The transition from totalitarianism to democracy: WHAT CAN WE LEARN FROM THE BALTIC POST-INDEPENDENCE EXPERIENCE?

Introduction: On April 21st I gave the following speech at a conference held in Kyiv, the capital of Ukraine. The theme of the conference, as well as of my keynote speech, was to seek answers to the question: What can Ukraine learn from the Baltic post-independence experience? It turned out that there is a lot to be learnt from the Baltic experience. The most important lesson is that right from the beginning the political leadership in the Baltic countries stood united – across the political barricades, left, right and center – to consolidate their fragile independence by joining the EU and to take out an insurance policy against future threats by joining NATO. This unity of purpose gave their domestic politics – despite all the turmoil and social upheaval of the most difficult transition period – the internal descipline needed to push through and stand by difficult and necessary, but unpopular, decisions. This steadfastness of purpose and long term strategy has been sadly missing in Ukraine all the time since independence.

In February 1990 – tventy five years ago – the president of the United States and the founder of the Bush dynasty, gave a speech here in Kyiv, which later has become infamous. It was castigated as „the chicken speech“. In this speech the undisputed leader of Western democracy appealed to Ukrainians „not to succumb to extreme nationalism“; and to keep the Soviet Union together by all means, in the name of peace and stability.

If he or his successor would have given such a speech here in Kyiv today, I wonder if it would have caused riots. But, I am sure, it would have sounded as music to the ears of a man called Vladimir Putin. Putin, as is well known, is on record for having declared the dissolution of the Soviet Union to be „the greatest geo-strategic catastrophy of the 20th century“. For a former Soviet KGB-officer, this may be understandable. But for a Texan, who happens to be president of the United States, this in nothing short of ludicrous.

Cold War endgame.

History teaches us that few nations have escaped from the yoke of foreign domination peacefully. The peaceful Baltic Road to Freedom is an outstanding exception. But let us not forget that it was by no means easy. Those three small nations had to go through an ordeal and for a while, they were on the brink of war. Luckily, it was averted at the last moment.

In the early 1990s the political landscape in Europe was being transformed. The Berlin Wall had been torn down. In Warsaw there was Solidarnosc. In Prague there was the Velvet Revoluton. The whole of central and eastern Europe was breaking free from Soviet domination. The peaceful unification of Germany was in sight.

All of this was being made possible by a new man in the Kremlin, Mikhail Sergevich Gorbachev, by his refraining from the use of force to keep the possessions won by the Red Army during „the Great Patriotic War“. His political trademark, glasnost and perestroika, had even given rise to expectations of democratic reform within the Soviet Union, although that delusion was never shared by this author. Summing it all up – the end of almost half a century of cold war was in sight.

There was a lot at stake: The hopes for democratic reform within the Soviet Union; the peaceful liberation of central and eastern Europe; comprehensive agreements on nuclear and conventional disarmament; withdrawal of and reduction in military forces; end of the Cold War; a peace divident for all.

All of this, it was firmly believed in the West, was totally dependent upon Gorbachev remaining in power. Nothing, therefore, should be said or done, that could undermine Gorbachev´s position. His removal from power would risk the return of the hardliners. That could mean a return to the Cold War, end of the peace process and – in the worst case scenario – the danger of armed conflict in Eastern Europe. It all boiled down to a question of war or peace.

Western response.

This is why president Bush asked the Ukrainians not to leave the Soviet Union, in the name of peace and stability. This is why chancellor Kohl and president Mitterand wrote a joint letter to Landsbergis, the leader of Sajudis, in which they urged him to postpone the implementation of the declaration of independence of Lithuania; and asked him to negotiate with the Soviets, without any prior conditions.

And this is why, despite all the official rhetoric about freedom, democracy and the self-determination of nations, the leaders of the West were speaking an entirely different language behind closed doors. A classical case of rhetoric versus realpolitik. The leaders of the Baltic independence movements were told to settle for a compromise – some sort of home rule within the Soviet Union – all in the name of peace and stability. They were not even allowed to plead their case at OSCE conferences dealing with human rights and restoration of national independence in the post-cold war environment, lest they spoil the peace process.

In other words: The leaders of the Baltic independence movements, wishing to secede from the Soviet Union, into which they had been illegally and forcibly annexed, were told that they were becoming the spoilers of the peace That is why, when in January 1991 the Kremlin had decided to use military force to prevent the Baltic nations from leaving the Soviet Union, that their appeal for support in the West was met with a lukewarm response.

And this is why, my country – in the name of solidarity of small nations – tried to garner support among other small nations for the Baltic cause, since the leaders of the Western alliance were obviously beholden to a different agenda.

And this is why, when the attempted coup d´état in Moscow, in August 1991 had failed – causing a power vacuum in the Kremlin – we used that window of opportunity to initiate a process of diplomatic recognition of the restored independence of the three Baltic countries: First by Iceland and then by a few other small countries in Europe. The process turned out to be irreversible. The US managed to follow suit somewhat later, just ahead of the Soviet Union. – A few months later, the Soviet Union ceased to exist.

