Critical assessment of the Baltic Model

Austerity packages work. Look at the Baltic countries: they responded to the financial crisis with drastic measures. And succeeded.

“This is a popular narrative amongst leading neoliberal economists,” says Charles Woolfson, professor of labour studies at REMESO, Linköping University. He has researched developments in Latvia for many years. Together with Jeffrey Sommers from the University of Wisconsin-Milwaukee, he recently co-edited a book on the financial crisis in Estonia, Latvia and Lithuania: “The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model” (Routledge).

The Baltic states made a lightning-fast transition from Soviet republics to far-reaching neo-liberal capitalism. When the financial crisis struck in 2008, they responded with radical austerity programmes which included large cuts in salaries and pensions, resulting in drastically increased unemployment. GDP fell by 15-20% in just a few years.

Large numbers of people emigrated. The researchers speak of mass-migration from the three Baltic countries.

“They protested with their feet, not with their votes,” says Prof Woolfson.

However the austerity measures seem to have worked. Today the countries’ GDP has returned to pre-crisis levels. The macro-economic indicators are positive. Unemployment is down, though still high, at 11%. The Baltic states are held up as examples for others to emulate, including by Christine Lagarde, MD of the IMF. Other crisis-hit countries, for instance those in southern Europe, should follow the Baltic example.

“But the price of their recovery is high,” says Arunas Juska (at left in photo), one of the book’s authors. Originally from Lithuania, he is now a sociologist at East Carolina University, USA, and is visiting professor at REMESO.

“The demographic problems are growing, and as a result the recovery is not sustainable in the long term. With a rapidly ageing population and a shortage of qualified labour, it’s hard to see how they can build up a modern industrial sector. It works as long as they can compete with China in the low-wage league, but how sustainable is that?”

The book is concluded with a chapter on the tragic collapse of the Maxima shopping centre in Riga in November 2013. Large parts of the roof collapsed, killing 54 people. The authors describe the radical deregulation that preceeded the disaster. Insufficient safety procedures made it a reality. Alarms were ignored; the store management judged the alarms as false, and customers were advised to remain in the building and continue shopping. This was in contrast to several smaller stores in the same shopping centre, which were evacuated. Customers who tried to leave the centre were stopped, as emergency exists had closed when the electricity failed.

The chapter tells of a business and safety culture that has gone off the rails, a regulatory vacuum and dismantled check systems where responsibility has switched to “self regulation”.

The book has been welcomed by academics including Noam Chomsky.