International seminar "Main Challenges in the Baltic States…"

Yesterday I was invited to speak at international seminar organized by the German Academic Exchange Service and the University of Latvia, devoted to the main challenges the Baltic States and Germany face in context of Russian trade embargo and Greek crisis. Despite its glaring title, it was fruitful economic discussion (without any political appeals) moderated by our vice-dean Jānis Priede with several prominent speakers from Latvia, Germany, Estonia and Lithuania. Three-hour event provoked deep public interest with the number of participants at first exceeding the number of available chairs, and, subsequently - the available space in rather large auditorium.

Here are the main points from my message. Income convergence of the Baltic States vis-à-vis Germany may have stagnated since 2012 after we went one third of the way to German income level during 1995-2007, followed by economic slowdown and a fast rebound. This stagnation is not related to the business cycle with output gaps in all Baltic countries being around zero and even slightly positive (European Commission estimates). Rather it is a result of weak potential GDP growth, perhaps, entering the "middle income trap": losing competitiveness in the low-value added segment (China) and failing to compete with high-value added producers (Germany).

There are two alternatives how to avoid the middle income trap: low wages forever (does not make sense) and labour productivity rise. Latter option may be achieved either by capital accumulation (investments; currently problematic given investors' uncertainty and still outgoing deleveraging process) or raising total factor productivity via structural reforms.

It is not that we do not know what to reform and Global Competitiveness Report is like a voice crying in a wilderness pointing to inefficient legal framework, still common bribes and wasteful government spending among other things.  Rather it is a lack of political will for sufficiently fast reform implementation. But without structural reforms we will never reach the living standards of Germany (it would be simply a dream if we would not know how to achieve it; and it is very ambitious goal since we do).

My message was rather similar to that of Viktor Trasberg (Estonia, Tartu University) both in the main conclusions and contents (Baltic States perhaps reaching the glass ceiling of convergence, reference to the Global Competitiveness Index). It not only shows that the Baltic countries face the similar challenges, but also that our thoughts on how to promote economic development are comparable: we should focus on what we can do (structural reforms) rather than being angry about external environment (Greece, Russia) that we cannot influence.