Baltic Countries See Strong Growth, but Pitfalls Remain

Credit revival essential to sustained growth

Design of appropriate policies can help secure export growth

Reducing high unemployment requires structural changes

The IMF’s latest report on the economies of Estonia, Latvia, and Lithuania calls for policy measures to help resuscitate credit growth, maintain strong export growth, and address certain issues in the labor market. According to the report, coordinated national and regional policy responses will help the countries sustain economic growth going forward, particularly in light of their membership (or prospective membership) in the euro area.

The IMF’s “cluster reports,” as they are called, focus on economic analysis of logical groupings of economies and consider the policies of these countries in an integrated way. The reports aim to highlight shared concerns and policy lessons to policymakers and, where relevant, how shocks might move across economies and how countries can potentially benefit from policy coordination.

This new approach complements the IMF’s current approach to economic surveillance, which up until now has consisted of bilateral surveillance (the on-the-ground appraisal of individual member countries) and multilateral surveillance (the high-altitude oversight of the world economy).

Solid progress

The Baltics are small, highly open, economies with strong economic links to the Nordic countries and each other. Their financial sectors are among the most open globally, and their economies are characterized by high levels of foreign direct investment and trade. The Baltics trade mainly with each other and other European countries, in part as a result of increased EU integration.

In all three Baltic countries, income levels are converging toward those of advanced economies. Whether because of their economic model, the links to the Nordic countries, membership in the EU, or other factors, the Baltics managed to reduce the income gap with advanced economies over the last two decades.

The Baltic countries face common challenges, but there are also some issues specific to each country.

Growth has been strong and credit is growing again in Estonia, but there are signs of labor market overheating in spite of the still high level of unemployment. For the longer term, there may be scope for tax policies and education and training to reduce the apparently high structural unemployment rate. Latvia enters the euro area with the fastest rate of growth in Europe and market confidence...