Post on 16-Feb-2020
LIEPP Working Paper April 2017, nº66
Revisiting the Baltic growth model: From neoliberalism to the social investment welfare state
Sonja Avlijas Sciences Po (LIEPP) sonja.avlijas@sciencespo.fr
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.
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.
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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.
LIEPP Working Paper n° 66
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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
LIEPP Working Paper n° 66
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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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).
LIEPP Working Paper n° 66
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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
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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
LIEPP Working Paper n° 66
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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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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
LIEPP Working Paper n° 66
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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
LIEPP Working Paper n° 66
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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
LIEPP Working Paper n° 66
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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
LIEPP Working Paper n° 66
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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
LIEPP Working Paper n° 66
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.
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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
LIEPP Working Paper n° 66
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.
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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.
LIEPP Working Paper n° 66
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
LIEPP Working Paper n° 66
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
LIEPP Working Paper n° 66
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
LIEPP Working Paper n° 66
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)
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)
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.
LIEPP Working Paper n° 66
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
LIEPP Working Paper n° 66
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
LIEPP Working Paper n° 66
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
LIEPP Working Paper n° 66
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
Source: Comparative Welfare Entitlements Dataset (CWED).
.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%)
Source: Comparative Welfare Entitlements Dataset (CWED).
.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
LIEPP Working Paper n° 66
47
Figure A7. Female public sector employment (% of
working age women)
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)
Working age refers to the age cohort (15-64).
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)
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)
Working age refers to the age cohort (15-64).
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
LIEPP Working Paper n° 66
49
Figure A9. Composition of labour market policy expenditures, 2006-2015
Source: Author’s calculations based on Eurostat data.
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
Training Job creation Compensation
0%
20%
40%
60%
80%
100%
2007 2009 2011 2013 2015
Slovakia
Training Job creation Compensation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2007 2009 2011 2013
Estonia
Training Job creation Compensation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2005 2007 2009 2011 2013
Latvia
Training Job creation Compensation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2009 2011 2013 2015
Lithuania
Training Job creation Compensation
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publiques) est un laboratoire d'excellence (Labex).
Ce projet est distingué par le jury scientifique international désigné
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Il est financé dans le cadre des investissements d'avenir.
(ANR-11-LABX-0091, ANR-11IDEX-0005-02)
www.sciencespo.fr/liepp
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