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

Saioa Armendariz, Carlos de Resende, Alice Fan, Gianluigi Ferrucci, Bingjie Hu, Sadhna Naik and Can Ugur

No 2025/018, IMF Working Papers from International Monetary Fund

Abstract: This paper examines competitiveness and productivity in the Baltics. Focusing on recent developments, it asks 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. The paper starts by documenting a deterioration in export performance across the region. Using a constant share decomposition, it finds that, unlike in Latvia and Lithuania, Estonia’s declining export share has been mainly linked to a reduction in the ‘intensive margin’—a sign of weakening external competitiveness and declining relative productivity. 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. While Estonia’s post-GFC slowdown in productivity growth and real exchange rate appreciation have eroded its competitive edge, Latvia and Lithuania have shown greater resilience, aided by more balanced real effective exchange rates and, for Lithuania, stronger corporate balance sheets. A micro-econometric analysis further reveals that resource misallocation, particularly in the services sector, has been a key driver of declining productivity in the region. These findings underscore the need for targeted reforms to improve allocative efficiency, boost productivity, and restore competitiveness in the Baltic region.

Keywords: Export shares; Competitiveness; Productivity; Baltics; export share; productivity in the Baltic; resource misallocation; productivity trend; TFP dynamics; TFP deceleration; Total factor productivity; Real effective exchange rates; Real exchange rates; Global (search for similar items in EconPapers)
Pages: 46
Date: 2025-01-17
New Economics Papers: this item is included in nep-cis, nep-eec, nep-eff and nep-tra
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