liepp working paper - sciences po/2441/r04642f098es955171...liepp working paper n 66 1 revisiting...

LIEPP Working Paper April 2017, nº66

Revisiting the Baltic growth model: From neoliberalism to the social investment welfare state

Sonja Avlijas Sciences Po (LIEPP) [email protected]

www.sciencespo.fr/liepp © 2017 by the author. All rights reserved. How to cite this publication : Avlijas Sonja, Revisiting the Baltic growth model: From neoliberalism to the social investment welfare state, Sciences Po LIEPP Working Paper n°66, 2017-04-21.

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LIEPP Working Paper n° 66

1

Revisiting the Baltic growth model: From neoliberalism to the

social investment welfare state

Sonja Avlijas

Abstract

This article shows that the services-oriented growth model in the Baltic

countries—Estonia, Latvia and Lithuania—has been underpinned by a

social investment welfare state. Some scholars have portrayed the region’s

transition to capitalism as socially ‘disembedded’ and exposed to a more

zealous form of ‘neoliberalism’ than the one found in Central and Eastern

Europe. These accounts have called attention to the social costs of such a

trajectory of capitalist development (Bohle & Greskovits, 2012). Others

have praised the exceptional economic growth in the region, and contrast-

ed its high educational performance and labour force participation to Cen-

tral and Eastern Europe, all the while ascribing these successes to the

sound implementation of the Washington consensus (Aslund, 2013). This

article provides a more nuanced perspective on the Baltic countries’ ap-

proach to growth in order to reconcile these two seemingly contradictory

perspectives. To that end, the article reveals higher state investment in

human capital, higher generosity of labour market policy and greater ex-

pansion of public sector employment in the Baltic states than in Central

and Eastern Europe. It argues that these social investment oriented policies

have underpinned these countries’ efforts to transform into knowledge-

intensive service economies. The article supplies a new type of growth

model to the literature on capitalist diversity in Eastern Europe. It also

shows that the expansion of a knowledge-intensive service economy can be

associated with growth of public sector employment, rather than its reduc-

tion.

Keywords: social investment welfare state, growth models, capitalist diversity,

knowledge economy, Eastern Europe

I am very grateful to Bruno Palier, Sarah Ashwin, Jan Rovny, Abel Bojar and participants in various

seminars and conferences for their useful comments and suggestions.

2017/04

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I. Introduction

Transition from socialism to capitalism in Eastern Eu-

rope was described as a “great economic experiment of

the 20th century” (Stiglitz, 1999, p.3). Following the

initial negative impact of transition during the 1990s,

Eastern European countries have maintained steady and

high growth rates throughout the 2000s, especially prior

to the 2008 global economic crisis (Figure 1). Extensive

economic restructuring and institutional change which

have taken place in the region have been influenced by

both international and domestic actors, as well as the

countries’ specific historical path dependencies.

These processes have led to the emergence of different

trajectories of capitalist development. Literature on capi-

talist diversity in Eastern Europe has acknowledged a

variance between the trajectory of the Baltic countries—

Estonia, Latvia and Lithuania—on one hand, and Central

and Eastern Europe (CEE) —Czech Republic, Hungary,

Poland and Slovakia—on the other. As Stockhammer,

Durand, & List (2016) remind us, CEE countries have

pursued economic growth by upgrading their industries

towards higher value manufacturing products via high

dependence on foreign direct investment (FDI) and inte-

gration with global value chains (see also Nölke &

Vliegenthart, 2009). Instead, the smaller Baltic countries

focused on rapid liberalization to attract foreign capital

into high value service sectors such as banking and real

estate (Bohle & Greskovits, 2012). Both trajectories

have, however, been characterized by high dependence

on foreign capital as a key driver of growth.


3

Figure 1. Annual GDP growth

Source: World Bank.

The three Baltic countries saw higher GDP growth rates

than CEE countries during the 2000s, which went up to

10% annually (Figure 1). They were also more severely

struck by the global economic crisis and experienced a

total 20% GDP decline during 2008-2009, due to their

high exposure to international markets. While this excep-

tionally strong impact of the crisis raised important ques-

tions about the sustainability of the Baltic growth model

(Bohle & Greskovits, 2012), following an internal deval-

uation and implementation of austerity measures (Som-

-15

-10

-50

51

0

GD

P g

row

th (

an

nu

al %

)

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

4

mers & Woolfson, 2014), the region swiftly and recov-

ered to again reach higher growth rates than CEE.1

Figure 2. Employment rates (20-64)

Source: Eurostat.

The three Baltic states have also seen much better and

more dynamic labour market performance than their

neighbours in CEE. Their employment rates have been

substantially higher than in most CEE countries,2 and

they generated more new employment during the 2000s

than all four CEE countries (Figure 2). The Baltic coun-

tries also saw steep declines in their unemployment rates

1 This sudden negative shock impacted the Baltic countries’ standards of living, as they also experienced drops in their levels of GDP per capita, albeit only temporarily

(see Figure A1 in the Appendix). 2 With the exception of the Czech Republic which has been at a markedly higher level of economic development than the rest of Eastern Europe since the onset of transition

(see Figure A1 in the Appendix).

55

60

65

70

75

Em

plo

ym

en

t ra

te 2

0-6

4,

%

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


5

during the 2000s. By 2008, they had dropped to almost

2%. While the 2008 crisis had a negative impact on the

three Baltic countries’ labour markets, they swiftly re-

covered the employment figures once they restored

growth (see Figure A2 in the Appendix).

