the availability of sea ports for the import of large quantities of bulk goods, together with the advantages displayed by the Baltic republics in animal husbandry productivity (persisting from the interwar independence years despite collectivisation) prompted Moscow’s planners to allocate a large part of these imports as inputs into the agriculture of the Baltic republics, making them important food suppliers for Soviet metropolitan centres (Krūmiņš 2017a: 966–967). These indirect subsidies did favour the Baltic republics, allowing them to keep and increase their output edge over the Soviet mean GDPpc level.

Nevertheless, the Soviet Baltic republics did not avoid the general slowdown of economic growth, known as late Soviet stagnation. Growth was most rapid in 1950–1960 (8.96% annually), slowing down to 3.14% in 1960–1970 and coming to a near standstill during the last decade of socialism (0.82% in 1970–1980, and 0.87% in 1980–1989). These figures conceal large fluctuations of growth rates across particular years, including those with negative growth (e.g. in 1966, 1972 and 1977–1978). According to Klesment et al. (2010: 44–46), they were most probably caused by crop failures. Indeed, because of the still considerable contribution of agriculture to total GDP (approximately 20%), its level still remained very sensitive to annual variation in weather conditions.

GDPpc data for the restored independence period (see Table 9.3) also display alternation between years of positive and negative growth. However, during this period recurring output contractions are related to changes in the market conjuncture (or human-made causes). After the end of restorational recession (in 1993–1994), these instances of conjuncture change have been related to economic crises arising abroad and then engulfing the small open economies of the Baltic countries. The sole exception may be the interruption in recovery growth in Latvia in 1995, caused by the bankruptcy of the largest private bank (Banka Baltija) (Krastiņš 2017: 810–816).

Table 9.3 GDPpc (in int$ 2011) and its growth rates in the Baltic countries, Finland and the USA in 1990–2040

All data in Table 9.3 are from MPD (2020), except for Estonia in 1990–1998, which are my own recalculations. 1989 is the last year for which GDPpc value is derived from the 1973 benchmark and Klesment, Puur and Valge’s composite physical output index. Starting with 1990, the GDPpc values are derived from annual growth rates, provided by the Estonian researchers according to UNECE (2010). According their information, GDPpc in 1990 did contract by −3.7%, in 1991—by −9.8%, in 1992—by −13.4%, and in 1993—by −5.8%, while 1994 was the first year of recovery growth (0.6%). When deriving GDPpc values from the 1989 benchmark (15,473 int$ 2011) and UNECE (2010) growth rates, we arrive at 15,409 int$ 2011 for 1998.

In this year, my time series converge with the original MPD (2020) values. Namely, for the year 1998, MPD (2020) provides a value of 15,593 int$ 2011, which is quite close to my estimate. Therefore, from 1999 onward, I accept MPD (2020) values. For 1999, UNECE provided an 0.7% annual growth rate. My value for 1998 and the MPD (2020) value for 1999 imply −0.5% growth, which almost exactly corresponds to the annual growth value provided by the WDI 2021 (−0.4%) for 1999. MPD (2020) values for 1998 and 1999 imply −1.65% growth for 1999, so my growth (and WDI 2021) values are near the mean of the UNECE (2010) and MPD (2020) growth values for 1999.

Availability of the GDPpc data series for Estonia in 1950–1989 allows applying the OIST not only for the 1973–1989 and 1989–2007/8 periods, but also for the longer intervals of 1960–1989 and 1989–2018. This makes restored independent Estonia successfully pass the OIST for actual economic performance success of capitalist restoration, as its GDPpc increased at an annual rate of 1.62% in the 1960–1989 period and at a 1.99% rate in 1989–2018. However, this rate would be still too low to ultimately pass the OIST by 2040 because during the whole totalitarian period, the Estonian annual growth rate was 2.70%.

The economic growth pattern that emerges out of the 1989–2018 period data is that of rapid growth after a steep and deep GDP decline during the period of radical capitalist restoration reforms. The decline reached its lowest point in 1993 (Estonia and Latvia) or 1994 (Lithuania). The subsequent growth was punctuated by two major economic crises coming from abroad. The first of them (in 1999) originated from Russia, where the government defaulted on its debts in 1998. By this time, the restored Baltic States were still deeply involved in trade with the former metropolis and other former Soviet republics. By 2018, the situation had changed radically, with EU countries becoming their main trade partners.

This transformation stands in close parallel to the interwar years, when by 1938 exports to the USSR had decreased to 5.0% for Estonia (Pihlamägi 2007: 222), 3.4% for Latvia (Valsts statistiskā pārvalde 1939: 180–183) and 5.7% for Lithuania (Centralinis Statistikos Biuras 1939: 252). For imports, the share coming in from the USSR in 1938 was 4.9% for Estonia (Pihlamägi 2007: 220), 3.7% for Latvia (Valsts statistiskā pārvalde 1939: 175–178) and 6.9% for Lithuania (Centralinis statistikos biuras 1939: 252). In 2018, Russia’s share in the foreign trade of Estonia was 6.4% for exports and 8.7% for imports (Eesti Statistika 2022). In Latvia, Russia’s share was 8.9% for exports and 8.4% for imports (Centrālā statistikas pārvalde 2020: 174), and in Lithuania—14.0% for exports and 14.2% for imports (Statistikos departamentas prie Lietuvos Respublikos Vyriausybės 2019: 81).

