Freedom is still the best policy

After the collapse of communism, Central and Eastern Europe and the Baltic countries launched several radical reforms and achieved remarkable economic growth. Some of these countries have trusted the invisible hand more, others less. As a result, not only have the results of reforms been different, but the impact of economic crises as well, says Mart Laar, prime minister of Estonia from 1992 to 1994 and from 1999 to 2002, and an advisor to the Georgian government on economics.

During the 1990s, the most radical and successful reforms came from the three Baltic States: Estonia, Latvia and Lithuania. Open markets, economic liberalisation, fast privatisation, stable currencies, flat tax rates – all of these became the trademark of the "Baltic Tigers." Early in the new millennium, the Baltic countries started to enjoy the fruits of their reforms, says Laar:

Economic growth reached 11 per cent to 12 per cent per year.

Living standards rose to 60 per cent to 70 per cent of the European average from 15 per cent to 20 per cent in 1992.

Yet times of rapid growth are unfortunately not always times of good decisions, says Laar. Governments thought they could afford a Western-style welfare state because the economy was doing so well. Conservative financial policy was weakened, lending was encouraged, chances to join the euro zone were missed, and social expenditures rose beyond the economy's ability to bear them.

Combine these mistakes with corruption, weak government and loose control of the banking sector, and the results can be very difficult – as in Latvia, which had to take out a loan from the IMF. Countries with a more effective visible hand, such as Lithuania and Estonia, are doing much better, says Laar:

Estonia is cutting nearly 10 per cent of its government budget, relying more on the market than on state intervention.

Also, it hopes to keep its finances under control so that it can join the euro zone by 2011.

Source: Mart Laar, Freedom Is Still the Best Policy, Wall Street Journal, February 13, 2009.

For text: http://online.wsj.com/article/SB123449222292880677.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 17 February 2009