Such successful economic and labour market perfor-

mance of the Baltic countries has been hailed by interna-

tional organizations such as the International Monetary

Fund and the World Bank. Much of the countries’ eco-

nomic success has been ascribed to their rapid and effec-

tive market liberalization, macroeconomic stability, sim-

plified tax systems as well as the reduction in the size of

their public sectors (Aslund, 2002, 2013).

Political economists also emphasized that there was min-

imal state involvement in the functioning of the Baltic

economies, and they criticized its social cost. Bohle &

Greskovits (2007, 2012) underlined the countries’ weak

welfarist contracts and low expenditures on social protec-

tion, while identifying the Baltic trajectory of economic

reform as ‘disembedded neoliberalism’. According to

them, the Baltic model of capitalist development has

been characterized by a zealous pursuit of macroeconom-

ic stability and economic openness, along with the low

provision of social security.

This literature has paid less attention to the fact that since

the onset of transition the Baltic countries, and most no-

tably Estonia, have been transforming into information

societies and knowledge-intensive economies (Runnel et

al., 2009). “When Estonia regained its independence

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6

from the Soviet Union in 1991, less than half of its popu-

lation had a phone and its only independent link to the

outside world was a Finnish mobile phone concealed in

the foreign minister's garden. Two decades later, it is a

world leader in technology” (“How did Estonia become a

leader in technology?,” 2013). All three Baltic countries

also boast of very high levels of tertiary educational at-

tainment (Figure 5) and high employment rates of the

traditionally disadvantaged groups, especially women

(Avlijas, 2016). Furthermore, according to the 2015 Pro-

gramme for International Student Assessment (PISA),3

Estonian 15 year olds are ranked third in the world by

educational attainment, after Singapore and Japan. Near-

ly half of the poorest pupils in Estonia score among the

top quarter of children across the OECD world, showing

the country’s high level of educational inclusiveness

(“Must try harder,” 2016). Finally, knowledge intensive

service employment in the Baltic countries, and particu-

larly in Estonia, exceeds that found in CEE (Figure 3).4

Despite these trends, scholarship has not accounted for

the role of the state and public policy in shaping the Bal-

tic transformation towards knowledge-intensive services.

In an initial attempt to analyze capitalist diversity in

Eastern Europe, Feldmann (2006) classified Estonia as a

liberal market economy, without making specific refer-

3 Test administered by the Organisation for Economic Co-operation and Development

(OECD) 4 The Czech Republic is an exception vis-à-vis Latvia and Lithuania, but the country has been at higher levels of economic development than the rest of the region

throughout transition (Figure A1 in the Appendix).


7

ence to the fact that such economies are considered inter-

nationally competitive in high-end services, information

and communication technology (ICT) and other sectors

that rely on radical innovation and changing market con-

ditions (Hall & Soskice, 2001). Bohle & Greskovits

(2012) mention the Baltic countries’ substantial invest-

ment into education, ICT and reduction of new social

risks, but do not develop the argument further.

Figure 3. Employment in knowledge-intensive ser-

vices (% of working age population)

Source: Author’s calculations based on Eurostat data. Notes: 1) There is a break in the series in 2008 because Eurostat

changed its classification of activities from NACE 1.1 to NACE 2.

2) According to Eurostat, an activity is classified as knowledge in-

tensive if tertiary educated persons employed (according to

ISCED97, levels 5+6 or ISCED11, levels 5 to 8) represent more than

33% of the total employment in that activity.

10

15

20

25

To

tal e

mp

loym

en

t in

KIS

, %

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

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In sum, the economic literature assumes that the state has

played a very marginal role in the Baltic and that the re-

gion’s labour market and educational performance can be

attributed to the supremacy of the market mechanism. On

the other hand, by reducing the Baltic growth model to

‘neoliberalism’, the political economists have failed to

acknowledge some of the unmistakably positive socio-

economic outcomes in the region and identify govern-

ment policies that can be associated with them.

By showing that state-driven educational reform and pub-

lic sector employment have played an important role in

the emergence of the Baltic growth miracle, this article

underlines that the knowledge-intensive services oriented

growth model in the region has been underpinned by a

social investment welfare state. Previous accounts of cap-

italist diversity in the region have been based on the tra-

ditional definition of the welfare state, while the Baltic

countries have been notorious for their low expenditures

on passive social welfare programmes. Therefore, earlier

contributions have overlooked the emergence of the so-

cial investment welfare state which, as defined by Morel

et al. (2012), focuses on the creation of human capital

(e.g. provision of education), as well as its mobilization

(e.g. work-life reconciliation policies) and maintenance

(e.g. life-long learning). A lot more that a passive disin-

tegration of the welfare state took place in the Baltic,

argues this article, throwing a new light on the Baltic

growth model. The article therefore revisits and chal-

lenges comparative political economy contributions

which have argued that the Baltic countries pursued a

‘disembedded neoliberal’ development trajectory during


9

their transitions to capitalism (most notably Bohle &

Greskovits, 2007, 2012).

The article adheres to the following structure. The next

section discusses the literature on the changing role of the

welfare state in the ‘new’ economy. From there, theoreti-

cal insights from advanced capitalist economies are iden-

tified, which are then used to update the existing typolo-

gy of capitalist diversity in Eastern Europe. Existing ac-

counts of capitalist development in the Baltic are also

reviewed in this section, in order to show that they have

not yet accounted for this ‘new’ welfare state. Section 3

presents data on education, training and digital literacy,

public sector employment and labour market access in

the Baltic and CEE spanning from the late 1990s (due to

data availability) up to 2014. The section thus uncovers

the nature of the social investment welfare state in the

Baltic and also discusses its resilience in the aftermath of

the 2008 economic crisis. The final section summarizes

the article’s contribution and its theoretical and empirical

implications.

