The Internationalization of the Baltic Economies

The three Baltic countries are often considered to be a group of relatively similar countries, but there are in fact, from both a cultural and an economic point of view, significant differences between them. This is also the case in relation to the speed and extent of the integration into the World Economy-into the economy dominated by the Western industrialized countries. How can these differences be explained? Are they a result of political choices concerning clearly defined explicit development strategies? Or have they arisen because of "implicit development strategies" influenced by a multitude of different factors? Both of the considerations are correct: Political choices direct the transition, but these choices have been influenced by many different elements as have the outcome of the political decisions. In the following I will present a model to analyze the interaction between the most important elements in the transition process. Focus will be on the change in institutions and activities related to the integration into the world economy-international trade and foreign direct investment into the Baltic. I will commence by presenting a model developed in Mygind (1994) to be used for structuring the analysis and explaining the different transition strategies. Following a general introduction, the model will be used to give an overview of the most important factors determining FDI and international trade in relation to the specific country in transition. The analysis emphasizes the importance of background conditions in explaining the choice and impact of the transition strategy. Thus, the empirical analysis will start with a short account of the most important differences in the three Baltic countries background conditions. It will then be illustrated the political process is determined by these background conditions and how the political choices lead to differences in transition strategies. The differences in the general transition strategies will be related to the specific institutions and conditions of importance for international trade and foreign direct investment. Finally the actual results of internationalization on trade and FDI will be analyzed. 2. A model for analysis of societal changes As well as illustrating a society with four subsystems, Figure 1 also shows the most important dynamics between these subsystems in the process of transition. The institutional system contains the formal rules governing the political process (constitution etc.) and the-3-economic coordination (property law, contract law, law on bankruptcy, taxation, regulation of the financial sector etc.). The production system includes the resources of …