The surge of right-wing populism in East-Central Europe is often portrayed as an unforeseen shift from the earlier post-1989 liberalization path. The “illiberal transformation” narrative underlines stark differences between the policy arsenals that informed democratization and marketization reforms in the early 1990s and those fueling current “democratic backsliding.” Yet this framing conceals the analytical maneuver of disconnecting the political sphere from its socioeconomic counterpart, thereby limiting democracy to the former and defining democratic participation based on electoral competition.

It was precisely this separation, which at the dawn of post-communist transformation, tended to align democratization not with leveling erstwhile power and wealth disparities, but with eradicating rent-seeking by the lingering elements of Soviet bureaucracy. Conceived in this way, democratization was deemed to be an engine of market reforms. Insofar as much of the “transitology” scholarship operated with a parochial “democracy” versus “authoritarianism” dichotomy, it repeatedly obscured authoritarian tendencies in consolidating democratic systems.

In the recently published article Democratic Facades, Authoritarian Penchants: Post-Communist Monetary Restructuring in the Baltic States, I argue that the corpus on “authoritarian neoliberalism” is well-positioned to instigate a much-needed departure from this externalization of “political” and “socioeconomic” spheres when revisiting the intricacies of post-communist transformation in general and monetary reforms in the Baltic states in particular.

Bents of Authoritarianism and Baltic Exchange-Rate Regimes

As is well known, the research program around “authoritarian neoliberalism” unearths the manifestations of authoritarianism in the processes related to the reconfiguration of state and institutional power to insulate certain policies and institutional practices from social and political dissent. This focus on the technocratic forms of authoritarianism – where the presence of democratic institutions in part camouflages the practices associated with the removal of key decision-making areas from popular control – has helped scholars dissect wide-ranging panoramas in which states in the nominally democratic neoliberal regimes increasingly opt for disciplinary conducts in favor of building consent with dissenting publics.

While the propensity to substitute the forms of elusive compromise between capital and labor for an outright exclusion and marginalization of the latter has been particularly evident since the onset of the 2007-2008 global economic and financial crisis, the displays of authoritarian bents in the practices of neoliberal governance are, of course, not a recent phenomenon. Yet, this acknowledgement does not warrant the dismissal of the notion as such. On the contrary, if deployed as an “investigative prism”, authoritarian neoliberalism can be productively used to study earlier periods of restructuring that reveal a variety of disciplinary strategies to promote state interventions geared at “emancipating” the market.

One such case study is the construction of monetary orders in Estonia, Latvia, and Lithuania following the disintegration of the Soviet Union. Institutionalized during the Baltic states’ departures from the Rouble zone, those monetary orders were predicated on currency board arrangements (CBAs) and aimed to combat inflation through a foreign exchange anchor that subordinated economic policies to the priority of exchange rate stability and a steady inflow of capital. In the article, I argue that the scaffolding of CBA-based monetary regimes amounted to the political project based on the necessities to safeguard the implementation of currency and monetary reforms from public contestation and input, delegate policymaking to technocratic preferences and invoke moralization about capitalism as a legitimizing device.

Focused on curbing inflation and eliminating fiscal deficits, the post-communist “stabilization reforms” were an integral component in the Shock therapy framework. The state had to introduce mechanisms allowing prices to reach their equilibrium values, impose a hard budget constraint, promote private ownership, establish a steady exchange rate and efficient monetary authority, initiate banking sector reforms, and dismantle intra-Soviet trade by securing European Community free trade agreements. In the Baltic states, these tasks had to be accomplished amid widespread disruptions in trade and finances, loss of export markets, and dysfunctional payment systems due to their intent to exit the Rouble zone and introduce their own national currency units.

Originating in the British colonial trade policies in Mauritius in the mid-nineteenth century, currency boards denote an extreme version of a pegged exchange rate regime. They establish a fixed peg to a foreign anchor currency and mandate an unlimited and unconditional conversion of national currency into foreign “reserve currency”. This arrangement is underpinned by the requirement that the central bank’s holdings of foreign-exchange reserves be equivalent to the domestic components of a respective state’s monetary base. Suchlike fixed exchange rate regimes were a rarity in the post-communist orbit, with CBAs introduced only in Bulgaria and Bosnia and Herzegovina.

