Baltic States in World Markets: Does Katzenstein's Framework Still Hold?

Abstract

Small states, argued Peter Katzenstein 25 years ago in his influential Small States in World Markets (SSWM), are different. Faced with the fluctuations of world markets and thus very vulnerable, they build corporatist arrangements and compensation mechanisms, thus ensuring political legitimacy and successful economic adjustment. On a broader level, SSWM spoke to the importance of history, ideology, and political efficacy. This paper presents an attempt to apply this influential framework to a new geographical and temporal setting. The Baltic countries are an interesting case study for the SSWM framework, because in many ways they are “smaller” then the 7 countries included in the seminal contribution by Katzenstein. In applying Katzenstein's framework, the paper surveys and synthesizes existing literature analyzing the developments of the Baltic countries over the two last decades, including the last financial crisis of 2008-2010. The paper finds that, on one level, Katzenstein's framework is very helpful in highlighting key developments in the Baltic regimes, including their emergence, continuities, and overall politicoeconomic strategies. On the other hand, the specific causal mechanism that can be drawn from SSWM running from vulnerability to corporatism to political legitimacy and adjustment has not developed in the Baltics. In particular, the Estonian case characterized by the lack of corporatism and social compensation but also political legitimacy is the hardest to reconcile with Katzenstein's account. At the end, the paper proposes a hypothesis to be explored in future research of why in Estonia the lack of corporatist and welfare state arrangements do not erode political legitimacy.