Macroeconomic populism in the Baltic countries

Macroeconomic populism in the Baltic countries Gábor Kutasi, Univesity of Public Service, kutasi.gabor@uni-nke.hu The outstanding growth and the sudden stop of the Baltic economies in the 2000s arose the assumption that their textbook-like, disciplined economic policy had actually an expansionary and overheating impact on economic growth. A reinterpreted theory of political economy was assigned to this phenomenon. It is called macroeconomic populism. The region has seemed to be very disciplined in fiscal and monetary sense since they became independent. In the first half of 2000s they even produced a boosting economic growth and significant real convergence to the higher developed EU members. The region has proved to be attractive for capital investment. However, economic analyses have projected some structural problems in their external (im)balance. These countries with balanced policies suffered sudden stop in 2007, what was even strengthened by the global crisis. If fiscal balance, debt sustainability and fixed exchange rate is secured, what else can undermine the growth potential? Behind the fine indicators considered to be important, the external imbalance of the Baltics showed increasing deficit year by year. Finally, the external indebtedness problem undermined the sustainable growth. The study behind the presentation tests the link between the current account imbalance and the real effective exchange rate. The methodology is an OLS regression analysis on current account balance including real effective exchange rate based on both HICP and unit labor cost. The hypothesis is that the real effective exchange rate has significant impact on the current account balance. The results are significant and excluding autocorrelation. If the results are placed in the Baltic economic context, it can be concluded that the macroeconomic populism can be detected in the Baltic region. The presentation overviewt he 2000s and the 2010s economic policy actions. Keywords: Baltic states, external imbalance, macroeconomic populism, real effective exchange rate, current account JEL: F32, F36, F41, G01