On a general plane, Baltic CBAs attested to the basic prerequisites for a neoliberal modality of regulating capitalist social relations of production and exchange. In the eyes of state managers, “political consensus” amounted to a form of “timid democratization” and the launch of reforms had to coincide with the Schmittian “period of extraordinary politics”. Democracy was thus enveloped in a euphemism for sophisticated forms of authoritarianism.

Trajectories of Monetary Restructuring in Estonia and Latvia

The article identifies the authoritarian bents in state-driven monetary restructuring in the mandates for planning, executing, and concluding “stabilization reforms” given to Estonia’s Monetary Reform Committee (MRC), Lithuania’s Litas Committee (LC), and Latvia’s Currency Reform Committee (CRC) in March 1991, November 1991, and May 1992, respectively. These state entities were comprised of three individuals (typically including the Prime Minister, the Governor of the Central Bank, and an “independent” advisor) and worked to prevent the Baltic Supreme Councils (parliaments) from overseeing reform trajectories.

In Estonia and Latvia, the three-member conclaves had the power to issue decrees, considered to have the same status as parliamentary decisions regarding any reform-related issue. They could determine the time of monetary reform and policies related to taxes, debt, securities, pensions, wages, and foreign trade. For example, even if the law on the CRC’s establishment obligated the latter to report to Latvia’s Supreme Council, Committee’s resolutions were legally binding. There was even a mechanism to overturn the legislative acts in place.

Insulated from parliamentary control, the MRC in Estonia and the CRC in Latvia could present inflation targeting as a panacea of restructuring and a value-free policy objective. The moralizing rhetoric about the necessity of reform was deployed to conceal its social costs. For the governor of the BoE, Kallas, “ordinary people’s discontent and disappointment” were the barriers in “Estonia’s struggle for democracy and independence”. Thus, the success of monetary reform necessitated a “break with the socialist values” of distribution and equalization to be achieved through a hard-fought “national struggle”.

The opposition to the reform course was eradicated in part through the adoption of restrictive citizenship laws, passed in February 1992 and July 1994. These laws rendered a significant portion of Estonia and Latvia’s populations stateless overnight, barring certain individuals from property ownership, voting, or standing in national elections. The legislation silenced popular resistance from non-ethnic Estonian working-class groups. Latvia’s similar nationality law, though passed months after monetary reform, left a quarter of the country’s population stateless.

The concentration of power within the state bureaucracy and the central bank, alongside the quashing of opposition through constitutional means, combined with significant financial aid from the IMF, contributed to the relatively unchallenged nature of Latvia’s reform. After the CRC’s decisions in May 1992, the transitional currency (Latvian Rouble) was introduced, coexisting with the national unit – the Lats – starting from March 1993. By March 1994, the Lats was pegged to the IMF’s Special Drawing Rights’ (SDRs) basket of currencies. The Bank of Latvia (BoLv) retained conventional central bank functions (setting rates and serving as lender of last resort). However, due to minimal exchange rate fluctuations against the SDRs and substantial reserves, the monetary system effectively operated as a de facto CBA.

Estonia’s route to monetary restructuring was less direct. In 1991, discussions arose about tackling the issue of monetary overhang – sizable Rouble deposits from entities and individuals. The dilemma was whether to swiftly adopt an independent currency or phase it in via vouchers. This produced a clash between the Forest Committee, representing export-focused manufacturing, and the MRC and BoE, favoring rentiers and foreign investors. To gain clout, the latter group invited Jeffrey Sachs to Estonia. Sachs endorsed the Argentinian CBA in meetings with BoE officials, the government, and the IMF mission. This arrangement was deemed transparent and trustworthy. It proposed to bypass the absence of monetary expertise and address credit demands by making them unfeasible. The CBA required an exchange rate to be supported by foreign exchange reserves. Currency issuance depended on obtaining foreign reserves through export surpluses or foreign loans. Backed by the IMF mission, the Sachs-Hansson Plan was executed in June 1992. The Kroon replaced the Rouble and its exchange rate was fixed to the Deutschmark. With the domestic money supply backed by gold and foreign reserves, the BoE lost the authority to set interest rates and provide credit to the government, commercial banks, or enterprises.