II. Theoretical framework: A ‘new’ welfare state for

the ‘new’ economy

The argument put forward in this article is theoretically

embedded in the literature which focuses on the role of

the welfare state in the ‘new’ knowledge-intensive ser-

vice economy. The traditional view is that European wel-

fare states have been shrinking and disappearing over the

past few decades (Allan & Scruggs, 2004; Pierson,

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10

2006), driven by neoliberalism that reduces the state to

regulation as the main instrument of economic govern-

ance (Schmidt & Thatcher, 2013). A number of social

policy and political economy scholars have, however,

challenged this perspective (Fougner, 2006; Hemerijck,

2012; Jenson, 2010; Morel et al., 2012; Perkins et al.,

2004). Instead, they argue that European welfare states

have been adapting to new economic circumstances and

new social risks which have emerged in response to the

changes in demographic, family and labour market struc-

tures, as well as growing fiscal pressures. Given the

emergence of the ‘new’ ICT-intensive service economy,

tapping into the knowledge and skills of the workforce

has been recognized as a key driver of economic growth

and development across the EU and beyond. These

changes have led to the emergence of the so-called social

investment welfare state which has focused on creating

and enhancing the human capital of the population to

support the expansion of the knowledge-intensive econ-

omy as a key vehicle of modern era growth (Morel et al.,

2012). In that context, Jensen (2008) argues that educa-

tion should be considered part of the welfare state and

that its absence from the literature and welfare state

measurements may be more a matter of convention than

anything else (p.160). Furthermore, efforts to expand the

definition of the welfare state beyond social transfers and

also focus on social services have been rife in the more

recent literature (e.g. see Schelkle, 2012 for an over-

view).

The social investment welfare state focuses on the re-

duction of labour market vulnerability of individuals

through investment in their human capital from early


11

childhood through life rather than via passive social

insurance of adults. The logic of social investment is to

subsidize disadvantaged citizens in order to improve

their marginal productivity, so that they can access

higher wages and better quality jobs. It is thus very dif-

ferent from a laissez-faire state which focuses on regula-

tion only and on the creation of any jobs, including the

low wage and low quality ones.

These insights have also begun to shift scholarly atten-

tion towards the examination of institutional and political

factors that underpin the expansion of the knowledge-

and ICT-intensive economy and that can maximize its

yields (Garritzmann et al., 2017; Häusermann, 2010).

Nelson & Stephens (2012) have shown that, contrary to

conventional wisdom about liberalization, substantial

public sector investment is needed in order to support

growth of high productivity service jobs. Thelen (2014)

has also shown that liberalization in some countries, most

notably in Scandinavia and in the Netherlands, has gone

hand in hand with social investment policies delivered by

the state. The argument put forward in this article—that a

knowledge-intensive services oriented growth model in

the Baltic has been underpinned by the social investment

welfare state—therefore builds on the insights from this

latest generation of comparative political economy re-

search on the trajectories of service liberalization in the

ICT-intensive growth era (Nelson & Stephens, 2013;

Thelen, 2014; Wren et al., 2013).

Such a redefinition of the welfare state has also had

consequences for how political economy scholars view

the role of social policies in economic development.

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Rather than assuming that the role of the welfare state is

to protect the population from market forces, there has

been a growing interest in understanding how welfare

state reforms are used to support countries’ growth tra-

jectories (Hassel & Palier, fcm; Morel et al., 2012).

Specifically, in the context of de-industrialization of the

advanced capitalist economies and the concurrent ICT

revolution, public investment into human capital has

become a key welfare state input for the knowledge-

intensive growth model. In that context, social invest-

ment can be viewed as a political strategy that trans-

forms the current distributional conflict over cash re-

sources into a future-oriented welfare for all through

equitable production, mobilization and maintenance of

human capital. In other words, instead of looking at

social investment only as a supply side intervention, it

can also be seen as an alternative perspective on redis-

tribution, or a government strategy for strengthening the

negotiating position of labour vis-à-vis capital by

providing them with more education, which then feeds

into higher productivity, higher wages, better living

standards and economic growth (Midgley, 1999).

These insights about the recent transformations of the

welfare state in advanced capitalist economies have not

yet been examined in the context of Eastern Europe.

Instead, political economy scholarship on the region has

retained the traditional notion of the welfare state. For

example, Bohle & Greskovits (2012) argue that the rap-

id transformation and liberalization of the Baltic econ-

omies occurred along with little political pressure to

compensate the losers of transition. They propose that

the Baltic neoliberal model was feasible because of


13

these countries’ emphasis on identity politics of nation

building and alienation from the Soviet Union, which

resulted in high social tolerance for inequality. Accord-

ing to them, the perceived threat of Russia united the

people politically and made it feasible to impose a high

economic and social cost on the population. They go on

to argue that, as a result of this high social tolerance for

inequality, the Baltic countries were able to focus on

economic growth only, rather than also on redistribution

and monetary compensation of the losers of transition.

The authors contrast this development model to what

they refer to as ‘embedded neoliberalism’ in CEE coun-

tries—characterized by FDI-led reindustrialization and

large welfare state expenditures to compensate the los-

ers of these reforms through passive cash transfers, such

as unemployment benefits and pensions, including early

retirement schemes (Bohle & Greskovits, 2012).

