Estonia Schadenfreude

It is now common in the left-leaning blogosphere to cite Estonia, its rapidly collapsing economy, and its earlier free market policies.  Sometimes the name of Dan Mitchell pops up as well.

I would add a cautionary note.  Recall for instance that Chile and South Korea and New Zealand also had collapsing economies, for a while (the early 80s for Chile and late 80s for NZ) but they rebounded because they were built on relatively sound economic policies.  The point can be made that they, like the Estonians, indulged in too much speculative excess but most Estonian decisions have been good ones.

Which Eastern European economy has suffered least from the financial crisis?  By most accounts it is Bulgaria.  Should we envy their economic policies?  Should you prefer the Bulgarian Way to the Estonian Way?

Which country has a future you would bet upon?



i don't know for sure, but wasn't the problem with estonia just that they funded their boom by borrowing in a foreign currency (mostly EUR) and then had serious trouble when their currency tanked?

if they built something valuable during the boom the will do very well afterward -- they can devalue their currency, default on their foreign currency loans, and the real value of what they built will be intact and unencumbered by debt. they will do blisteringly well.

Tyler, Bulgaria got lucky - the lev is pegged to the Euro, Bulgarians did not need to (and thus did not) borrow in other currencies. In many ways, though, Bulgaria's economy is in much worse shape than other Eastern European economies. The SOFIX index took a vicious beating in 2008 (second only to Russia's, I believe). Bulgarians are way overleveraged relative to their low incomes. The demographics look horrible - Bulgaria went from close to 9 mil people in the late 80's to 7.5 mil today, due to both negative growth and emigration. The economy is concentrated in the capital Sofia, with only a few exceptions (e.g. tourism). Virtually all banks are foreign-owned (Greece, Austria, Hungary) - and now cannot lend because the parent banks are preserving capital, so the credit crunch has hit pretty hard. Worst of all, Bulgaria is nursing a real estate bubble, which is just beginning to pop.

Bulgaria was, by most estimates, five years or so behind Poland, Hungary, Czech Republic and the Baltics in terms of reforms. Now it's late to the bust too, but it has not escaped it.


I think you are misunderstanding the dispute. I found an article by Matthew Yglesias that was refuting the free market policies as a cause of Estonia's and others growth, and instead arguing that they were tapping into the recent credit bubble. This is quite different from arguing that their free market policies caused the problem. It's just saying that the Estonia miracle isn't proof that their economic policies were responsible for their short lived success.

We're all Bulgarians now.

Bulgaria so far has not suffered a financial breakdown simply because the economy was less exposed. This however has little to do with policy choices. Both countries run currency boards. Estonia is almost fully dependent on the nordic banks and it indeed attracted a lot of property and other speculative investment, as well as tourism.

In Bulgaria the financial system is also dominated by big European banks, but they are a mix of almost all big player ( many Greek banks, UniCredit and others) - which makes systemic failure less likely. Bulgaria also had a fair share of property investments ( mostly holiday homes ) which have already been almost completely devalued and the whole property market seems to be heading the Estonian way.

Also Bulgaria has a much larger agriculture, as well as light & heavy industries, whose business cycles mean that they are now entering the worst of their problems.

Finally the Bulgarian economy on the whole is far less developed and much weaker - which makes it more robust ( ). So I agree with you , if I had to bet on the economic future of either, I'd go north.

Babar, FYI: Estonian Kroon is pegged to Euro, and was pegged to Deutschmark before that.

Agreed ED, but I think I would set the bar even higher. If you want to make policy recomendations for the US I think the country should at least be as big as California or Texas, 25-35 million.

If the country in question is of similar size or smaller than a medium large US state (IL, MI, PA, GA, NC, OH, NJ )I don't think comparisons have much merit for a country as large and diverse as the US.

This pretty much puts our peer group as Japan, Germany, France, UK, Italy, South Korea, Spain, Canada, and Australia.