Alternative Route: Lithuania

The Lithuanian case departs from conspicuous authoritarian statecraft in the Baltic north. This idiosyncrasy stems from the balance of social forces in the country where the breeding ground for monetary reform (and CBA) was located in a local think tank, the Lithuanian Free Market Institute (LFMI), rather than directly inside the state apparatus (LC) or the central bank. Further differences include the LC’s limited mandate (focused on issuance dates of the national unit, the Rouble’s withdrawal, and setting the Rouble-Litas exchange rate), the parliament’s power to dissolve the committee, and ongoing political disagreements within the LC. On the one hand, these unique institutional aspects explain why Lithuania’s monetary reform took twice as long to implement. On the other, the Lithuanian case demonstrates that reform outcomes need not rely on authoritarian neoliberal practices by default.

Bereft of direct control over state apparatus, the group backing the currency board for Lithuania had to rely on contingencies to push through the preferred exchange rate arrangement. Conditions for a frontal attack were generated when following the withdrawal of interim currency (talonas) and the introduction of a new national unit (the Litas) under a managed float, the BoLt chose not to replicate exchange-rate-based stabilization programs underway in Estonia and Latvia. Instead of relying on a nominal exchange-rate fixity as an instrument for reducing inflation, the Bank sought to reduce the monetary base by restraining credit for the government’s budget deficit and keeping control over the exchange rate.

However, as the Litas appreciated in the second half of 1993, the Lithuanian Federation of Industrialists accused the BoLt of engendering an “unstable and unpredictable environment”, urging for a lowered and fixed exchange rate. Export-oriented national manufacturers’ preference for a weak currency reflected the election pledge of the Democratic Labor Party to stimulate production and output but placed the government in sharp conflict with the BoLt – seeking to consolidate its mandate over the conduct of independent monetary policy.

The clash between the government and the central bank accelerated the drive to reinvigorate the CBA campaign. Despite collaborative endeavors by the LFMI, the IMF, and a select group of economists, strong opposition emerged on the verge of the parliamentary vote on the “Law on the Credibility of Litas.” This opposition united economists from the Bank, ministries of Finance, Economy, and Foreign Affairs, Vilnius University’s Faculty of Economics, nationalist MPs, and the Association of Commercial Banks. Parliament’s approval of the law in March 1994 hinged on Lithuania’s Prime Minister’s ability to threaten the President with government resignation if the law was rejected. After establishing the US dollar as the anchor currency, Lithuania initiated CBA operations, ensuring full support of legal tender through foreign reserves, and diminishing the central bank’s role in monetary policy.

Legacies of Baltic Currency Boards

Born into varying institutional contexts and diverse national social dynamics, Baltic CBAs laid the foundation for externally oriented capital accumulation regimes. Notwithstanding mixed opinions within the neoliberal consensus on fixed exchange rates, CBAs earned “credibility” due to their commitment to peg maintenance, clear tasks, and low risks. However, claims that these policy arrangements served Baltic “national interests” by placing decision-making in an independent monetary authority’s hands are inherently political. As shown in the article, the introduction of CBAs favored forces profiting from rent, interest, dividends, and foreign investments. International financial institutions and rating agencies also praised CBAs, which complemented fiscal restraint, privatization through foreign direct investment (FDI), and openness to capital inflows.

The CBAs were particularly lauded for their role in mitigating policy uncertainty and currency devaluation concerns that led to substantial FDI inflows. From 1989 to 1998, per capita FDI was notably higher in the Baltic trio compared to other transition states. After joining the European Union (EU) in 2004, private investments boosted Baltic economies, driving annual growth rates around 8% of GDP. However, much investment went into the non-tradeable sector (real estate, construction), leading to external trade deficits that did not enhance export sector competitiveness. Exchange rate arrangements from the 1990s prevented typical market responses to current account deficits, contributing to an extremely hard landing when the 2008 credit crunch hit.

In conclusion, the article praises the effectiveness of “authoritarian neoliberalism” as an analytical prism, while also stressing the need to uncover its historical manifestations in East-Central Europe. By showcasing a broad spectrum of governance methods used to achieve similar reform results, I advise caution against potentially stretching the concept too far. This ensures that its explanatory power, which is applicable in two out of the three studied cases, remains intact.

Jokubas Salyga is Assistant Professor in the Department of Political Science at the University of Texas Rio Grande Valley. He tweets at @jokubassalyga.

Photo by Mait Jüriado.