Baltic state economies: tiger syndrome

By Dr. Eugene Eteris

For Western experts economic growth in the Baltic states during the last 4-5 years very often seems quite extraordinary. Indeed, almost zero-growth in the EU member states (in average, 1-1,5%) has been in striking contrast with that of about 6% in average in the Baltic states.

When statistics don't help much

Phot: A.F.I.

Statistics is, in fact, quite an astonishing think, I thought, reading a small note about Lithuania’s growing economy in a popular British weekly, The Economist (July 19^th, 2003, p.26). In particular the figures on growing GDP by 6,7 last year, and even up to 9,4% (in fact, 9,1% according to country’s financial ministry) in this year’s first quarter! And then, I thought, we would see a bright picture of public the sectors’ booming development due to additional surplus in the budget. Apparently, it was not the case; the case was to impress by statistics.

To show these booming GDP growth figures has become a common place in all reports about the Baltic States development, both by local and foreign economists and politicians. To mention a kind of Baltic tiger syndrome is presently a fashion. Even our magazine’s international edition fell victim of that a couple of years ago /See: In search of the Baltic tiger, The Baltic Course, Autumn/Winter 2000, pp. 10-13/. Quite recently one of the popular Latvian daily Chas (An hour) published an expert analysis on “Baltic tigers” /See: Chas, June 2^nd, 2003, Special supplement, “Baltic tigers’ jump”, p.2, in Russian/.

No doubt, GDP growth is an important indicator of economic development for all countries /See Table 1/. But one has to distinguish between the growth in the states with a stable and developed social-economic infrastructure and those where turbulent growth doesn’t make a wealthier society. Growth rate indicators alone are not enough, at all. Social unrest, air pollution in cities, crime, peoples’ trafficking and other unresolved problems – this is where additional GDP should be aimed at. Unemployment in Lithuania is more than 10%, budget deficit is the highest in the Baltic trio. / See Table 2/. Foreign trade deficit in each on the three Baltic States exceeds 1 billion USD! Thanks to direct foreign investments (DFI) these countries could cover excess balance of payments to 110% in Lithuania, 82% in Latvia and 33% in Estonia. 

GDP growth in Lithuania is triggered essentially by the oil industry, transit and shipping; thus, transit and oil make up for nearly 20% of GDP. As soon as Russian oil companies turn their back to Mazeikiai oil refinery, a sharp fall can be envisaged in the growth figures. Profit here depends largely on country’s political relations with Russia. Industrial indicators of all three states compared to the early 1990s, has shown a clear evidence of decline in industrial development (in Latvia by 47%, in Estonia by 63%, and Lithuania by 56%).  

The reasons for growth

It might sound quite odd, but Baltic experts do not have a common opinion about the reasons and backgrounds of Baltic tigers’ potentials. But three reasons are more or less accepted by all: First, strategic geographic location of these countries in the Baltic Sea region, with easy access to EU and Russia. Hence, solid revenues in all transit business, including oil, goods and services, i.e. financial. For example, behind most of the Baltic States’ financial transactions are “covered” Russian money. Goods’ “re-export” from these countries reaches 45% in Latvia, 21% in Estonia and 13% in Lithuania. By the way, about 69% of Lithuanian export to CIS are goods of non-Lithuanian origin. Second, experienced, trained and cheep labor force, which is an attractive component for industries transfer and investments from France, Germany, Italy, etc. Third, quick, although painful, pace of radical privatization reforms in these countries that made them adequate to Western-type entreprenuership, providing a solid ground for Western DFI.      

But for the Baltic States it is still a long way to go in order to join West European countries’ level of wellbeing, i.e. at least 30-50 years. Here, of course, The Economist is right:  “…the Baltic trio still rank among the poorest of the ten countries due to join the European Union next year, with per capita incomes around one-fifth of the EU average.”

So, statistics can really pull the wool over one’s eyes.