In the interwar years, the main cause of the drop in eastern trade were autarkic Soviet policies, making the USSR mainly interested in the import of industrial investment goods, which the Baltic countries could not supply. Under restoration, a major factor was the political determination of the restored Baltic States to reduce their economic dependence on the former metropolis. They were helped in these efforts by the Russian counter-sanctions on the EU, as a response to sanctions imposed in 2014 to punish Russia for aggression against Ukraine. By 2018, Russia remained an important trade partner only for Lithuania due to a lack of suppliers of energy resources at cheaper prices. Yet, by 2018, all three Baltic States were secure from the shockwaves of further economic crises originating from Russia.

During the original independence period, only two Western countries (Germany and Great Britain) served as major foreign trade partners of all three Baltic countries, taking up to 60% of their exports and providing the same share of imports (Hinkkanen-Lievonen 1984; Pihlamägi 2007). Foreign trade of the restored Baltic States is much more diversified, with Finland and Sweden becoming major trade partners of Estonia, while Lithuania became Latvia’s most important trade partner (Koyama 2020: 18–20). The increase of trade between the Baltic countries themselves is another important difference from the interwar years, when projects to establish a common Baltic market came to nothing (Remess 2017; Romas 1934). Under restoration, its emergence was simply the (beneficial) collateral effect of joining together into a much larger common European market (Terk 2011).

Deep integration into global financial, goods and commodity markets made the Baltic countries vulnerable to the Great Recession, which hit Estonia and Latvia in 2008, and Lithuania in 2009. The decade between the Russian crisis in 1999 and the Great Recession was that of most rapid growth under restoration and even from the entire economic history of the Baltic countries (with a possible exception for the 1950s). This growth was driven by foreign investments, which Estonia succeeded in attracting already in 1994–1999, becoming the growth leader among the Baltic countries and earning the reputation of ‘a shining star from the Baltics’ (Hansen and Sorsa 1994).

Due to Estonia’s milder transformational crisis and early spurt, the long-run inter-Baltic convergence trend broke down. By 2000, there was a new north-south gap emerging among the Baltic countries. In 1913–1938, the dividing line separated underdeveloped Lithuania from the more advanced Latvia and Estonia. Now this divide moved to the north, separating Estonia from other two Baltic countries. By 2000, Latvian GDPpc made up 67.3% and Lithuanian—64.3% of Estonia’s GDPpc (see Table 9.3). So, the output gap between Estonia and the other Baltic countries became much larger than the gap between Latvia as the Baltic leader in 1938 and the other Baltic countries, when Estonia’s GDPpc made up 89.8% and Lithuania’s output per capita was 79.9% of the Latvian value (see Table 8.4).

However, after the Russian 1999 crisis, foreign investments flooded all three Baltic countries (Koyama 2020: 20–22). As soon as it became clear that all three Baltic countries will be accepted into the EU together (this happened in 2004), foreign investors became interested not only in Estonia, but in the other two countries as well. Scandinavian banks bought up almost the entire banking sector (with the exception for Latvia), providing local producers with cheap credit (Dombrovskis 2017: 671–674). After EU accession, the Baltic countries received generous subsidies to modernise their infrastructure. Abundant and cheap foreign capital drove up economic growth in the Baltic countries close to the two digits level, earning all three the reputation of “Baltic tigers” by 2008.

During the interwar independence period, the 1913 output per capita level was surpassed only during the second decade of independence. Our estimates (see Table 8.4) do not allow specifying the exact point in time when this happened, but recovery to the prewar level took at least 17 years, as in 1929, in all three Baltic countries the output per capita level still was below the 1913 mark. During the years of restored independence, Estonia’s output per capita surpassed the 1989 level in 2000, while Lithuania achieved this in 2004 and Latvia—in 2005, so in only a slightly shorter time (15–16 years). Protracted duration of the recovery periods both after the establishment of independent states in 1918 and their restoration in 1990–1991 can be explained by the severity of challenges that the Baltic States faced both in 1918–1920 and in 1990–1991. The ones from the interwar years were already discussed in the preceding chapter.

During the restoration period, Latvia faced perhaps the largest challenges again, indicated by displaying the slowest recovery and the loss of its top rank according to output per capita among the Baltic countries, which it had in the interwar and last Soviet-era years (see Tables 8.4 and 9.3). The main cause of the exceptionally strong contraction of the Latvian economy in 1992–1994 was structural distortion of its economy by “socialist over-industrialisation”, and hosting more (in comparison with the other Baltic countries) all-union enterprises, many of which were part of the USSR military complex. Although such enterprises belonged to sectors that were technologically advanced (electrotechnical equipment, instruments, radio electronics) and predominantly manufactured end products, they were dependent on wide networks of subcontractors in the Soviet Union and produced their output mostly for the Soviet market. Although it was technologically sophisticated, it was outdated by world-level standards (Krastiņš 2018).

The survival of such enterprises was not impossible. That could happen only under a purposeful industrial policy, aiming to attract high-quality FDI, and to promote the formation of industrial clusters (cp. Porter 1998 (1990); Drahokoupil 2008). The governments of the freshly restored Baltic States lacked the necessary expertise and resources, being overwhelmed by the many challenges of the still continuing period of “extraordinary politics”. The lack of political will could have played its role too, as most of these kinds of enterprises were perceived as “civil garrisons” of the occupying Soviet empire. They employed mainly Russian-speaking immigrants and were managed by Russian-speaking directors, serving as strongholds of Interfront and the pro-Moscow Communist Party of Latvia during the final confrontation in 1990–1991 between the centre in Moscow and the Popular Front government.

