economic transformation process in lithuania jekaterina rojaka senior analyst october 6, 2008....
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Economic transformation process in Lithuania
Jekaterina RojakaSenior Analyst
October 6, 2008. Sofia, Bulgaria
Strengths, Weaknesses, Advantages & Threats
2|
The economic backlog shrank over a last couple of years
184
123117 113
8981
72 69 63 60 58 5441 38
No
rway
Den
mar
k
Fin
lan
d
Ger
man
y
Slo
ven
ia
Cze
chR
epu
blic
Est
on
ia
Slo
vaki
a
Hu
ng
ary
Lith
uan
ia
Latv
ia
Pola
nd
Ro
man
ia
Bu
lgar
ia
2000 2007
GDP per capita in Purchasing Power Standards, EU-27=100
Source: Eurostat
3|
Technological level in EU old-timers remains several times higher than in new member states
Value added per employee in manufacturing industry, EUR thousand
71.1
51.1
10.3 8.811.3
7.4
63.5
19.7 17.6 16.712.3
86.8
Finland Denmark Lithuania Estonia Poland Latvia
2000 2007
* Data of 2006, estimate
*
Source: Eurostat
4|
Earnings in the Baltics still lag behind those in the Western Europe
*2007 September ** 2006 m. industry
Source: national statistics offices
Average monthly earnings in 2007, EUR
221
594 635 721 784 852 919
1326
2330
3103
3784
Bulg
ari
a*
Lith
uania
Latv
ia
Hungary
Est
onia
Cze
ch R
.
Pola
nd
Slo
venia
Irela
nd**
Germ
any**
Norw
ay*
5|
Lithuania enjoyed the sharpest drop in unemployment rate
18.8
16.2
7.5
9.0
6.96.4
8.7
16.4
9.8
7.3
5.6
13.7
8.7
6.7
12.8
16.4
4.3
11.1
9.68.4 8.3
7.5 7.4 7.1 6.9 6.96.4 6.1 6.0
5.3 4.9 4.7 4.33.8
Slo
vaki
a
Pola
nd
Ger
man
y
Fran
ce
Bel
giu
m
Hu
ng
ary
EU
-27
Bu
lgar
ia
Fin
lan
d
Ro
man
ia
Sw
eden
Latv
ia
Cze
chR
epu
blic
Slo
ven
ia
Est
on
ia
Lith
uan
ia
Den
mar
k
2000 2007
Unemployment rate, %
Source: Eurostat
6|
Productivity growth lags behind that of labour costs
3.9 3.5 4.3 4.9
11.0
15.917.3
20.8
12.8
15.4
7.7 8.1
2.9 3.52.0
3.1
16.8
20.2
23.3
30.2
18.5
20.9
5.8
11.2
2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007
Denmark Finland Estonia Latvia Lithuania Poland
Labour productivity
Labour costs
Labour costs and value added per employee, annual changes, %
Source: Eurostat
7|
Lithuania enjoyed spectacular economic growth…
4.16.6 6.9
10.3
7.3 7.9 7.78.8
6.20.5
-0.3
0.1
-1.0
2.9
6.1 7.1
9.3 14.8
4.6
6.47.0
9.310.2
14.114.7
18.1
21.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 I H
Deflator
Real GDP
Nominal GDP
Gross domestic product, annuual changes, percent
Source: Eurostat, DnB NORD Bankas
8|
Share of employed in industry dropped from 22 percent in 1998 to 19.5 percent last year
0
200
400
600
800
1000
1200
1400
1600
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Services
Construction
Industry
Agriculture
Number of employed, by economic sector, thousands
Source: Statistics Lithuania
9|
Structure of economy has changed slightly
Structure of value added by activity, percent
7.0
0.7
3.8
6.0
1.5
12.3
2.1
10.3
