Chapter

I Introduction

Author(s):
Françoise Le Gall, L. Psalida, Pietro Garibaldi, Julian Berengaut, Jerald Schiff, Kerstin Westin, Augusto López-Claros, Richard Stern, and Dennis Jones
Published Date:
November 1998
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Author(s)
Julian Berengaut

The process of adjustment and reforms in the Baltics deserves attention for three overarching reasons: (1) the extent and speed of transformation from the central plan and political repression to the market and democracy; from plummeting output and living standards and high inflation to high growth, low inflation, and rapidly rising real incomes; and from reliance on the central bank and bilateral and multilateral sources for financing to accessing domestic and international financial markets; (2) the policy challenges the countries have faced in choosing and maintaining exchange rate regimes; confronting weaknesses in the banking system; protecting public revenues while adjusting the pattern of expenditures; and resolving problems of interenterprise and energy arrears; and (3) an opportunity for a cross-country prospective based on similarities in size, starting positions, external shocks, and policy objectives, and differences in the choice of policies and their timing.

The linkage between the policy choices, their implementation, and the policy outcomes is the basic theme of the volume. Chapter II provides an overview of macroeconomic and structural adjustment policies mainly since 1994–95. By that time, financial stabilization had taken hold which allowed a critical mass of structural reforms to be put in place thereby creating the conditions for the revival of growth. Chapter III surveys issues regarding the choice of exchange rate regimes in the Baltic countries, including recent experience, current challenges, and medium-term policy options. Chapter IV covers three broad fiscal issues: the evolution of the budget processes into a rational tool for public resource management, revenue mobilization including the factors that explain the Baltic countries’ success in preventing erosion of the tax-to-GDP ratio, and expenditure management and rationalization. Chapter V focuses on developments in the financial sector of the three countries, taking as a point of departure the banking crisis that occurred in Estonia (1992, 1994), Latvia (1995), and Lithuania (1995–96); it concentrates on the evolving structure of financial markets and the restructuring of the banking systems that subsequently took place. Chapter VI discusses private sector development in the Baltics, namely, problems in its measurement, recent trends, and the necessary conditions to foster it, and the policy agenda for removing remaining obstacles. Chapter VII examines the Baltic countries’ relations with the European Union (EU), concentrating on pre-accession issues and the implications of membership in the EU for the three countries.

Rather than a comprehensive review of economic developments and policy issues in the Baltic countries, the volume represent a partial overview of those aspects that have stood out in the transition through 1997 as interesting challenges with potentially broader applicability. The selectivity of the papers is heightened by its methodological approach emphasizing the cross-country perspective rather then employing country-by-country descriptions; the cut-off point for describing developments is, in most cases, mid-1997.

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