Baltics need to raise productivity - World Bank

Jul 04, 2008
By Mike Collier

BRUSSELS  - The countries of Eastern Europe and the former Soviet Union, including the Baltic States, need to innovate, include all their citizens in the development of their countries, and integrate with the broader global economy if they want to sustain growth, according to a new World Bank report.

Launched in Brussels on July 2, the study with the snappy title: 'Innovation, Inclusion, and Integration: From Transition to Convergence in Eastern Europe and the Former Soviet Union', says productivity growth is “the only viable route to lasting prosperity.”

In order to achieve that growth there needs to be a supportive, competitive business environment, a keen financial sector, good governance, and superior skills and infrastructure, the report says.

A particular challenge is identified as aging populations, which will slow economic growth unless more of the population is brought into the labor force. Resources should be used more efficiently, and pensions and health care systems are reformed to avoid them becoming sources of acute fiscal pressure, the World Bank says.

“When it comes to the importance of competition for restructuring activities in firms, the transition economies are following in the footsteps of developed market economies,” said Pradeep Mitra, the World Bank's Chief Economist for Europe and Central Asia Region, the author of the report. “Their business and financial sectors are maturing as well, relying less on family and informal sources to fund fixed investments.”

According to Mitra, “Boosting productivity requires firms either to innovate, developing knowledge new to the world, or to absorb knowledge, integrating and commercializing knowledge new to the firm but not to the world.”

“Productivity growth,” said Mitra, “is higher in firms when they face stronger pressure from domestic competitors to develop new products and markets; when they are in industries that rely more on external finance in countries with more developed financial sectors; when rules and regulations are more predictable and there is greater confidence in the legal system; when they offer more on-the-job training to their workers; and when the availability of mainline telephone services is higher and the incidence of power outages is lower.”

Of the Baltics, only Estonia merits a special mention in the report. “The Czech Republic, Estonia, Hungary, Poland, and the Slovak Republic,” said Mitra, “have attracted large amounts of foreign direct investment, and participate almost as heavily as developing East Asia in producer-driven global commodity chains, such as those for automotives and information technology and export capital and skilled labor-intensive products. In contrast, most CIS countries export natural resources and unskilled labor-intensive products.”

However, all three Baltic states have issues with demographics and their labor markets.

Said Mitra: “The challenge posed to economic growth by rapidly aging populations... is serious and systemic. Offsetting it requires, first, getting the most out of the existing capital stock and labor force – through all the reforms of the business environment needed for productivity growth. Second, it calls for using all and not just part of a country’s human resources by raising and equalizing the retirement ages for men and women and, where the fiscal situation allows, reducing taxes on labor that make hiring labor expensive. Third, it requires reform of pensions and health care systems, so that fiscal pressures do not crowd out desirable spending on infrastructure and social safety nets and the private investment for productivity growth.”

“Finally,” Mitra added, “international circular migration of labor that is coordinated between sending and receiving countries and respects migrants’ rights can supplement such a policy package. Migration involves complex political, economic, and social factors, and it is for this reason that policy experiments might be needed to improve the frameworks that regulate it.”