Baltic economies: more pain in the past, more gain in the future?
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Baltic economies: more pain in the past, more gain in the future?
Raul Eamets University of Tartu
"Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"
Bank of Latvia 02.11.2012.
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Source: Morten Hansen & Raul Eamets
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Our GDP is back in 2005
90
100
110
120
130
140
150
160
170
180
190
2000 2002 2004 2006 2008
200=100EU27
EA
DK
DE
EE
IE
LV
LT
NL
PT
SK
FI
SE
UK
US
JP
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Estonia: two restrictive supplementary budgets in 2009
• 10,6% cut in operational expenditure of the central government – including the wage bill by 9,6% and administrative costs by 12%.
• Stricter limits on new borrowing by municipalities. • Suspending contributions to the second pillar pension system for until
the end of 2010; • increase in value added tax (from 18% to 20%) • twice higher taxes on natural gas • considerable increases in different environmental duties
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Fiscal Policy in Estonia Budget deficit/surplus
% of GDP
Budget surplus/deficit
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
% of GDP
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What would have happened without action… "If nothing had been done" scenario
public balance
-14,0
-12,0
-10,0
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
2002 2003 2004 2005 2006 2007 2008 2009* 2010*
% of GDP
Maastricht criterion
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Labour market flexibility …How quickly labour market adjusts to
macroeconomic changes
In Baltics: Wage reduction Working hours declined Employment declined
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Employment changes: construction was most affected
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Wages are flexible • Union density and collective bargaining coverage is
very low • Latvia - 20% salary cuts in public institutions • Estonia – 9,6% salary cuts in public institutions • Estonia - The total salary income of Estonian
population decreased around 10 billion EEK which was around 4% of GDP
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Table 11. Annual wage changes in the Baltic States by economic sector Industry Estonia Latvia Lithuania 2008 2009 2008 2009 2008 2009 Total economy 13.8% -4.6% 20.6% -4.0% 19% -4%
Primary 17.7% -7.4% 17.2% -4.6% 23% -8% Industry 11.5% -3.5% 13.4% -4.0% 18% -4%
Manufacturing 10.8% -3.9% 19.8% -2.1% 18% -4%
Energy 17.0% 6.8% 5.6% -5.0% 16% 0% Construction 8.3% -13.4% 19.0% -1.1% 10% -21%
Business services 12.3% -4.2% 21.0% -1.8% 19% -5% Public services 17.4% -4.5% 20.2% -9.7% 22% -11%
Public administration 15.7% -7.6% 16.1% -18.0% 23% -10% Education 20.4% -2.5% 23.4% -9.9% 26% 8%
Source: national statistical offices of Estonia, Latvia, Lithuania
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Policy responces Baltics versus EU 15
Baltic countries EU15 Government expenditures ↓ Government expenditures ↑(NL, SE, DE) Government investnments ↓ Government investments ↑ (AT, DE, DK, NL, PT, SE) Direct taxes ↑ Direct taxes ↓ (AT, DE, DK, ES. IE, SE, UK) Excise duties↑ Excise duties↑ (FI, GR, NL, IE, UK) Public pensions ↓ LAT Social welfare support ↑ (BE, IE, GR) Business aid ↑ EST Business aid ↑ (ES, DE, FR. GR, NL, UK, PT)
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Baltic countries: back in growth track
Source: The Economist, 14.07.2011
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To get budget back to balance - is it mission impossible?
Lessons from Estonia 1. Very strong political commitment –
in Estonian case it was EURO 2. Small economy ? 3. Strong Government 4. Weak trade unions no public unrest 5. Flexible labour market
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To sum up Limited policy instruments to stabilise economy Labour market should be "buffer" for macroeconomic
adjustment Employment working hours wages Socially costly unemployment Increasing competitiveness and "forced" restructuring,
low loan burden for future generations
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Thank you!