Fiesta in misfortune?

By Oleg Bozhko

The misfortune may not be all too close to home for the Baltics, but anti-terrorist alliances and the global anthrax scare has nevertheless lulled the fiesta that has still trickled into rejoice over the enduring economic growth of the Baltic states. Figures for the second quarter of 2001 show that the Latvian GDP has increased by 9.2 %, while the GDP of neighboring Lithuania and Estonia grew a respective 5.7% and 5%

The new Baltic tiger

Taking into consideration that Latvia demonstrated the largest economic growth (6.6%) among all EU applicant countries last year, these numbers have provided a sound basis for Latvia's Prime Minister Andris Berzins to talk of his country as the Baltic tiger. During the first six months of 2001 Latvia's economy has experienced a total growth of 8.8% year-on-year, while the Estonian economy rose 5.4% and Lithuania's economy still ranks third with the 5.1% growth.

With concern to the above-mentioned figures, the Bank of Latvia - an institution of almost traditionally optimistic expectations for the future - has increased its growth prospects for the Latvian GDP even more, now set at 7.3%-7.5 % for 2001 and 5.0%-5.5% forecast for 2002. The impact set on the Latvian economy after the latest global developments and the slackening of economic growth in the USA, Europe and Japan are the main arguments mentioned by the central bank for backing these forecasts.

The Latvian prime minister has also expressed his confidence in the fact that the entire Latvian population will be able to experience the positive effects of this growth within the next six months. However, despite the significant GDP growth over the last two years, the unemployment rate in Latvia has decreased only by half a percent, now standing on over 14% (by ILO standards).

Compared to 1989, Latvia's GDP has hardly managed to exceed the 60% barrier - the lowest indicator among the Baltic states; what's more, its GDP per capita - 4,075 US dollars. It's not hard to work out that by having a low initial base it's thus easier to achieve higher growth.

In the case of China, which has over the last decade retained its status of the world's fastest growing economy, may serve as an example. During the last twelve months the Chinese GDP grew by 7.9%, exceeding the respective Latvian figure only by a fraction of a percent. Despite China being the seventh largest economy in the world according to total indices, its GDP per capita does not exceed four thousand dollars (3,800).

Growth specific

The largest growth in the Latvian economy during the first six months has been observed with regard to the transit sector (14%), followed by commercial services (13.1%), trade (11.2%) and the manufacturing industry (10.6 %) - the only decrease (-0.2%) was recorded in the agricultural sector.

The situation is quite the opposite in Estonia where the largest growth (13.6%) has occurred right in the agricultural sector (including hunting), as well as in the hotel and restaurant business; however, it seems that the current global events have proved to be somewhat of a dying swan's song for the latter sector. Besides this, there has also been growth in the amount of financial services rendered in Estonia (13.3%), followed by the increase in trade turnover (8.7%) and industrial production (6.2%). Nevertheless, the fishing industry has at the same time experienced a steep fall of -16.2% in total production amounts, as well as a decrease in forestry (-7%) and the mining industry (-3.9%). The volume of electricity, natural gas and water consumption has fallen by -3.7%.

Except for Lithuania, which in order to retain jobs on a certain level continues targeting at industrial production, Estonia and Latvia have approached the status of a post-industrial economy to the highest degree.

As a result, the amount of production coming from the mining and manufacturing industries in Lithuania has in the first six months of 2001 grown by 24.7%, while the figures revealing performance spheres like financial services and trade have climbed only 8.7% and 4.7% respectively. Meanwhile, Lithuanian exports have grown as much as 23%, which is by far the best performance among the Baltic states, as the level of Latvian exports in eight month's time has increased by 12.4%, and Estonian exports saw only 6.5% growth during the first half of the year (mainly due to the export of services, not goods).

The latest developments in the USA and Afghanistan have for the time being left an impact only upon the Latvian tourism industry, cutting demands for trips to hot regions - countries with a mainly Muslim population - except for Turkey which has also joined the anti-terrorist alliance. According to initial calculations, turnover for the tourism industry has dropped 10%, but does not essentially influence the country's entire economy (not the case, for example, in Cyprus or Turkey).

Aviation and hotel businesses have already incurred and no doubt will be subject to further losses - luckily these are also sectors of no crucial importance to the Latvian national economy. Yet what concerns the most essential sector of the Latvian economy - transit (mainly of Russian crude oil and petroleum products) - the turnover of transshipped amounts through Latvia might even increase due to escalating warfare.

Whether the plunge of the European and US stock markets leaves any influence upon the Latvian stock market, having been in a status of permanent stagnation already for several years, is questionable too.

With the foreign trade turnover reaching 70% of the GDP, the Latvian economy is considered to be quite open, and can therefore not ignore the negative signals sent by the global market, especially those coming from the EU market, as it accounts for 63% of total exports and up to 55% of total imports to Latvia.

It should be noted that the Estonian economy is even more open with exports alone accounting for two-thirds of the GDP, thus making Estonia the first to slowdown its economic growth even before the tragic events of September.

In case biological or any other form of terrorism reaches Europe - and there is a fear that Great Britain as an ally of the US might be attacked next - Latvian and Estonian economies might be hit hard due to the panic and decrease in traditional patterns of consumption that accompanies it.

As the IMF and many experts believe that in the nearest future the three so-called islands of stability - Russia, China and India - will appear in rough waters of the global economy ocean, to reduce risk in foreign economic relations, it is advisable to re-orientate exports in the direction of these countries. By the way, Latvian companies are already on their way back to the Eastern markets - the growth of Latvian exports to CIS countries this year accounts for 33%, whereas the level of exports to EU countries has increased only by 7%.

Meanwhile, Lithuania has never abandoned the Eastern market, which can also be observed in its export structure - exports to Russia constitute up to 10%, while exports to CIS countries make another 9% (for comparison: in Estonia and Latvia the proportion of exports to Russia and the CIS together does not exceed 4% and 9.5% respectively). For this very reason Lithuania is expected to have the largest growth among the Baltic states next year (see diagram).