Economic developments in the Baltic countries: handling of economic crisis, its domestic and...

Economic developments in the Baltic countries: handling of economic crisis, its domestic and international effectsProf. Dr. Ramūnas VilpišauskasDirector of the Institute of International Relations and Political Science , Vilnius University

Presentation for the Norwegian ambassadors meeting, October 28, 2011

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The outline:

• The main arguments;• Key economic indicators and trends;• The political economy of crisis management;• They main issues on the current agenda;• Baltic States’ rankings in the regional context;• Agenda of the Nordic-Baltic cooperation.


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The main arguments (I):

• Lithuania and other Baltic countries have been among the most advanced reformers in Central and Eastern Europe since 1990s; • The Baltic States have been the fastest growing region in Europe for the past decade – an outcome of transition reforms and European integration, with this trend interrupted in 2008-2009 and restored recently;• During the last decade the Baltic sea region became increasingly integrated economically with trade and investment flows (labor moving to Nordic and capital moving to the Baltic countries) with EU membership contributing significantly to this trend;


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The main arguments (II):

• The financial crisis exposed high interdependencies among Nordic and Baltic States’ economies and showed flexibilities of the Baltic economies;• While the Nordic countries have been consistently leading in Europe (and the world) in terms of competitiveness and other economic and social indicators, the Baltic states have shown their dynamism and comparative advantages (especially in the context of the current euro zone problems);• EU membership and Baltic Sea neighborhood and level of integration provides opportunities for the Baltic States to learn from the Nordic countries and to come out from the crisis by becoming more competitive, fiscally sound and growing economies.


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Almost a decade of dynamism of the “Baltic tigers” resulting in fast

convergence to the EU average


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Strong convergence since 2000 till 2008:Relative GDP per capita in PPS in 1997-2010

1997 2000 2004 2008 2009 2010

EU-27 100 100 100 100 100 100

EU-15 115 115 113 111 110 110

Estonia 42 45 57 68 64 64

Latvia 35 37 46 56 52 52

Lithuania 39 39 50 61 55 58

Denmark 133 132 126 120 121 125

Finland 110 117 116 117 113 116

Sweden 124 128 126 122 118 123

Source: Eurostat


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Convergence interrupted in 2008 by the global crisis and domestic

factors with resulting swings in the key indicators


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-20

-15

-10

-5

0

5

10

15

2006 2007 2008 2009 2010 2011 2012

PPS Rapid fall in GDP

Lithuania

Latvia

Estonia

Denmark

Finland

Sweden

EU-27

Source: European Commission Autumn 2010 Economic Forecasts


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Quarterly growth rates on GDP in 2010-2011:(based on seasonally adjusted data)

% change c/w previous quarter % change c/w the quarter of last year

2010 2011 2010 2011

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

EU-27 0.5 0.2 0.7 0.2 2.3 2.1 2.4 1.7

EU-17 0.4 0.3 0.8 0.2 2.0 2.0 2.4 1.6

Estonia 1.2 2.5 2.4 1.8 5.0 6.7 8.5 8.4

Latvia 1.8 1.1 0.5 2.2 2.6 3.5 3.4 5.7

Lithuania 0.3 1.8 3.5 0.4 1.6 4.6 6.8 6.2

Denmark 1.1 -0.3 0.1 1.0 3.2 2.6 1.9 1.9

Finland 0.3 1.6 0.3 0.6 3.5 5.4 4.8 2.7

Sweden 1.9 1.6 0.8 1.0 6.6 7.6 6.4 5.3

Source: Eurostat

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0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012

Growth of unemployment

Lithuania

Latvia

Estonia

Denmark

Finland

Sweden

EU-27



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-4

-2

0

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010 2011 2012

Decrease of inflation

Lithuania

Latvia

Estonia

Denmark

Finland

Sweden

EU-27



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-25

-20

-15

-10

-5

0

5

10

15

2006 2007 2008 2009 2010 2011 2012

Rapid restoration of current account balance (% of GDP)

