Baltic economies: more pain in the past, more gain in the future?

Raul Eamets University of Tartu

"Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"

Bank of Latvia 02.11.2012.

Source: Morten Hansen & Raul Eamets

Our GDP is back in 2005

90

100

110

120

130

140

150

160

170

180

190

2000 2002 2004 2006 2008

200=100EU27

EA

DK

DE

EE

IE

LV

LT

NL

PT

SK

FI

SE

UK

US

JP

Estonia: two restrictive supplementary budgets in 2009

• 10,6% cut in operational expenditure of the central government – including the wage bill by 9,6% and administrative costs by 12%.

• Stricter limits on new borrowing by municipalities. • Suspending contributions to the second pillar pension system for until

the end of 2010; • increase in value added tax (from 18% to 20%) • twice higher taxes on natural gas • considerable increases in different environmental duties

Fiscal Policy in Estonia Budget deficit/surplus

% of GDP

Budget surplus/deficit

-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% of GDP

What would have happened without action… "If nothing had been done" scenario

public balance

-14,0

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

2002 2003 2004 2005 2006 2007 2008 2009* 2010*

% of GDP

Maastricht criterion

Labour market flexibility …How quickly labour market adjusts to

macroeconomic changes

In Baltics: Wage reduction Working hours declined Employment declined

Employment changes: construction was most affected

Wages are flexible • Union density and collective bargaining coverage is

very low • Latvia - 20% salary cuts in public institutions • Estonia – 9,6% salary cuts in public institutions • Estonia - The total salary income of Estonian

population decreased around 10 billion EEK which was around 4% of GDP

Table 11. Annual wage changes in the Baltic States by economic sector Industry Estonia Latvia Lithuania 2008 2009 2008 2009 2008 2009 Total economy 13.8% -4.6% 20.6% -4.0% 19% -4%

Primary 17.7% -7.4% 17.2% -4.6% 23% -8% Industry 11.5% -3.5% 13.4% -4.0% 18% -4%

Manufacturing 10.8% -3.9% 19.8% -2.1% 18% -4%

Energy 17.0% 6.8% 5.6% -5.0% 16% 0% Construction 8.3% -13.4% 19.0% -1.1% 10% -21%

Business services 12.3% -4.2% 21.0% -1.8% 19% -5% Public services 17.4% -4.5% 20.2% -9.7% 22% -11%

Public administration 15.7% -7.6% 16.1% -18.0% 23% -10% Education 20.4% -2.5% 23.4% -9.9% 26% 8%

Source: national statistical offices of Estonia, Latvia, Lithuania

Policy responces Baltics versus EU 15

Baltic countries EU15 Government expenditures ↓ Government expenditures ↑(NL, SE, DE) Government investnments ↓ Government investments ↑ (AT, DE, DK, NL, PT, SE) Direct taxes ↑ Direct taxes ↓ (AT, DE, DK, ES. IE, SE, UK) Excise duties↑ Excise duties↑ (FI, GR, NL, IE, UK) Public pensions ↓ LAT Social welfare support ↑ (BE, IE, GR) Business aid ↑ EST Business aid ↑ (ES, DE, FR. GR, NL, UK, PT)

Baltic countries: back in growth track

Source: The Economist, 14.07.2011

To get budget back to balance - is it mission impossible?

Lessons from Estonia 1. Very strong political commitment –

in Estonian case it was EURO 2. Small economy ? 3. Strong Government 4. Weak trade unions no public unrest 5. Flexible labour market

To sum up Limited policy instruments to stabilise economy Labour market should be "buffer" for macroeconomic

adjustment Employment working hours wages Socially costly unemployment Increasing competitiveness and "forced" restructuring,

low loan burden for future generations

Thank you!