The key of success inside the Baltic model

Nerijus Mačiulis is a chief economist at Swedbank, one of the largest financial institutions in Baltic and Nordic countries. Dr Maciulis is also an associate professor at private university and is also member of editiorial board of Baltic Journal of Economics. Previously he has taught at universities in France, Mexico and Australia and published articles on economic growth, Economic and Monetary Union, investments and speculative attacks in currency markets. Here is what he said in an exclusive interview for EconomyNews.bg

Mr. Mačiulis, The Baltics are states with traditionally the highest economic growth in the EU. What are the major features of their economy compared to other countries?
I guess one could say that during the past 10 years the major feature was underdevelopment, which meant that due to low base effect we were rapidly catching up with EU average. The process will continue during this decade, but 9-10% annual GDP growth, which was not uncommon during last decade, cannot be expected. Of course, we cannot dismiss the progress that was achieved since we regained the independence in early 90s. Infrastructure was brought up to European standards (thanks to EU structural funds), companies have invested heavily and expanded their capacity, and relatively stable financial sector was developed. There were quite a few setbacks, but in general Baltic countries were on the path of rapid development thanks to openness and high dependence on exports – we had no other choice since our home markets are so small.

Lithuania is one of the first countries to emerge from the crisis, without seeking outside help from the IMF and other institutions. What measures were taken to overcome the crisis in this way?
Government has increased some taxes, but the major fiscal consolidation was achieved by cutting government spending. This has intensified the recession – in 2009 GDP contracted by some 15%. But the adjustments were very quick and efficient – lower budget deficit and government’s determination to implement reforms convinced financial markets and borrowing price has dropped. The good thing was that government spending cuts was accompanied by some important structural reforms. Higher education system was liberalized and private universities are now able to compete with the public ones. There was a crackdown on shadow economy and state owned enterprise reform was initiated – it aimed to make state companies more transparent and efficient. These two initiatives so far brought limited results, but, of course, these things take time. The general lesson here is that fiscal austerity has to be accompanied by structural reforms which liberalize trade and labour relations and encourage companies to invest and make them more competitive. Without these reforms a country is doomed to descend on a downward spiral of never-ending recession – just look at Greece.

Lithuania held a highly successful export policy. What are the best practices in this regard?
Nothing much to be proud of – during the past few years companies have slashed wages and reduced the number of employees, and thus regained cost competitiveness. This allowed gaining new market shares and exports soared despite recession in the euro area – currently our exports are some 30% larger than they were before the crisis. Of course some companies have found smarter ways to cut costs and become more competitive – they optimized their processes, got rid of unnecessary and wasteful activities, and invested in innovative technologies. This is the way to go, since low labour costs give you advantage only in a very short term.

How Lithuania is attractive for foreign investment?
To some extent – yes, it is. One of the biggest advantages is educated labour force – 92% of population has secondary or higher education. Lithuania is also number one country in EU according to number of university graduates per 1000 inhabitants. Of course, the quantity of education does not say much about the quality of it, but there is progress in the right direction. Profit tax in Lithuania is relatively low, but overall tax burden could be lower – especially labour taxes. I would prefer to see Lithuania following the path of Switzerland – low taxes and relatively few free public services – rather than that of Scandinavian countries – breathtaking taxes and very generous social benefits.

The three Baltic states took quite higher positions in the Doing Business ranking of the World Bank, in comparison to other European countries. How the state facilitates small and medium businesses?
The best way how the government can help small and medium enterprises to grow is to… let them be. Getting rid of the excessive regulation and unnecessary meddling has a very positive impact on entrepreneurship – young people are not discouraged to start a new business. I would not say that Baltic countries are following this advice, but in the EU context we are relatively free to do business. Government provides some tax incentives (for example, lower profit tax rate for companies which have annual revenues below EUR 300 000 and those which invest in technology) and runs agencies which provide state guarantee for the credit to SME’s. This is important, because credit access for small companies is usually rather restricted. One of the biggest burdens which keep us away from top 10 countries in “doing business” rating s is relatively high corruption, which sometimes can become a real burden for companies.

Do you think that the Baltic model is applicable in other European countries?
An upgraded Baltic model is the way to go: low taxes, limited government regulation and intervention, incentives for investments and exports, constant obsession with efficiency and innovation in both private and public sectors. Encouraging public companies and institutions (universities, hospitals) to compete with the private companies is incredible driver of efficiency. Long term potential and welfare very much depends on creativity, innovativeness and entrepreneurship. These competences have to be developed from the very early age, not just at universities.

Danail Alekov
Sofia - Vilnius