After victory, the Latvian government did not perceive itself as obliged to help such enterprises. The unspoken expectation that liquidation of such enterprises may encourage return migration of their unemployed workers to their homeland republics also existed, thus contributing to restoration of the ethnic variety and population structure of Latvia before 1940. By the time restitution was complete and a workable institutional framework to attract foreign investments (1994–1995) was established, most of these enterprises were already defunct, including ones such as VEF, which in 1986 employed 19,489 employees, Radiotehnika (14,054), Alfa (7675) and Kommutators (7239) (Krastiņš 2018: 306).

The changes Latvian industry underwent in 1991–1999 were remarkably similar to those in 1913–1925. To recall (see Chap. 8), by 1913 Latvia (and to a lesser extent Estonia) was one of the most industrialised areas of the Russian Empire, producing goods for its huge markets. During the interwar years, Latvian industry consisted mainly of small- and medium-sized enterprises, producing for the domestic market. ‘Concerning the number of industrial enterprises, interwar Latvia’s industry model was reproduced: the number of enterprises with a modest number of employees increased. In 2000, the number of enterprises with less than fifty employees increased to 4,735, those with 50–249 employees increased to 521, while there were only 117 enterprises with more than 250 employees. Within the space of a few years, the huge enterprises of the Soviet years became defunct’ (Krastiņš 2018: 263).

All three Baltic States suffered from the Vanek-Reinert effect: when two nations at widely different technological levels integrate on free market terms, the first casualty is the most advanced economic activity in the less advanced nation, leading to partial de-industrialisation of the relatively weaker economy (see Tiits et al. 2006: 73). However, the early success of Estonia in attracting FDI alleviated the impact of this effect on the country’s economy. When foreign capital arrived in Latvia and Lithuania, enterprises possessing technological capabilities in middle- to high-tech level manufacturing were already bankrupt, their equipment was stripped away for alternative uses in services and low-tech level production (e.g. domestic or gardening appliances for local markets) and large parts of the labour force were deskilled. Foreign investments were directed to banking, telecommunication, and infrastructure monopoly sectors and did not contribute significantly to the maintaining or upgrading of export-oriented production capabilities.

Those surviving and start-up Lithuanian and Latvian enterprises that were able to enter foreign markets could only do this by joining consumer-driven international commodity chains as subcontractors for low-skill labour-intensive products. Thus, these countries entered the “low road” development path, characteristic of semi-periphery countries. Differently, some middle- and high-tech enterprises (e.g. in electronics) in Estonia became subsidiaries of transnational corporations early on, joining international commodity chains in positions and on conditions not unlike the former communist countries of Central Europe (Kalvet 2004). The overall development trajectory of the Baltic countries can be described as a ‘detour from the semi-periphery to the semi-periphery’ (with a partial exception for Estonia), slightly paraphrasing Ivan Berend’s description (Berend 1996): after some 50 years of relative isolation from the CWS, the restoration of capitalism brought them to the same positions they were in before World War II.

The indicator of the restoration of the interwar world-systemic position of Latvia and Lithuania is their almost unchanged position in the international GDPpc ranking during the interwar and restored independence periods (see Table 8.4). The weakness of the GDPpc indicator is that some oil and gas exporting countries (with Saudi Arabia and the Persian Gulf states serving as the most conspicuous examples) belong to high-income parties, although their economies belong to the CWS periphery according to their structure. Therefore, this indicator should be supplemented by an analysis of their export structure using the classification proposed by Bela Greskovits and Dorothee Bohle (Greskovits 2005; Bohle and Greskovits 2007), who applied it to data from the Comtrade database of the UN Statistics Division.

Depending on whether the exports are dominated by (1) heavy-basic, (2) light-basic, (3) heavy-complex or (4) light-complex production, four types of countries can be distinguished. Heavy-basic production (1) consists of agricultural products, oil, gas, electricity, coal, metals, paper, rubber and plastic. Light-basic production (2) is deemed to include timber and its products (including furniture), textile, footwear, etc. Heavy-complex production (3) consists of chemicals (other than pharmaceutical products), vehicles and heavy industrial machinery. Light-complex production (4) is considered to embrace pharmaceuticals, electronic and electrotechnic equipment and light products from the machinery manufacturing industry.

Unlike the classic “dependence theory”, assuming a dualism between the centre and the periphery, and Wallerstein (1974), who introduces an intermediate semi-peripheral position, I argue that the number of structural positions in the CWS is not fixed. Instead, the number of these positions grows with every new Kondratieff wave (Norkus 2016, 2017). With every new technological revolution at the core of the CWS, former carrier industries are degraded to “traditional” ones, and are moved out of the countries at the centre of the capitalist world economy. At the time of the third Kondratieff wave (1873/95–1940/50), encompassing the two decades of independence of the Baltic countries, the CWS core countries produced steel, fertilisers and other chemicals themselves. Only the textile industry had already relocated to semi-peripheral countries, which exported not only raw materials but also technically simple (e.g. processed food or timber products) industrial products.

At the time of the current fifth Kondratieff wave (since 1985–1990), when capitalism was restored in the Baltic States together with their independence, it was not just basic-light (e.g. textiles) and heavy-basic (e.g. steel or oil processing) industries that had moved out of the CWS core. They were followed by industries producing technologically complex heavy industry (e.g. cars) and light industry (e.g. electronics). Thus, countries hosting carrier industries of the previous (fourth) Kondratieff wave (1940/50–1980/90) took up the newly emerged semi-core position in the CWS under the global conditions of the fifth Kondratieff wave, specialising in manufacturing heavy-complex and light-complex products.

