Small States, Profound Implications: Exchange Rates, Flexibility, and The Lessons from the Baltic States for Political Economy

• In Event: Baltic Political Economies in a Broader Perspective

Abstract

While small in size and economic clout, the three Baltic countries present important puzzles and also lessons for broader discussions regarding practical and academic issues in political economy. First, these states have grown very fast over the last three decades. Second, they have been surprisingly resilient to a flurry of economic shocks, displaying remarkable resilience. In this paper, I aim to establish how surprising these phenomena were in a broader context. Furthermore, I discuss how a deeper analysis of the Baltic countries’ performance can suggest ways of improving the conventional models of currency crises, accounts of the relationship between exchange rate regimes and growth as well as adjustments to shocks, and long-run economic development. In particular, I emphasize the importance of better understanding, measuring, and then incorporating into respective empirical accounts the relevant dimensions of economic flexibility (most importantly but not exclusively, labor market flexibility) and institutional resilience. Overall, I lay the case for scholars and practitioners in the fields of political economy and economics to pay closer attention to the curious case of the Baltic countries, as their study presents far-reaching implications.

Short Bio

Associate Professor and Chief Researcher at Vilnius University

Author

• Vytautas Kuokštis, Vilnius University