Analysis of the Baltic economies before and after the crisis - are they a policy model for successful recovery? A look at competitiveness trends, the role of EU policies, and the prospects ahead. Presented at the 88th #IfW Konjunkturgespräch in Berlin, Nov. 2013
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From Overheating to Euro-Zone Membership: Lessons from the Baltics?
1. From Overheating to Euro-Zone Membership:
Are the Baltics a Role Model
for Successful Crisis Management?
Dr. Christian H. M. Ketels
Institute for Strategy and Competitiveness
Harvard Business School
88. Kieler Konjunkturgespräch
Berlin, Germany
17 September 2013
3. From Baltic Tigers … Basket Case to Phoenix?
Prosperity Trends in Selected Countries
GDP Per Capita, US-Dollar
PPP-adjusted
Source: The Conference Board, Sept 2012
4. From Baltic Tigers to Basket Case to Phoenix?
Prosperity Trends in Selected Countries
GDP Per Capita, US-Dollar
PPP-adjusted
Source: The Conference Board, Sept 2012
5. What Drove the Pre-Crisis Growth Spurt?
• Expansionary fiscal and monetary policy?
• Export-driven growth?
• Capital inflows?
8. Trade in the Baltic Sea Region
Source: UNCTAD (2012) State of the Region-Report 2012
9. FDI Stock over Time
Baltic Sea Region Countries
State of the Region-Report 2011Source: UNCTAD (2011), author’s analysis.
Iceland
Sweden
Denmark
Finland
BSR
Germany
Norway
Russia
Estonia
Poland
Lithuania
Latvia
Outward Inward
Share of GDP Share of GDP
10. Current Account Balance
Baltic Countries and Poland, 2000 – 2006
Current Account Balance,
in % of GDP
Baltic Sea Region
Lithuania
Latvia
Estonia
Poland
11. Unit Labor Costs
Baltic Countries and Poland, 2000 – 2007
2000 = 100%
Baltic Sea Region
Estonia
Latvia
Lithuania
Poland
12. What Drove the Pre-Crisis Growth Spurt?
• Expansionary fiscal and monetary policy? NO
• Export-driven growth? SOMWHAT
• Capital inflows? CRITICAL
• What policy choices drove these dynamics?
13. Past Policy Reforms in the Baltics
Macro
Political Institutions
Rule of Law
Human Development
Related and Supporting
Industries
Demand Conditions
Context for Strategy
and Rivalry
Factor Input
Conditions
Micro
Admin
Skills InnovationCapital
Logistics
Social Infra-
structure and Pol.
Institutions
Macroeconomic
Policy
Business
Environment Quality
Company
Sophistication
ICT
EU Accession
EU Accession
Structural Funds
14. Baltic Countries’ Competitiveness Ranking
Microeconomic Competitiveness, 2005 - 2012
Latvia
Lithuania
Estonia
Source: World Economic Forum Global Executive Opinion Survey 2012, ISC analysis
1
25
50
75
100
15. Baltic Countries’ Competitiveness Ranking
Social Infrastructure and Political Institutions, 2005 - 2012
Latvia
Lithuania
Estonia
Source: World Economic Forum Global Executive Opinion Survey 2012, ISC analysis
1
25
50
75
100
16. Baltic Countries’ Competitiveness Ranking
Macroeconomic Policy, 2005 - 2012
Latvia
Lithuania
Estonia
Source: World Economic Forum Global Executive Opinion Survey 2012, ISC analysis
1
25
50
75
100
17. The Role of EU Accession
Macroeconomic policy
• Euro zone conditions
• Stability and Growth Pact
Microeconomic policy
• Acquis Communitaire
• Common Trade, Competition, and
Agricultural Policy
• Structural Funds, Framework
Programs, CIP
• Lisbon Agenda
PROVIDED
• Minimum standards
• Reducing weaknesses
• Generic policy targets
PROVIDED
• Minimum standards
• Reducing weaknesses
• Generic policy targets
LACKED
• Strategic priorities
• Creating strengths
• Unique objectives
18. Is e-stonia Different?
Outcomes below
potential:
• Employment
• Exports
• Foreign Direct
Investment
E-
government
ICT
infrastructure
Educational
Programs?
Cluster
mobilization?
Investment
attraction?
19. The Crisis Moment
• Capital Inflows dry up as global risk appetite wanes
• New credit, investment, and then consumption drop
• Unemployment quickly rises
• Slowing global demand adds to the region’s pains
20. Current Account Balance
Baltic Countries and Poland, 2000 – 2010
Current Account Balance,
in % of GDP
Baltic Sea Region
Lithuania
Latvia
Estonia
Poland
21. Crisis Response: The Latvian Experience
Pre-Crisis Policy Response Impact
• Excessive capital
inflows
• Credit growth, real
estate bubble,
wage growth, …
• Insufficiently
active public
policy response
• Austerity program to
balance government
budget
• Internal devaluation
through pressure on
nominal wage levels
• Fiscal pressure used to
drive overdue structural
reforms, e.g. health care
• Ring-fencing of social
spending to most
vulnerable groups in
society as far as possible
• Budget deficits
meeting international
commitments
• Unit labor costs
dropped, current
account balanced,
export growth
(quantity, quality)
• Unemployment
spiked, slowly
receding
• New wage of
emigration
22. Unit Labor Costs
Baltic Countries and Poland, 2000 – 2010
2000 = 100%
Baltic Sea Region
Estonia
Latvia
Lithuania
Poland
23. Labor Market Impact
Baltic Countries and Poland, 2000 – 2011
Recorded unemployment
rate, %
Baltic Sea Region
Estonia
Latvia
Lithuania
Poland
24. Latvia’s Exports
State of the Region Report 2013
Markets
Products
Markets per product
Source: State of the Region Report 2013
25. Latvia’s Exports by Clusters
2000 - 2011
0.0%
0.1%
0.2%
0.3%
0.4%
-0.05% -0.03% -0.01% 0.01% 0.03% 0.05% 0.07% 0.09% 0.11%
Compound annual growth rate of Latvian world export market share, 2000 - 2011
Furniture
Latvian World Export
Market Share, 2011
Entertainment/
Reproduction Products
Transportation &
Logistics
Note: Bubble size is proportional to absolute export value
Source: UNCTAD Trade Data; International Cluster Competitiveness Project at ISC (HBS)
Building
Fixtures
Forest
Products
Agricultural Products
Containers/Packaging
Processed
Food
Apparel
Tourism
26. Rate of annual change/
Share of GDP
%
Source: EIU (2013)
Key Macroeconomic Indicators: Latvia
28. Outlook
Opportunities
• Euro-zone accession (has) will remove(d) risks
• Exports dynamics indicate new growth opportunities
Challenges
• Recovery growth push will gradually dissipate
• Weak growth outlook in Europe provides difficult external context
• IMF projects lower trend growth rate
29. Lessons for Others
• Reforms are possible
• The Euro remains an important policy goal; it is not a barrier to a quick
resolution of the crisis
• Fiscal consolidation is not sufficient to embark on a solid and
sustainable growth path
• Country-specific conditions are highly important (political, economic)
• We need to rethink the role of the EU across different policy areas
– Benchmarks work for macro policy and legal framework conditions
– Benchmarks are insufficient and potentially dangerous for efforts to
upgrade microeconomic competitiveness