6.1 6.37.2
5.2
0.5
3.7
10.0
17.2
1.3
13.1
2.9
11.8
4.8 4.6
6.8
16.5
19.4 19.1
Ag
ricu
ltu
re,
hu
nti
ng
an
dfo
rest
ry
Min
ing
,q
uar
ryin
g
Man
ufa
ctu
rin
g
Ele
ctri
city
, g
as,
wat
er s
up
ply
Con
stru
ctio
n
Dom
esti
c tr
ade
Hot
els
and
rest
aura
nts
Tran
spor
t,st
orag
e,co
mm
un
icat
ion
Fin
anci
alin
term
edia
tion
RE
, ot
her
bu
sin
ess
Pub
licad
min
istr
atio
nan
d d
efen
ce
Ed
uca
tion
Oth
er
2000 2007
Source: Eurostat
10|
Exports growth has lost its steam
9.5
21.219.4
6.94.4
17.7
12.2
4.7
14.4
29.6
0.8
-2.0 -0.5
7.6
9.3
5.8
4.8
12.9
39.1
22.0
17.4
6.4
12.0
27.0
18.0
9.5
27.4
2000 2001 2002 2003 2004 2005 2006 2007 2008 IH
Price component
At constant prices
At current prices
Exports of goods and services, annual change, %
Source: Statistics Lithuania, DnB NORD Bankas
11|
About 55 percent of all manufacturing products are exported
0
20
40
60
80
100
M.
of
tob
acc
o
Ex
tra
ctio
n
of
pe
at
Ex
tra
ctio
n o
f cr
ud
eo
il, g
as
M.
of
che
mic
als
M.
of
rad
io,
TV
M.
of
tex
tile
s
Re
cycl
ing
M.
of
dre
ssin
g o
f fu
r
M.
of
ele
ctri
cal
eq
uip
.
M.
of
oth
er
tra
nsp
ort
eq
.
M.
of
op
tica
lin
stru
me
nts
M.
of
oil
an
d o
ilp
rod
uct
s
M.
of
woo
d a
nd
its
pro
duct
s
M.
of
mo
tor
ve
hic
les
Ma
nu
fact
uri
ng
M.
of
ma
chin
ery
,e
qu
ipm
en
t
M.
of
furn
itu
re
M.
of
rubb
er,
pla
stic
s
M.
of
ba
sic
me
tals
M.
of
pu
lp,
pa
pe
r
Min
ing
an
d q
ua
rry
ing
M.
of
lea
the
r
M.
of
fab
rica
ted
me
tal
p.
M.
of
food
pro
du
cts
Pu
blis
hin
g,
pri
nti
ng
M.
of
oth
er
no
n-
me
talli
c p
.
M.
of
com
pu
ters
Qua
rry
ing
of
sto
ne
,e
tc.
2004 2007
1998
Share of exports in total production by industry, %
Source: Statistics Lithuania, DnB NORD Bankas
12|
Share of high-tech exports in Lithuania remains negligible
54.6
40.7
29.026.5
20.318.1 17.9 16.7
14.1 13.4 12.8 12.711.2
8.05.4 4.9 4.7 4.2 3.1
Malt
a
Luxem
bou
rg
Irela
nd
Un
ited
Kin
gdom
Hu
ngary
Fin
lan
d
Fra
nce
EU
-27
Germ
an
y
Sw
eden
Den
mark
Cze
chR
epu
blic
Au
stri
a
Est
on
ia
Slo
vakia
Spain
Lith
uan
ia
Latv
ia
Pola
nd
Exports of high technology products as a share of total exports in 2006, %
Source: Eurostat
13|
... since low and medium-low technologies dominate in manufacturing
3.3
19.3
25.2
52.1
12.9
31.4
24.2
31.5
4.3
13.0
37.5
45.2
High technologyindustries
Medium-high technologyindustries
Medium- low technologyindustries
Low technologyindustries
Lithuania in 2007 EU-15 in 2001
Lithuania in 2004
Manufacturing industries by level of technologies, % of total value added in manufacturing
Source: Eurostat, DnB NORD Bankas estimates
14|
Nearly a third of all machinery and equipment, as well as food products is exported to Russia
Exports to Russia, share in total Lithuania's exports, %
27.025.1
24.2
12.6
8.1 7.4
4.43.1
1.2
21.9
34.6
26.3
31.2
11.39.8
11.2
4.8 4.7 4.2
0.7
28.7
15
11.4
15
Mac
hin
ery
and
equ
ipm
ent
Tra
nsp
ort
veh
icle
s
Foo
dp
rod
uct