Countries specialising in the manufacture of heavy-basic and light-basic products can be classified as belonging to the periphery and semi-periphery. Restored capitalism countries with the best macroeconomic performance (the Czech Republic, Estonia, Hungary, Poland, Slovakia) managed to reintegrate into the CWS, taking up a semi-core position. The collapse of the Soviet empire coincided with the upswing of the fifth Kondratieff wave, marked by a move out of the CWS core not only of branches of industry characteristic of the second and third Kondratieff waves, which had still not relocated at this time, but also by the offshoring of industries characteristic of the fourth Kondratieff wave.

Transnational corporations (TNC), operating from the CWS core, bought industrial enterprises in post-communist countries that produced technologically complex products in communist times, which were nevertheless not competitive on the world market, and modernised them, providing them with capital and know-how (see e.g. Myant and Drahokoupil 2011; Nölke and Vliegenthart 2009). After modernisation, they started to work for the international market, preserving or creating work places for a highly skilled workforce. They enabled resident countries to gradually acquire capabilities for genuine technological innovation, which is a distinctive feature of technological frontier countries belonging to the core of the CWS.

Like the Central European states, at the end of the state socialist period, there were many enterprises in the Baltic countries producing technologically complex production. The sector included not only industries representative of the declining fourth Kondratieff wave, but also those of the ascending fifth Kondratieff wave. However, they were not competitive on the world market, and produced mainly for the needs of the Soviet military machine. Almost all of these technologically advanced industries were lost during the capitalist restoration. The sole survivors were industries representative of the first three Kondratieff waves. They include food, textiles, and wood processing industries that already existed or were created (in the case of Lithuania) during the interwar independence period, producing basic-light or basic-heavy production.

The return to the pre-communist position in the CWS is most conspicuous in the case of Latvia, which during the interwar independence period did pay for imports by selling processed food (butter and bacon) and timber products. Remarkably, during the first two decades of post-communism, the timber industry was the most successfully developing industry in Latvia, providing 30–40% of total exports (Remess 2017: 736; Krūmiņš 2017b: 43). New large enterprises emerged only in this branch. After an initial decline, the food industry also recovered, steadily increasing its contribution to exports (Krastiņš 2018: 263). The contribution of instruments and machine production declined, reflecting Latvia’s failure to attract high-quality FDI.

Different from Latvia, which established the profile of an exporter of light-basic products, produced by the carrier industries of the first Kondratieff wave (1780–1825/30), Lithuania’s profile in international trade is marked by heavy-basic industrial products, related to technologies invented and made prominent in the times of the second (1825/30–1873/95) and third (1873/95–1940/50) Kondratieff waves. Like Latvia and Estonia, at the end of the intermediate communist period, Lithuania had many enterprises producing technologically complex production, including those which were representative of the ascending fifth Kondratieff wave. As in Latvia, they were all lost during the restoration of capitalism. However, survivors included some large enterprises built in the Soviet years that produced basic-heavy products—fertilisers and fuel, which continue to be the most important Lithuanian export articles (Norkus 2014: 258–277).

Until the closure of the Ignalina Nuclear Power Plant in 2009, Lithuania was a regionally important exporter of electricity, which also belongs to the same class of products, although it is not heavy. Among the newly established enterprises in the service sector, the most successful business story in the restored independent capitalist Lithuania is Girteka: founded in 1996, it has since grown into one of the largest logistics companies in Europe, operating a fleet of 4000 trucks and employing 7000 truck drivers (Segers and Suliokas 2017). The line of continuity with interwar Lithuania is represented by the Lithuanian food industry, which continues to be an important contributor to Lithuania’s exports, sometimes using modernised production facilities built in the interwar years.

The semi-core position of restored independent Estonia is indicated by the higher share of light-complex products among its exports. Although modest in comparison with the CWS core countries, the share of high-tech products in Estonia’s exports exceeds those of the other Baltic countries. Products classified as “electrical machinery” and “telecom apparatus” according to the SITC classification took top positions in Estonia’s exports in 2008, while “cork and wood” was the largest position in Latvia’s, and ‘petroleum and petroleum products’ in Lithuania’s export sector (Gligorov et al. 2009: 147–148). The most important single contributor was Eesti Erickson, a producer of telecommunication equipment, the Estonian subsidiary of Sweden’s Ericsson group. In 2015, this was the largest Estonian enterprise, with an annual turnover of 1.196 million Euro, employing 1400 employees (Krastiņš 2018: 271).

When determining the position of a particular country in the international division of labour hierarchy, it is important to take into consideration that under conditions of contemporary global capitalism (and differently from the interwar years), intra-industrial trade (the export and import of goods belonging to the same product groups between two countries) plays an increasing role in international trade. Most production sites in the former communist countries are only parts or segments of regional or global commodity chains. The higher level of FDI investment in Estonia indicates the deeper involvement of this country in such chains. This does not necessarily indicate the high position of the country in the CWS hierarchy, as MNC usually outsources segments in production chains that create low added value, while the most productive segments remain in the homeland countries.

