Competitiveness and Productivity in the Baltics: Common Shocks, Different Implications

IMF Working Papers, January 17, 2025

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Canonical URL: Competitiveness and Productivity in the Baltics: Common Shocks, Different Implications

Authors: Saioa Armendariz, Carlos de Resende, Alice Fan, Gianluigi Ferrucci, Bingjie Hu, Sadhna Naik, Can Ugur
Published: January 17, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400299582.001

Paper examines competitiveness and productivity in the Baltics, focusing on recent developments and asking why Russia’s war in Ukraine led to a prolonged recession and strong decline in competitiveness in Estonia, while Latvia and Lithuania shielded their economies more effectively.
Authors: Saioa Armendariz, Carlos de Resende, Alice Fan, Gianluigi Ferrucci, Bingjie Hu, Sadhna Naik, Can Ugur.
Date: January 17, 2025.
Series: IMF Working Papers, Working Paper No. 2025/018, Issue: 018, Volume: 2025, Pages: 46.
DOI: https://doi.org/10.5089/9798400299582.001
Stock No: WPIEA2025018
ISBN: 9798400299582
ISSN: 1018-5941

Documents a deterioration in export performance across the region.
Constant share decomposition result:
- In Estonia, the declining export share has been mainly linked to a reduction in the “intensive margin”—interpreted as a sign of weakening external competitiveness and declining relative productivity.
- In Latvia and Lithuania, export share declines were not predominantly driven by the intensive margin in the same way.
Multivariate filtering techniques and estimates of the real effective exchange rates based on historical productivity trends, consistent with Balassa-Samuelson, confirm that differences in long-term total factor productivity growth have affected external competitiveness.
Comparative dynamics:
- Estonia experienced a post-GFC slowdown in productivity growth and real exchange rate appreciation that have eroded its competitive edge.
- Latvia and Lithuania displayed greater resilience, aided by more balanced real effective exchange rates.
- Lithuania additionally benefited from stronger corporate balance sheets.

A micro-econometric analysis reveals that resource misallocation, particularly in the services sector, has been a key driver of declining productivity in the region.
Emphasis on allocative efficiency: resource misallocation is central to the decline in productivity across the Baltics.

Findings underscore the need for targeted reforms to:
- Improve allocative efficiency.
- Boost productivity.
- Restore competitiveness in the Baltic region.
Policy focus implied by results:
- Address structural factors behind resource misallocation, especially in services.
- Strengthen factors that support balanced real effective exchange rates and corporate balance sheet resilience.

Subject: Foreign exchange, Production, Productivity, Real effective exchange rates, Real exchange rates, Total factor productivity.
Keywords: Baltics, Competitiveness, export share, Export shares, Global, Productivity, productivity in the Baltic, productivity trend, Real effective exchange rates, Real exchange rates, resource misallocation, TFP deceleration, TFP dynamics, Total factor productivity.

Source: IMF Working Papers — "Competitiveness and Productivity in the Baltics: Common Shocks, Different Implications", January 17, 2025.