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Baltics: Small Countries Weathering Financial Storm

Washington, 7 October 1998 (RFE/RL) -- The world's financial leaders are using the International Monetary Fund (IMF) and World Bank meetings in Washington to discuss every aspect and angle of the financial crises which are plaguing many corners of the globe.

Virtually unnoticed as the heavyweights from the largest and richest nations offered their prescriptions before global television cameras was the mild-mannered governor of the Central Bank of Finland.

He addressed the meetings Tuesday on behalf of the Nordic and Baltic countries. The cameras turned away, but Matti Vanhala quietly suggested that in looking for solutions, the world could do worse than observe the Baltic nations of Estonia, Latvia and Lithuania.

These small countries, being rocked by the turbulence and spillover effects from the crisis in its giant neighbor Russia, have nevertheless weathered the situation quite well, he said.

They did it in a most unorthodox way -- they followed prudent fiscal (budget) and monetary policies and kept their focus on strengthening their banking systems and developing the private sector.

They have felt the shock waves from Russia, to be sure, but Vanhala said the lesson is that they followed the "solid and strict macroeconomic policies which now shield them against contagion."

Vanhala said the Russian crisis is an illustration of what happens when confidence in the economic policy of a country collapses with what he called "a dangerous, rapid deterioration of economic conditions."

The overwhelming priority for Russian authorities now, he said, is to halt the destructive downward spiral. The first requirement to do that, said Vanhala, is to gain the political backing and credibility needed to devise and implement reform programs and to enact the laws necessary to carry them out.

The international community must stand ready to help, he said, but the key to stabilization lies with Russia itself.

The individual responsibility of each nation to follow prudent financial policies has been an underlying theme of the broad-ranging discussions of the causes of the current crises and how the system might be adjusted to prevent or mitigate them in the future.

But that isn't sexy and it doesn't satisfy the popular demand for a magic formula. U.S. Treasury Secretary Robert Rubin put it simply after a meeting of the G-7 major industrial nations this past weekend: He said, "The world can get through this series of crises if every country will do what it's supposed to do."

IMF Managing Director Michel Camdessus said the importance of what each country does in the middle of a global economy is shown by how quickly the contagion spread around the world. He said this has demonstrated the vulnerability of emerging markets to abrupt changes in confidence, and the risks that arise when relatively small economies become the recipients of very large short-term capital flows.

U.S. President Bill Clinton picked up on the theme when he said what counts is the substance in a market economy, not just the trappings. Too often, he said, what has appeared to be a thriving market system has masked an epidemic of corruption or cronyism. Clinton said investors and entrepreneurs, foreign and domestic, will not keep their money in economies where prosperity is a facade.

Every speaker at the annual meetings is suggesting a long list of reforms in the global financial system. But at the heart of every one is the simple stricture advanced by the Finnish bank governor: The cure begins at home.