New Kind of Hegemony and Ambiguous Transition in Lithuania

IV. Three Models of Political Economy of Transition

4.3 New Kind of Hegemony and Ambiguous Transition in Lithuania

In sharp contrast to the two, the political power in the post-soviet Lithuanian state was divided between the ex-communist president Brazauskas and the Seimas (legislative power) characterized by a hierarchical relationship between majority of leftist ex-communists (the LDLP and Lithuanian Social Democratic Party) and marginalized nationalists (Sajudis/Homeland Union and Lithuanian Christian Democrats). The ex-communists were elected by the majority of population on the platform of the same orientations previously set forth by the nationalist-minded Sajudis during regime change – a free market economy and democracy – but not at the expense of decreasing living standards. Thus, the ruling majority rested mainly on the support of those hit most severely by the Sajudis reforms during 1990-1992, namely, the old Soviet era

45 industrial elites, pensioners, and rural population.

International observers and scientists have often portrayed the bipolar party system in Lithuania consisting of one large, powerful party and opposition in positive light and contrasted it with „undemocratic‟ political leadership of Estonia and Latvia (Clark 1995). In the view of many, Lithuania had the most stable political scene among the Baltic states. Indeed, the post-soviet Lithuanian state during that period resembled a typical democratic two party system and was stable (Clark et al 1999). Yet it was not conductive to a successful economic transition, however. The underlying reason was ideological nature of the Lithuanian ex-communists.

Contrary to widely accepted belief that Lithuanian communists collaborated with nationalist during the period of regimes change and thus were „patriotic‟/‟nationalist‟, I contend that the post-soviet leadership here was rather an expression of a new kind of hegemony of the old communist bureaucratic apparatus, with control over power rather than long-term state benefits as the primary goal. The LDLP, Lithuanian Social Democratic Party and President Brazauskas were successors of the CP LTSSR which, in the light of perestroika, started to lose its political and economic power. The failure of nationalist-led Sajudis provided an opportunity to reconstruct and compete as a new force.

The basis for this group was a tightly-knit network of hierarchical connections that have developed during the Soviet period. For a long time, the organization of the communist party rested on so-called nomenklatura system in which people were appointed to high and medium positions based on the list of qualified persons. In such a system, the bureaucrats were subjected to rules, punishments and awards as well as various benefits (Antanaitis 2008). This nomenklatura-style network, with a goal of maximizing internal benefits, continued into the post-soviet period. As a result, almost all significant posts in state apparatus were filled by members of this group, often regardless of competence and professional commitment. Added to this, there has been eagerness to maintain support from the electorate – pensioners, rural population, ethnic minorities, and industrial elites. Moreover, the nationalist opposition was rather weak:

Sajudis/Homeland and Christian Democrats have distinguished themselves by their anti-communist and anti-Russian rhetoric, however, its economic policies have been loosely defined (Ramonaite 2006).

These three factors – corporate nomenklatura culture, its dependency on societal needs and absence of strong alternative to ex-communists – have shaped Lithuanian economic

transition which was far less effective, more corrupt and slow pace of than in Estonia or Latvia.

The „gradualist‟ (Kolodko 2000) strategy in Lithuania became to be marked by a relatively loose monetary policy, lack of fiscal discipline, high levels of state control and complicated privatization process which resulted in slowest speed of recovery, lowest living standards, larger portion of soviet legacy and lower competitiveness among the Baltic states (World Bank Country Study 1998).

In contrast to the rational and decisive Estonian state‟s attitude toward economic restructuring, Lithuanian leadership was very ambiguous. On the one hand, the state wanted to maintain the electoral support. On the other, it promised to continue the free market reforms.

Given the situation, these two goals were irreconcilable and thus the transition process was marked by many conflicting policies.

Lithuania‟s monetary policy was subjected to government intervention: the Central Bank was highly dependent on the state which pushed for an increased money supply to cover rapidly decreasing living standards, a policy that resulted in low interest rates and weak currency. Under such conditions, high levels of inflation were maintained for a long time. To even greater extent that Latvia, Lithuanian state yielded to popular demands and kept high levels of public spending, such as agricultural credits, various types of subsidies, funding for the remained soviet-style enterprises; this lack of fiscal discipline, combined with an absence of a clear taxation system and poor tax collection ran the state budget into deficit, and Lithuania had to take loans from international organizations. During the banking crisis, the banking sector in Lithuania remained under excessive political influence and control (EIU Country Report 1995) . Contrary to the tough Estonian and Latvian policies imposed on a number of ineffective banks, the government here continued to finance them, since most of the managerial staff belonged to the nomenklatura network. Moreover, the privatization program followed the same logic: unlike in Estonia or Latvia were outsider privatization was preferred, Lithuania lacked a central governing institution and applied the so-called manager- and employer buyouts (MEBOs) were the existing large-scale soviet style enterprises were sold for vouchers (redeemable government coupons) to their previous managers and employers. In such way, the old-fashioned managerial, entrepreneurial and technical skills continued for a long and, most importantly, a certain class of ex-nomenklatura managers formed along with this privatization. Furthermore, while Lithuania has reoriented its trade towards Western Europe, it remained the Baltic republic most closely linked

to other post-Soviet countries. As a consequence, the Lithuanian economy has also been hit most severely by the Russian crisis in 1998 (OECD Report 2000). The first government lasted until 1996, but the former Soviet nomenklatura rule continued until 2000 (Antanaitis 2008), as the electoral law was favorable to larger parties.

