The Baltic countries are doing unexpectedly well

Lithuania, Latvia and Estonia suffered heavily in the global economic crisis. However, they have been able to deal with their problems, and the sanctions imposed against Russia have not affected their economies too much – this is also visible in the Doing Business 2016 report.
The Baltic countries are doing unexpectedly well

(Jirka Matousek, CC BY)

The good results, however, should not obscure the enormous problem: a rapidly shrinking population.

At the beginning of September 2015, Lithuania left the ranks of developing countries and became recognized as a mature economy – at least this is how it is perceived by the International Monetary Fund, which makes the distinction on the basis of, among others, the GDP per capita, the degree of export diversification and the level of integration with the global financial system.

It appears that Lithuania, which suffered greatly as a result of the last economic crisis (e.g. in the second quarter of 2009 its economy shrank by approx. 22.4 per cent in annual terms, and registered unemployment stayed around 11-12 per cent for many months and only began to decrease in mid-2014), has got back on track in good style, with 2 per cent growth this year and real chances for 3 per cent growth in the next year.

The result could have been even better, had it not been for the sharp decrease in the value of exports to Russia, although Lithuanian producers have largely managed to compensate for the restrictions on the Eastern markets by replacing them with new trade partners. In comparison with 2014, exports to the United States increased by 37 per cent, exports to Spain increased by about 58 per cent and to Sweden by 8 per cent. As expected, the number of tourists from Russia and Belarus has decreased (due to Belarus’s strong links with the Russian Federation, economic problems in Russia also affect Belarusians). In the first half of 2015, the number of Russian tourists decreased by 37 per cent y/y. The number of visiting Belarusians was about 14 per cent lower than the year before. At the same time, however, the number of visitors from the European Union member states has increased.

Serious game

Whereas before 2008 it was Latvia and Estonia that earned the title of „Baltic Tigers” as they were quickly catching up with the more developed countries, currently it is Lithuania that is becoming the envy of its neighbours. It is the country that absorbs the highest number of foreign investments in the region of Central and Eastern Europe. The data is impressive: in 2014 in Lithuania there were 6.7 FDI for every million inhabitants (3.8 in Estonia, 1 in Latvia; the average for the whole region was 3.2). In addition to the sectors that are steadily developing throughout the region (IT, logistics, financial services), Lithuania is slowly becoming one of the centres in the production of computer games.

In its annual report for 2014, the Japanese analytical agency Media Create (dealing, among others, with the technology market) indicated Lithuania as one of the best places in Central and Eastern Europe for the development of the computer games industry. The agency emphasizes that global producers are showing an increasing interest in the region and will be opening their studios – which will employ mainly local workers – here. Due to the high level of education of university graduates, the large number of technical universities, as well as the fact that the Baltic States express a strong interest in new technologies, it is Lithuania that is becoming an important spot on the map of development of companies in the industry. Arvydas Arnašius, the head of Invest Lithuania, an agency responsible for winning over foreign investors, reminded us that the global market of computer games is worth USD100bn, and game producers offer employment, not only to professional developers, but also to designers, scriptwriters and composers. “This is a large and creative sector, and the combination of the well-developed infrastructure that we have in Lithuania with the knowledge of our specialists will allow us to meet our objectives,” Arnašius said in an interview for The Lithuania Tribune.

Multinational companies investing in the production of games are complaining that their cooperation proposals are not taken seriously by state and local government institutions in the countries of Central and Eastern Europe, as if there was a belief that gaming was not a serious business, but at the very most a hobby for young enthusiasts. Meanwhile, the Lithuanian agencies supporting business treat game producers with the same attention as representatives of industry and create special incentives for them. Study courses associated with IT are promoted (in 2011 computer science and related courses were studied by 6,200 people, and in 2014 already by 7,600). Lithuania is also leading in the ranking of countries offering the best ICT infrastructure.

As a result of these efforts, at least six companies producing computer games are currently operating in Vilnius alone. This is an interesting development, because in the region it is Estonia that has excelled in the popularization of new technologies in everyday life. Everything began in 1996, when the so-called Tiger Leap Project was inaugurated there. The program involved the computerization of various spheres of life (education, circulation of documents, contacts with public institutions) and the removal of barriers to entrepreneurs. Residents use electronic identity cards, and even voting in the elections takes place on the internet.