While none of the Baltic countries host even a single high-tech MNC, serving as a hub site of its activities (and therefore does not qualify for a core position), it is known that the share of intra-industrial trade in Estonia’s foreign trade is higher than it is in the other Baltic countries, and there is evidence that it serves as an offshore site for segments creating relatively high added value both in industry and services. ‘Estonia’s added value to imported (semi-manufactured) products amounted to approximately 40% of its industrial production’s export as early as at the beginning of the 2000s, while Latvia’s corresponding figure was below 20%’ (Terk 2011: 175).

By the time of the onset of the Great Recession in 2007, the reintegration of the Baltic countries into the global economy was complete, and they too received a full-force hit in 2008–2009. In fact, its impact was exacerbated by the overheating of the Baltic economies on its eve. Financial inflows from abroad served to support domestic consumption, bloating current account deficits. Wage increases overtook growth in productivity and undermined their competitive position (Dombrovskis 2017: 670–681). During the crisis, the Baltic countries earned fame for restoring macroeconomic equilibrium by means of internal devaluation, or decreasing nominal and real wages. The aim was to maintain the currency peg, which has been the central institution of the Baltic neoliberal model since the early 1990s, to enable them to join the Euro zone. They succeeded at both aims. Estonia became a member of the European Monetary Union on 1 January 2011, Latvia on 1 January 2014 and Lithuania on 1 January 2015 (Kattel and Raudla 2013; Norkus 2018).

However, success was achieved at considerable social cost, with unemployment surging to 20%. Implementing strict austerity policies, Latvia closed nearly 50% of the country’s schools and hospitals (Dombrovskis 2017: 699–700). The outcome was an unprecedented wave of emigration (up to 7–8% of the population of Latvia and Lithuania emigrated in 2008–2011), made possible by the open borders and common labour market of the EU (Woolfson and Sommers 2014a). The possibility to emigrate meant the Great Recession of 2008–2011 had no systemic consequences. This makes the Great Recession of the restoration years very different from the interwar Great Depression. It was of a similar scale, and the Baltic governments conducted very similar economic policies in a vain effort (except for Lithuania, which did not devalue) to keep their national currencies in line with the gold standard (Kuokštis 2015).

In interwar Estonia, the spreading discontent within various social groups in light of the deterioration of their economic situation brought enormous political success to the Vaps Movement (the Union of Participants in the Estonian War of Independence), which was the Estonian equivalent of fascist movements in other European countries. Vaps succeeded in persuading the majority of Estonian voters that the main culprit of their economic difficulties was the absence of a stronger executive power, due to the super-parliamentary features of the Estonian democracy according to its 1920 Constitution. To prevent a Vaps electoral victory, incumbent Prime Minister Konstantin Päts established a dictatorship on 12 March 1934 (Kasekamp 2000), followed two months later by his Latvian colleague Karlis Ulmanis, who also justified his coup with the inability of parliamentary democracy to cope with economic crisis (Stranga 2017).

New authoritarian regimes displayed a preference for continuing and deepening state control over the economy after the end of the crisis, when it was introduced and applied as an emergency measure. Outlawing the Marxist “class struggle” ideology, which was exposed at this time by both democratic (Social-Democrat) and totalitarian (Communist) left parties, and banning trade unions, which were controlled by these political forces, they imported corporatist institutions from fascist Italy. Although they had a largely facade-like character, the attempt to extend state control to ever new areas of social life did shift the Baltic countries away from liberal democratic capitalism, which had existed in Estonia and Latvia before the Great Depression. Even if they remained capitalist after the crisis, the import of corporatist institutions, expansion of the state sector, subordination of cooperative unions to state control and regulation of prices (Kõll and Valge 1998; Pihlamägi 1999: 115–148) did make the attraction basin of Baltic capitalism more shallow and less resilient to switch to an alternative (and inferior) state socialism equilibrium.

No comparable changes happened in the Baltic neoliberal model of capitalism during the Great Recession, making it another case of the ‘strange non-death of neoliberalism’ (Crouch 2011), while its critics expected that the Great Recession would usher in the restoration of a (neo)-Keynesian welfare state. Short and less-than-generous unemployment allowances were an integral part of the Baltic neoliberal model ever since its establishment. They were decreased even more or cancelled altogether as part of the implementation of austerity policies during the crisis. Under conditions of surging unemployment, migration to EU countries became the most attractive survival opportunity. Yet, by the same token, such strong emigration secured social and political peace in the Baltic countries, because emigration (or “exit”) to affluent EU countries or Norway was deemed a more attractive opportunity than having a “voice” for potential political entrepreneurs (Norkus 2018).

Another way in which the Great Recession under restored Baltic capitalism differed from the interwar Great Depression was rapid recovery after major contraction. First of all, this applies to Lithuania, where negative growth endured for only 1 year, and already in 2012 the Lithuanian GDPpc surpassed the top (2008) pre-crisis level. By 2018, Lithuania had caught up to (and slightly surpassed in the next years) Estonia, in terms of its GDPpc (see Table 9.3), although (according to WDI 2021) it remained markedly lower without adjustments for differences in price levels for non-tradable services, which is higher in Estonia.

GDPpc decline continued longest (for 3 years) in Latvia, where it recovered to its pre-crisis level in 2014, displaying very strong recovery growth. The severity of the Latvian crisis was caused by the ultimate failure of the daring and high-risk strategy to establish itself as a “near Switzerland” for the post-Soviet space, encompassing the fSU republics. As financial services create very high value, this strategy was to some extent supported by the Latvian government, although its inventors and promoters were Russian and Jewish entrepreneurs (Krastiņš 2017; Hallagan 1997).

