ECONOMIC WELL-BEING UNDER PLAN VERSUS MARKET: THE CASE OF ESTONIA AND FINLAND.

• Author: Bocharnikova, Anna

Historically, Estonia and Finland shared similar cultural, political, and economic characteristics apart from the almost 50 years of Soviet rule (1944-1991) in Estonia (Raun 1987). During that time, Estonia lacked political freedom and became a centrally planned economy. Meanwhile, Finland remained a democracy with a market economy. After Estonia gained independence in 1991, the resemblance of the institutional landscape in the two neighboring countries started to be restored.

This article investigates the dynamics of individual economic well-being in Estonia and Finland over three periods: (1) 1923-1938, when both countries were similarly situated; (2) 1960-1988, during which Estonia was under Soviet control; and (3) 1992-2018, after Estonian independence. Economic well-being is calculated using the purchasing power of wages in terms of the affordability of a minimal food basket.

The results show that, in 1938, the purchasing power of wages in Estonia was 4 percent lower than in Finland; in 1988, it was 42 percent lower; and, by 2018, the gap had fallen to 17 percent. Consequently, as measured by the purchasing power of wages, well-being in Estonia and Finland was similar before the Soviet occupation, widely diverged during Soviet rule, and converged after Estonian independence, with the transition from plan to market.

Background

There has been a long-standing debate on the economic impacts of central planning versus free markets. Traditionally, the most illustrative examples are countries that differ only in their economic and political institutions--such as East and West Germany, or North and South Korea. Such examples offer an opportunity to examine the effects of two different systems in similar environments. While some pairs are more popular for analysis, some are less obvious, especially if their characteristics became too dissimilar after the introduction of different policies. One of these less obvious examples is Estonia and Finland.

Estonia is often compared to other post-Soviet states, while Finland is normally examined within the Nordic countries. However, historically, they share more similarities than it first seems. In addition to geographical proximity and cultural affinities, such as religious (Lutheranism) and linguistic (Uralic languages), Estonia and Finland had very similar political and economic developments before the Soviet Union occupied Estonia (see Nordic Estonia).

The two neighboring countries had a similar legacy after the Scandinavian rule and the rule of the Russian Empire. They both underwent wars of liberation and gained independence in the early 20th century. As two new sovereign countries, both became parliamentary democracies under the rule of law and remained market economies.

Similar agrarian reform in Estonia and Finland led to the formation of a family farming system that played a big role in the economies of both countries (Lapping 1993; Jorgensen 2006). In 1920 and 1921, Finland and Estonia, respectively, became members of the League of Nations and developed strong economic and political connections with the international community. Estonia and Finland were relatively late with industrialization. Indeed, until the 1930s, both were predominantly agrarian economies. In the early 1930s, both nations suffered from the Great Depression but had their economies expand anew in the late 1930s, with a growing industrial sector. Under the Russian Empire, Estonia and Finland had strong connections with the Russian market, but the Soviet regime disturbed those linkages by 1924. Both countries then reoriented toward the West and began actively trading with European nations.

There is a common opinion that Estonia never became a Nordic country because it was occupied by the USSR when the Nordic Council was formed. In fact, the Nordic identity in modern Estonia is still very strong. Toomas Hendrik lives, Estonian foreign minister, who later served as a president of Estonia, delivered an influential speech, "Estonia as a Nordic Country," in 1999 (lives 1999). In 2015, the Estonian prime minister Taavi Roivas defined Estonia as a "New Nordic Country." In the same year, the Swedish ambassador to Estonia, Anders Ljunggren, stated that Estonia would have been considered a Nordic country by the other Nordic countries (Aavik 2015).

As advocates for the Nordic affiliation of Estonia often pointed out, more than a thousand years of Estonian and Finnish shared history was eclipsed by about 50 years of the Soviet occupation. The similarities between the two countries became disturbed during that time, when Estonia experienced a totalitarian regime and centrally planned economy.