Furthermore, scholarship on capitalist diversity in East-

ern Europe has made an explicit separation between so-

cial and educational policies (Bohle & Greskovits, 2012;

Cerami & Vanhuysse, 2009; Lendvai, 2009; Martinaitis,

2010; Vanhuysse, 2006). When it comes to CEE, Nölke

& Vliegenthart (2009) have pointed out that neither mul-

tinational companies nor governments have invested

much into the qualifications of their workforce (p. 680).

Bohle & Greskovits (2012) argue that educational reform

never took place in CEE due to the scarce resources fol-

lowing pressures of international capital for subsidies, as

well as EU-imposed tight budgetary constraints. In con-

trast, Martinaitis (2010) shows that the Baltic countries

have developed general skill regimes during transition,

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but he does not examine the role of the state in these

transformations.

Finally, Vanhuysse (2006) and Cerami & Vanhuysse

(2009) connect welfare state reforms in CEE to these

countries’ growth strategies. They show that the welfare

state restructuring which took place in CEE was part of

the rational political strategies geared towards stimulat-

ing economic development rather than sheer populism. In

other words, they argue that CEE governments intention-

ally used welfare payments such as unemployment bene-

fits and pensions to ‘divide and pacify’ the losers of tran-

sition, and thus reduce political instability so that they

can attract FDI.

Building on this literature, this article proposes that the

Baltic governments have had an active, state-led ap-

proach to welfare state reform. However, it has not been

the one suggested by Bohle & Greskovits (2012) and

Vanhuysse (2006), according to which these countries’

governments exploited ethnic divisions to shift as many

competencies as possible to the market. Instead, the strat-

egy of welfare state reform in the Baltic has been shifted

towards social investment, this article argues. The next

section empirically examines this proposition.

III. Empirical analysis: Social investment in the Baltic

Statistical data and primary literature sources are used in

this section to assess whether the Baltic countries have

established a social investment welfare state during


15

transition. To that end, policies and socio-economic

outcomes that the political economy and social policy

literatures have associated with social investment are

examined. Empirical studies have typically focused on

educational attainment and digital literacy, public sector

employment and labour market access for the tradition-

ally excluded (see Morel et al., 2012 for an overview).

While some of the literature has also associated work-

family reconciliation policies such as childcare with the

social investment state (e.g. Morgan, 2012; Nelson &

Stephens, 2012), this article does not examine childcare

policy. Formal childcare provision has not become a

politically salient topic in Eastern Europe until very

recently, perhaps due to the institutional legacy that the

countries inherited from the socialist era, nor has it been

associated with greater female entry into the labour

force. For example, Mills et al. (2014) point out that in

Eastern European countries “the level of childcare us-

age, enrolment and public investment is actually very

low”, even though some of them have very high female

employment rates (p.42). The following three sub-

sections therefore present policies on education, training

and digital literacy that have been implemented in the

Baltic countries since the onset of transition, and pre-

sents a range of educational and labour market trends

that can theoretically be associated with these social

investment oriented policies.

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3.1 Education, training and digital literacy

3.1.1 Policies

The collapse of the Soviet Union in 1989-1991 led to

structural changes in the educational systems of the

newly independent Baltic states. OECD reviews of na-

tional education policies during the 1990s show that all

three Baltic countries started the process of vigorous

and all-encompassing education reforms which shared

similar concepts and principles (OECD, 2002, p.15).

The countries differed in terms of the sequence of im-

plementation of educational reforms, but they neverthe-

less shared many similarities. All three also saw unprec-

edented grassroots engagement of educators and drastic

increases in tertiary educational enrolment numbers

already during the early stages of transition (OECD,

2001a, 2001b, 2002).

Apart from the many legislative changes which served

to reform the higher education curricula, strengthen the

research infrastructure and create more flexible degree

programmes, the Baltic countries’ educational reforms

were also characterized by strategic thinking about how

education could strengthen their position in the global

economy. The Estonian government, most notably,

launched the Tiger Leap National Programme in 1997

with the aim to modernize the educational system, and

create an inclusive learning environment that is more

suited to the needs of “a knowledge-‐based, information

technology-intensive economy” (OECD, 2001a, p.54).

The programme equipped schools with ICT, linked

them to the internet and offered ICT education and


17

teaching/learning software to teachers.

Lumiste et al. (2007) also recognize the key role that in-

vestment in ICT has played in the stellar economic per-

formance of Estonia. Runnel et al. (2009) argue that the

country’s strategic plan to develop into a modern ICT-

intensive service economy has contributed to such per-

formance. The reform of the educational system towards

a ‘technological revolution’ also had an additional aim to

revitalize democracy and bring citizens closer to the state

which was rebranding itself as efficient and modern

(Runnel et al., 2009). The country also established the

Estonian Education Forum, a working group in charge of

producing strategic documents on the country’s future

education scenarios with the aim to inform education

policy making (OECD, 2001a, p.54).

Using a range of indicators to measure skill intensity of

the educational systems in Eastern Europe,5 Martinaitis

(2010) shows a stronger orientation towards general

skills in all three Baltic countries than in CEE (p. 89-

91). Within the Varieties of Capitalism analytical

framework, general skills are those which are

transferable across firms, and even across sectors. They

underpin high-end services, ICT and other sectors that

rely on radical innovation and changing market

conditions. Martinaitis (2010) also argues that the three

countries paid much less attention than CEE to the

development of vocational education and specific skills

5 For example, students at ISCED 5A level as % of youth aged between 18 and 26;

students (ISCED 5A) enrolled in social science, business and law fields as % of all students; % of adults engaged in non-formal education and training, that studied social

science, business and law.

