The Political Economy of Internal Adjustment in the Baltic States: Explaining Responses to the Crisis ; Vidinio prisitaikymo politinė ekonomija Baltijos šalyse: valstybių reakcijos į krizę aiškinimas

Abstract

In this dissertation, the experience of Estonia, Latvia and Lithuania during the crisis in 2008-2010 is analysed. Its aim is to find out why the Baltic countries chose and were able to implement the strategy of "internal adjustment", i.e. kept fixed exchange rates and achieved fiscal sustainability via fiscal consolidation. Furthermore, it asks why Estonia was able to handle the crisis most successfully. Based on the theories of currency crises and fiscal consolidation, a theoretical model is constructed. The empirical investigation relies on both qualitative and quantitative (statistical) methods. It is found in the dissertation that conventional theories cannot adequately explain the Baltic situation during the crisis. Therefore, non-conventional factors are investigated. The Baltic willingness to defend the fixed exchange rates can be attributed to certain economic factors (high flexibility and indebtedness in foreign currencies), continuity in economic policy, causal beliefs, and non-economic functions of fixed exchange rates. The implementation of a very large fiscal consolidation package was possible due to weak trade unions, a high degree of centralization, causal beliefs about appropriate economic policies, weak interest groups and lack of societal mobilization capacity. Estonia's better performance was due to better informal institutions, namely a higher trust in government, which allowed Estonia to collect more taxes during the crisis than Latvia and Lithuania.