The transition.

How do you go about building democratic institutions and a functioning market economy – from scratch? It is a daunting task. The transition from a centralized command economy to a diversified market economy, had never been tried before. Despite their glorification of the German Reich, the Nazis had never abolished the market economy. There was therefore nothing in the textbooks on how to do the job.

In the beginning, inevitably, there is chaos. The productive machinery and state administration of the previous regime was more or less paralysed. There was a real danger of a complete break-down. A market economy is based on the recognition and protection of property rights. It is based on private enterprise rather than centralized state planning. So, one of the first tasks is to privatize state assets, were applicable.

It is a process wrought with danger. If you can do it by public tender, fine. But how is it going to be financed? If valuable state assets are handed out as booty to favoured cronies, you have opened up the gates of hell, in the form of corruption. Corruption is a way of life. Once that genie is out of the bottle, it is hard to lock it up again. It stakes out the way towards plutocracy, or worse still, to kleptocracy. Either way, it is incompatible with genuine democracy.

The privatization process in Russia under Yeltsin has been called „The Theft of the Century“. You tell me, how it was done in your country! Then we can compare the Russian way with the Norwegian way. I am talking about natural resources, such as oil and gas. In Russia it was handed out as a booty to a few powerful oligarchs. In Norway those precious natural resources are by law the property of the nation. The licencing fees are deposited with a public investment fund – mostly invested abroad to avoid inflation at home – to finance the retirement of elderly Norwegians in the future.

In the Baltic states this process opened up many opportunities for quick enrichment – even profiteering. But I am not aware of any major scandals on a scale that might be familiar to you. But of course we are talking about profiteering. That´s the point. After all private profit is meant to be the driving force of a market economy.

But the role of a democratic state is to lay down the rules of the game. In such a state it is the responsibility of the legislative, executive and judicial powers of the state to make sure that all participants play by the rules of the market. In reality there is no such thing as free or perfect markets. That is why the state should take care of the public interest by preventing the formation of monopolies and other market distortions.

Shock therapy or gradual reforms?

In a command economy, prices are set by political fiat. They are therefore neither an indication of effective demand nor a guide to optimal allocation of resources. In a market economy prices are supposed to be determined by the laws of supply and demand. When prices are set free for the first time, there is a grave danger, under unavoidable circumstances of extreme shortages everywhere, that inflation will get out of control. To fix it, you will have to do everything possible to enhance competition.

This requires a series of important decisions: Are you going to opt for protectionism or open up to foreign competition from the beginning? Are you going to expose your national currency to the vagaries of the financial markets, or are you going to tie it, in the name of stability, to a strong foreign currency? Are you going to offer incentives for foreign direct investment? How are you going to design your tax system? Are you going to give priorities to incentives for investment, in the name of economic growth? Or can you afford to emphasize equitable distribution from the start? BIG questions. Few answers. You simply proceed by trial and error.

Most developed countries initially developed their industrial infrastructure behind protective walls. They opened up their markets to foreign competition only after some time, when they felt confident about some domestic comparative advantage. Even the Asian tigers, in the latter half of the 20th century, adopted this approach. But in a globalized world time is a precious commodity for nations, that lost out on the latter half of the 20th century. Most national leaders nowadays feel they have no choice but to jump into the deep end of the pool at once. In eastern Europe in the 1990s the choice seemed to be between two options: Shock therapy or gradual reform.

Those are medical metaphors. Shock-therapy means surgery. But for the patient to survive surgery he must be robust enough to endure it. Sometimes the body politic is so fragile that it is advisable to prescribe medication (e.g. subsidized energy or basic food stuffs) while the patient is building up his immune system. Sometimes you have to mix the two approaches in the name of flexibility.

This is politics. But the common goal is to get the chaos under control; to start the productive machinery and run it at maximum speed; to give wealth creation precedence over equitable distribution á la the Nordic model. The policy mix adopted depends on the strength of the democratic institutions and the willingness of the public to endure sacrifices now for greater benefits in the future. All of this depends on the level of trust and confidence in the political leadership. And trust can only be earned through proven deeds.

European integration.

During this crucial period of transition, your prospects for success will be greatly enhanced, if you can rely on positive external support.

The lessons of history are deeply rooted in the psyche of the Baltic nations. When the Second World War broke out they were left alone to deal with their fate. They were caught unprepared to face an overwhelming and brutal adversary.

That is why it was uppermost in the minds of their political leaders right from the start to do everything possible to consolidate their fragile independence; and to take out a trustworthy insurance policy against potential external threats in the future. This meant joining the European Union and NATO at the earliest possible opportunity. When formulating policy and making important decisions, they had an overall guiding principle: Would this policy or this decision enhance their capacity to fulfill the entrance requirements, as defined by those organizations, or not?

The European Union is not merely a customs union or a free trade area. Its primary purpose, right from the beginning, was to prevent war and maintain the peace in Europe. It is a political union, first and foremost. The nations of Europe voluntarily apply for membership but undertake the obligation to fulfill the entrance qualifications. They are ready to give up part of their formal sovereignty in order to share in the enhanced sovereignty of the union itself.

