'Baltic Rim' Bids for Old Trading Glory

By Reginald Dale

International Herald Tribune, June 11, 1999

STOCKHOLM - In the late Middle Ages, the region bordering the Baltic Sea was the richest in Europe, if not the world. The 70 or so cities of the Hanseatic League operated an open trading system often seen as an early model for the European Union of today. Now the region once again claims to be Europe's fastest growing market, and there is much talk of recreating the prosperity of the old Hanseatic glory days - this time linked to the rest of the Continent - in what local boosters like to call the ''Baltic Rim.''

It will not be easy. After heady forecasts earlier in the 1990s, the Russian economic crisis has made a dent in the immediate growth prospects of the three Baltic States - Estonia, Latvia and Lithuania - that shook off 50 years of Soviet rule at the end of the Cold War.

The three countries are still hobbled by unwelcome inheritances from their former Soviet masters in the form of inadequate economic infrastructure, imperfect legal systems, corruption and a lack of understanding of market economics. There is still uncertainty over Russia's future intentions.

But there can be no doubt that the area presents great opportunities. At a conference in Stockholm this week on Baltic investment, attended by government and business representatives from around the region, there was widespread agreement that the three countries were heading in the right direction, even if they still have a long way to go.

After World War II, one participant pointed out, it took war-torn Finland nearly half a century to catch up to the living standards of neighboring Sweden, which had remained neutral.

It may take almost as long for the poor countries of the Baltic - often defined as including northern Poland and northwestern Russia - to draw level with thriving Sweden, Finland and Denmark.

But the Baltic economies are beginning to be transformed by foreign investment. Perhaps the region's biggest asset - a more welcome inheritance from the bad old days - is a well-educated and technologically sophisticated work force, with wages generally ranging from one-sixth to one-tenth of those in Sweden or Finland.

Many of the Soviet Union's electronics and other high-tech industries were located in the Baltic region, including St. Petersburg and the surrounding area. Scandinavian companies are increasingly treating the Baltic countries both as part of their home market and, with much of the work force Russian-speaking, as a stepping stone to Russia.

Optimists hope to draw much of northwestern Russia - rich in energy and raw materials - into a Baltic growth area that would underpin the region's security as well as its economic and political stability.

Some have a vision of a high-tech, low-tax, deregulated entrepreneurial paradise, in which a kind of neo-Hanseatic Silicon Valley would link the established technological industries of Sweden and Finland with California-style start-ups in the Baltic states.

That will require a lot of changes. Although the region is technically a free-trade area, conference participants complained of burdensome obstacles at borders for both goods and people.

The aim of reducing the time taken for frontier crossings to a maximum of two hours (compared with 10, 20 or even more) is still pie in the sky, especially at the Russian border.

But apart from Russia, all the countries of the region are forecast to grow faster than the average for industrial countries this year and next. And it is in the whole of Europe's economic and security interests to encourage the region's development.

Much effort will have to come from Baltic governments, which need to continue to improve the climate for the massive foreign private investment that will be essential for the region's growth. Most Baltic companies are too small to thrive in the open market by themselves.

What the European Union can do is make it crystal clear that the Baltic states will be admitted as soon as possible. It is perhaps a good sign that the conflict in Kosovo has convinced many European leaders that the whole process of the EU's eastward enlargement and the stabilization of the former communist states should be accelerated.

It will also be good for the rich, sometimes complacent Scandinavian countries if their high-tax, high-cost and highly regulated economies have to face some serious low-cost competition from their former Hanseatic partners.