‘It Is Important That The Baltic Governments Are Trusted By Their Voters’
Interview with Pekka Sutela, Professor at the Aalto University, Helsinki. 20 years until March this year he worked at the Central Bank of Finland. Pekka Sutela was a participant of the international symposium ‘Twenty Years: Political and Economic Evolution in Post-communist Europe’ which was held at the HSE from May 23rd – May 25th.
— I want to ask you a few questions about the Baltic countries and the impact of the last crisis on these states.
— The impact measured by the loss of production was very large: it was among the very largest in the world along with Iceland and Ukraine.
— Especially compared to other European countries…
— Yes, compared with other European countries. And we always have to remember that this crisis was not actually a global crisis, since there were many countries that continued to grow through these years. The drop in the Baltic countries was so severe partially because just before the crisis there was an overheating of the economies – they were growing too fast. And this was because they were receiving a lot of investment, both financial and real investment, and also because the citizens of the Baltic countries wanted to reach a Western-European standard of living as soon as possible. And that’s one of the reasons why they ran up quite a lot of debt.
— And what about now?
— Now they have started to grow. Unemployment, which was very high, about 20%, is now decreasing in all of these countries. It remains to be seen how fast the growth will be, but the good news is that the exports from these countries are now recovering, perhaps faster than I would have expected. This effectsof the crisis involved not only the growth of unemployment, but also declining incomes. And these declining incomes have improved the competitiveness of production in the Baltic countries, and exports are now benefiting from this.
— Why did the Baltic countries that suffered so badly during the crisis, recover so fast?
— They have quite flexible labour markets, they have quite flexible economic institutions, and I must say that the policies that the governments followed in these countries were consistent and they were supported by the large majority of the population. Contrary to many expectations, including mine, there were no serious political disturbances, no strikes, no fighting in the streets or anything like that. The governments acted in a consistent way and their policies were supported by most of the population.
— What do you think, which reforms are needed now, after the crisis? Maybe the crisis has shown that some sectors of the economy are not that competitive or are in a bad situation or in a vulnerable position?
— We have to distinguish between different countries because we always have a bad habit of talking about the Baltic countries as if they were all the same. The situation in Estonia has changed, because Estonia is now member of the Eurozone, so it doesn’t have the kind of currency problems as it might have had earlier. In Lithuania, on the other hand, domestic industries are relatively competitive and the decline in Lithuania was smaller than it was in the other countries. Latvia is an interesting case because for Latvia, financial activities and the banking industries used to be very important. What’s important is how large a part of the financial sector these will be and also real estate and the construction industries, how big they are going to be in the future, because these were the overheated sectors of the economy. Also Latvia is quite dependent on tourism. It is very important how attractive it becomes as a tourist destination in the future. But I find it fascinating that the governments both in Latvia and in Estonia had to make very strict cuts in the economy, but still the same governments have been voted back to power. So, even though they had to take very drastic measures, even though unemployment grew and many people suffered a lot, still they had the support of the population. I think that we might expect that the economic policies in these countries will remain consistent in the years to come. Still there is a big problem – in the future what kind of production is actually going to exist, the kind of activities, the kind of industries that are going to be competitive in these countries over a longer period of time? Now they are benefitting from declining costs, but this will not last forever. So, how do they find new competitive industries or new competitive companies? That’s obviously a very big issue for them. Especially because they are such small societies, such small nations, relatively minor things can have a big impact in a small economy.
— Do you expect them to be more liberalized?
— That seems to be what is going to happen. The governments that are now supported by the population are center-right governments, and they are liberalizing governments. But in many respects these already are quite liberal economies, as we know.
Anastasia Astakhova, specially for the HSE News Service