Centre and Periphery: the Baltic States in Search of Economic Independence

The short-term economic prospects of the Baltic states (Estonia, Latvia and Lithuania), following their achievement of political independence from the USSR in September 1991, are assessed. They face both the general difficulties of transition to the market and a special problem of disentanglement from the Soviet Union/Commonwealth of Independent States. The paper focuses on the problems of disentanglement, in conditions of rapid inflation and output decline in the Soviet successor-states. These problems arise from (i) around 90 per cent of cross-border merchandise flows being with other Soviet/ex-Soviet republics; (ii) the inter-republic flows constituting around 50 per cent of Baltic GDP; (iii) the Baltic states’ position inside the single rouble currency area, with their money supply outside their own governments’ control. Projections are made of the likely short-term adjustment costs for the Baltic economies of an abrupt shift to trading at world market prices with Russia and other Soviet successor-states, with settlement in convertible currencies. It is shown that the available data on the Baltic states current accounts with the rest of the world in 1988–1989 give an exaggerated impression of adjustment costs but that, even so, the latter are likely to exceed assistance available from the West.