Lithuania

Latvia

Estonia

Denmark

Finland

Sweden

EU-27



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0

10

20

30

40

50

60

70

80

90

2006 2007 2008 2009 2010 2011 2012

... and growing state debts, % of GDP

Lithuania

Latvia

Estonia

Denmark

Finland

Sweden

EU-27



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The political economy of crisis management:

• The Baltic States responded to economic crisis in similar ways through internal adjustment of prices and wages, though influenced by domestic politics (elections in Lithuania in 2008 delayed the adjustment measures and made them more difficult due to pre-election spending promises);• The outcomes of the adjustment were dependent on previous policies with Estonia being in the best fiscal situation allowing it to join the euro zone in 2011;• While in Estonia government managed to maintain public trust during the crisis (“loyalty”), in Latvia and Lithuania crisis resulting in more people “exiting” (emigrating or withdrawing into shadow economy), while there has been very little response in the form of “voice” (demonstration and public protests).


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The political economy of post-crisis period:

• All three Baltic States came from the crisis with the economic recovery in 2011 exceeding significantly EU average; •The Baltic States have not only surprised outsiders by rapid adjustment of prices and wages, but also by post-crisis election results in Estonia and Latvia bringing the same coalitions to power;• The political uncertainty remains in Lithuania with parliamentary elections approaching in Autumn 2012, and in Latvia with a shaky new coalition in power;• Economic situation is relatively good (especially compared to Southern Europe), but uncertainty remains due to possibility of European economic decline and worsening domestic sentiments.


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The Baltics will need structural reforms to sustain improving

business environment and come closer to their Nordic neighbors


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0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011Ran

k Heritage Foundation Economic Freedom Index

Lithuania

Latvia

Estonia

Denmark

Sweden

Finland


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The political economy of structural reforms:Easier said then done

• The Lithuanian Government has started it’s work with a slogan of “change” and the stress on crisis as an opportunity for structural reforms; • However, the crisis did not lead to planned structural reforms in Lithuania (yet), with the only exception being high education where the presence of reformers with a prepared reform program and external support (WB/IMF advice, EU resources) resulted in reform of financing and management; • Measures have also been taken to advance the implementation of energy projects aimed at integrating Baltics into the Nordic market and provide more sources of supply;• The Government initiated the Sunset process for administrative reform and Sunrise for business environment, set up the Progress Council on the long-term reforms (Lithuania 2030);• Will recovering economy and approaching parliamentary elections in 2012 reduce the appetite for further reforms (social security, health care)?


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Business risks and opportunities in Lithuania:

• The main domestic risk is related to the approaching parliamentary elections and resulting uncertainty of business environment; • External risk are mostly linked to the uncertainty regarding economic growth in the main exports markets and developments in the euro zone;• If both of these risks maintain high uncertainty, the pressure for emigration will continue reducing potential for growth and dealing with social –demographic issues;

•The current Lithuanian Government has made improving business environment and investment climate it’s priority, however, it has been slow on delivery side;• The key objective of the Government is to create conditions for Lithuania to become a leading services center in the Baltic-Nordic region;• The Government has focused on attracting companies such as Barclays and Western Union to establish their subsidiaries in Lithuania, other major recent investments include ThermoFisher Scientific and others;• The sectoral focus is on knowledge industries with EU structural funds directed into such fields, though there is an understanding of creating good business conditions for all companies (especially deregulation of SME’s activities).


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Rediscovery of the Nordic – Baltic cooperation?

• Nordic companies are among the key investors in Lithuania and other Baltic states (especially in banking, telecommunications);•Overcoming infrastructural isolation in the EU market through Nordic – Baltic integration:

• Baltic energy market interconnection (BEMIP);• Upgrading transport infrastructure;

• Return to economic convergence, especially after completing “left-overs” agenda (Schengen, euro zone) and the Single market (services), EU Baltic Sea region strategy; • Attempts of policy transfer from Nordic to Baltic States (for example, reform of managing state assets);• Possibilities for socialization and convergence of values.

BEMIP:electricity

28

BEMIP: natural gas

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Economic developments in the Baltic countries: handling of economic crisis, its domestic and...

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