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which are geared towards the manufacturing industry

and are not easily transferable across sectors (p.82-83).

This further emphasizes the Baltic states’ strategic ori-

entation towards the development of a growth model

oriented towards knowledge-intensive services instead

of manufacturing.

Figure 4. Education expenditures (gen. government)

Source: Eurostat.

General government expenditures on education as a share

of GDP in the three Baltic countries have been signifi-

cantly higher than educational expenditures in CEE, es-

pecially in comparison to the Czech Republic and Slo-

vakia (Figure 4). Estonia, in particular, has allocated sub-

stantial public funds to education, reaching up to 7% of

34

56

78

Ed

uca

tio

n e

xp

en

ditu

res,

% o

f G

DP

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


19

GDP in some years. This makes it one of the biggest

spenders on education in the EU, as well as the OECD.6

Moreover, since the three Baltic countries had exception-

ally high growth rates during the 2000s (Figure 1), their

nominal allocations towards education would have been

growing even during the periods which saw dropping

shares of educational expenditures in GDP.

Furthermore, Hungary and Poland, who have spent high-

er shares of their GDP on education than the Czech Re-

public and Slovakia, especially during the mid-2000s,

have not had such a clear vision for educational reform as

the Baltic states, and their policy was neither entirely

focused on the strengthening of manufacturing and spe-

cific skills nor on the development of the general ones

(Martinaitis, 2010).

High expenditures on education in the Baltic states along

with their overall smaller government size also demon-

strate that educational spending has been a high political

priority for their governments. In other words, education

devours a significantly higher share of total public ex-

penditures in the Baltic than in CEE. Overall public rev-

enue/public spending as a share of GDP in 2002 was

36% in Estonia, and 35% in Latvia and Lithuania, while

it was 51% and 45% in Hungary and Poland respectively.

Therefore, expenditures on education which amounted to

7% of the GDP in Estonia in 2002 constituted 20% of the

country’s total public expenditures. In contrast, Hungary

6 EU-15 average spending on education is around 5% of GDP.

2017/04

20

allocated 11% of its total public expenditures to educa-

tion in the same year (see Figure A3 in the Appendix).

Investment in ICT in the region may have also spurred

further demand for higher education. Skill-biased tech-

nological change can, in theory, increase the demand for

higher education. “The shift in production technologies

causes information technologies to be complementary to

employees with higher skill levels since it increases the

returns to schooling” (Galor & Moav, 2000 in Castelló-

Climent & Hidalgo-Cabrillana 2010, p.2).

EU funds have provided an additional stimulus for social

investment in Eastern Europe. The EU began to heavily

shape Eastern European growth models and EU co-

financing became an essential factor for the development

of the region since the countries became members in

2004. For the programmatic period 2007-2013, EU funds

have represented 18.5% of Estonia’s GDP, while they

have represented 19.4% and 19.6% in Latvia and Lithua-

nia respectively (vs. 16.2% Eastern European average).

Thus, the Cohesion Fund, European Social Fund and

Horizon 2020 have played an important role in promot-

ing social investment in the region, both as part of the

Lisbon Agenda, Europe 2020 and the 2013 Social In-

vestment Package.

Ever since 1993, member states have been determining

the types of activities they spend the EU funds on. There-

fore, allocation of funds and their structure reflect the

countries’ individual growth strategies. In contrast to the

other Eastern member states, many of the EU funds in

Estonia have been channelled to the development of the


21

knowledge-intensive economy, such as boosting interna-

tional competitiveness of enterprises through R&D and

technology development. In Latvia and Lithuania the

funds have been directed towards training of the unem-

ployed and teachers, as well as increasing knowledge and

competences of the workforce, thus indicating a strong

social investment oriented component of the EU projects

implemented in these countries too (KPMG, 2014).

Finally, Baltic countries have been allocating around

20% of their labour market policy expenditures to train-

ing while this category of expenditures has been almost

non-existent in CEE (see Figure A9 in the Appendix).7

While there was a dip in expenditures on training during

the period of economic recession, their share has recov-

ered in Estonia and Latvia since, while it has continued to

lag in Lithuania. Importantly, these expenditures in the

Baltic have not come at the expense of unemployment

compensation which guarantees income security to the

unemployed. In fact, ever since the early 2000s, the Bal-

tic countries have been at least at the level of CEE if not

higher in terms of unemployment assistance coverage

and income replacement rates, the standard measures to

assess the generosity of the unemployment insurance

system (see Figures A4-6 in the Appendix). This implies

that a comparatively strong labour market policy has un-

derpinned the Baltic growth model. In addition, Masso &

Krillo (2011) show that expenditures on both passive and

7 A cross-national comparison of labour market policy expenditures as % of GDP

would not be very informative, since the Baltic countries have had substantially

superior labour market performance than CEE throughout the 2000s and therefore less

unemployed persons to spend on.

2017/04

22

active measures in the Baltic countries have grown sig-

nificantly since the onset of the 2008 economic crisis,

also thanks to the use of EU funds which compensated

for some of the fiscal constraints that the countries faced

at the time. These observations indicate a strong response

of labour market policy in the Baltic states to the adverse

impact that the recession has had on the countries’ labour

markets.