As for the EU-internal market, every nation state is under the obligation to play by the same rules. The four freedoms of trade in goods, services, financial transactions and the labour market are meant to ensure a level playing field – or a win-win situation, as the Americans would put it.

Although the EU is not a military organization, nonetheless it provides the member states with the „soft power“ projected by the most important player globally in international trade. NATO, on the other hand, is a military alliance, open to democratic societies and providing them with collective security vis a vis external threats. In both cases only functioning democracies need apply.

Perhaps, this is the most important lesson to be learnt from the Baltic post-independence experience: Right from the beginning, the politial leadership stood united, across all political deviding lines, behind the longterm goal of joining both the EU and NATO. Those ultimate goals enjoyed solid support among the majority of the populations. This unity of purpose gave their domestic politics – despite all the turmoil and social upheaval of the most difficult transition period – the internal discipline needed to push through and stand by difficult and even unpopular decisions.

Whenever demagogues or populists wanted to take the easy way out, such moves could be thwarted, if they conflicted with the declared purpose or undermined the capacity to fulfill the entrance qualifications. Steadfastness of purpose and long-term strategy, despite the social upheaval of the transition, helped the Baltic nations to pull through.

This has helped make the Baltic post-independence experience a success story. Despite ethnic divisions, economic hardship and political strain, they have managed to build functioning, democratic institutions. They have achieved their declared aim to return to the family of European democracies. Their economies have successfully been integrated into the inner market of the European Union They have shown the self discipline required to fulfill the entrance qualifications of both multi-national organizations, the EU and NATO. They are well on their way of catching up with their richer neighbours. And as members of the North Atlantic Alliance they have the full force of NATO behind them in standing up to hostile military threats to their security. This is a success story from which others can learn a lot.

The Baltic Way out of the Crisis.

Of course the Baltic states could not escape the international financial crisis that emanated from the United States and has engulfed most of us in the past few years. Having enjoyed rapid economic growth in the boom years prior to the crisis, with an influx of foreign capital – and having become heavily indebted – the Baltic states were in fact hit hard by the crisis. With the draining up of foreign direct investment and the withdrawal of lending by foreign owned banks, the sudden contraction of their economies was severe.

But since the banks were for the most part foreign owned, the Baltic governments were spared the cost of bailing out the banks. Other EU-member states have not been so fortunate. In Ireland, Greece, Cyprus and other Mediterranian countries, the bailing out of the banks by tax payers, and severe cuts in social expenditures, year by year, have caused political upheaval: Massive contraction in economic output, offensive level of unemployment, especially amont the younger generation, and unsustainable debt burden, at an even higher percentage of GDP than before the crisis.

The German-imposed austerity, as a response to a recession, is not only bad economics; it is a classical case of a remedy which is worse that the disease. The subsequent inequality is rapidly accelerating, reaching levels that threaten social cohesion and political stability. For years we have watched EU-leaders react with half-measures , too little and too late. This political malaise has prolonged the eurozone financial crisis with no long term solution in sight.

Rather than trying to improve their competitiveness by devaluing their currencies, all the Baltic governments decided to tie themselves to the mast and ride out the storm, to use a navigational metophore. Devaluations of their currencies would have made the foreign denominated debt of companies and households utterly unsustainable. On this point I can speak from the bitter experience of my own country.

Instead the Baltics imposed upon themselves the so-called „internal devaluation“, voluntarily cutting wages, salaries and other productive costs as well as social expenditures to restore their competitiveness and to create incentives for economic growth. This turned out to be successful. The crisis, although severe, turned out to be short-lived.

These were tough measures that required a lot of self-discipline and political maturity. In most other countries collective sacrifice like this would have been deemed politically impossible. This success story has considerably enhanced the prestige of the Baltic nations within the European Union.

Influx of EU structural funds and EU-instigated measures to restructure bank debts and to have the foreign owned banks resume normal lending activities, succeeded in restoring economic growth. By putting their own house in order by drastic measures that turned out to be effective, the Baltic nations have set an example for others to emulate. Can our friends in Ukraine benefit from that experience? You bet – and it is not too late.

About the author: Mr. Hannibalsson was Iceland´s Minister of Finance 1987-88 and Minister for Foreign Affairs and External Trade 1988-1995. As finance minister he oversaw an overhaul of the state revenue and tax system. In 1989-94 he was in charge of Iceland´s negotiations on the EEA-agreement with the European Union. As minister for foreign affairs he was active in garnering support for the restored independence of the Baltic states. In 1998-2006 he served as ambassador of Iceland in Washington D.C., Helsinki, The Baltic states and Ukraine. In the last few years he has been a visiting scholar at several universities, e.g. Vitautas Magnus University in Vilnius and Tartu University in Estonia. His autobiography, Tilhugalíf (Honeymoon) became a best-seller in Iceland in 2002.