Becoming the centre of Soviet “high-tech” industries and preserving the outlook of a Western metropolis city (the “Baltic Paris”), Riga attracted not only an unskilled Russian-speaking labour force, but also a highly educated workforce, including many persons born and educated in the Soviet metropolis cities of Moscow and Leningrad (Saint Petersburg). As a result, a unique situation emerged in Latvia, with the ethnic division of labour showing greater semblance to that of the Soviet republics of Central Asia than the other Baltic countries. ‘A comparison of educational levels indicates a significant gap between Latvians and other groups. Per thousand people over age 15, in 1989 there were 96 Latvians with a completed higher education, but 407 Jews, 163 Ukrainians and 143 Russians’ (Dreifelds 1996: 159).

Immigrants were a majority not only among industrial workers of low and middle qualifications, but also in the ranks of engineers, technicians, highly skilled workers and representatives of other modern professions. After Soviet high-tech industry collapsed, and the restorational citizenship law excluded immigrants from employment in the public sector, the educated Russian-speaking immigrant majority directed their energies towards self-assertion in the private sector. According to Latvian data, up to 80% of Latvian entrepreneurs belonged to “non-titular nationalities” by the middle of the 1990s (Bleiere et al. 2014: 477). In this way, the Latvian restoration of capitalism also featured the restoration of the ethnic division of labour, which had existed in interwar Latvia: ethnic Latvians dominated in public administration, while Jewish and German minorities prevailed in business.

Their international connections contributed significantly to the rapid recovery of Latvia’s economy in the 1920s, while their business and engineering prowess promised a breakthrough in re-industrialisation, based on the development of new internationally competitive products, probably in household appliances, radio-technical equipment and electronics. The most capable task force for this kind of breakthrough was employed at VEF—the State Electrotechnic Factory—with a mixed German-Latvian personnel. One of its products was the VEF Minox, the world’s smallest photography camera, designed by Baltic German constructor Walter Zapp (Solovjova 2020). In 1938–1939, VEF produced 17,000 such cameras, remaining the symbol of the industrial potential of interwar Latvia, which the Soviet empire developed and exploited. In the restored capitalist Latvia, its place was taken by the Russian Jewish minority.

The most important sphere of activity of the Russian-speaking business elite in Latvia became offshore and financial intermediation services for businessmen from Russia. As large Soviet-era enterprises collapsed, the banking sector mushroomed, the number of banks in Latvia approaching 60 in 1994 (Hallagan 1997: 66). If the daring strategy of Latvia as a “near Switzerland” for the post-Soviet space would have worked, Riga certainly would have restored the position it had in 1913, but this time as an “entrepôt high added value service economy” in this space. However, the bankruptcy of Banka Baltija in 1995 exposed the risks of this too-close association with big business in Russia, interrupting Latvia’s recovery growth. History repeated in 2008, as another “too big to fail” Latvian bank (Parex Bank) collapsed. The Latvian government’s expenditure to bail it out was a cost the other Baltic countries did not have to pay because by 2008, in Estonia and Lithuania nearly all large private banks were foreign-owned (Dombrovskis 2017: 682–686).

The situation of Estonia’s government in 2008 was facilitated by the availability of a considerable reserve fund (Kattel and Raudla 2013: 429; Kukk 2019: 163–170). Nevertheless, the Estonian GDPpc contracted for 2 years (2008–2009), while its top pre-crisis level (2007) reached only in 2017 (see Table 9.3). Estonia’s recovery was slowed down by the deep integration of its economy with that of Finland. In former years, being in the neighbourhood of prosperous Finland (the capital cities of both countries—Tallinn and Helsinki—are separated by only 90 km of the Gulf of Finland, or a three-hour ferry trip) was an important advantage for Estonia, contributing to its rise in the Baltic economic championship of the 1990s.

The abolition of all export and import duties in 1992 made Estonia an attractive place for weekend shopping tourism from Finland. Since 2004, both countries are members of the EU, which means the absence of all barriers for workforce movement. All of this makes it both possible and attractive for many Estonians to go to work in Finland, but to return for weekends or holidays to Estonia, or to still consider it their “real” country of residence despite the prolonged physical absences. Therefore, Estonia’s demographic statistics did not record noticeable emigration or population decrease after 2004, which culminated in the years of the Great Recession in the other two Baltic countries.

However, during the Great Recession, Finland was affected by a “double dip” recession: after output contraction in 2008 and 2 years of recovery growth, Finland’s output declined again over the space of 4 years (2012–2015). Although Estonia’s growth rates did remain positive, their temporal dynamics mirrored the Finnish pattern and they were much below the levels of Latvia and Lithuania, which had no such “Finnish entanglement”. Despite the post-crisis slowdown, restored Estonia, with its annual growth rate in 1989–2018 (1.99%), still outperformed Soviet Estonia in 1960–1989 (1.62%).

However, a 1.99% growth rate over the entire 1989–2040 period would still be too low to score an ultimate pass on the OIST, as during the totalitarian era of 1938–1989, Estonia’s GDPpc growth rate was 2.70%. Under this growth rate, its GDPpc would be 60,210 int$ 2011. To reach this target value, in the 22 years remaining until the 100th anniversary of the Molotov-Ribbentrop Pact (1939), Estonia’s GDPpc should grow at 3.64%, which is above the 3.19% growth rate in 2011–2018.