And still most of those are not close to being as large as the US or as ethnically or geographically diverse. IMO the US is truly exceptional as a large (population and geography) and rich country.

Estonia is in trouble because they borrowed excessively. They also likely played the speculation game in the same manner as Iceland. Is this a legitimate criticism of the free market system itself? Not any more than if I am fiscally irresponsible and end up ass deep in credit card and mortgage debt. Simply because people (and nations) do stupid things is not an indictment of the free market system in general.

I also think it unreasonable to suggests that the situation of Estonia and the like is a criticism of seasteading. A much more appropriate model for the seasteaders to emulate for their ocean city-state is that of Singapore or Hong Kong. Both are examples of successful city-states that are riding out the current mess as well as can be expected. Of course, an ocean city-state will need to attract various industries (everything from space launch, technology manufacturing, banking, etc.) as well as trade with the rest of the world in order to be economically successful. The fact that places like Singapore and Hong Kong exists suggests that, from an economic standpoint, that seasteading could be successful. The real hurtle is engineering. The ocean is a incredibly hostile environment for man-made structures. I actually think its worse than space (but far cheaper to access at the current time).


Agree 100% with your analysis of MY's post, and of the liberal blogosphere basically not having any real commentary about eastern europes free market policies, and of the amount of conservative claims about EE.

By Tylers logic, we can expect Estonia to bounce back quickly due to its relatively sound economic policy. We have a testable hypothesis.

What Estonia and Ireland do is really bad. What they do is really bad not when they are doing bad but when they are doing good. Those countries are in the business of stealing money from other countries taxpayers. When a closed economy feels like doing low corporate tax rates, there is no problem. But when such open economies decide on a low corporate and high income tax regime, they free ride other countries social and education system and worse they are even complice in direct tax fraud. Just google transfer pricing + insfert any suposed low tax miracle country.

By most accounts the Eastern European economy that has suffered the least from the financial crisis is where black market rules ... Albania.

Georgi has a good point - one of the biggest differences between Baltics and much of the rest of the region (and to a lesser degree between the Baltics) is the differing levels of corruption. If there is one metric on which Estonia is clearly different than Bulgaria, this is it. If someone was looking for a testable hypothesis, some difference between levels of corruption and some output (recovery?) would be an interesting one to try. Conceivably possible to tease out the effect separate from monetary.

Another down part of this crisis is we are likely doomed to 5-10 years of bad econometric analyses, whereby economists neglect to control for the key factors in the crisis (in Eastern Europe, particularly monetary regimes), either causal or results, and come to asinine conclusions.

@Georgi: I don't agree that "devaluation will just bring temporary pay cuts for employees." If what you are saying is that Estonia effectively is a maquilladora (maakiijaadoorra?) for the rest of Europe, it still needs to reduce the costs on what it produces. And yes, Estonians will pay higher prices for imports, but no change in domestic consumption - which will favour domestic consumption and reduce the trade disbalance. These effects may be at the margin, but they're still there.

Put another way, by either a devaluation or a massive coordinated national wage cut, the same effect is more or less achieved. The primary difference is that in an economy with mostly foreign exchange loans (including to the household sector) - in a devaluation the banks are mostly insolvent immediately. With the peg maintained and massive contraction in the economy, the banks go insolvent slowly, and in general, better for all foreign currency creditors.

That's a valid public policy choice, even if one can question whether it is the "best." (Although a cynic might ask whether this constitutes a bailout of Sweden's banking sector).

"@eccdog except for the 'rich country' piece, kenya fits your criteria."

As does Brasil and several other countries (Indonesia, Russia, Kazahkstan, etc). But typically comparisons are limited to rich world "market" democracies.

Actually I see Brasil as the most similar country to the US (other than Canada) in everyway but wealth.

Large country geographically and population, former European colony that passed its former country by, history of slavery, history of imigration (Italians, Germans, Japanese to Brazil).

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