SEB's economists: It will take several decades for Baltics to reach the prosperity of Nordics

There are significant differences between Baltic countries and Nordic countries in terms of living standards. However, SEB's economists in Baltic countries are convinced that with targeted action it is possible to reduce this gap. On October 2 three economists from Latvia, Lithuania and Estonia met in Estonian town Viljandi to discuss the economic situation in Estonia, Latvia and Lithuania and the state of the convergence process with rich Nordic countries.

Baltic countries have enjoyed rapid rise in living standards in recent years. While the impact of the great recession was far more severe in the Baltics than in much of the Western Europe, all three countries have now closed the gap and managed to exhibit GDP growth far above 3%. Fast recovery of the labour market has resulted in a situation where the employment rate now significantly exceeds the pre-crisis level. High demand for labour has boosted the wage growth and the average wage has increased by 22% in Estonia, 24% in Latvia and 30% in Lithuania during last three years.

Dainis Gašpuitis, macroeconomics expert at SEB Latvia: “Despite the economic success of the recent times, it is in human nature to compare oneself to those who are doing even better. Due to the geographical and cultural proximity, Baltics like to weigh themselves against the fortune of the Nordic countries. Even when adjusted with living expenses, GDP per capita in Finland and Sweden exceeds that of the Baltic countries 1.5 to 2 times. The difference in average wages is even far greater. While due to the economic downturn in Finland, Baltics have been able to somewhat close the gap, the rapid growth in Sweden has made the convergence process much more difficult.”

Despite the good economic growth of the recent years, the future outlook of the Baltics remains somewhat uncertain. The profitability of the business models that have taken Baltic countries this far has significantly decreased in recent years, due to the high wage growth. Businesses that previously thrived due to the availability of cheap labour may now be closing their doors and it is certainly not granted that there are enough more productive companies willing to take their place.

On the 2nd October SEB’s Baltic economists met in the small town of Viljandi in Estonia, to discuss the future prospects of the countries. They agreed on the fact that the convergence with Nordic countries will take decades if not generations. Yet they proposed many ideas that could accelerate the process. According to the Dainis Gašpuitis the main problem lies in low spending on research and development: “R&D expenditures account for just 0.4% of GDP in Latvia to 1.3% in Estonia. In Sweden and Finland the respective share is from 2% to 3%. Without boosting R&D investments there are few reasons to believe that we are able to significantly increase the value of our exports”.

Economist of SEB Estonia, Mihkel Nestor, added that while R&D is important, there are also other ways to add more value to the business. “There are hundreds of companies in the Nordic countries who operate in the very same sectors as their Baltic competitors. What makes them different is their ability to ask much higher price for their products due to well-known and highly valued brands, something which in the Baltic countries is rare.”

Tadas Povilauskas, senior analyst at SEB Lithuania, emphasized also the role of the education system: “When looking at the university graduates, technical subjects are much more popular in the Nordic countries than in the Baltics. Also taking the vocational track is far more common in the Nordics, which guarantees a continuous supply of qualified labour”.

As a positive ending note SEB’s Baltic economists concluded that while catching up with the Nordics will take time, looking at the progress Baltic countries have made this far, there are good grounds to believe that we will get there eventually. Just that more guts, clever ideas and ambition are needed. Moreover, not all aspects of prosperous life are measurable and comparable, and in many ways Baltic convergence with Nordics can happen much quicker.