To outperform the entire totalitarian era, the Latvian economy should grow at least 2.46% annually in 1989–2040, reaching a GDPpc level of at least 54,087 int$ 2011 by 2040. With 24,313 int$ 2011 in 2018, its growth rate of 4.04% in 2011–2018 is quite sufficient to reach this achievement, so long as it can be maintained during the remaining 22 years (the minimum sufficient growth rate is 3.70%). For Lithuania, the minimum “pass” growth rate for 1989–2040 is 2.79%, and in the remaining 22 years it should fall no lower than 3.62%. Again, if Lithuania will maintain a 4.40% growth rate in 2011–2018, it will easily overshoot the minimal target of 59,787 int$ 2011 for 2040, derived from the 1989 GDPpc value and totalitarian era growth rate.

The OECD (2018) policy paper (‘The Long View: Scenarios for the World Economy to 2060’) helps us understand the meaning of target values for passing the OIST in 2040, as well as to discuss the prospects of the Baltic countries to pass the American and Finnish standard tests. There is a technical problem in using OECD (2018) figures for these aims, however, as they are in 2010 US$ at PPP. Despite the only 1 year difference in the baseline year, they are strictly incomparable (also due to possible technical differences in the calculation of purchasing power parities). To achieve comparability, I have converted OECD (2018) estimates for 2040 into 2011 int$, as used in the MPD 2010, calculating the OECD annual growth forecast for countries of interest for the 2018–2040 period, and then using them to derive OECD forecast values for ultimate restoration success years in 2011 int$ from the GDPpc levels for 2018 according to MPD (2020).

After this conversion, we find that GDPpc values in 2040 for the Baltic countries, as forecast by the OECD, are below my minimum target for passing the OIST. This could be expected because OECD forecasters describe their methodology in constructing a “baseline scenario” as an extrapolation of “current trends”. It seems that so as to establish these trends, they used a longer retrospective than 2011–2018 because OECD (2018) growth rates for 2018–2040 are rather close to those in 1989–2018 according to the MPD (2020) data (1.99% for Estonia, 1.53% for Latvia and 2.17% for Lithuania).

The unfortunate news is that if the OECD (2018) baseline scenario will come true, the Baltic countries will not be able to pass the strict version of the American standard test, which applies to countries that at the time of capitalist rehabilitation had already escaped the poverty trap (defined as GDPpc below 20% of the US level), and belonged to the middle-income countries group (GDPpc below 55% of the GDPpc level). According to this version, the ultimate economic success for these countries means achieving at least 70% of the GDPpc level. According to the OECD (2018) baseline scenario, the US GDPpc will grow at a rate of 1.17% in 2018–2040, reaching 71,472 int$ 2011.

The forecast growth rates of the Baltic countries are 2.23% for Estonia, 2.50% for Latvia and 2.28% for Lithuania. They will make considerable progress in convergence, and Estonia’s GDPpc will make up 62.30%, Latvia’s—58.56%, and Lithuania’s—62.88% of the US figure. This is much above the 55% benchmark for countries that were still poor at the time of capitalist restoration. However, it is still below the 70% mark, which almost corresponds to the EU mean as of 2021, and is therefore an appropriate benchmark for passing the American standard test by countries that were already middle-income countries at the time of capitalist restoration (see Chap. 4 above).

The forecast growth of Finland in 2018–2040 is 1.27% annually. Thus, if OECD (2018) forecasts will come true, the Baltic countries will also significantly reduce their lag behind Finland, passing a lenient version of the Finland standard test, as in 2040, Estonia’s GDPpc will be 86.72%, Latvia’s—81.52% and Lithuania’s—87.53% of the forecast Finnish level (51,345 int$ 2011). Then the lag behind Finland will become much smaller in comparison with that in 1938, when Lithuania’s GDPpc made up 63.3%, Estonia’s—71.1% and Latvia’s—79.1% of Finland’s GDPpc. However, this still would not mean complete convergence, as is required by the strict version of the Finnish standard test.

However, if the Baltic countries will grow at the rates necessary to pass the OIST in the CREPS, achieving levels of 60,210 (Estonia), 54,087 (Latvia) and 59,787 (Lithuania) int$ 2011 in 2040, this will allow them to overtake Finland and achieve 84.24%, 75.67% and 83.65% of the US level. This would certainly mean the economic triumph of restoration. For those who may consider such a prospect unrealistic, I can report that there was a time when Estonia’s leaders would have considered such figures as too modest. During the parliamentary elections in 2007, the Reform Party leader and Prime Minister of Estonia in 2005–2014 Andrus Ansip promised that Estonia would rank among the five richest countries (on par with Switzerland and Luxembourg), and Alexander Grover (2009) recalled this promise in the title of his book (The New Estonian Golden Age. How Estonia Will Rise to Be One of Europe’s Five Richest Nations).

Among the Baltic States, Estonia is by no means alone in its optimism because the actual official long-term strategy of Lithuania’s development (accepted by the Lithuanian parliament on 15 May 2012) contains a commitment to make Lithuania at least the tenth wealthiest EU country already by 2030 (Lietuva 2030). Therefore, target values implied by the OIST are neither too far-fetched nor arbitrary. In fact, they will certainly be achieved if Latvia and Lithuania will maintain their recent (2011–2018) growth rates (of around 4%), and Estonia will only slightly improve (by 0.5–0.1% per annum) its growth performance during the two coming decades. Can this be achieved (and how)?