3.1.2 Educational attainment and digital literacy

By the end of post-socialist transition, the Baltic coun-

tries had a substantially higher share of the population

with tertiary education8 than the CEE ones, which have

been at even higher levels of economic development.9 In

2014, 32.6% of the working age population had tertiary

education in Estonia in comparison to 19.1% in the

Czech Republic (Figure 5). Latvia and Lithuania also

stood out in terms of the higher educational attainment of

their populations in comparison to CEE. While the earli-

est available Eurostat data on tertiary educational attain-

ment shows that the Baltic countries were at higher levels

than CEE already in the early 2000s, Terama et al. (2014)

underline that enrolment in tertiary education in Estonia

increased by 168% between 1994/95 and 2005/2006,

8 Eurostat groups educational attainment into three categories, following the Interna-tional Standard Classification of Education (ISCED) 19978 classification: i) pre-

primary, primary and lower secondary education (levels 0, 1 and 2); ii) upper second-

ary and post-secondary non-tertiary education (levels 3 and 4), and iii) first and sec-ond stage tertiary education (levels 5 and 6). 9 Measured in terms of GDP per capita and GDP per capita PPP.


23

which constituted the highest growth rate in the OECD

during that period (p.116).

Figure 5. Working age population with tertiary edu-

cation

Source: Eurostat.

Note: CZ – Czech Republic, EE – Estonia, HU – Hungary, LT –

Lithuania, LV – Latvia, PL – Poland, SK – Slovakia.

The cross-national difference in educational attainment

has been even starker along gender lines. The Baltic

countries saw the steepest gains in tertiary educational

attainment among women. By 2014, 40.7% of working

age women had tertiary education in Estonia in compari-

son to 20.1% in the Czech Republic (Figure 6). There-

fore, expansion of tertiary education in the Baltic has

primarily benefited women, which is consistent with the

18.1

8.6

23.8

9.6

26.9

14.9

31.4

19.2

20.2

11.7

32.6

24.8

19.1

9.7

0 10 20 30 40Population with tertiary education, %

SK

PL

LV

LT

HU

EE

CZ

20142001

20142001

20142001

20142001

20142001

20142001

20142001

2017/04

24

literature on social investment in advanced capitalist

economies (Nelson & Stephens, 2013; Thelen, 2014).

Figure 6. Working age women with tertiary education

Source: Eurostat.

Note: CZ – Czech Republic, EE – Estonia, HU – Hungary, LT –

Lithuania, LV – Latvia, PL – Poland, SK – Slovakia.

Finally, quality of education in the Baltic, and particular-

ly in Estonia, has received international recognition. Es-

tonia has become an international leader in educational

achievement, according to PISA assessments. Based on

the results of the most recent 2015 PISA, Estonia came

only after Singapore and Japan in terms of the proficien-

cy of 15-year-old students in science, reading and math-

ematics. It has also become one of the world’s top per-

formers when it comes to the inclusion and fairness of

20.3

8.5

28.1

10.7

33.9

17.3

36.9

22.3

23.1

12.3

40.7

30.6

20.1

8.5

0 10 20 30 40Women with tertiary education, %

SK

PL

LV

LT

HU

EE

CZ

20142001

20142001

20142001

20142001

20142001

20142001

20142001


25

secondary education. More than four in ten Estonian stu-

dents with a disadvantaged background score among the

top quarter of students in all PISA participating countries

despite the odds against them (OECD, 2016). Latvia was

also one of the few countries which saw consistent im-

provements in their PISA scores from 2000, and its per-

formance is at the level of the OECD average, along with

the more developed economies such as the United States,

Austria and Sweden. Lithuania, on the other hand, has

lagged behind the OECD average.

The level of digital literacy, proxied by internet usage

skills, in the Baltic is also higher than in CEE, and Lithu-

ania in particular (Figure 7). It has in fact almost reached

that of Sweden, while it is far above the rest of the EU

member states.

According to The Web Index, Estonia is ranked very

highly in a number of dimensions of the Internet’s con-

tribution to social, economic and political progress in

countries across the world.10 For example, in terms of the

Access and affordability of the Internet component of the

Index (which includes indicators such as access to inter-

net in schools, cost of broadband per capita income and

policies promoting free and low cost internet access),

Estonia ranked third in Europe and Central Asia in 2014,

right behind Denmark and Finland. While Lithuania and

10 This index is produced by the World Wide Web Foundation and it is the

world’s first measure of its contribution to social, economic and political pro-

gress at country level.

2017/04

26

Latvia are not included in this survey,11

the Czech Re-

public was in the 17th

place, followed by Hungary which

was in the 18th

and Poland in the 22nd

. In terms of the

Education and awareness component of the index, Esto-

nia was also ranked third, after Iceland and Denmark,

while CEE countries lagged substantially.

Figure 7. Share of individuals aged 16-74 with profi-

cient internet usage skills

Source: Eurostat.

Note: These individuals can complete 5 or 6 of the following activi-

ties: used search engine, sent mail with attachment, posted messages

to chatrooms/newsgroups or online discussion forum, made phone

calls, done peer-to-peer file sharing or created a web page.

11 While this index does not include Lithuania and Latvia, other sources indicate that these two countries, although lagging after Estonia, are aspiring European

leaders in ICT.

01

02

03

0

Inte

rne

t skill

s,

hig

he

st

leve

l, %

16

-74

2004 2006 2008 2010 2012 2014year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


27

Estonia also ranked higher than Latvia and Lithuania in

terms of its educational and ICT infrastructure already

during the early 2000s, as well as its high-technology

exports. Latvia appears to have been slightly more ad-

vanced than Lithuania in terms of hi-tech exports, but

weaker in communication technology and R&D efforts

(World Bank, 2003, p.8). Lithuania has also continued its

progress in communication technology, and by 2013 the

country was ranked 8th

in the EU according to usage of

electronic government services (KPMG, 2014).

