The Baltic economy was quickly integrated into the Soviet national economic planning system in the immediate post-World War II period. Covering less than 1 percent of the former USSR's land area and accounting for less than 3 percent of its population, the region still managed to account for just over 3 percent of total national income for much of the Soviet period.
After the break-up of the Soviet Union in 1991, the dilemma confronting the newly independent Baltic states was how to maintain a measure of economic growth while extricating their industrial production from a long-standing dependence on traditionally undervalued resources obtained from newly independent states of the former USSR, themselves facing similar difficulties.
The essence of Soviet central planning was a measure of regional specialisation in industrial production and economies of scale in output. Thus, the Baltic region produced more than twice its per capita share of electric motors, machine tools, and radio receivers. The latter were produced exclusively in Latvia and accounted for more than one-sixth of the total Soviet output.
The Baltic region is not rich in natural resources. Manufacturing industries traditionally were based on agriculture, forestry, and fishing. Mineral and energy resources upon which modern industrial economies are dependent are mostly imported. Energy resources are illustrative of the general situation.
Estonian oil shales and some potential for harnessing hydroelectric power are the principal regional energy resources. During the Soviet era, substantial investment was made to develop the oil shales and hydroelectric power sites for energy production. But regional resources contributed in only a small way toward meeting the regional demand for energy.
In the early 1990s oil, natural gas, and coal from the former USSR satisfied more than two-thirds of the Baltic region's energy requirements. For most of the post-World War II period, all sources of energy in the USSR were undervalued, but supplies were sufficient to meet domestic demand as well as a growing export market.
After the break-up of the Soviet Union, Russia and Belarus, the main sources of energy for the Baltic region, themselves faced energy supply shortages. Until the nuclear meltdown at Chernobyl, in Ukraine, in 1986, the Soviet nuclear power industry was planned to develop very swiftly, especially in regions such as the Baltic where other energy resources are limited. In the wake of the Chernobyl disaster, nowhere was the future of nuclear energy viewed with equanimity, although the one major installation in the Baltic region, at Ignalina in Lithuania, continued to operate. Dependence upon imported oil, natural gas, and coal, to say nothing of other industrial raw materials, was thus expected to continue, as were the higher prices for energy, to be paid in convertible hard currency.
While the Baltic region has few comparative advantages in terms of its natural resource base, it does possess a well-educated, entrepreneurially oriented work force. Rates of labour productivity consistently ranked among the highest during the Soviet period, and goods produced in the Baltic region were in demand elsewhere in the USSR because of their comparatively high quality.
Before the collapse of the USSR the region accounted for a disproportionate share of joint-venture agreements with foreign firms, to some degree a measure of Baltic entrepreneurship and Western perception of market potential. Historic affinities and continuing good relations with Scandinavian countries offered some scope for trade and technology transfer to assist in the disengagement from the former USSR. Trade opportunities existed as well in the new market economies of eastern Europe, but this region had its own serious economic development problems, not least of which was weak domestic currencies.
As of the early 1990s each of the Baltic states had made significant progress toward privatisation and the adoption of market principles, including proposals for the introduction of their own currencies.
Progress across the region, however, was not everywhere the same. Estonia had moved furthest, with Lithuania lagging behind Latvia. Public opinion polls conducted before the demise of the USSR regarding attitudes toward private sector activities and cooperatives revealed a similar ordering of the degree of positive response among the three states. Lithuania had been less receptive to foreign investment than elsewhere in the Baltic region and thus not surprisingly had received less. This was in part attributable to more restrictive laws regarding ownership of land by foreigners.
To be sure, the radical transformation of a system of production and exchange created over half a century according to socialist principles is difficult. But the shift to a market economy was expected to be less problematic than repairing the serious environmental damage that this system of production occasioned.
Throughout the Baltic region Soviet urbanisation and industrialisation bequeathed a degraded environment. Most cities lacked adequate sewage treatment facilities, even the largest, Riga. Industrial effluent from, for example, cellulose and polymer factories along the Western Dvina and its tributary streams was inadequately treated and added to the pollution from the city of Riga, all of which ended up in the seriously polluted Gulf of Riga.
Agricultural pollutants - fertilisers, herbicides, and pesticides - contributed to this problem. Degraded landscapes were also common to the sizable Soviet military bases and training areas located throughout the Baltic region. These and other examples of environmental degradation were of widespread public concern. The amelioration of environmental degradation was expected to exact an economic price that the newly independent states could ill afford. Nor were all sources of pollution affecting the Baltic region within its political jurisdiction. Substantial amounts of water- and airborne pollution originated in factories located in the adjoining states of Belarus and Russia. The transnational pollution hazard is considerable, as the Chernobyl nuclear disaster of 1986 attests.