Why Poland and the Baltics?
In Europe, the Baltic States represent, after Poland, the most successful systemic transformation that led centrally-planned systems to the market economy.
Reason, attraction & goal. These changes can’t be fully understood simply through a quantitative approach since need to be complemented by a historical and socio-political perspective: which becomes necessary in understanding the deep causes and effects of the transformational recession that took place at the beginning of the Nineties, the subsequent period of recovery and the process of FDI attraction that led these countries to join the EU on one side, but making the structural differences even stronger on the other side.
You have to know where you come from, in order to clear the path to your goals.
The performance during the transition from a centrally planned to a market economy strongly depends on the initial conditions: the higher the distortions, represented by under-openness and perverted trade flows, the worse the transformational recession. Moreover, inadequacies in the institutional capacity in one country have a dramatic impact on economic performance, measured by output growth and the degree of economic development: liberalization alone, when not complemented by stabilization and strong institutions, cannot ensure any efficient performance. The institutional capacities depend on the strong affirmation of the rule of law – implemented by the control over corruption and rent-seeking, and the protection of property rights.
What should multi-national enterprises mind before planning FDIs?
In the Central and Eastern European economies, the transformational recession that followed the collapse of Communism and the shock therapy was caused mainly by investment constraints that did not allow for rapid transfer of capital stock from inefficient sectors to efficient ones: after the implementation of the so-called Balcerowicz Plan in Poland, only in Estonia the liberalization process, which worked faster than in Latvia and Lithuania, influenced positively the economic performance, creating notable market stimuli. In effect, the different impact of structural reforms on FDI attraction in the Baltics was strongly influenced by the timing of reform: Estonia was faster than the neighbors in reform implementation, and that created a competitive advantage as the first mover, mainly in the banking and financial sector, while the higher control over corruption and the reform of the corporate tax system, which brought the tax rate on reinvested earnings down to zero, made the rest, ensuring the GDP growth and macroeconomic stability that led Estonia to join the Euro area in 2011.