3.2 Public sector employment

Figure 8 shows employment trends in the knowledge-

intensive parts of the public sector in the Baltic vs CEE.

According to the Eurostat classification, knowledge-

intensive public sector activities include the following: i)

public administration and defence, including compulsory

social security, ii) education, and iii) health and social

work.12

Public sector employees which work in state

12 Because of the variation in employment rates across the Eastern European countries

analysed in this article (see The three Baltic countries saw higher GDP

growth rates than CEE countries during the 2000s, which went up to

10% annually (Figure 1). They were also more severely struck by

the global economic crisis and experienced a total 20% GDP decline

during 2008-2009, due to their high exposure to international mar-

kets. While this exceptionally strong impact of the crisis raised im-

portant questions about the sustainability of the Baltic growth model

(Bohle & Greskovits, 2012), following an internal devaluation and

implementation of austerity measures (Sommers & Woolfson, 2014),

the region swiftly and recovered to again reach higher growth rates

than CEE.

2017/04

28

owned public companies are omitted from the analysis,

also because of the significant variations in company

privatization levels across Eastern European countries.

Figure 8. Public sector employment (% of working

age population)

Source: Author’s calculations based on Eurostat data.

Note: There is a break in the series in 2008 because Eurostat changed

its classification of activities from NACE 1.1 to NACE 2.

Public employment levels in the Baltic have risen stead-

ily during the 2000s, and by 2008 the region had by far

the highest share of public sector employment in East-

Figure 2), employees in the public sector are calculated as a share of the total

working age population instead of a share in total employment. This is because two

countries can have identical shares of employees in the public sector out of all em-

ployees, but when the overall employment rate is much lower in one country, that indicator hides the fact that a significantly lower portion of working age people work

in the public sector in that country.

10

11

12

13

14

15

To

tal e

mp

loym

en

t in

pu

blic

se

cto

r, %

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


29

ern Europe (Figure 8). This is an unexpected finding,

given the ‘neoliberal’ narrative offered by the political

economy literature on Eastern Europe. The 2008 eco-

nomic crisis had an adverse impact on the level of pub-

lic employment in Latvia only, but the trend had recov-

ered by 2010 and continued going upward. The differ-

ences between the Baltic and CEE are even more pro-

nounced for women’s employment, which indicates a

larger presence of women in the Baltic public sector

than in CEE (see Figure A7 in the Appendix).

Figure 9. Employment in education (% of working

age population)


Notes: 1) There is a break in the series in 2008 because Eurostat

changed its classification of activities from NACE 1.1 to NACE 2. 2)

Working age refers to the age cohort (15-64).

34

56

7

To

tal e

mp

loym

en

t in

ed

uca

tio

n,

%

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

30

The education sector in particular has driven the overall

higher trends in public sector employment in the Baltic.

Figure 9 shows the share of employment in the education

sector as a share of total working age population in East-

ern Europe. The share is around 2pp higher in the Baltic

countries than in CEE by the end of the period of obser-

vation. These trends have also been particularly pro-

nounced for women. Around 10% of all working age

women worked in the education sector at the end of the

period of observation in all three Baltic countries (see

Figure A8 in the Appendix).

3.3 Labour market inclusion

The Baltic countries have performed better than CEE

when it comes to labour market inclusion of the tradi-

tionally marginalized groups such as women. Women

have attained very high levels of employment, especial-

ly the educated ones, which is characteristic of countries

with high levels of social investment (Nelson & Ste-

phens, 2013). This trend stands in stark contrast to CEE

countries, which have struggled to effectively incorpo-

rate women into their labour force (Avlijas, 2016). Em-

ployment rates of women aged 20‑64 in 2008 stood at

72.9% in Estonia, 71.9% in Latvia and 68.7% in Lithu-

ania in comparison to 62.5% in the Czech Republic,

60.3% in Slovakia and 54.8% in Hungary (Figure 10).

Following the drop in female employment during the

2008-09 recession, these rates recovered to almost pre-

crisis levels by 2014.


31

Employment gap between the two genders has also been

substantially lower in the Baltic than in CEE, standing

at around 4pp in all three Baltic countries in 2008. The

gap ranged between 7‑10pp in CEE throughout the peri-

od of observation (Figure 11). The 2008 crisis had a

“positive effect” on the gender gap in employment rates

in the Baltic, which disappeared entirely, predominantly

because of a greater loss of male jobs in the region. As

the male jobs recovered, the gaps almost returned to

their (still very low) pre-crisis levels by 2014. These

data indicate that women in the Baltic countries have

had much more equal access to the labour market than

women in CEE, both before and after the 2008 econom-

ic crisis.

Figure 10. Female employment rates (20-64)

Source: Eurostat.

50

55

60

65

70

75

Fe

ma

le e

mp

. ra

te 2

0-6

4,

%

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

32

Figure 11. Gender gap in employment rates (20-64)

Source: Eurostat.

Employment rates of youth, defined by Eurostat as

those aged 20-29, have been substantially higher in Es-

tonia and Latvia than in other Eastern European coun-

tries throughout the 2000s. They rose steadily in the two

countries to reach around 70% in 2008, while Lithuania

did not see as much progress on that policy front. While

the 2008 recession caused a rather substantial drop in

youth employment in the two leading performers, the

two countries saw a recovery since 2010, but these rates

have yet to recover to their pre-crisis levels (Figure 12).

02

46

81

0

Ge

nd

er

ga

p in

em

p.

20

-64

, p

p

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


33

Figure 12. Youth employment rates (20-29)

Source: Eurostat.

