IMF: better if “Baltic Tiger” never happened?

RIGA — The skyscrapers. The German luxury cars. The massive shopping complexes. Would it have been better if they never came to the Baltic states at all?

Indeed, a working paper released by the International Monetary Fund this week written by economists Bas B. Bakker and Anne-Marie Gulde posits that if the credit boom that spurred intense, rapid growth in the Estonian, Latvian and Lithuanian economies earlier this decade had not occurred the countries may be in better shape today.

“While the credit booms generated strong growth during the boom-phase, the subsequent bust has been so deep that seen over the 2003–10 period countries with the strongest credit boom have seen slower average GDP growth than countries that did not experience this boom,” the paper reads.

“Given that much of the capital inflows were in the form of loans, these countries also saw the steepest rise in external debt and the largest fiscal deficits … the conclusion that the rapid expansion of the financial sector was beneficial for growth may thus have been too sanguine.”

People’s incomes soared during the “Baltic Tiger” years from 25 percent of the European Union average to about 65 percent, the gross domestic product skyrocketed and full-on Western consumerism was introduced for the first time to much of the population. However, with these benefits came a number of risks that Bakker and Gulde say the Scandinavian banks (SEB, Swedbank, Dankse, Nordea) that dominate the Baltics and government policymakers paid insufficient heed to — inflation, a trade imbalance and decreased competitiveness.

However, putting in policies to check the growth was politically unpopular and largely seen as unnecessary. After the boom died and the crisis hit, the Baltic states’ fixed currency regime prevented monetary solutions, forcing an “internal devaluation” that has brought on double-digit GDP declines, the highest unemployment in the European Union and a steep decrease in real estate values.