I spent most of my Thursday at a Rail Baltica conference (organized by the Meierovica Society, Konrad Adenauer Foundation, EC representation, and others), where I had to moderate some of the discussions. For those who don’t know, Rail Baltica is an ambitious project to link Baltic capitals to Warsaw, Berlin, and, possibly, Helsinki, by a (relatively) high speed train. For example, if something called the ‘red option’ is realized, you could get from Riga to Tallinn in about two hours.

Is it important to have Rail Baltica? I think the answer is yes. Here is one way to think about this. Trade economists spend a lot of their time using data on trade between countries to estimate the so called gravity models. This model is an econometric technique which attempts to explain trade flows between any two countries by their incomes (GDP), geographic distance between them, and other factors, such as existence of a common language, trade barriers, etc. Drawing on Edward Leamer’s March 2007 article in the Journal of Economic Literature, typical estimates say that distance elasticity is -0.9. In plain language this means that each doubling of distance reduces trade by 90 percent. Why? One of the earliest and most most powerful insights economics (which dates back to Adam Smith) is that specialization is a powerful driver of trade and economic growth. However, geographical distance inhibits trade by making the exchange of goods, people, and ideas costly. Better transport networks reduce the cost of distance and promote trade, and therefore, economic growth. For example, is it a mere coincidence that construction of the railroad networks went together with the breathtaking economic growth experienced by Western Europe and U.S. in the 19th century? These considerations make Rail Baltica a daring vision that is likely to be crucial to the development of this region.

Will this vision become a reality? At the moment it is not very clear. In my view, the culmination of the conference was the presentation by Pavel Telička, coordinator of the Rail Baltica project. His speech was extremely bold, which is very unusual for such events. At some point I thought he came very close to banging his fist on the table. In short, Mr. Telička was unhappy with how different Baltic countries delivered on their earlier commitments to the project. According to him, Estonians delivered 95% of what they promised earlier (investing massively in the modernization of their infrastructure), Lithuanians delivered about 5%, whereas Latvians – 0%. Mr Teličkawent so far as to suggest that there is a very high likelihood that, if nothing gets done in the next few weeks, Latvian authorities will not see the European funding.

The why is an interesting question. Mr Telička indicated that Mr. Augulis, the minister of transportation, is more interested in investing in the Riga-Moscow line, rather than Rail Baltica. Why? I see two competing hypotheses here. The first one is that the Riga-Moscow line is expected to provide a higher return on investment as compared to Rail Baltica. Is this plausible? There is a pretty good cost-benefit study for Rail Baltica, but I am aware of no such analysis (of comparable quality) for the Riga-Moscow line. I therefore don’t see how, at the time being, one could make an informed decision here. The second hypothesis is quite obvious. The Greens & Farmers (the minister’s party) is highly influenced by the interests of Ventspils, which is not interested in introducing a viable alternative to its ports. Indeed, the history of the railroads is riddled with instances of fierce opposition from the vested interests.

And one more observation. The conference, once more, highlighted sharp differences in quality of the public officials from Latvia and Estonia. If I were to rank quality of presentations by the officials from the Baltic States, I’d say that the Estonian one was a clear #1. He has done his homework, clearly presented using good English, and generally left an impression of competence and enthusiasm. Then, I’d say a Polish official came a close #2, and Finnish official – a close #3. Lithuanians were not represented. However, I’d be extremely reluctant to rank the Latvian official as #4. That might suggest that the quality of her presentation was only ‘half-as-bad’ as that of the Polish presenter. A #20 would be a more accurate estimate. After the conference I had a chance to talk to the Estonian official. Turns out Estonians do not have a separate ministry of transportation but a department within their Ministry of Economy. Number of employees: about 40. Number of employees in the Latvian Ministry of Transportation? About 100.

Seems like a very specific suggestion for a “structural reform”…