IV. Conclusions and implications for future research

This article shows that a social investment welfare state

in the post-socialist Baltic states has played an active

role in delivering and shaping the region’s growth mod-

el. The article contributes to the literature on capitalist

diversity in post-socialist Eastern Europe. It does so by

revisiting the account by Bohle & Greskovits (2012)

who criticize the Baltic growth model and argue that it

has been socially ‘disembedded’ and characterized by

very low state involvement. The article also revises the

account that the region’s socio-economic successes can

be attributed to the sound implementation of the Wash-

50

55

60

65

70

Yo

uth

em

plo

ym

en

t ra

te 2

0-2

9,

%

2004 2006 2008 2010 2012 2014year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

34

ington Consensus, which has put forward by Aslund

(2013). It therefore appeases two seemingly contradicto-

ry perspectives on the nature of the Baltic transition to

capitalism. The article’s findings are also of high politi-

cal salience, because failing to acknowledge the im-

portant role of the state in underpinning economic trans-

formation towards the ‘new’ economy leads us down a

perilous path of concluding that market on its own can

bring about superior educational and labour market per-

formance. Finally, the article contributes to the emer-

gent comparative political economy literature on growth

models and growth strategies of the advanced capitalist

economies, which emphasizes the importance of under-

standing how countries’ growth trajectories are deter-

mined by specific political opportunities and con-

straints, as well as the specific public policies that un-

derpin them (Baccaro & Pontusson, 2016; Hassel &

Palier, fcm).

The empirical section of the article shows that the Baltic

countries have had higher expenditures on education

and ICT literacy, higher generosity of labour market

policies, higher levels of public employment and better

labour market inclusion than CEE. The section also un-

covers cross-national variations in the social investment

welfare states across the region. Estonia is identified as

the regional leader, Latvia as following closely, while

Lithuania has lagged substantially in some dimensions

of the social investment agenda.

The article also shows that social investment policies in

the Baltic have been resilient to the impact of the 2008

economic crisis. While the three countries were severely


35

impacted by the recession, both in terms of their GDP

decline and employment losses, empirical evidence has

shown a pro-active labour market policy during the re-

cession, following which their employment rates recov-

ered to almost pre-crisis levels by 2010. The resilience

of social investment policies during a severe recession

indicates that they are not auxiliary strategies, but are in

fact key pillars which support the region’s growth mod-

el.

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Appendix

Figure A1. Economic development, GDP pc PPP

Source: World Bank.

Figure A2. Unemployment rate (% of total pop.)

Source: Eurostat.

0

10

00

02

00

00

30

00

0

GD

P p

er

ca

pita

, P

PP

(cu

rre

nt

int.

$)

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

24

68

10

12

Un

em

plo

ym

en

t ra

te,

% t

ota

l p

op

.

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

44

Figure A3. Share of education in general government

expenditures

Source: Eurostat.

51

01

52

0

% o

f e

du

ca

tio

n in

go

vt.

exp

en

ditu

res

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


45

Figure A4. Unemployment assistance coverage rate

Source: Comparative Welfare Entitlements Dataset (CWED).

Note: *Percentage of the labor force insured for unemployment risk.

Figure A5. Unemployment assistance income re-

placement rate: Single individuals


.6.7

.8.9

1

Co

ve

rag

e:

Pe

rce

nta

ge

of

the

la

bo

r fo

rce

*

1995 2000 2005 2010year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

0.2

.4.6

.8

Re

pla

ce

me

nt

rate

: S

ing

le 1

00

%

1995 2000 2005 2010year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

46

Figure A6. Unemployment insurance income re-

placement rate: Family (100%)


.2.4

.6.8

Re

pla

ce

me

nt

rate

: F

am

ily 1

00

%

1995 2000 2005 2010year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


47

Figure A7. Female public sector employment (% of

working age women)





14

16

18

20

22

Fe

ma

le e

mp

loym

en

t in

pu

blic

se

cto

r, %

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia

2017/04

48

Figure A8. Female employment in education (% of

working age women)





56

78

91

0

Fe

ma

le e

mp

loym

en

t in

ed

uca

tio

n,

%

1995 2000 2005 2010 2015year

Czech R Estonia

Hungary Latvia

Lithuania Poland

Slovakia


49

Figure A9. Composition of labour market policy expenditures, 2006-2015


Note: 1) Data are not available for Poland. 2) The author includes the following policies into the job creation category: labour market arbitrage, employment incentives,

supported employment and rehabilitation, direct job creation and start-up incentives.

0%

20%

40%

60%

80%

100%

2007 2009 2011 2013 2015

Czech Republic

Training Job creation Compensation

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2007 2009 2011 2013

Hungary


0%

20%

40%

60%

80%

100%

2007 2009 2011 2013 2015

Slovakia


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2007 2009 2011 2013

Estonia


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2005 2007 2009 2011 2013

Latvia


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2009 2011 2013 2015

Lithuania


Le LIEPP (Laboratoire interdisciplinaire d'évaluation des politiques

publiques) est un laboratoire d'excellence (Labex).

Ce projet est distingué par le jury scientifique international désigné

par l'Agence nationale de la recherche (ANR).

Il est financé dans le cadre des investissements d'avenir.

(ANR-11-LABX-0091, ANR-11IDEX-0005-02)

www.sciencespo.fr/liepp

Directeurs de publication : Bruno Palier & Etienne Wasmer Sciences Po - LIEPP 27 rue Saint Guillaume 75007 Paris - France +33(0)1.45.49.83.61 [email protected]

liepp working paper - sciences po/2441/r04642f098es955171...liepp working paper n 66 1 revisiting...

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