July 24, 2009

An Unfettered Faith in Free Markets and Limited Role of Government are Under the Test

The discrepancy in the economic performance of the FSU countries is mainly responsible for how easily the world political leaders turn to Keynesian macroeconomic policy. The FSU economies demonstrated such a weird discrepancy in their post-socialist transition that we could hardly prove the importance of individual liberty and private property for economic growth. While Latvia, Estonia, and Lithuania are not only the first bastions of democracy and market economy in the FSU region, they are also very successful examples of economic liberalization of former socialist states. But the heretical examples of Russia, Belarus and Kazakhstan make it hard to defend the unfettered faith in free markets and limited role of government. Moreover, the current economic recession gives more fodder for the critics of economic liberalism because the freest FSU countries such as the Baltic States underwent much harsher economic downturn than their authoritarian counterparts like Russia and Belarus. The Baltic trinity (i.e. Estonia, Latvia, and Lithuania) have the sharpest fall in their GDPs as compared to the first quarter of 2008. While Russia has a 6% drop in GDP and Belarus has a 4% fall in GDP, the Baltic States are experiencing a double-digit fall in GDP with 18% in Latvia, 15.6% in Estonia, and 12.6% in Lithuania (see). Ukraine is somewhere in between Russia and Lithuania with an 8% decline in GDP (see IMF World Economic Outlook, April 2009).

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