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

_IMF Working Papers, January 17, 2025_

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## Bibliographic details
- 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

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### Overview and research question
- 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

### Empirical findings on export performance and competitiveness
- 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.

### Micro-econometric evidence and drivers of productivity
- 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.

### Policy implications and recommendations
- 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.

### Keywords and subject areas
- 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2025/01/17/competitiveness-and-productivity-in-the-baltics-common-shocks-different-implications-561082_