s
To
tal
Met
als
and
arti
cles
ther
of
Plas
tics
,ru
bb
er
Tex
tile
s an
dte
xtile
arti
cles
Ch
emic
alp
rod
uct
s
Furn
itu
re
Wo
od
an
dar
ticl
esth
ero
f
Min
eral
pro
du
cts
Oth
er
2004 2007 2008 IH
Source: Statistics Lithuania
15|
Lithuania does not seem attractive for foreign investors
12815
100129596
83977986
5428
3376 3184 29522477
1598
EU
-27
Cze
chR
epu
blic
Fin
lan
d
Est
on
ia*
Bu
lgari
a
Slo
vakia
Slo
ven
ia
Latv
ia*
Lith
uan
ia*
Pola
nd
Rom
an
ia
Foreign direct investments per capita in 2006, EUR
* in 2007
Source: Eurostat
16|
Manufacturing accrued the most of FDI, however new injections drain off
0.5 1.1
28.8
2.50.7
22.7
2.3 1.9
16.9 16.2
5.2
1.20.6 0.5
36.3
9.3
1.6
11.5
0.82.0
10.9
17.2
8.4
1.1
Agri
cult
ure
Min
ing,
quarr
yin
g
Manufa
cturi
ng
Ele
ctri
city
,gas,
wate
rsu
pply
Const
ruct
ion
Dom
est
ictr
ade
Hote
ls a
nd
rest
aura
nts
Tra
nsp
ort
,st
ora
ge
Com
munic
ati
on
Fin
anci
al
inte
rmedia
tion
RE,
oth
er
busi
ness
Oth
er
2000 2007
Foreign direct investments by economic activity, %
Source: Bank of Lithuania
17|
US investments account for just a mere share of total FDI
2.0
17.3
14.7
5.8
9.7
8.4 8.6
1.5
3.4 3.1
1.5
8.5
5.0
2.9
18.0
12.911.7
9.68.6
5.95.2
4.4 4.33.1
1.8 1.7 1.6 1.5
Pola
nd
Denm
ark
Sw
eden
Russ
ian
Federa
tion
Germ
any
Est
onia
Fin
land
Latv
ia
Neth
erl
ands
Norw
ay
Unit
ed S
tate
s
Unit
ed
Kin
gdom
Sw
itze
rland
Fra
nce
2000 2004 2008
FDI structure by investing country, as of 1st of J anuary, %
Source: Bank of Lithuania
18|
Unfortunately, Lithuania fails in attracting FDI - the key stimulus to robust long-term economic growth
391 561 370 637 530 505-612 -475
1501 1755 2604436 1421 1893
4199 3388
1057 40
845588
-744-670 -765
-393
510 2974625
4559
980712845
1058
-244
2000 2001 2002 2003 2004 2005 2006 2007
Loans
Portfolio investment
FDI
Other
Investment balance, LTL Mio
Source: Bank of Lithuania
19|
RE developers have skimmed off the largest share of issued loans
2.0
18.7
6.4
3.1
17.5
1.62.6
11.110.5
4.5
0.10.8
1.8
10.6
2.1
11.5
2.4
6.2
18.8
1.90.4 0.3
1.5
3.9
Ag
ricu
ltu
re,
hu
nti
ng
an
dfo
rest
ry
Ma
nu
fact
uri
ng
Ele
ctri
city
, g
as,
wa
ter
sup
ply
Co
nst
ruct
ion
Do
me
stic
tra
de
Ho
tels
an
dre
sta
ura
nts
Tra
nsp
ort
,st
ora
ge
,co
mm
un
ica
tio
n
Fin
an
cia
lin
term
ed
iati
on
RE
, o
the
rb
usi
ne
ss
Pu
blic
ad
min
istr
ati
on
an
d d
efe
nce
Ed
uca
tio
n
He
alt
h a
nd
soci
al
wo
rk
2004 2008 IH
Loan portfolio structure by economic activity, %
Source: Bank of Lithuania
20|
Energy intensity in the new member states is extraordinary high
1582
1165
967 949869 823
645585 544
438 417320
241 241 237 219 212 204 203 196 191 185 157 149 144 118 114
Bulg
ari
a
Rom
ania
Est
onia
Lith
uania
Slo
vakia
Cze
ch R
epublic
Latv
ia
Pola
nd
Hungary
Turk
ey
Cro
ati
a
Slo
venia
Fin
land
Port
ugal
Gre
ece
Spain
Norw
ay
Sw
eden
Unit
ed K
ingdom
Neth
erl
ands
Italy
Fra
nce
Germ
