Baltics Poised to Unleash Market Potential

IN the eyes of the world, three tiny countries have just been reborn: Latvia, Lithuania, and Estonia.How can these resource-poor Baltic nations, for 51 years subsumed by the mammoth centrally commanded Soviet economy, make a go of it in the world? The challenge is daunting, say Western economists, businessmen, and government experts, but the potential is enormous. The people are educated, Western-oriented, and eager for change. But most important, the location and geography of these states - on the western edge of the Soviet Union, with major ports along the Baltic Sea - have positioned the three as the "gatekeeper" to and from the East. It is a historical role the Baltic nations are poised to resume. Riga, the capital of Latvia and the largest port in the Baltics, will be "the Hong Kong of Europe," says a United States government specialist on the Baltics. In the past year, representatives of Hong Kong and Singapore have visited the Baltics and vice versa. In the postwar era, Finland has prospered by importing Soviet raw materials and exporting finished products as well as marketing its connections in the Soviet bureaucracy. In time, with low wages and a skilled work force, the Baltic states can become the "maquiladoras" of Scandinavia, just as Mexican border factories provide cheap labor for US companies. And with the upheavals in the central Soviet bureaucracy since Soviet President Mikhail Gorbachev's rise to power, the Finns have lost some of their insider's edge. For the Baltics, one consolation for their 51 years of incorporation into the Soviet economy is that they know that system intimately and can profit financially from their ties, especially to those regions that don't already have the foreign presence that Moscow and Leningrad have. According to Jenik Radon, a New York lawyer with business and government connections in the Baltics, the Estonian capital of Tallinn has consulting firms advising the Soviet Pacific island of Sakhalin on how to develop its timber industry. In Riga, a consultancy is advising the Siberian peninsula of Kamchatka on its own timber industry. The Baltic Sea ports will provide revenue for these nations, though the Russian Republic plans to build a bulk cargo port 150 kilometers west of Leningrad that is meant to replace the Latvian ports of Venspils and Klaipeda. Currently, more than 50 percent of Soviet exports go through Latvian ports. Another advantage for the Baltic peoples is that, literally, they speak the Russians' language. Numerous experts on the Baltic economies say that in five to 10 years the Baltic states will be well on their way toward a market economy and will enjoy a much higher standard of living than the Soviet republics. But getting from here to there won't be easy. The Baltic nations still lack the basic financial structures and culture of a market economy. There are no money markets, no mobile labor force, no stock markets. "There is a lack of public acceptance of the middleman function as such, and there is no tradition of paying for know-how," write Swedish development experts Leif Grahm and Lennart Konigson in a survey on Baltic industry. "Until the facilitating, brokering functions gain acceptance and industry realizes that it has to pay a price for know-how - whether it is a matter of advertising, engineering, or management consultants - [the Baltics'] possibilities for realizing [their] potential will remain constrained." In short, after 50 years of a centrally planned economy commanded from Moscow, the Baltic states have to relearn the basics of capitalism. And they need to unlearn the communist notion that making money as a middle man is immoral. "Building a new culture will take time," said Mr. Grahm in an interview. Even though the Baltic republics have little in the way of hard currency, they do have industrial structures that are valuable. Some of these can be sold off to Western business and the proceeds used to make investments in the West. Only through active involvement in the Western economy will Baltic businessmen learn how market economies work, Grahm says. "These people are very smart, they're just ignorant - high IQ, bad training," says the US official. The issue of selling off state industries remains to be ironed out in the Baltics. There has been some discussion of distributing properties to pre-annexation landowners. In Latvia, there has been discussion of a voucher system, in which each citizen can sell his points to someone else or pool his with others' to buy a factory or other state enterprise. One of the problems, says Grahm, is that there has been no discussion of the relationship between entrepreneurship and responsible management. He also raises concerns about a growing "mafia" in the Baltics that has arisen out of the decline of fear in the country. One of the public misperceptions about the breakup of the Soviet Union - including the breakaway of the Baltic republics - is that political independence equals economic self-sufficiency. In fact, the vast network of bilateral republican agreements that have been forged of late within the USSR can serve as the economic foundation of a future confederation of former Soviet republics. Even more germane than inter-republic agreements is enterprise to enterprise accords. "In reality, a bilateral agreement between Vilnius [the Lithuanian capital] and Kiev [the Ukrainian capital], for example, isn't relevant, except that it legalizes negotiations between enterprises," says Matthew Sagers, an economist at PlanEcon consulting firm. "The key is when you have an agreement between a carburetor manufacturer in Vilnius and a Kharkov [in the Ukraine] tractor plant." In the spring of 1990, when Moscow cut energy supplies to Lithuania over its pro-independence policies, Lithuania was forced to forge independent economic relationships - an experience that showed the republic that it could be done and helped prepare it for real independence.