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The three Baltic countries—Estonia, Latvia, and Lithuania—have long been among the leaders in postcommunist reform. In my 2007 book, How Capitalism Was Built, I concluded without hesitation:
The Baltic states…are the star performers [among postcommunist countries]. They are full democracies with normal market economies and predominant private ownership. They have a steady, high growth rate of around 8 percent a year. Their corruption is low, and their budgets are close to balance. The Baltic governments are small and well run.
The Baltic economies undertook the three essential steps early on. They liberalized prices and trade. They broke out of the inflationary ruble zone in 1992 and swiftly stabilized their newly minted currencies with a fixed exchange rate as an anchor, strict fiscal and monetary policies. They also carried out fast privatization.
Therefore, the current crisis is all the more shocking. All the three Baltic economies are in deep economic crisis. Latvia experienced a decline in GDP of 4.6 percent in 2008, and Estonia 3.6 percent, and this year all the three Baltic economies are expected to contract by 12 to 18 percent. No other economies are facing such declines apart from Ukraine and Armenia, which are not directly related to the Baltic hardship.
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