Last year, we learned that Lithuania had overtaken Estonia in economic development. How did this happen? Taking a longer historical perspective, the Baltic states' economic fortunes have in fact taken surprising turns and twists over the past 150 years.

Few people know which country, more than a century ago, before World War I, was the undisputed Baltic economic tiger. That country was Latvia. By the end of the 19th century, Riga had become the third most important industrial center in the Russian Empire, after Moscow and St. Petersburg. By 1913, Riga's population was eight times larger than Tallinn's — such was our backwardness and provincialism compared with the Latvians at the time. Now, however, Latvia is the poorest of the Baltic states.

A hundred years ago, Lithuania was living in a completely different world compared with Latvia and Estonia. Lithuania's level of socioeconomic development lagged behind its Baltic neighbors by 20 to 30 years. Even its national awakening came several decades later. By the end of the 19th century, literacy in Lithuania barely reached 50 percent, while in Estonia and Latvia it was already 95 percent.

World War I, in which Latvia suffered far more than Estonia, toppled the Latvians from their throne, and by the end of the 1930s the two countries' levels of prosperity had largely evened out. Lithuania, however, remained hopelessly behind.

In this context, it is interesting to read the memoirs of German soldiers who invaded the Baltic states in the summer of 1941. Almost all of them recall the striking visual contrast when crossing the Lithuania–Latvia border. Entering Latvia felt like a return to Europe — its towns, villages and people's clothing did not differ much from East Prussia, then part of Germany. Lithuania, on the other hand, reminded them more of Belarus and eastern Poland.

Paradoxically, it was Soviet rule that turned Lithuania into a developed industrial state. Forced industrialization and urbanization took place in Lithuania during the Soviet era. However we may judge Soviet economic policies in hindsight, the fact remains that it was only on the eve of restored independence that Lithuania had caught up with its Baltic neighbors in development.

The following period of restored independence, specifically the 1990s and 2000s, is one that we Estonians can look back on with pride. Although many experts initially believed Latvia had the best prospects for success thanks to its infrastructure, ports and Riga, the country quickly sank into corruption, overly cautious reforms and dependence on Russian transit. The situation in Lithuania was not much better.

In Estonia, there is a myth that Mart Laar's bold free-market reforms made us successful. That is only partly true. The most important of those reforms was privatization. Unlike in Latvia and Lithuania, our privatization process was relatively transparent: instead of murky "our boys" deals, Scandinavian foreign capital dominated. Unlike in Latvia and Lithuania, where corruption and local oligarchs held sway, Estonia seemed like a Western, safe place to invest and do business.

Estonia's success lasted largely until the end of the previous decade, when the first signs quietly appeared that Lithuanians had managed to make better strategic choices in several areas. According to experts, Lithuania was able to make necessary investments in the energy sector earlier than we did, which meant it was not hit as hard during the energy crisis.

Lithuania's export sector is more diverse than ours. The government began pursuing an active industrial policy earlier and has also managed to diversify its new technology sector. Our innovation, by contrast, has remained largely IT-centric and, inspired by the myth of the Estonian e-state, rather self-absorbed. Lithuanians were not afraid to borrow at critical moments and made far more effective use of EU funds for investments in infrastructure, education and research. In Estonia, by contrast, a fetish for balanced budgets dominated for decades.

In summary, Lithuania relied far less on the "invisible hand" of the free market, with the government taking a much more activist role in developing the economy. We, on the other hand, believed that the attitudes "the market will sort everything out" and "the state must not intervene in the economy" (which indeed made us successful in the 1990s) would keep us on the Baltic economic throne three decades later.

Perhaps most telling is the fact that in Estonia, there has been virtually no serious discussion about Lithuania's success and the reasons behind it. Instead, a self-assured arrogance prevails, a belief that we will soon reclaim our first place. We avoid the uncomfortable questions about whether Estonia's old model of success may have run its course. Perhaps it is worth recalling here the golden words of Toomas Hendrik Ilves: "What brought us here will not take us forward."

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