V. Conclusions

The Baltic states started their transition towards a market economy at approximately the same time and shared a lot of similarities from the outset. In the light of this, the goal and orientation of the three have been the same – liberal democracy, free market economy and integration into Western economic and political world through transnational organizations (EU and NATO). Yet despite these similarities that the Baltic states have shared at the beginning, they have achieved varying degrees of success (the North-South gap). Within a decade, Estonia has established itself as having the highest living standards, budget surplus and revenues from foreign direct investment as well as being the most technologically advanced among the three. Moreover, according to some international rankings, Estonia belongs to one of the most rapid and successful performers worldwide, a fact that compelled some to refer to its development as an

„economic transition miracle‟. In contrast to their northern Baltic neighbor, Latvia‟s performance was more modest, with Lithuania lagging behind the two almost invariably of indicator taken.

Why did the Baltic states that have shared substantial similarities at the outset achieve varying degrees of success? What generalizations can be drawn from examples of the Baltic states?

These have been the central questions of this thesis.

5.1 Institutional Settings, Ideologies and Contingency

Competing explanatory frameworks attempted to account why the Baltic states diverged a great deal despite the similar initial conditions. These explanations can be grouped around two main perspectives, namely: (1) economic, and (2) cultural. Contrary to these, I have put forth an alternative, political economy explanation. I looked at the relationship between state-building and economic transition during the initial period of the post-soviet economic transition (1992-1996) and argued through comparative analysis that institutional settings and ideological differences between Estonia, Latvia and Lithuania were discernable. In Estonia, parliamentary system and exclusion of a significant part of population from electoral rights brought to the stage a brand new group of policymakers that enjoyed a great level of autonomy from society. Fueled by politics of identity, they have implemented decisive, radical and rapid market-oriented transitional policies during 1992-1994. In Latvia, a strong ethnic threat produced highly

fragmented political leadership during 1993-1995 that adopted mixed economic transition policies, more moderate than these of Estonia. Lithuania was an exception among the three. Here, failure of the perestroika-period nationalists to maintain public support brought to power ex-communist president and parliamentary majority which, resting on the Soviet-style nomenklatura networks and having control over state rather than successful transition as their primary goal, were more ambiguous toward market reforms. As a result, Lithuania‟s transition during 1992-1994 was the slowest and least consensual in the Baltic states.

Moreover, one may also notice that a great role was played here by contingency. A number of factors combined together and created unpredictable situations, with unintended consequences. Similar to Estonia, the rationale of Sajudis in Lithuania has rested on „economic nationalism‟. During 1990-1992, it implemented radical economic restructuring policies that share much in common with those of Estonia adopted only two years later, during 1992-1994.

Moreover, the both groups had a very limited knowledge on economy: for Sajudis head Landsbergis, it was a generalized image of the Lithuanian Interwar Republic and idealized Scandinavia, for Laar in Estonia – book of Milton Friedman and fascination with German reforms. Yet the destinies have been radically different: in Lithuania, the reforms were premature as the country was still under the USSR control; nationalists stood alone. In Estonia, the nationalists experienced the same defeat and for the same reasons, but only after the radical policies started working. The LNIP in Latvia had similar goals as the Estonian ENIP and EHS, yet no one has expected that the issue of citizenship will become a major dividing line for the new policymakers and will make the necessary political consensus on decision-making impossible. All in all, the process of restructuring itself was very dynamic, rapid and thus fragile.

Furthermore, I have argued that these differences were decisive to the emergence of the North-South gap as they set the pace for subsequent periods and had long-term economic outcomes. Thus, findings of this thesis contrast greatly to the accounts of nationalist explanation of post-soviet development where the Baltic states are seen as belonging to a unitary model of regime change and political-economic restructuring. I have demonstrated that what is taken as Baltic model of transition is actually Estonian model.

5.2 State-Building and Baltic Development

Different disciplines have raised question on what are the underlying reasons of success or

failure of development, and the answers depended on cases chosen. Generally speaking, there have been several significant explanations. In the 1950s, a modernization theory emphasizing worldwide social, political, individual and economic change, inextricably linked with the U.S.

post-war politics began to appear in the writings of American social scientists. They believed that economic advancement and modernization of so-called Third World comes out from extensive inflow of ideas, capital and human resources from the West through communications, media, and migration. In the 1970s, a new wave of literature produced by the Latin American thinkers shifted attention to negative causes of participation in global capitalist development. It was argued that economic dependence on trade, aid and investment results in slow economic growth and unequal income distribution. Political dependence on foreign states and foreign firms, in their view, results in dependency of the state on external forces or capitalist elites. The experience of East Asia (Japan, South Korea and Taiwan) violated the predictions of dependency theory and helped to formulate theories of „developmental state‟ and „embedded autonomy‟. It concluded that external economic involvement may produce internal growth and the state is able to serve the internal needs.

The developments after the break-up of the USSR in the early-1990s have been unprecedented and thus provided a battleground for the existing theories of development. There has been a widespread assumption that former authoritarian regimes and centrally-planned economies will be invariably replaced by democratic forms of government and free market economies. However, as cross-country studies soon revealed, that was not the outcome. The post-soviet countries soon diverged a great deal in terms of political systems (from democratic to authoritarian) and economic orientations. The Baltic states soon emerged as a specific category within the former soviet countries: the only ones that unambiguously chose liberal democracy and capitalist market economy as their ultimate goal.

My detailed analysis of the initial period of transition in Estonia, Latvia and Lithuania (1992-1996) points to the importance of the state, namely, dynamics of state-building, bureaucratic apparatus, decision-making in the process of economic transition. Further analysis needs to be done to test the relation between these variables in subsequent periods and comparisons with East Asian cases might give new impetus and insights to state-centered theories of development.

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