any
Aust
ria
Irela
nd
Japan
Denm
ark
Gross inland consumption of energy divided by GDP, in 2005, kgoe per 1000 euro
EU average
Source: Eurostat
21|
The optimism of economic agents lost momentum
-30
-20
-10
0
10
20
30
2003 2004 2005 2006 2007 2008
Economic sentiment indicator
Industrial confidence indicator
Consumer confidence indicator
Dynamics of economic sentiment and consumer confidence indicators in Lithuania
Source: Statistics Lithuania
22|
Flat rate introduction – one of the most successful policies
TOP statutory personal income tax, % of income in 2006 Adjusted top statutory tax rate on corporate income, % of income in 2007
Source: Eurostat
• Early implementation – attracted foreign investments• Easy administration• Boost in tax collections
23|
The list of less successful policies is longer…
Doing business difficulties - to get suitable personnel, percent
16.423.0 23.0 25.0
30.2 31.1 33.7 36.0 36.640.9
51.6
61.064.8
67.8
76.7
Cze
ch R
epub
lic
Swed
en
Den
mar
k
Slov
akia
EU
Rom
ania
Aus
tria
Ital
y
Slov
enia
Bul
gari
a
Lux
embo
urg
Port
ugal
Lat
via
Est
onia
Lith
uani
a
Doing business difficulties - to find suitable premises, percent
16.0 17.119.0
25.0 25.927.9 28.4
33.635.1 36.6
41.3 42.3 42.344.0 44.4
Den
mar
k
Swed
en
Aus
tria
Cze
ch R
epub
lic
Slov
enia
EU
Ital
y
Rom
ania
Slov
akia
Bul
gari
a
Est
onia
Lat
via
Lux
embo
urg
Lith
uani
a
Port
ugal
Among the least successful policies:• Inability to maintain robust FDI inflows• “Resting on laurels” strategy: no policies to combat swelling
prices, especially on property; no actual reform of education system, postponing investment
24|
Opportunities
• The trade flows through Lithuania are expected to intensify – favourable prospects for transport sector;
• Considerable potential in exports of tourism services;
• Positive impulses from mounting Eastern markets;
• Opportunities to magnify investment flows to the country remain robust;
• Benevolent trends in global markets for agriculture and food industry;
• Promising engineering industry;
• Enough room for expanding exports of IT, trade-related, financial and construction services.
Weaknesses
• Worsening macro conditions, pessimistic expectations;
• Decreasing competitiveness of individual export-orientated industries.
• Slower productivity growth compared to that of wages;
• Deteriorating attractiveness for foreign investors;
• Rising costs of finance;
• Tight public finances;
• Strong inflationary pressure and potential hikes in energy prices;
• High energy consumption intensity;
• Low quality of public sector services;
• Scarce share of value added created in the higher technologies sectors.
25|
The new Government will have toroll up their sleeves
KEY Economic policy directions:
• To improve business conditions (ensure higher quality of Governance, depress corruption, fine rule of law, etc.)
