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Economic developments in the Baltic
countries: handling of economic crisis,
its domestic and international effects
Prof. Dr. Ramūnas Vilpišauskas
Director of the Institute of International Relations and Political Science ,
Vilnius University
Presentation for the Norwegian ambassadors meeting, October 28, 2011
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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PPS
Rapid fall in GDP
15
10
5
Lithuania
Latvia
0
2006
2007
2008
2009
2010
2011
2012
Estonia
Denmark
-5
Finland
Sweden
-10
EU-27
-15
-20
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
2010
% change c/w the quarter of last year
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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Growth of unemployment
25
20
Lithuania
15
Latvia
Estonia
Denmark
10
Finland
Sweden
EU-27
5
0
2006
2007
2008
2009
2010
2011
2012
Source: European Commission Autumn 2010 Economic Forecasts
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Decrease of inflation
18
16
14
12
Lithuania
10
Latvia
8
Estonia
6
Denmark
Finland
4
Sweden
EU-27
2
0
2006
2007
2008
2009
2010
2011
2012
-2
-4
Source: European Commission Autumn 2010 Economic Forecasts
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15
Rapid restoration of current account
balance (% of GDP)
10
5
0
Lithuania
2006
2007
2008
2009
2010
-5
2011
2012
Latvia
Estonia
Denmark
-10
Finland
Sweden
-15
EU-27
-20
-25
Source: European Commission Autumn 2010 Economic Forecasts
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Source: European Commission Autumn 2010 Economic Forecasts
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90
... and growing state debts, % of GDP
80
70
60
Lithuania
Latvia
50
Estonia
40
Denmark
Finland
30
Sweden
EU-27
20
10
0
2006
2007
2008
2009
2010
2011
2012
Source: European Commission Autumn 2010 Economic Forecasts
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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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Rank
Heritage Foundation Economic Freedom Index
2004
2005
2006
2007
2008
2009
2010
2011
0
10
Lithuania
20
Latvia
Estonia
30
Denmark
Sweden
40
Finland
50
60
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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
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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 “leftovers” 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.
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BEMIP:
electricity
BEMIP: natural gas
28
Thank You!
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