In the advanced capitalist (technological frontier) countries, technological innovation grounded in research and development is the only way of increasing productivity. Less developed countries can do this either by exploiting still unused resources (“extensive growth”) or by emulation (technology transfer). The post-socialist restoration of capitalism involved two overlapping processes: (1) integration into the world economy by finding a place in the international division of labour; and (2) closing the technology gap or catching up to the technological frontier countries. During the first two restoration decades, variation in the growth rates of the former socialist countries reflected differences in the absorptive capacity to assimilate and apply new ideas and technology developed abroad (Abramowitz 1986).

Its effects are measured by the changes in total factor productivity (TFP). Along with factor accumulation (use of an additional labour force and capital), this is one of the sources of economic growth. Innovation-driven growth is displayed in the purest form when output increases despite a decrease in labour force and capital. Among the restored capitalism countries, the Baltic States displayed the greatest TFP growth in the EU pre-accession years of 1995–2001: ‘increases in TFP are estimated to have contributed 4.25% to annual GDP growth in Estonia, 3.75% in Latvia, and 3% in Lithuania. These estimates are somewhat larger than similar estimates for other acceding countries and significantly larger than estimates for the euro area’ (Burgess et al. 2004: 25).

Lower growth rates after the Great Recession may be related to the exhaustion of the growth potential by technology transfer. To maintain 3–4% annual growth rates during the next two decades and thus escape the middle-income trap, the Baltic countries need to develop their capabilities in genuine technological innovation, a defining feature of countries on the technological frontier (Tiits et al. 2006: 29–50). Despite Estonia’s recent growth setback after the Great Recession, it seems like this Baltic country is best qualified for such an achievement (see Kalmus et al. 2020). The evidence supporting this statement is provided by this country demonstrating the relatively largest share of GDP expenditure on research and development—in 2018, Estonia spent 1.43%, Lithuania 0.94% and Latvia 0.63% (World Bank 2021). According to findings of the last global study of the Programme for International Student Assessment (PISA) by the OECD, Estonian 15-year-old school pupils were ranked eighth best in mathematics, and fifth best in science and in reading. In both rankings, Lithuania and Latvia rank far behind (Schleicher 2019: 6–8).

This means that the current GDPpc parity between Estonia and Lithuania (with Latvia lagging behind) will not endure for long. Evidence of the fragility (or low sustainability) of Lithuania’s recent growth performance is not only its small research expenditure (with the bulk financed by EU cohesion funds), and relatively low student performance (36th rank in mathematics, 32nd in science and 35th in reading),³ but also marked differences in the social structure of Estonia and Lithuania. They are disclosed by a recent study (Morkevičius et al. 2020) based on European Social Survey (ESS) data and employing the framework of the European Socio-economic Classification (ESeC) (Rose and Harrison 2007).

This study provides a comparison of changes in the socio-economic class population composition in 21 European countries in 2008–2015 (unfortunately, Latvia did not participate in the ESS Round 4 (2008–2010) and its data from ESS Round 7 (2014–2015) remain unreleased). We found that changes to class structure in Estonia corresponded with general trends, involving the expansion of the “higher-salariat” and the lower white-collar class, and the contraction of the “proletariat”—the class of manual, routine workers. By 2016, among the former communist countries, Estonia’s class structure displayed most similarities with the post-industrial type of class structure of the advanced Northern and Western European countries. Quite differently, Lithuania’s class structure still retained the characteristic features of an industrial-type class structure. The slow contraction of the manual worker class and the near stagnation in the growth of the “higher salariat”, accompanied by the marked decrease of the relative size of the “lower salariat”, made the evolution of Lithuania’s class structure during the recent decade a deviant case.

More broadly, the character of changes in the class structure of Estonia during the Great Recession and recovery period suggests that this country not only preserved, but also enhanced its potential for leapfrogging growth in the coming decades, while class structure changes in Lithuania most likely decreased its potential to avoid the middle-income trap. The lack of expansion of the upper service class and the contraction of the lower service class, including mainly persons with a higher education and vertical mobility aspirations, may be outcome of severe “brain drain” during the Great Recession. It endangers the long-term prospects of Lithuania’s growth catching up, which is conditional on the preservation of the pool of highly educated labour, employable in the high technology sector.

As was already pointed out, Estonia’s increasing entanglement with Finland did allow it to avoid the massive loss of population by emigration to faraway countries. Yet, there is hint of the irony of history in the success of Latvia and Lithuania to save their currency pegs by policies of internal devaluation during the Great Recession. Given the scarcity of natural resources, the main wealth of the Baltic States is human capital, embodied in their working age populations. Younger educated people prevail among emigrants, withdrawing from the Baltic economies their most precious resource. It is most likely that the overwhelming majority of émigrés will never return.

If the Baltic economies will continue to grow, they will be replaced (and are already being replaced) by a foreign workforce. ‘Ironically, the most available source of emigrants to make up shortfalls would be from Ukraine, Moldova, Bulgaria, and Belarus’ (Woolfson and Sommers 2014b: 140). Fears about becoming a minority in one’s own country because of the mass immigration of Russian speakers was the strongest stimulating force behind the ethno-nationalist mobilisation of indigenous populations to struggle for the restoration of independence in 1988–1991. The “immigration solution” for the imminent problem of finding a replacement workforce would be the ultimate irony of the Baltic internal devaluations, and (more generally) the success of capitalist restoration.

However, while the solution for the lack of a sufficient (industrial) workforce by immigration was externally imposed under the Soviet regime, under restoration this will be a voluntary choice made by the Baltic nations themselves. Predictions suggest that among the Baltic countries, Estonia will augment its domestic workforce by immigrants to a lesser degree than the other two Baltic countries.