The Economies of the Baltic States Continue to Experience Serious Problems

2 june 2017

In their new bulletin on the current trends in the global economy Analytical Center experts look at the economic development factors of Estonia, Latvia, and Lithuania in the period following the Great Recession.

In 1995-2007, the Baltic States managed to carry off a most successful transformation of their economies: all the countries saw average GDP growth of 6-7 % per year, the experts notes. In the decade before the global financial crisis, i.e. between 1998 and 2007, the GDP of Estonia and Lithuania expanded by 1.9 times while that of Latvia increased by 2.1 times. Ireland was the only other country in the EU that saw similar growth in that period.

The experts believe this success was to a large extent made possible by the Baltic States' "Soviet heritage", namely: the countries had a well-educated skilled workforce and well-developed infrastructure; the Tallinn port alone accounted for a lion's share of services exports in Estonia. In the meantime, Russia pledged to pay off all the Soviet debts, thereby giving the former Soviet republics access to both private and state loans. In addition, the decision to aim for eventual EU membership also helped the Baltic States: In 1994, they conclude free trade agreements with the EU and on 1st May, 2004 they joined the EU. The market reforms and good institutions helped significantly increase the wealth of the Baltic nations by 2008, the experts note.

The Great Recession of 2008-2009 dealt a serious blow to the Baltic States, especially Latvia and Estonia, holding their development back for at least a decade, the experts are convinced. The global financial crisis was further exacerbated by the tough monetary policy that was pursued by all the Baltic States, with the result that, during the Great Recession, according to the IMF, Latvia saw the third greatest drop in GDP in the world after San Marino and Greece. The economic downturn in the region was accompanied by a gradual decrease in the utilization of the transit capacity in the countries' ports as competition with Finnish and Russian ports intensified. The total negative GDP growth reached negative 14.8 % in Lithuania (2009), negative 19.3 % in Estonia (2008-2009), and negative 20.6 % in Latvia (2008-2010).

"The economy of Lithuania passed its pre-crisis level in 2013 and on the whole between 2008 and 2017 it saw GDP growth comparable to that of Germany and the UK. In Latvia and Estonia, the GDP was still below the 2007 level in 2016. Similar to Finland, total GDP growth in these two countries between 2008 and 2017 was closer to that of Spain and Portugal, whose economic problems have been getting a lot more attention from analysts," the experts write on the pages of their bulletin. At the same time, the experts note, that the Baltic States continue to face some serious problems: the aging of the population, the outflow of workforce and difficulties in finding new development drivers.

For more see the bulletin In Focus: The Baltic States: a Revival after the Great Recession.

For other issues of our bulletin on current trends in the global economy see Publications.