Estonia, Latvia, Lithuania - who has done the best?! Kaspar Oja

GDP and domestic demand – recovery is about to begin GDP, volume 2000=100 Domestic demand, volume 2000=100 GDP, yoy growth Domestic demand, yoy growth

GDP and domestic demand 2
Economists seem to belive that Estonia will have the fastest recovery
… however Lithuanian GDP fell less during the crises
Growth of domestic demand is going to be sluggish due to high unemployment in all three countries, growth has to come from the exporting sector

Sharp decline in consumption due to low savings

Investments as % of GDP

Industrial production shows good growth
Estonia had the sharpest decline in industrial production during the crises
… however the recovery is also the fastest

Export volumes are growing in all three countries
Entrepreneurs who closed down their factories in 2008 are returning
Crises left production capacities idle - it is easy to increase production
Time is good for new FDIs
Some Scandinavian companies could move their produciton to the Baltics due to relatively lower labour costs
Exports of goods, value, index 2007=1

Growth of exports is positive in all three countries Exports (goods and services), volume, yoy growth

External balance (current account + capital account)

LABOUR MARKET AND COMPETITIVENESS

HICP
Prices grew at tremendous pace before the crises
We saw that deflation is possible in 2009
What is happening now?

Price growth at the moment
Price growth is dependant on external factors energy and food
Lack of internal pressures should keep price growth low in the coming years
high unemployment - weak pressures for wage growth
idle production capacities - production potential is higher than demand for products

Export deflator
Fast growth of prices means loss of competitiveness for producers

Flexibility in labour markets - contributions to compensation of employees Estonia Latvia Lithuania

Unemployment will remain high in the coming years

Youth unemployment could harm future potential

One of several explanations for fast growth of unemployment
Unemployment depends on flows to and from employment
During the crises the number of people leaving a job did not increase substantially
The number of people getting a new job decreased
If there aren’t many vacancies, people won’t leave voluntarily and some firms start to fire
Loosing rigidities that hamper hiring, decreases firing
Idea from: Gilles Saint-Paul, The High Unemployment Trap, 1995

Although it is hard to find a job people seem to have hope as activity rates remain high

WHAT WAS DONE DIFFERENTLY BEFORE THE CRISES?

Estonian fiscal policy has been much different than in Latvia and Lithuania Budget surplus as % of GDP Government debt as % of GDP

Government expenditures 2005=1

Government expenditures yoy growth

Two opposing views on government expenditure
Keynsian:
we can’t earn more than we spend;
aggregate supply depends on aggregate demand;
therefore cutting expenditures will lead to lower demand and production
Barro-Ricardo equivalence theorem:
it does not matter whether a government finances its spending with debt or a tax increase;
to pay back loans taken today, it has to raise taxes tomorrow

Concluding remarks
Crises was at least partly a result of the boom
low level of savings
fast growth of prices, possibly loss of competitiveness
Economies fell around 15% in 2009
Unemployment was around 20% in 2010Q1
not likely to decrease fast
Budgets are still in deficit
Government debt is growing fast in Latvia and Lithuania

Future?
What should be done to avoid future crises?
What should be done to avoid future booms?

Thank You!

Estonia, Latvia, Lithuania - who has done the best?! Kaspar Oja

by Gerd Tarand on Aug 09, 2010

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Estonia, Latvia, Lithuania - who has done the best?! Kaspar Oja — Presentation Transcript

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