New markets were found

Lithuania, Latvia and Estonia were among countries that suffered the most after Russia imposed sanctions on imports from the European Union. Before August 2014, when the restrictions came into force, 19.8 per cent of the Lithuanian, 16.2 per cent of the Latvian and 11.4 per cent of the Estonian exports were directed to Russia. Like the aforementioned Lithuanian producers, Latvian and Estonian manufacturers have also found new markets for their products, and the belief that sanctions are a good disciplinary tool is so strong there that the Estonian Prime Minister Taavi Rõivas appealed to the European Union to consider expanding the sanctions in the event that Russia evades implementing the Minsk agreements.

This is a bold statement if we consider the regular calls on the part of the group of countries whose exports were to a similar extent reliant on Russia (Cyprus, Hungary, Slovakia), urging to abandon the sanctions or even to seek arrangements with Moscow bypassing Brussels.

The year 2016 is not shaping up as a period of particularly rapid growth for Estonia. GDP is forecast to grow by 2.7 per cent (and by 3.4 per cent in 2017). The situation will be slightly better in Latvia, where GDP should increase by 3 per cent in 2016 and by 3.6 per cent in 2017. This is largely due to the increasing value of foreign investments. Interestingly enough, the country most interested in Latvia and, above all, in cooperation in the agricultural sector, is China. Food products imported from Europe are enjoying an enduring popularity on that market, so the traditionally agricultural Latvia has a good offer for the Asian partners.

Vanishing nations

While the economic sanctions ended up having a limited impact, something entirely different could prove to be a threat to the economies of the Baltic States: the constantly declining number of inhabitants. This trend has continued for years and there are no signs of it reversing. Since 1992, there has not been a single year in which the population did not decrease. The effect is such that in 1992 Latvia, Lithuania and Estonia were inhabited by a total of 8 million people, and in 2013 by barely 6.5 million.


(infographics Dariusz Gąszczyk)

Let’s take Lithuania as an example: in the years 1990-2014, the country lost 825,000 people, that is 1/3 of its population. In 2014, 36,600 people left and 24,300 people arrived, 80 per cent of whom were returning Lithuanians. The government assumes that, along with economic recovery, their number will continue to grow – for a country where the fertility rate is even lower than in Poland, this may be the only salvation.

The Baltic States are one of the fastest aging regions in Europe. If the current pace is maintained, the governments of these countries will have to find new sources of pensions’ financing for the constantly growing group of pensioners, while the working population decreases. Although in the late 1990s all these countries began introducing pension reforms, their effects were not satisfactory.

In 2001, for example, Estonia launched a radical reform, establishing a pension system based on three pillars (the first is mandatory for everyone, the second is mandatory for those born after 1983, the third is based on voluntary savings). The system seemed modern, but in light of the increasing depopulation, introduced solutions have proven to be insufficient. In 2014, the National Audit Office announced that the stability of Estonia’s pension system was at risk and that a new long-term plan was needed. The new one has to be efficient in a situation where in 2060 there would be 1.3 workers per one retiree (in 2008 this ratio was 1.7 workers per retiree). Today, men retire at the age of 63 and women at the age of 61, but from January 1st, 2016 the retirement age for men and women will be unified (63 years). It will be further raised from 2017, so that by the year 2026 it will reach 65 years for all residents of the country.

In Lithuania the reforms began in 1995 (the law introduced uniform pension benefits for everyone, supplemented by an additional amount dependent on the person’s earnings during the years of work, and the retirement age was raised to 60 years for women and 65 for men). However, the proper reform began in 2000 and in reality was only completed in 2013, when new regulations took effect, according to which the future retirees must select in which of the three pension schemes they want to save money for their retirement.

The work on the legislation was tumultuous, and the members of parliament could not agree on a number of key issues, such as the fate of private pension funds. The ultimately published document is complicated and unclear to most citizens. This, however, is not the end – the challenge faced by Lithuania (and the other countries of the region) is the further increase of the retirement age, because leaving it at 65 years will certainly not be enough.

(Jirka Matousek, CC BY)

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