The Soviet rule in Estonia began in 1940, was interrupted in 1941 during the German occupation of Estonia, reestablished in 1944, and lasted until 1991. Already in 1940-1941, the Soviet Union nationalized all land in Estonia, banks, and large industrial enterprises. When the USSR regained control over Estonia in 1944, it quickly and fully integrated the country into the Soviet centrally planned structure. The Estonian economic landscape changed dramatically. Its trade connections with non-Soviet markets were cut; private ownership of the means of production was liquidated; and the economy was refocused toward the extraction of natural resources, much of which was sent to other Soviet republics. Political institutions experienced a major change as well: the democratic regime was replaced by a one-party system with almost unlimited political power.

In the Soviet Union, analysis of the Estonian transition to a planned economy had a highly ideological character and was described as a big success. However, it was widely criticized later and is still a very debatable matter. Whether the Soviet period helped or hindered Estonia in achieving its economic policy aims, it is clear that Estonian development experienced a radical twist under Soviet central planning, compared to what it was before and relative to its neighbor Finland. Such a change cannot but affect normal people's lives.

Meanwhile, Finland defended its independence and remained a market economy with private property rights, the rule of law, limited power of the executive, and relatively free trade. In 1973, Finland signed a free-trade agreement with the European Community. In the late 1980s, like other Nordic: countries, Finland eased economic regulations, privatized some state-owned enterprises, and altered tax policy. In 1995, the country joined the European Union and adopted the euro. We can never know if Estonia would have done the same if it had remained independent from the Soviet Union but similar to Finnish developments, which were popular among other European countries as well.

When Estonia gained independence from the Soviet Union during 1988-1991, its institutional structure began to converge with Finland's. Estonia became a parliamentary democracy, the size of the Estonian government was reduced dramatically, subsidies and state-owned enterprises were abolished, the economy reopened for international trade and foreign direct investment, and macroeconomic stability was achieved via a strict monetary policy and balanced budgets. Estonia left almost no sign of the Soviet system and joined the European Union in 2004.

This article examines how the economic well-being of the Estonian people was affected by the institutional change during and after the Soviet regime compared to Finland. The main contribution is the use of hard-to-find statistical data to construct relative measures of well-being using an indicator for the purchasing power of wages. As such, this article should contribute to the long-lasting debate over the efficacy of markets versus planning by providing new data for a case of two similar countries with different experiences.

Assuming that changes in government policies affect individual economic well-being, the economic situation in Estonia and Finland is expected (1) to be similar when the countries had similar economic and political institutions; (2) to differ widely during the Soviet occupation of Estonia; and (3) to start converging after the Estonian independence.

Research Design

Such measures of national well-being as gross domestic product (GDP) per capita do not cover the entire period of interest, but Estonian and Finnish historical statistics contain enough information to construct an indicator to grasp it. Data on retail prices and average wages provide information about purchasing power, since they can help in determining the quantity of goods and services that can be bought with a wage unit. The purchasing power of wages (PPW) is calculated at a specific point in time for a specific place to capture people's economic well-being. This procedure is used to determine how individual economic well-being in Estonia and Finland has been changing over time.

PPW is measured using retail prices of basic foodstuffs over the entire period of interest in both countries. The higher the PPW, the more things of an average price can be purchased, and the freer people are financially. While the conceptual definition of PPW includes goods and services, the operational definition used in this study means the quantity of foodstuffs that can be bought with a wage unit.

PPW was found according to the minimal consumer basket of food normally used for minimum wage legislation. The minimal food basket (Table 1) respects the minimum amount of calories required in order to function normally--a standard of 2,100 to 2,300 calories, according to the Food and Agriculture Organization and World Health Organization (MONSTAT 2018).

Since the exact minimal baskets for Finland and Estonia were not available, and the methodology does not change much internationally, the model used is taken from the Russian Federation Labour Code (2012). Although there are probably some differences in consumption habits among the countries, the format of the minimal...