• To increase attractiveness of investment climate (eliminate bureaucratic barriers, liberalize labour market, tax system reforms, development of public services for business, promote industrial parks, render active cooperation with potential investors, enhance of Government support for exports activities, etc.)
• To refine Lithuanian economic structure (introduce essential investment promotion system, enhance clusterisation processes, Increase financing for (R&D) and establish effective incentives for innovations).
• To bridge social differentiation and combat inflation.
26|
DnB NORD Bankas Economic Research Publications are available at:http://www.dnbnord.lt/en/about/reviews/
Thank you for your attention!
27|
KEY FOREIGN INVESTORS IN LITHUANIA
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28|
Bureaucracy and corruption are the key obstacles for businesses
5448 44
3526 24 24 21 20 18 16 16 12 12
44
4344
5362
36 39
30
50 53
41
56
33
64
05 12
8 9
39 33
39
30 29
9
13
15
18
Bu
reau
cracy
Corr
up
tion
Lab
ou
r fo
rce
short
ag
e
Everl
ast
ing
lych
an
gin
g,
con
flic
tin
gle
gis
lati
on
base
Diffi
cult
ies
tog
et
fin
an
cin
g
Hig
hco
mp
eti
tion
Hig
h t
axes
Un
skill
ed
lab
ou
rfo
rce
Com
plic
ate
dp
roce
du
res
for
start
-up
Un
secu
rep
rop
ert
y r
igh
ts
Ineff
ect
ive
cou
rt s
yst
em
Įsta
tym
ųvir
šen
yb
ės
neb
uvim
as
Non
tran
sap
ren
tco
urt
s
Mon
op
olie
s an
dre
stri
ctio
ns
Very important obstacle Obstacle Not an obstacle Do not know
Obstacles for busineses in 2007, % of total respondents
Source: DnB NORD bankas, 2007
29|
The situation has worsened substantially
-54
-59
-62
-62
-69
-76
-79
-82
-82
-85
-85
-88
-97
-100
42
29
35
18
19
0
21
15
9
15
3
9
0
0
Overall business environment
Access and cost of finance
Tax rates
Regulations and limitation in ind. business areas
Crime and theft
Legal system or conflict resolution
Skills and education of available workers
Quality of legislation
Ease of starting a new business
Competition
Corruption
The supremacy of law
I nefficient government bureaucracy
Limited labour supply
Worsened or has not changed Improved
Changes in business conditions over the last 2-3 years, % of total respondents
Source: authors calculations, Competitiveness Project
30|
Other new member state are more attractive
5341 41 38 36 34 29 26 22 19 16 10
2541 41
31 4031 39
3250 56 63 71
6 3 316 4
13 6
0
9 36 3
Taxes
Bure
aucr
acy
Qualit
y o
f le
gis
lation
Acc
ess
and c
ost
of
finance
Overa
ll bu
siness
env
ironm
ent
Ease
of
start
ing a
ne
wbusi
ness
Corr
uption
Cou
rts
and c
on
flic
t re
solu
tion
Pro
pert
y r
ights
Reg
ula
tions
and lim
itatio
n in
ind.
