“Latin Americanization” of the Estonian economy: institutional analysis of financial fragility and the financialization process

By drawing on the tradition of institutionalism and the Minsky–Kregel framework on sovereign financial systems, the paper discusses the nature of and the institutional factors behind financial fragility in Estonia within a wider financialization phenomenon. The study reveals the emergence of two interrelated manifestations of the financialization process in Estonia in the form of increased international inequality in favor of foreign actors, accruing from cross-border investment activity, and higher debt burden of the household sector against the accumulation of savings in the economy as a whole. Institutionally, these developments have been supported by the embeddedness of the Washington Consensus policies. Given the lack of intervention in the economy by means of either prudential capital account controls or specific foreign direct investment policies, the result has been a heavy reliance on foreign capital in both the financial and nonfinancial sectors. Furthermore, the privatization process and recurring banking failures associated with the transition process have created a particular historical context in terms of institutional arrangements and idiosyncratic elements that laid the groundwork for deteriorating internal and external imbalances in the economy.