busi
ness
are
as
Skill
s and a
vaila
bili
ty o
fla
bour
forc
e
Com
petition
Worse Similar More favourable Do not know
Business conditions, compared to other NMS, % of total respondents
Source: authors calculations, Competitiveness Project
31|
EU-11 rankings by ease of doing business in 2008
• Lithuania: drastic slump in EoDB from 16th position in 2006, and still among the average by ease of doing business index
• Most of categories fall behind though• Positive changes in 2009
Source: World Bank, authors calculations
DK FI IE EE LV LT PL CZ HU SK SL
Ease of Doing Business 5 13 8 17 22 26 74 56 45 32 55 1. Starting a business 18 16 5 20 30 57 129 91 67 72 120
2. Dealing with licenses 6 39 20 14 82 57 156 83 87 50 62
3. Employing workers 10 127 37 156 96 124 78 55 81 75 166
4. Registering property 39 17 79 21 85 4 81 54 96 5 99
5. Getting Credit 26 26 7 48 13 36 68 26 26 7 68
6. Protecting investors 51 51 5 33 51 83 33 83 107 98 19
7. Paying taxes 83 83 6 31 20 71 125 113 127 122 63
8. Trading across borders 2 5 20 7 19 23 40 30 45 90 69
9. Enforcing contracts 30 7 39 29 3 18 68 97 12 50 79
10. Closing a business 7 5 6 50 64 31 88 108 53 36 34
Improved
No changes
Worsened
32|
EU-11 rankings by global competitivness
• Slovakia’s macro stability under the question, while that of Lithuania - among the best country's indicators
• Higher education: quantity versus quality• Institutions: the longest list of imbalances
Source: World Economic Forum, authors calculations
Rank DK FI IE EE LV LT PL CZ HU SK SL
GCI 2007-2008 3 6 22 27 45 38 51 33 47 41 39 Basic requirements 1 2 27 29 47 43 64 42 55 50 37 1. Institutions 2 1 18 34 59 58 82 69 54 60 44 2. Infrastructure 7 10 49 36 56 48 80 41 54 58 37 3. Macroeconomy 10 9 21 14 44 38 56 43 107 62 29 4. Health and primary education 3 1 16 30 45 43 36 29 41 39 22 Efficiency enhancers 4 14 19 27 42 41 43 30 40 34 38 5. Higher education and training 3 1 21 23 29 25 35 28 33 41 24 6. Goods market efficiency 3 10 4 27 47 44 69 38 59 35 39 7. Labour market efficiency 5 29 19 26 36 44 49 35 58 25 51 8. Financial market sophistication 6 17 5 31 38 54 64 53 51 33 47 9. Technological readiness 5 11 25 19 40 38 51 35 41 36 29 10. Market size 45 49 46 91 82 67 22 38 41 57 72 Innovation and sophistication factors 8 6 22 35 72 44 61 28 43 52 30 11. Business sophistication 6 11 22 44 71 42 68 30 46 52 31 12. Innovation 10 3 19 31 77 48 58 27 37 51 30
Improved
No changes
Worsened
33|
World Bank: tax rates is the key obstacle to business
Source: World Bank
34|
WEF: taxes again lead the anti-ranking
0.0
1.9
2.8
1.5
2.1
3.0
5.4
6.8
10.4
6.8
10.6
16.1
15.9
16.6
0.2
1.6
2.3
2.7
3.5
4.0
4.5
5.2
9.2
10.8
11.6
13.5
14.5
16.2
0 2 4 6 8 10 12 14 16 18
Foreign currency regulations
Crime and theft
Government instability/coups
Inflation
Poor work ethic in national labor force
Inadequate supply of infrastructure
Policy instability
Access to financing
Inadequately educated workforce
Restrictive labor regulations
Corruption
Inefficient government bureaucracy
Tax regulations
Tax rates
2007-2008
2006-2007
Source: World Economic Forum, Global Competitiveness report
The Most Problematic Factors for Doing Business, percent of respondents
35|
The prices of necessities picked up most significantly
19.417.5
16.1 15.4 15.2
10.79.1 8.3
5.1
1.90
-3.3
-8
-4
0
4
8
12
16
20
Ho
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ng
, w
ate
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lect
rici
ty,
ga
s
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d a
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be
ve
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s
Tra
nsp
ort
Ho
tels
an
dre
sta
ura
nts
Alc
oho
licb
ev
era
ges,
tob
acc
o
He
alt
h c
are
Ed
uca
tio
n
Oth
er
Furn
ishin
gs
Re
cre
ati
on
an
dcu
ltu
re
Co
mm
un
ica
tio
ns
Clo
thin
g a
nd
foo
twea
r
2000 2004 2007 2008 August
HICP, annual changes, end of period, %
Source: Statistics Lithuania